UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K/A
Amendment No.1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: AUGUST 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
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.)
150, 630 - 8TH AVENUE SW, CALGARY AB T2P 1G6
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (403) 303-8258
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
PAR VALUE US$0.0467
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 [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Aggregate market value (i.e., last price) of voting stock held by
non-affiliates of the Registrant, as of October 21, 2004, US$1,285,177 based on
the closing sale price of US$0.04 on October 21, 2004.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of October 21, 2004, 32,129,417 shares of common
stock, par value US$0.0467 per share
DOCUMENTS INCORPORATED BY REFERENCE: NONE
EXPLANATORY NOTE
This Amendment No.1 to our Annual Report on Form 10K for the fiscal year ended
August 31, 2003 includes a change to the number of shares outstanding as of
October 21, 2004. Due to a clerical error, the number was not updated and did
not reflect recent issuances of shares. The number of shares outstanding has
increased to 32,129,417 from 14,295,410. This Form 10-K/A does not attempt to
modify or update any other disclosures set forth in the original filing.
Additionally, this Form 10-K/A does not purport to provide a general update or
discussion of any other developments at the Company subsequent to the original
filing. The filing of this Form 10-K/A shall not be deemed an admission that the
original filing, when made, included any untrue statement of material fact or
omitted to state a material fact necessary to make a statement not misleading
PART I
EXCHANGE RATES
The currency amounts in this Annual Report on Form 10-K, including the
financial statements, are, unless otherwise indicated, expressed in Canadian
dollars ("Cdn$"). This Form 10-K contains translations of certain amounts in
Canadian dollars into United States dollars ("US$") based upon the exchange rate
in effect at the end of the period to which the amount relates, or the exchange
rate on the date specified. For such purposes, the exchange rate means the noon
buying rate in New York City for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate"). These translations should not be construed as
representations that the Canadian dollar amounts actually represent such U.S.
dollar amounts or that Canadian dollars could be converted into U.S. dollars at
the rate indicated or at any other rate. The Noon Buying Rate at the end of each
of the five years ended August 31, the average of the Noon Buying Rates on the
last day of each month during each of such fiscal years and the high and low
Noon Buying Rate for each of such fiscal years were as follows:
- --------------------------------------------------------------------------------
2004(1) 2003 2002 2001 2000
================================================================================
At end of period Cdn$1.3130 Cdn$1.3857 Cdn$1.5588 Cdn$1.5508 Cdn$1.4715
Average for period 1.3320 1.4822 1.5724 1.5284 1.4714
High for period 1.3721 1.5778 1.6003 1.5825 1.4955
Low for period 1.2965 1.3523 1.5317 1.4685 1.4489
(1) Through August 31, 2004.
On October 12, 2004 the Noon Buying Rate was Cdn $1.2573.
ITEM 1. BUSINESS.
OVERVIEW
GENERAL
At August 31, 2003, we were engaged in the business of providing systems
integration and interactive entertainment. Our business is conducted through our
operating subsidiaries. At such date, we provided systems integration services
through our Logicorp Data Systems Ltd. and Logicorp Services Group Ltd.
subsidiaries (collectively referred to as "Logicorp") and eTelligent Solutions
Inc. ("eTelligent"); and interactive entertainment services through our NTN
Interactive Network Inc. ("NTN") and GalaVu Entertainment Network Inc.
("GalaVu") subsidiaries.
We sold GalaVu on April 25, 2003 and effective December 15, 2003 we sold
certain assets and liabilities of NTN. We discontinued the operations in our
merchant capital services subsidiaries comprised of Chell Merchant Capital Group
("CMCG") and Chell.com USA, during February 2001; CMCG was then used to acquire
Logicorp in January 2002.
We were incorporated on May 12, 1986 pursuant to the laws of the State of
New York as TrioSearch, Inc. In June 1988, we changed our name to NTN Canada,
Inc. In March 1998 we changed our name to Networks North Inc. and in September
2000, changed our name to Chell Group Corporation. Our headquarters and
principal place of business is located at Suite 123 2340 Pegasus Way NE,
Calgary, AB T2E.8M5. Our registered office is located at c/o Reitler Brown LLC,
800 Third Avenue, 21st Floor, New York, New York, 10022.
Through August 31, 2001, our management employed an aggressive acquisition
and disposition strategy. Through August 31, 2002, our management employed a
strategy of building and maintaining our current operations. During the year
ended August 31, 2003, our management employed a strategy of maintaining
operations in our core business of system integration and divesting of
operations that were not part of this segment.
1
In October 1996, we acquired all of the outstanding stock of Magic Lantern
Communications Ltd., an Ontario corporation, and its subsidiaries. In August
1997, we acquired through Magic Lantern certain business assets of Image Media
Ltd. and 802117 Ontario Inc., operating as Pilot Software. Effective March 18,
2002, we sold all of the outstanding stock of Magic Lantern Communications Ltd.
for Cdn$1.85 million in cash.
As of June 1999, we acquired all of the outstanding stock of Interlynx
Multimedia Inc., an Ontario corporation. Effective June 2001, we sold our
interest in Interlynx for $50,000 cash and a $45,000 note.
In September 1999, we acquired substantially all of the property and
assets (excluding accounts receivable) of GalaVu Entertainment Inc., an Ontario
corporation. In April 2003, we sold GalaVu for $170,000 and a note for $325,000.
In September 2000, we acquired certain assets and the following shares
from Chell.com, a corporation the sole stockholder and director of which is
Cameron Chell, our former Chairman of the Board of Directors, President, and
Chief Executive Officer, for an aggregate purchase price of US$27,002,086: (a)
480,000 shares of cDemo which then represented approximately 14.3% of cDemo's
issued and outstanding stock; (b) 875,000 shares of Engyro Inc. which then
represented approximately 34% of Engyro's issued and outstanding stock; and (c)
100% of the issued and outstanding stock of Chell.com (USA) Inc., a Nevada
corporation. See "Certain Relationships and Related Party Transactions."
Effective January 1, 2002, we acquired through CMCG all of the issued and
outstanding shares of 123557 Alberta Ltd. and 591360 Alberta Ltd. which own 1/3
of the shares of Logicorp Data Systems Ltd., and Logicorp Service Group Ltd.
respectively. The remaining 2/3 of the shares of Logicorp data Systems and
Logicorp Service Group were acquired directly by CMCG.
On March 18, 2002, we sold our educational video and media resources
business, which was conducted through our Magic Lantern subsidiary and its
subsidiaries.
Effective December 15, 2003 we sold certain assets and liabilities of NTN
to NTN Communications, Inc. ("NTN Communications"), an unaffiliated third party
from which NTN licenses portions of its technology. The purchase price consisted
of US$250,000 in cash, US$650,000 in stock of NTN Communications, and additional
cash based on working capital at closing. The purchase price was offset by
approximately US$700,000 owed by NTN to NTN Communications under this license
agreement. We believe that the interactive entertainment industry does not
represent the growth markets that we wish to develop.
Until April 30, 2001, Chell.com USA was an operating company in the
merchant services. Since then and thru August 31, 2002, we have not had any
operations in merchant services.
Engyro and cDemo were investment companies that were invested in under our
merchant services segment. We have no further plans to develop these companies
and as such are held as investments that were written down during the fiscal
year ended August 31, 2001 to zero.
Effective August 8, 2004, the Company's previously wholly-owned
subsidiaries, , Logicorp Data Systems Inc., and Logicorp Service Group Inc.
(together, "Logicorp") issued common shares to NewMarket Technologies, a
publicly-traded company for $2.1 million USD, such that NewMarket holds 51% of
the outstanding equity securities of Logicorp. In exchange for 51% of these
subsidiaries, NewMarket will pay $1.1 million in cash and $1.0 million will be
paid to Logicorp according to the terms of a $1.0 million, 24-month promissory
note.
BUSINESS SEGMENTS
Systems Integration is an area of business in which our subsidiaries offer
systems solutions to companies of various sizes. These solutions include the
delivery and installation of computer hardware solutions; services to companies
to aid in their business processes or infrastructures or customized solutions to
enable smooth migration to advancing technologies growing technology with their
organization.
2
Interactive Entertainment is an area of business that we have decided to
divest ourselves of in order to focus our attention on the systems integration
as is seen with the subsequent sales of GalaVu and NTN. This segment was viewed
as an area of business in which we could use our technology to provide
entertainment to the end user. This entertainment would allow for the
interaction with other users or just for their own benefit. This segment has
been discontinued by the sales of GalaVu and NTN.
ORGANIZATIONAL STRUCTURE
During the year ended August 31, 2003, we conducted our business through
five material operating subsidiaries or subsidiary groups and three other
companies in which we held investments. The following is a list of these
subsidiaries or groups and investments, a designation of the business segments
in which each then operated, and the percentage of our revenue attributable to
such subsidiary or group of subsidiaries or investment:
- --------------------------------------------------------------------------------
PERCENTAGE OF REVENUE
FOR THE YEAR ENDED
WHOLLY-OWNED SUBSIDIARIES BUSINESS SEGMENT AUGUST 31, 2003
================================================================================
Subsidiaries or Subsidiary Groups Actual Proforma(1)
- --------------------------------- ------ -----------
Logicorp Systems 93.8 73.5
Integration
eTelligent Systems 6.2 4.9
Integration
NTN (sold December 2003) Interactive 0.0 13.9
Entertainment
GalaVu (sold April 2003) Interactive 0.0 7.7
Entertainment
CMCG Merchant Services 0.0 0.0
Investment Companies
- --------------------
Engyro, Inc. (2) Other 0.0 0.0
cDemo Inc. (2) Other 0.0 0.0
- --------------------------------------------------------------------------------
(1) The operations of NTN were sold on December 15, 2003. We sold GalaVu on
April 25, 2003. We discontinued the operations of CMCG in February 2001. CMCG
was then used to acquire Logicorp in January 2002. See Note 13 of consolidated
financial statements for disclosures on business acquisitions
(2) The percentage of ownership in these companies is less than 5% and the
values have been written of in Fiscal 2001
We believe that we currently beneficially own less than 5.0% of the
outstanding securities of Engyro and cDemo. As a result of our minority
investment in such entities, future revenues, when and if realized, will not be
included in our total revenues. We have no obligation to provide additional
funding or support to such corporations and believe that such corporations are
immaterial to our business.
LOGICORP
Logicorp is a Western Canadian information technology solution provider,
specializing in Network Infrastructure, Security, Microsoft Business Solutions
and Managed Services. We want our clients to consider us their sole provider of
computer-related products and services, to meet their entire network
infrastructure, security and managed services needs, either at a single or
multiple locations. We believe our strong relationship with manufacturers and
suppliers and our commitment to development and education can be a huge
advantage for our clients. We intend to provide the strategies, solutions,
services and products to help our clients better manage their business and
technology complexities.
IT Infrastructure. We offer services designed to comprehensive, expert
develop and enhance clients' IT environments and infrastructures through our
supply channels and our staff. Through remote monitoring and management, request
management, or on-site systems support our services are intended to help a
company maintain smooth operation of the network, whether it is a large site
with many users or a small business network. We help manage desktop environments
for end-user communities, implement and maintain desktop infrastructures,
help-desk services, managing local area networks and shared systems and
technology lifecycle management. We also offer a continuum of fully managed,
3
scalable, hosting services, including assisting clients with the implementation
and hosting of their enterprise packaged applications, storage related
consulting, mainframe management, security and privacy services and web hosting
services.
o End User Services. Our customizable services manage the desktop
environment for end-user communities with distinct user profiles,
devices, applications, work locations or collaboration needs.
Offered through a Web portal with flexible pricing options, End User
Services include messaging, digital learning, mobility and mail
services.
o Field Services. We offer on-site implementation and maintenance of
desktop infrastructure, including hardware and software support,
install/move/add/change services and warranty management.
o Helpdesk Services. We provide users with a single point of contact
for problem and service requests. These services enable direct
interaction between the desktop user and Logicorp's technical
support organizations, which leverage both human and technical
resources.
o Infrastructure Services. We manage local area networks and shared
systems to defined levels of performance, including server
management, network management, security management and
backup/restore services.
o Technology Lifecycle Management. Logicorp provides a suite of
services that augment, support and increase the value and
productivity of end-user hardware and software. The services include
planning and architecture, procurement, global reporting, model
office services (to test designs before implementation), security
management and business continuity/disaster recovery services.
o Security and Privacy. We deliver consulting, technology, training
and managed solutions to ensure the privacy, integrity and continued
availability of critical information and processes. Our services and
solutions include smart cards and biometrics, perimeter protection
of logical systems, best practices in business continuity, security
and privacy training and outsourced managed security and privacy.
Transformation Services. Our Transformation Services include Business
Process Innovation Services and Business Acceleration Services. Our Business
Process Innovation Services help clients achieve their business objectives by
redesigning and transforming their process and performance measurement systems
to effectively support their business strategies. Our Business Acceleration
Services optimize business processes and deliver solutions that enable clients
to quickly realize business value, generate savings and minimize implementation
risk.
Applications Management and Development Services. Our services help
organizations plan, develop, integrate and manage custom applications, packaged
software and industry-specific solutions. We offer applications management and
development services on an outsourced or out-tasked basis. Services range from
outsourcing of all application development and management to implementation and
management of Logicorp-owned or third-party industry applications. Our services
are supplemented by our industry-specific applications for the communications,
financial, health care and transportation industries, as well as for government
clients.
SERVICES CONSULTING
Services Consulting encompass a continuum of innovative and scalable
solutions from enterprise strategy through application design, development and
deployment. Our services encompass the management and deployment of disciplines,
competencies and capabilities within the following areas: Applications Services,
Applied Value Chain Services, Business Process Innovation Services and Business
Acceleration Services.
o Application Development and Support. We create new applications,
providing full lifecycle support through delivery. We define the
application requirements, analyze application characteristics,
implement to a production environment and monitor performance for a
warranted time.
4
o Application Selective Outsourcing. We offer full support for either
specific applications or an entire application portfolio. An expert
Logicorp team assesses the specified applications, plans the
transition and provides ongoing management to improve the client's
productivity and operating efficiency.
o Customer Relationship Management Services. Our services help clients
create collaborative, client-centric organizations. We provide
assessments, design and architecture, and implementation of CRM
solutions to manage the customer experience.
o Enterprise Resource Management Services. Our services help clients
assess and optimize their core enterprise business processes and
applications globally in both shared and dedicated environments.
Services include solutions engineering, enterprise modeling,
real-time automation, business intelligence and enterprise-software
expertise.
o Industry Products. Services include a full range of consulting,
planning, implementation and optimization to support adapting and
deploying industry-specific solutions to meet our clients' needs.
BUSINESS PROCESS INNOVATION SERVICES
Business Process Innovation Services help clients achieve their business
objectives by redesigning and transforming their personnel, process and
performance measurement systems to effectively support their business
strategies. We create operational efficiencies and enhance how our clients
deliver products and services to their clients and throughout their enterprise.
Services include quickly identifying opportunities for the greatest impact,
developing a business case for change, implementing industry-specific best
practices and developing a phased change implementation plan. Our competencies
are organized into the following practice areas:
o Integration Services. By integrating disparate systems, we offer
clients greater access to information, systems and tools within
their enterprise or among other members of their trading community.
Our capabilities include integration assessment,
application-to-application and business-to-business integration,
building of portals and dashboards and workflow integration.
o Portals and Dashboards. Provides clients with immediate, aggregated
information in a personalized view. We focus on implementing secure,
Web-based solutions that provide a single point of access to
information, applications and services. This practice combines
functions from many IT disciplines, including business intelligence,
document management and Intranet site development.
o Collaboration Services. Enables clients to share and coordinate data
with employees, customers, suppliers and partners, build digital
communities and exchange information within applications, among
enterprises and across business relationships. We optimize
collaboration and improve related business processes through the
deployment of leading messaging and collaboration technologies.
o Mobile Applications. Enables clients to extend information sharing
to an increasingly remote work force. Our offerings include Mobile
Workplace, an integrated service platform providing mobile employees
real-time interactive access to workplace applications, and Mobile
e-mail and Collaboration, extending e-mail access to mobile
employees.
o Web Content Management. We design and deploy innovative Web content
management solutions to help clients manage digital contents to
deliver a personalized Web experience, enable collaboration and
promote re-use.
o Web Application Development. Allows clients to significantly reduce
IT costs and create more responsive and effective organizations by
seamlessly connecting information, people, systems and devices. We
offer a range of services using Microsoft(R) and Java(R) 2
Enterprise Edition (J2EE) platforms as well as the advantages of
certified developers, proven architectural frameworks and best
practice software development methodologies.
5
o Microsoft Enterprise Services. We build and deliver innovative
solutions that leverage Microsoft platforms, products and tools,
with emphasis on developer tools, server software, client software
and end user applications.
ETELLIGENT SOLUTIONS INC.
eTelligent is a western Canadian team of business system consultants
specializing in implementing and integrating e-business, CRM (customer
relationship management) and financial services solutions from Microsoft Great
Plains. The organization is comprised of professional accountants, information
technology specialists and support staff, who provide implementation, training
and support services. eTelligent Solutions has offices in Edmonton and Calgary,
Alberta. eTelligent Solutions Inc. has provided successful business solutions to
a variety of business organizations for over ten years. They currently represent
and support over 70 Microsoft Great Plains customers throughout Alberta. All of
their employees are certified through the Microsoft Great Plains University.
NTN
NTN Interactive Network. NTN Interactive Network subsidiary is engaged in
the marketing and distribution of the NTN Entertainment Network services
throughout Canada. These activities are being conducted through an exclusive
license covering Canada granted to NTN Sports Inc., (predecessor to our NTN
Interactive Network subsidiary) by NTN Communications, Inc. of Carlsbad,
California, an unaffiliated corporation from which NTN licenses a portion of its
technology ("NTN-US"). The license grants our NTN Interactive Network subsidiary
the right to market the products and programs of NTN Communications, Inc.
throughout Canada for a 25-year term ending December 31, 2015. NTN
Communications, Inc. does not have an equity position in us or in our NTN
Interactive Network subsidiary.
Effective on December 15, 2003, we sold certain assets and liabilities of
NTN to NTN-US. In exchange for this business and assets, NTN has agreed to pay
US$1.5 million (Cdn$2.03 million), consisting of (i) US$650,000 (approximately
Cdn$853,000) of unregistered common stock (approximately 238,000 shares) of
NTN-US (NTN:AMEX) valued on the closing market price on the date of sale and
(ii) US$250,000 (approximately Cdn$328,000) in cash at closing, less certain
fees due from NTN to NTN-US, such amounts payable in three equal monthly
payments.
THE NTN ENTERTAINMENT NETWORK
The NTN Entertainment Network is owned and operated by NTN-US and uses
existing technology to broadcast two-way interactive live events to subscriber
locations. The network provides digital data transmissions, which enable
equipment and software at subscriber locations to display text and graphics
programming and to interpret responses from network viewers. All programming is
produced at and transmitted from the NTN-US broadcast center in Carlsbad,
California. More than 3,600 restaurants, lounges, hotels, and other hospitality
sites across North America have subscribed to these services and installed
systems capable of receiving network broadcasts. These subscriber systems
receive satellite transmissions containing updates to the network interactive
programs, such that thousands of patrons at subscriber locations can interact
with the same programs simultaneously. Our NTN subsidiary markets the network
throughout Canada to the hospitality industry, installs the systems, and
provides technical and marketing support to network sites. Over 400 group
subscribers are located in Canada. Designed to be hardware independent, the
network may be transmitted through a variety of techniques including, direct
satellite, cable, gateway service, FM sideband, Internet, TV vertical blanking
interval, and telephone. We currently use direct satellite as the method of
transmission.
NETWORK PROGRAMMING.
The two-way interactive programming currently featured over the network
includes a variety of interactive sports and trivia games permitting viewer
interaction and participation for 16 hours each day. All present network
programming is structured to provide time for national, regional and local
advertisements, as well as for local inserts, which permit each subscriber to
display announcements of promotional prices or other events at its business
location.
6
NTN PLAY-ALONG GAMES.
NTN Play-Along Games are played in conjunction with live, televised
events. The prime NTN Play-Along Game is QB1, a game of football strategy.
NTN PREMIUM TRIVIA GAMES.
NTN Premium Trivia Games are promotion-oriented weekly game shows that
usually require an hour of participation. Prizes are awarded to the top
finishers. Games among all participating subscriber locations include the
following: Showdown, a general knowledge game; Sports Trivia Challenge, a game
focused on sports, and Spotlight, a game that quizzes players about the world of
show business and celebrities; Playback, a music news, trivia, song title and
musical topics game; and Sports IQ, a weekly sports trivia game. Half-hour
interactive trivia games comprise the majority of the Network's programming.
Countdown and Wipeout are trivia games designed for fast competitive play among
participants at each subscriber location.
INTERACTIVE EVENTS. Interactive Events is a customizable, hosted
interactive trivia, polling or question event brought to the customer. An event
can be created with a customer's logos, graphics and content and will be hosted
by a real host to aid in increasing the enjoyment of the event.
NTN INTERACTIVE NETWORK MARKET. Our NTN subsidiary positions the network
to prospects and clients as a means of attracting patrons (to play the games),
retaining their patronage (as they return to play again), and increasing the
length of time patrons stay in their establishment. As the number of repeat
customers and their length of stay increases, the hospitality establishment has
an increased opportunity to sell additional food and beverage.
Our NTN subsidiary's sales force targets the strongest hospitality outlets
in Canada, including a number of chain accounts. Attractive rental packages are
in place to support our NTN subsidiary's sales efforts. Our NTN subsidiary
promotes the network as one of the best and technically advanced forms of
on-premises advertising to this market, offering long-term repetitive exposure
to a captive, attentive, and enthusiastic audience.
Each end user receives the subscriber system, including the equipment and
the proprietary software, from our NTN subsidiary. In most instances, the
customer rents the equipment from our NTN subsidiary. Our NTN subsidiary, in
turn, purchases equipment from several suppliers. Following installation, each
end user pays a monthly fee to our NTN subsidiary for the network services.
GALAVU ENTERTAINMENT NETWORK INC.
Our GalaVu subsidiary (sold April 2003) is a technology-based
entertainment provider of interactive in-room entertainment systems to hotels.
At April 25, 2003, our GalaVu subsidiary was installed in over 200 Canadian
hotels, primarily small and mid sized. GalaVu's interactive system is based on
proprietary technology and provides a wide range of affordable, in-room
entertainment packages. Marketed to guests under the "Round-the-Clock
Entertainment" brand, GalaVu's suite of products include Hollywood movies on
demand, premium television programming, and other information and entertainment
services designed to enhance the stay of hotel guests while generating revenue
for our GalaVu subsidiary and its hotel partners.
Pursuant to a Share Purchase Agreement dated April 25, 2003, we sold to
DVOD Networks Inc., an Ontario corporation ("DVOD"), all of the issued and
outstanding shares of capital stock of GalaVu for $1.00. Concurrently, we
assigned to DVOD or caused our subsidiaries to assign to DVOD, for $2.00
promissory notes and other receivables of GalaVu in the aggregate amount of
$1,672,608. In addition, 488605 Ontario Limited, a non-affiliated Canadian
corporation ("488605") and an individual assigned a $375,000 note payable by
GalaVu in return for $170,000. This amount was paid by DVOD to us and a new
$325,000 note was issued to one of our subsidiaries.
7
CHELL MERCHANT CAPITAL GROUP
CMCG was set up as a separate subsidiary to be in the business of
researching, identifying and acquiring technology companies. CMCG's focus was to
identify upcoming technology trends and create the effective infrastructure
required to build out and support these trends. CMCG is a wholly-owned
subsidiary of our company. Our interests in our Logicorp subsidiaries are held
through Chell Merchant Capital Group.
ENGYRO
Engyro is the surviving legal entity resulting from the merger of R Home
Funding Co. Ltd., a Nevada corporation and its wholly owned Delaware subsidiary,
Engyro, Inc. Its headquarters are located in Shelton, Connecticut. Engyro was a
financial transaction engine designed to support the high demands created by
rapid growth in the application service provider industry. We own less than 5.0%
of the stock of Engyro and the remaining equity of the company is owned by
private venture capitalists and Engyro's management. The direction and purpose
of the company may now be very different from its original intent. We have
written down our investment to zero as our ownership is less than 5%.
CDEMO
cDemo is a start up company that was incorporated in the State of Delaware
in February 2000. We own less than 5.0% of the stock of cDemo and the remainder
of the company's stock is distributed as follows: private venture capitalists;
cDemo's management and employees, none of whom are affiliated with us. Allan
Chell, the brother of Cameron Chell, our former Chairman of the Board of
Directors, President and Chief Executive Officer, is a Director and principal
shareholder of cDemo and its Vice-President of Strategic Development.
cDemo plans to position itself as a trusted and unbiased electronic
assessment tool and service. To perform a standardized electronic assessment and
listing, cDemo has researched and developed an assessment methodology that is
capable of "commoditizing" products, and displaying them in a format that is
easy to both read and view. cDemo's unique consortium of technology partners are
producing a technological system that we believe will be capable of tailoring
the cDemo electronic assessment to industry and partner requirements. The
assessment software will be loaded into a rugged, handheld tablet. cDemo plans
to use this tablet device to collect and transmit an electronic demonstration
based on an Internet connection to the cDemo backend database.
GROWTH STRATEGY
Our growth strategy primarily focuses around increasing the profitability
in our operating companies through process development and technological
advances to aid an organization in operating efficiencies. While at the same
time searching for companies that will allow for us to increase our market share
and our profitability or allow us the ability to offer unique technologies that
our companies can sell and promote to our existing and potential new clients.
COMPETITION
The market for each of our business segments was at August 31, 2003 and
remains rapidly evolving and highly competitive. Although we believe that each
of our business segments is comprised of a large number of actual and potential
competitors and that, other than our interactive entertainment business segment,
the business segments in which we operate diverse segments of the interactive
entertainment and venture capital services markets will provide opportunities
for more than one supplier of products and services similar to ours, it is
possible that a single supplier may dominate one or more market segments.
Competitors include a wide variety of companies and organizations, including
venture capitalists, interactive entertainment providers, Internet software,
content, service and technology companies, telecommunication companies, cable
companies and equipment/technology suppliers.
Our NTN Interactive Network subsidiary operates in the interactive
entertainment services industry. In 1996, we became aware of a new entertainment
system, Sports Active, attempting to enter the hospitality market. Sports Active
offers only two programs, a football game and a trivia game. With the entrance
of motion picture, cable and TV companies, competition in the interactive
entertainment and multimedia industries will likely intensify in the future.
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GalaVu's competition includes other interactive in-room entertainment
providers. With the development of new satellite technologies, and the
increasing speed of network connections, GalaVu expects the competition to
develop new services. These new services may include digital programming on
demand, enhanced hotel concierge services, billing presentment and settlement,
and others. GalaVu expects that new technologies will lead to intensifying
competition in the future.
INTELLECTUAL PROPERTY
Our success is dependent upon software and other intellectual property
from third parties. Notwithstanding the foregoing, no one license is material to
our business prospects, financial condition or results of operations. We must
conduct our operations without infringing on the proprietary rights of third
parties. We also rely upon non-patented trade secrets and the know-how and
expertise of our employees. To protect our licensed technology and other
intellectual property, we rely primarily on a combination of the protections
provided by applicable contract, copyright, trademark, and trade secret laws as
well as confidentiality procedures and licensing arrangements. Although we
believe that we have taken appropriate steps to protect our non-patented
proprietary rights, including requiring that our employees and third parties who
are granted access to our licensed technology enter into confidentiality
agreements with us, there can be no assurance that these measures will be
sufficient to protect our rights against third parties. Others may independently
develop or otherwise acquire non-patented technologies or products similar or
superior to ours.
We license from third parties certain software and Internet tools that we
include in our services and products. If any of these licenses were terminated,
we could be required to seek licenses for similar software and Internet tools
from other third parties or develop these tools internally. We may not be able
to obtain such licenses or develop such tools in a timely fashion, on acceptable
terms, or at all. Companies participating in the software and Internet
technology industries are frequently involved in disputes relating to
intellectual property. We may in the future be required to defend our
intellectual property rights against infringement, duplication, discovery, and
misappropriation by third parties or to defend against third-party claims of
infringement. Likewise, disputes may arise in the future with respect to
ownership of technology developed by employees who were previously employed by
other companies. Any such litigation or disputes could result in substantial
costs to, and a diversion of effort by, us. An adverse determination could
subject us to significant liabilities to third parties, require us to seek
licenses from, or pay royalties to, third parties, or require us to develop
appropriate alternative technology. Some or all of these licenses may not be
available to us on acceptable terms or at all, and we may be unable to develop
alternate technology at an acceptable price or at all. Any of these events could
have a material adverse effect on our business, prospects, financial condition,
and results of operations.
EMPLOYEES
As of September 15, 2004 we employed 65 employees in the four operating
subsidiaries, consisting of 3 executives, 3 general managers, 29 salespersons, 3
in marketing, 5 individuals involved in administration, 5 individuals involved
in finance and accounting, 17 individuals involved in information services. We
believe that our staff is adequate for our anticipated needs.
ITEM 2. PROPERTIES.
During the fiscal year ended August 31, 2003, we owned an approximately
25,000 square foot parcel of land, located at 14 Meteor Drive in Toronto,
Ontario, on which stands a 12,500 square foot, one story building. On December
19, 2003, we sold this land and building to an unrelated third party for
approximately $730,000 and recorded a gain on the sale of approximately
$100,000.
During the fiscal year ended August 31, 2003, we owned an approximately
29,000 square foot parcel of land, located at 10 Meteor Drive, Toronto, Ontario,
on which stands a 14,000 square foot, two story building. We sold this land and
building to an unrelated party on March 7, 2004 for approximately $710,000. The
sale resulted in an approximate gain of $70,000.
9
The properties located at 10 & 14 Meteor Drive in Toronto, Ontario and 775
Pacific Road in Oakville had been financed through a mortgage, with the Bank of
Montreal, dated April 24, 2002. The principal balance outstanding regarding
these two properties, as at August 31, 2003 was Cdn$789,584. The property at 14
Meteor was sold December 19, 2003.
During the fiscal year ended August 31, 2003, GalaVu leased 8,619 square
feet of office space in a building located at 3790 - 3820 Victoria Park Avenue,
North York, Ontario, which lease expires on October 31, 2002 (CND$77,729
annually). GalaVu was sold April 25, 2003 and the Company no longer holds any
obligation on these leases.
During the fiscal year ended August 31, 2002, Chell Merchant Capital Group
leased 12,043 square feet of office space in Suites 301, 500 and 700 in a
building located at 630 - 8th Avenue S.W. Calgary, Alberta, T2P 1G6. The
combined annual rent of the three suites was Cdn$199,000. Effective October
2002, we subleased this space to unaffiliated third parties upon the
discontinuation of the operations of this subsidiary for Cdn$144,000 per annum.
Commencing on December 15, 2003, we started utilizing interim space in
Toronto, Ontario at nominal cost and there are no lease agreements in place for
the use of the spaces.
Logicorp leases approximately 17,502 square feet in Edmonton, 11,800
square feet in Calgary and approximately 4,500 square feet in Vancouver for
approximately annual rent of $220,350, $115,640 and $62,300 respectively. The
leases expire as follows: Edmonton - December 2006, Calgary - July 31, 2012, and
Vancouver - March 31, 2007.
We believe that our facilities and those of our subsidiaries are adequate
for their present requirements.
ITEM 3. LEGAL PROCEEDINGS.
Set forth below is a description of material pending litigation to which
we are a party.
NTN LITIGATION
On June 18, 1992, Interactive Network Inc. (Interactive) commenced a
lawsuit against us, NTN Communications and our NTN subsidiary in the Federal
Court of Canada, Trial Division, Montreal, Quebec, under the title INTERACTIVE
NETWORK, INC. v. NTN COMMUNICATIONS, INC., NTN SPORTS, INC. AND NTN CANADA, INC.
This action alleges that Interactive granted NTN Communications the right to use
the Interactive Patent, which right Communications then improperly licensed to
our NTN subsidiary and us. Interactive alleges that the license agreement
between NTN Communications and our NTN subsidiary and us infringes upon the
Interactive Patent. The action seeks a declaration of the validity of the
Interactive Patent, an injunction restraining us from further infringement, and
either damages (in an unspecified amount) or an accounting of profits derived
from certain games used in Canada. Except for the aforementioned pleadings, no
proceedings or discovery have been undertaken in this action.
We believe that the licenses granted to us by NTN Communications are valid
and that the patent infringement claims underlying this action will ultimately
be proven to be unfounded. We intend to vigorously defend our position and to
prosecute the Interactive position in the action; however, there can be no
assurance that any or all of these actions will be decided in favor of us. We
believe, based in part upon the advice of outside, independent counsel, that the
costs of defending and prosecuting these actions will not have a material
adverse effect upon our financial position.
In its Quarterly Report on Form 10-Q, for the quarter ended September 30,
1996, NTN Communications stated that "[w]ith the courts [SIC] assistance,
[Communications] and [Interactive] have been able to reach a resolution of all
pending disputes in the United States and have agreed to private arbitration
regarding any future licensing, copyright or infringement issues which may arise
between the parties." The disputes referred to in the NTN Communications Form
10-Q involved litigation in the United States involving allegations similar to
the allegations underlying the actions between Interactive and us. In the NTN
Communication Form 10-Q, NTN Communications also noted that "no substantive
action has been taken in the furtherance of" the Company Action or Interactive
Action.
10
CANADA CUSTOMS AND REVENUE AGENCY LITIGATION
Canada Customs and Revenue Agency is currently in discussions with us
regarding a potential liability with respect to withholding tax on certain
amounts paid to Communications. An assessment in the amount of approximately
$550,000 has been made to date by Canada Customs and Revenue Agency and we have
filed a notice of objection. We believe that we have valid defenses with respect
to these matters and accordingly, no amount has been recorded in the Company's
financial statements. In the event that such matters are settled in favor of
Canada Customs and Revenue Agency, the amounts could be material and would be
recorded in the period in which they become determinable.
LOGICORP DATA SYSTEMS LITIGATION
On January 27, 2003, a former President of Logicorp Data Systems filed a
wrongful dismissal claim against Logicorp Data Systems and us. A round of
examinations for discovery has been held and preparation of the affidavit of
records is underway. Further discoveries were held during the week of September
8, 2003. Our counsel has determined that it is too early in the process to
evaluate the merits of the case. We have not accrued any liabilities related to
this claim as of August 31, 2003. We have filed a counter-suit stating that the
former President was fraudulent in his representation to the Company.
In June 2001, a former employee filed a wrongful dismissal claim against
LDS. Subsequently the employee offered to settle for which LDS rejected. No
further action has taken place since October 2001 and accordingly, LDS believes
it will prevail and has not accrued liabilities on the accompanying financial
statements related to this claim.
CHELL MERCHANT CAPITAL GROUP LITIGATION
In May 2002, a former consultant filed a claim against CMCG. The
consultant claims that he is owed commissions, options and expenses related to
his time working at Interlynx. The consultant has offered to settle for which
CMCG has rejected. CMCG believes that firstly, it is not responsible for a
lawsuit against Interlynx and secondly, that the consultants claims are
unjustified. This lawsuit is scheduled for trial at the end of October, 2004.
CMCG believes it will prevail and has not accrued liabilities on the
accompanying financial statements related to this claim.
8% CONVERTIBLE NOTES
On December 1, 2001, the Company offered to certain investors 8%
convertible notes up to a maximum amount of US$ 8,000,000 in a private
placement. The Company received approximately Cnd$6,587,622 through this
offering. Under the terms of this offering, the notes are convertible into
shares of common stock at a price of the greater of (1) 50% of the average
closing bid prices for the ten trading days prior to conversion or (2) US$0.50.
These notes were due August 9, 2002. On April 9, 2002 all of the holders of the
notes signed commitments to voluntarily convert the notes based on the
conversion price per the terms of the agreement, which was determined to be
US$0.95 per share. This conversion was subject to shareholder approval. The
conversion of these notes would have resulted in the issuance of approximately
4,389,000 shares representing approximately 20% of the total common shares
outstanding after the issuance, and diluting the current common stockholders. As
of August 31, 2003, none of these shares has been issued and the outstanding
amount of the convertible notes was classified as liabilities. As of December 2,
2002, the Company, Joseph Gunnar & Co., LLC ("JGUN"), the placement agent in
this offering, and the holders of these notes entered into a settlement
agreement providing that the conversion price for these notes shall equal 85% of
the two day weighted average trading price of the common stock for the five
trading days preceding effective date of the registration statement under the
Securities Act of 1933, as amended, relating to the resale of the shares of
common stock issuable upon such conversion, provided, that such conversion price
cannot be greater than $0.75 or less than $0.40. Effective January 7, 2003, the
Company, JGUN, Cameron Chell and the holders of the notes agreed that if this
registration statement is not declared effective on or prior to September 1,
2003, the noteholders could "put" their shares of common stock to Mr. Chell at a
11
price of $0.475 per share during the period of December 1 - 14, 2003. At April
30, 2004, such registration statement has not been filed. By letter dated
December 4, 2003, the noteholders agreed to permit the Company until February
28, 2004 to file all required filing and periodic reports under the Securities
Exchange Act of 1934, as amended, and to amend the period during which they may
"put" their shares issuable upon such conversion to Mr. Chell from December 1-
14, 2003, to March 1 - 14, 2004, in exchange for the extension of the "put"
period and the reduction of the conversion price to $0.25 per share, provided,
that, if such deadline was not satisfied by the Company such agreement and
reduction of the conversion price would be null and void. By letter, dated
February 26, 2004, this deadline and the "put" period were amended to be April
30, 2004 and May 1 - 14, 2004, respectively. By letter, dated April 29, 2004,
the Company requested that such deadline and "put" period be further amended to
be May 30, 2004 and June 1 - 14, 2004, respectively. In the event that the notes
should be converted into shares of common stock at the conversion price of $0.25
per share, the aggregate number of shares of common stock issued upon such
conversion would be approximately 16,640,000, representing approximately 54% of
the common stock outstanding giving effect to such conversion. On June 11, 2004,
the Company again requested that such deadline and "put" period be further
extended to be August 10, 2004 and August 11-24, 2004, respectively. Effective
September 14, 2004, the Company has asked for another extension to October 11,
2004. In addition, the Company proposed that the notes would be automatically
converted on the earlier of (i) the date that all annual and quarterly reporting
obligations under federal securities laws have been complied with or (ii) July
10, 2004. The conversion price of the notes has been further reduced from $0.25
per share to $0.16 per share. The aggregate number of shares of common stock
issued upon such conversion would be approximately 29,358,209, representing
approximately 67.25% of the common stock outstanding giving effect to such
conversion. One noteholder has indicated to the Company that it believes that it
has a cause of action against the Company with respect to the foregoing and its
rights under such notes, and has threatened to bring such action against the
Company. In the event that the Company should be found to be in default of the
notes or the related agreements, the Company may be required to repay the notes
in the event that a settlement is not reached with the noteholders. In such
event, the Company does not believe that it currently has the necessary capital
available to repay the notes and would be required to seek additional sources of
capital or seek protection from creditors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
Neither our property nor ourselves are a party or subject to any other
material pending legal proceedings, other than ordinary routine litigation
incidental to our business.
To our knowledge no other proceedings of a material nature have been or
are contemplated against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET PRICE FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock, par value $.0467 per share (the "Common Stock"), was
delisted from the over-the-counter market and was quoted on the NASDAQ Small Cap
Market ("NASDAQ"), under the symbol "CHEL". It is now traded on the NASDAQ pink
sheets under the symbol "CHEL.PK". Set forth below is the range of high and low
bid prices (US$) for shares of Common Stock for each full quarterly period
within our three most recent fiscal years and our quarter of the current year.
The information reflects inter-dealer prices, without retail mark-ups, markdowns
or commissions and may not necessarily represent actual transactions.
12
- --------------------------------------------------------------
HIGH LOW
---- ---
(US$) (US$)
==============================================================
2001 FISCAL YEAR
First Quarter 7.219 3.000
Second Quarter 4.813 1.813
Third Quarter 2.313 0.938
Fourth Quarter 1.600 0.870
2002 FISCAL YEAR
First Quarter 1.310 0.510
Second Quarter 1.990 0.520
Third Quarter 2.250 1.190
Fourth Quarter 1.40 0.109
2003 FISCAL YEAR
First Quarter 0.909 0.109
Second Quarter 0.209 0.019
Third Quarter 0.409 0.109
Fourth Quarter 0.499 0.001
2004 FISCAL YEAR
First Quarter 0.259 0.001
Second Quarter 0.109 0.01
Third Quarter 0.059 0.001
Fourth Quarter 0.059 0.029
On September 14, 2004, the closing price of the Common Shares on NASDAQ
pink sheets was US$0.08.
As of September 14, 2004, we had 14,295,410 shares of common stock
outstanding.
As of the close of business on July 8, 2004, there were approximately 228
holders of record of our Common Stock. We believe that there are approximately
1,100 beneficial holders of Common Stock. We are informed and believe that as of
July 21, 2004, Cede & Co. held 3,406,326 shares of our common stock as nominee
for Depository Trust Company, 55 Water Street, New York, New York 10004. It is
our understanding that Cede & Co. and Depository Trust Company both disclaim any
beneficial ownership therein and that such shares are held for the account of
numerous other persons.
Since its inception in 1986, we have not paid any cash dividends on our
Common Stock. However, we have, in the past, declared certain stock dividends
and stock splits. We intend to retain earnings, if any, to finance operations
and, therefore, do not expect to declare or pay any cash dividends on the Common
Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth a summary of selected financial information
regarding the Company and its subsidiaries, consolidated, for each of the five
fiscal years ended August 31, 2003.
Statement of Operations Data (Canadian Dollars):
- ----------------------------------------------------------------------------------------------------------------
Year Ended August 31,
--------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Cdn$ Cdn$ Cdn$ Cdn$ Cdn$
Restated (1)
- ----------------------------------------------------------------------------------------------------------------
Operating revenues 32,500,096 34,207,924 16,595 13,703 61,804
Cost of sales 28,380,248 31,319,987 -- -- --
Gross profit 4,119,848 2,887,937 16,595 13,703 61,804
Net loss attributable to common
shareholders (7,541,502) (30,888,553) (11,747,639) (2,323,621) (971,497)
Net income (loss) per share, basic and
diluted (0.71) (3.13) (1.40) (0.81) (0.36)
Weighted average number of shares
outstanding, basic and diluted 10,757,273 9,879,836 8,393,589 2,873,042 2,635,050
=================================================================================================================
13
Balance Sheet Data (Canadian Dollars):
- -----------------------------------------------------------------------------------------------------------
August 31,
- -----------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Restated (1)
- -----------------------------------------------------------------------------------------------------------
Total assets 7,297,262 13,380,666 9,537,218 10,631,974 12,072,282
Long-term obligations 113,392 1,051,603 2,417,388 1,206,479 1,243,151
Shareholders' (deficit) equity (22,910,890) (16,988,536) 3,408,066 9,383,419 10,792,767
===========================================================================================================
(1) - See Note 17 to consolidated financial statements
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
RECENT EVENTS
Effective August 8, 2004, the Company's previously wholly-owned
subsidiaries, Logicorp Data Systems Inc., and Logicorp Service Group Inc.
(together, "Logicorp") issued common shares to NewMarket Technologies
("NewMarket"), a publicly-traded company for $2.1 million USD, such that
NewMarket holds 51% of the outstanding equity securities of Logicorp. In
exchange for 51% of these subsidiaries, NewMarket will pay Logicorp $1.1 million
in cash at closing. An additional $1.0 million will be paid to Logicorp
according to the terms of a $1.0 million, 24-month promissory note. As a result
of this transaction, the Company holds the remaining 49% of the outstanding
shares of Logicorp.
Twelve (12) months following the first anniversary of the purchase of the
51% interest, if Logicorp has achieved annual sales of at least $18,000,000 with
at least a breakeven profit, Chell Group will have an option to require
NewMarket to acquire the remaining 49% of the sellers remaining stock for a
purchase price of $1,900,000 to be paid in NewMarket stock with piggyback
registration rights. NewMarket will have an equal right to require the sale of
Chell Group's remaining 49% stock position in Logicorp under the same
performance conditions.
CORPORATE BACKGROUND
We are engaged in the business of providing interactive entertainment
services and systems integration services. Our core businesses are the systems
integration services provided by our Logicorp Data Systems Ltd. subsidiary and
the interactive entertainment services provided by our NTN Interactive Network
and GalaVu Entertainment Network Inc. subsidiaries.
As of August 31, 2003, we had a working capital deficit of $22,191,579 and
an accumulated deficit of $51,450,983. We generated revenues of $32,500,096 for
the 2003 Fiscal Year and incurred a net loss of $7,541,502. In addition, during
the 2003 Fiscal Year, net cash used in operating activities was $3,323,865.
We are in a transitional stage of operations and, as a result, the
relationships between revenue, cost of revenue, and operating expenses reflected
in the financial information included in this annual file do not represent
future expected financial relationships. Accordingly, we believe that, at our
current stage of operations period-to-period comparisons of results of
operations are not meaningful.
PLAN OF OPERATIONS
Our business strategy is to divest ourselves of non-core operating and
wind up all non-operating companies. While at the same time refocusing our
energies in our core companies and bring these operations to profitable
operations. Our core operations are the systems integration segment companies.
We will be bringing our corporate entity current with all of its filings and
will begin to petition for market status. While all the time looking for new
opportunities that may arise in order to increase our value and profitability.
14
We expect our general and administrative costs to increase in future
periods due to our operating as a public company whereby we will incur added
costs for filing fees, increased professional services and insurance costs.
The following is our selected statement of operations data by business
segment for the years ended August 31, 2003, 2002, and 2001.
================================================================================
2003 2002 2001
$ $ $
Restated
================================================================================
Revenue
Systems Integration 32,500,096 34,205,614 --
Corporate -- 2,310 16,595
- --------------------------------------------------------------------------------
32,500,096 34,207,924 16,595
- --------------------------------------------------------------------------------
Operating loss
Systems Integration (3,034,169) (1,162,568) --
Merchant Service -- -- (5,076,619)
Corporate (2,709,541) (15,089,159) (3,115,758)
- --------------------------------------------------------------------------------
(5,743,710) (16,251,727) (8,192,377)
- --------------------------------------------------------------------------------
Net loss attributable to common
shareholders
Systems Integration (3,659,647) (12,173,848) --
Merchant Service -- -- (6,524,427)
Corporate (4,795,166) (16,698,965) (3,115,758)
Discontinued Operations 913,311 (2,015,740) (2,107,454)
- --------------------------------------------------------------------------------
(7,541,502) (30,888,553) (11,747,639)
- --------------------------------------------------------------------------------
Total assets
Systems Integration 4,534,621 6,435,982 --
Merchant Service -- -- 1,589,465
Education -- -- 128,986
Corporate 1,793,349 2,810,773 3,170,689
Discontinued Operations 969,292 4,133,911 4,648,078
- --------------------------------------------------------------------------------
7,297,262 13,380,666 9,537,218
- --------------------------------------------------------------------------------
Capital expenditures
Systems Integration 275,104 127,737 --
Corporate 24,896 7,355 46,978
- --------------------------------------------------------------------------------
300,000 135,092 46,978
- --------------------------------------------------------------------------------
Depreciation & Amortization
Systems Integration 573,186 425,692 --
Merchant Service -- -- 431,967
Corporate 470,762 601,550 162,836
- --------------------------------------------------------------------------------
1,043,948 1,027,242 594,803
- --------------------------------------------------------------------------------
Interest expense
Systems Integration 625,479 182,209 --
Corporate 1,837,037 9,940,974 1,146,708
- --------------------------------------------------------------------------------
2,462,516 10,123,183 1,146,708
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
YEAR ENDED AUGUST 31, 2003 COMPARED TO YEAR ENDED AUGUST 31, 2002
REVENUES. Revenues from product sales for the 2003 Fiscal Year were
$30,321,968 compared to $32,468,400 for the 2002 Fiscal Year, a decrease of
$2,146,432 or 6.6%. For comparative purposes, Logicorp was purchased on January
1, 2002, thus we are comparing 12 months for the 2003 Fiscal Year compared to 8
months for the 2002 Fiscal Year. Logicorp experience an overall decrease in
sales. This decrease is attributed to a slumping technology market and decreased
sales due to a reorganization in the sales force.
15
Revenues from service sales for the 2003 Fiscal Year were $2,178,128
compared to $1,739,524 for the 2002 Fiscal Year, an increase of $438,604 or
25.2%. For comparative purposes, Logicorp was purchased on January 1, 2002, thus
we are comparing 12 months for the 2003 Fiscal Year compared to 8 months for the
2002 Fiscal Year. In addition, eTelligent was purchased June 1, 2002 thus
resulting in a full year of sales for the 2003 Fiscal Year as compared to 3
months worth of sales for the 2002 Fiscal Year. eTelligent's sales for the 2003
Fiscal Year were $1,136,206 compared to $473,553 for the 2002 Fiscal Year, an
increase of $662,653. Logicorp experienced an overall decrease in service sales
of $224,049. This decrease is attributed to a slumping technology market and
decreased sales due to a reorganization in the sales force.
As a result of the foregoing, our total revenues in the aggregate were
$32,500,096 for the 2003 Fiscal Year, compared to $34,207,924 for the 2002
Fiscal Year, a decrease of $1,707,828. The decrease is due to a slumping
technology market and a decreased sales staff.
COST OF REVENUES. Cost of revenues from product sales for the 2003 Fiscal
Year was $28,088,752 compared to $30,725,499, a decrease of $2,636,747 or 8.6%.
This decrease is the result of decreasing comparative sales and a change in
sales mix to higher margin products
Cost of revenue from service sales for the 2003 Fiscal Year were $291,496,
compared to $594,488 for the 2002 Fiscal Year. The decrease is attributable to
increases in the sales of services, offset by decreasing the costs associated
with the sales department.
As a result of the foregoing, our total cost of revenues for continuing
operations was $28,380,248 for the 2003 Fiscal Year, compared to $31,319,987 for
the 2002 Fiscal Year, a decrease of $2,939,739 or 9.4%. The decrease is the
result of decreasing sales from the weak technology market.
GROSS PROFIT. Gross profit was $4,119,848 for the 2003 Fiscal Year
compared to $2,887,937 for the 2002 Fiscal Year. The increase is attributable to
having Logicorp and eTelligent for a full fiscal year in the 2003 Fiscal Year.
EXPENSES. Selling, general and administrative expenses for the 2003 Fiscal
Year were $8,656,468, compared to $7,622,873 for the 2002 Fiscal Year, an
increase of $1,033,595 or 13.6%. Due to having Logicorp and eTelligent for a
full fiscal year, there was in increase of $3,143,406. The major items
offsetting the increase were; no cost associated with the acquisition and
financing raises in the 2003 Fiscal Year when compared to approximately
$2,600,000 in the 2002 Fiscal Year; decreased costs associated with the closing
on CMCG in the 2002 Fiscal year of $528,711 and decreased legal and accounting
fees of $717,860. As a percentage of our total revenues, such costs increased to
26.6% for the 2003 Fiscal Year from 22.3% for the 2002 Fiscal Year.
Write-off on leasehold improvements for the 2003 Fiscal Year was $163,142
compared to $nil for the 2002 Fiscal Year. Since the Company was not occupying
the space leased by CMCG, it was determined that the value of the leaseholds
needed to written off to represent the PV of rent received from the sublease.
Depreciation and amortization for the 2003 Fiscal Year were $1,043,948,
compared to $1,027,242 for the 2002 Fiscal Year, an increase of $16,706 or
1.6%.. As a percentage of our total revenues, such costs increased to 3.2% for
the 2003 Fiscal Year compared to 3.0% for the 2002 Fiscal Year.
Loss from the impairment of goodwill for the 2003 Fiscal Year was nil
compared to $10,489,549 for the 2002 Fiscal Year. The costs for the 2002 Fiscal
Year arose from the impairment of our subsidiaries in the Logicorp Group of
Companies.
Loss from operations for the 2003 Fiscal Year was $5,743,710 compared to
$16,251,727 for the 2002 Fiscal Year, a decrease of $10,508,017 or 64.7%. This
decrease was caused primarily by no impairment of goodwill for the 2003 Fiscal
Year ($10,489,549 for the 2002 Fiscal Year) and an increase in gross profit
($1,231,911 for the 2003 Fiscal Year) associated with having Logicorp and
eTelligent for a full fiscal year.
16
Loss on extinguishment of debt was nil for the 2003 Fiscal Year compared
to $521,120 for the 2002 Fiscal Year. The 2002 Fiscal Year loss resulted from a
beneficial conversion and interest expense was calculated as of the date of the
agreement to convert the notes to common shares, as the difference between the
conversion price and the fair value of the common stock into which the notes are
convertible. The Company recognized a loss on extinguishment of debt and
corresponding additional paid in capital and the balance of this debt has been
retired.
Interest expense for the 2003 Fiscal Year were $2,462,516, compared to
$10,123,183 for the 2002 Fiscal Year, a decrease of $7,660,667 or 75.7%. The
decrease was primarily the result of not having the interest costs of beneficial
conversion features ($6,283,881) and interest costs associated with the
financing raises ($1,909,011)for the 2003 Fiscal Year. As a percentage of our
total revenues, such costs decreased to 7.6% for the 2003 Fiscal Year compared
to 29.6% for the 2002 Fiscal Year.
Loss on disposals of investments/property were $248,587 for the 2003
Fiscal Year compared to $1,838,140 for the 2002 Fiscal Year. The costs arose
from the loss from the sale of one of the properties. In the 2002 Fiscal Year
the loss arose from the writing down the deposit on Applicationstation.com. As a
percentage of the Company's total revenues, such costs were 5.4% for the 2002
Fiscal Year.
NET INCOME/LOSS. As a result of all of the above, the Company's net loss
for the 2003 Fiscal Year was $7,541,502 (which includes $913,311 of gains from
discontinued operations) compared to net loss of $30,751,537 (which includes
$2,015,740 of losses from discontinued operations) for the 2002 Fiscal Year, a
change of $23,210,035.
DISCONTINUED OPERATIONS. The Company sold GalaVu on April 25, 2003 and
Interactive on December 15, 2003 (see Note 4 of financial statements for further
discussion). Accordingly, the Company is following the guidance in SFAS 144
Accounting for the Impairment or Disposal of Long-Lived Assets. The operations
of GalaVu, Interactive and Magic are presented as discontinued operations for
all periods presented.
YEAR ENDED AUGUST 31, 2002 COMPARED TO YEAR ENDED AUGUST 31, 2001
REVENUES. Revenues from product sales for the 2002 Fiscal Year were
$32,468,400. As Logicorp was purchased in the 2002 Fiscal Year there is no
comparison for our fiscal year ended August 31, 2001 (the "2001 Fiscal Year").
Revenues from service sales for the 2002 Fiscal Year were $1,739,524. As
Logicorp was purchased in the 2002 Fiscal Year there is no comparison.
Other revenues were nil, compared to $16,595 for the 2001 Fiscal Year.
Other revenue composed of income derived from securities held. Since there are
no longer such investments, there was a decrease.
As a result of the foregoing, our total revenues in the aggregate were
$34,207,924 for the 2002 Fiscal Year, compared to $16,595 for the 2001 Fiscal
Year, an increase of $34,191,329. The increase is due to the purchase of the
Logicorp entities.
COST OF REVENUES. Cost of revenues from product sales for the 2002 Fiscal
Year was $30,725,499. As Logicorp was purchased in the 2002 Fiscal Year there is
no comparison for our 2001 Fiscal Year.
Cost of revenues from service sales for the 2002 Fiscal Year were
$594,488. As Logicorp was purchased in the 2002 Fiscal Year there is no
comparison.
As a result of the foregoing, our total cost of revenues for continuing
operations was $31,319,987 for the 2002 Fiscal Year, compared to $nil for the
2001 Fiscal Year, an increase of $31,319,987 or 100%.
GROSS PROFIT. Gross profit was $2,887,937 for the 2002 Fiscal Year
compared to $16,595 for the 2001 Fiscal Year. As Logicorp was purchased in the
2002 Fiscal Year there is no comparison for our 2001 Fiscal Year.
17
EXPENSES. Selling, general and administrative expenses for the 2002 Fiscal
Year were $7,622,873 compared to $7,258,609 for the 2001 Fiscal Year, an
increase of $364,264 or 5.0%. Of this, there were increases to legal and
accounting fees of $1,324,433, offset by decreasing operating costs of CMCG.
These increased due to the acquisition and the financing raises.
Depreciation and amortization for the 2002 Fiscal Year were $1,027,242,
compared to $594,803 for the 2001 Fiscal Year, an increase of $432,439 or 72.7%.
This increase is the result of $425,692 of additional depreciation resulting
from the addition of Logicorp and eTelligent. As a percentage of our total
revenues, such costs decreased to 3.0% for the 2002 Fiscal Year.
Loss from the impairment of goodwill for the 2002 Fiscal Year was
$10,489,549 compared to nil for the 2001 Fiscal Year. The costs arose from the
impairment of our subsidiaries in the Logicorp Group of Companies. As a
percentage of the Company's total revenues, such costs were 30.7% for the 2002
Fiscal Year.
Loss from operations for the 2002 Fiscal Year was $16,251,727 compared to
$8,192,377 for the 2001 Fiscal Year, an increase of $8,059,350 or 98.4%. This
increase was caused primarily by the impairment of goodwill of $10,489,549.
Loss on extinguishment of debt was $521,120 for the 2002 Fiscal Year with
no comparison for the 2001 Fiscal Year. A beneficial conversion and interest
expense was calculated as of the date of the agreement to convert the notes to
common shares, as the difference between the conversion price and the fair value
of the common stock into which the notes are convertible. The Company recognized
a loss on extinguishment of debt and corresponding additional paid in capital
and the balance of this debt has been retired.
Interest expense for the 2002 Fiscal Year were $10,123,183, compared to
$1,146,708 for the 2001 Fiscal Year, an increase of $8,976,475 or 782.8%. The
increase was primarily the result of the interest costs of beneficial conversion
features ($6,283,881), interest costs associated with the financing raises
($1,909,011), the amortization of the discount on debt ($589,981), increased
debt levels and the addition of Logicorp ($193,602). As a percentage of our
total revenues, such costs increased to 29.5% for the 2002 Fiscal Year.
Loss on write-down of investments for the 2002 Fiscal Year were $1,838,140
compared to nil for the 2001 Fiscal Year. The costs arose from writing off the
investment in Wareforce and the deposit on Applicationstation.com. As a
percentage of the Company's total revenues, such costs were 5.4% for the 2002
Fiscal Year.
The financing costs, write-down on investments and the loss on sale of
subsidiaries are one-time in nature and we don't view them as occurring until
similar transactions happen.
NET INCOME/LOSS. As a result of all of the above, the Company's net loss
for the 2002 Fiscal Year was $30,751,537 (which includes 2,015,740 of losses
from discontinued operations) compared to net loss of $11,747,639 (which
includes 2,107,454 of losses from discontinued operations) for the 2001 Fiscal
Year, a change of $19,003,898.
DISCONTINUED OPERATIONS. The Company sold GalaVu on April 25, 2003,
Interactive on December 15, 2003 and Magic on March 18, 2002 (see Note 4 of
financial statements for further discussion). Accordingly, the Company is
following the guidance in SFAS 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. The operations of GalaVu, Interactive and Magic are presented
as discontinued operations for all periods presented.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity have been cash provided by operations,
sale of subsidiaries, capital raises, issuance of short-term notes payable and
credit terms from suppliers and subcontractors. Our principal uses of cash have
been for operations and working capital. We anticipate these uses will continue
to be our principal uses of cash in the future.
18
At the 2003 Fiscal Year end, we had the requisite working capital to fund
our ongoing business operations based upon the losses that had been incurred
during the previous two fiscal years. In addition, our business plan for 2004
contemplates obtaining additional working capital through refinancings or
restructurings of our existing loan agreements, 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.
We may require additional financing in order to implement our business
plan. We currently anticipate capital expenditures of at least $150,000 during
the next 12 months for the replacement of older capital assets. If the
anticipated cash generated by our operations are insufficient to fund
requirements and losses, we will need to obtain additional funds through third
party financing in the form of equity, debt or bank financing. There can be no
assurance that we will be able to obtain the necessary additional capital on a
timely basis or on acceptable terms, if at all. If additional capital is not
raised, our business, prospects, financial condition, and results of operations
would be materially and adversely affected. As a result of a financing involving
equity, the holders of our common stock may experience substantial dilution. In
addition, as our results may be negatively impacted and thus delayed as a result
of political and economic factors beyond our control, our capital requirements
may increase.
The following factors, among others, could cause actual results to differ
from those indicated in the above forward-looking statements: pricing pressures
in the industry; the loss of any of our major customers; a continued downturn in
the economy in general or in the interactive entertainment sector; a further
decrease in demand for our products or continued weak demand for these products;
our ability to attract new customers; our ability to reduce costs; an increase
in competition in the market for interactive entertainment; and the ability of
some of our new customers to obtain financing. These factors or additional risks
and uncertainties not known to us or that we currently deem immaterial may
impair business operations and may cause our actual results to differ materially
from any forward-looking statement.
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this report to conform them to
actual results or to make changes in our expectations.
We have listed below the details of all the debt and borrowings the
company has.
In March 2001, LDS entered into a line of credit agreement with HSBC Bank
of Canada. Bank advances are payable on demand. The loan agreement covers (i) a
demand revolving operating loan up to $3,700,000; (ii) equipment loan up to
$300,000; (iii) demand Evergreen Capital loan/lease facility up to $300,000; and
(iv) loan on forward exchange contracts up to $500,000. The operating loan
carries an interest rate of 0.82% over the prime rate while the equipment and
Evergreen Capital loans carry an interest rate equal to, at the option of the
Company, (a) 1.05% over the prime rate at the end of each month; or (b) a fixed
rate agreed to by both the Bank and the Company. Under the terms of the
agreement, the Company can borrow, under the operating loan and 31% of the
forward exchange contracts outstanding, up to an aggregate of (i) 70% of
acceptable accounts receivable and (ii) 50% of the lesser of cost or current
market value of its inventory not to exceed $750,000. The effective rate at
August 31, 2003 was 4.32%. Borrowings under the line are subject to certain
financial covenants and restrictions on additional indebtedness and other
related items. As of August 31, 2003, the Company is in violation of maximum
debt to net worth and minimum working capital covenants. The loans are secured
by the assets of the Company under a general security agreement, and are
guaranteed by the Logicorp Service Group Ltd., through a security agreement and
are also personally guaranteed by the former shareholders of LDS. Under the
terms of the line of credit agreement, the bank may declare all outstanding
amounts immediately due and payable. The Bank has not called the loan. A
forbearance agreement was signed that expired in October 2003. The Company has
signed a new forbearance agreement that will extend to October 31, 2004 and
anticipates signing a longer forbearance before the end of October 31, 2004.
On January 22, 2002, Mr. Chell guaranteed liabilities of Logicorp to
its principal lender, HSBC, in the amount of Cdn$1.0 million. On December
24, 2002, Mr. Chell guaranteed trade credit of Logicorp to Synnex in the
amount of approximately Cdn. $1.0 million. On January 7, 2003, the board
determined that the Company would grant 3.5 million shares (actual
issuance of shares occurred in Fiscal 2004) of common stock to Mr. Chell
19
for such guarantees and other consideration in support of the Company. The
valuation on the shares was determined by the 10 day preceding trading
average of the Company's common stock, which resulted in an approximate
$134,000 US$ compensation expense recorded in Fiscal 2003. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a description of the loans.
The bank line of credit consists of debts from the following entities:
-----------------------------------------------------------
Company 2003 2002
-----------------------------------------------------------
Logicorp Data Systems Ltd. ("LDS") 908,432 603,740
eTelligent Solutions Inc. 0 0
-----------------------------------------------------------
908,432 603,740
===========================================================
On December 1, 2001, the Company offered to certain investors 8%
convertible notes up to a maximum amount of US$ 8,000,000 in a private
placement. The Company received approximately Cnd$6,587,622 through this
offering. Under the terms of this offering, the notes are convertible into
shares of common stock at a price of the greater of (1) 50% of the average
closing bid prices for the ten trading days prior to conversion or (2) US$0.50.
These notes were due August 9, 2002. On April 9, 2002 all of the holders of the
notes signed commitments to voluntarily convert the notes based on the
conversion price per the terms of the agreement, which was determined to be
US$0.95 per share. This conversion was subject to shareholder approval. The
conversion of these notes would have resulted in the issuance of approximately
4,389,000 shares representing approximately 20% of the total common shares
outstanding after the issuance, and diluting the current common stockholders. As
of August 31, 2003, none of these shares has been issued and the outstanding
amount of the convertible notes was classified as liabilities. As of December 2,
2002, the Company, Joseph Gunnar & Co., LLC ("JGUN"), the placement agent in
this offering, and the holders of these notes entered into a settlement
agreement providing that the conversion price for these notes shall equal 85% of
the two day weighted average trading price of the common stock for the five
trading days preceding effective date of the registration statement under the
Securities Act of 1933, as amended, relating to the resale of the shares of
common stock issuable upon such conversion, provided, that such conversion price
cannot be greater than $0.75 or less than $0.40. Effective January 7, 2003, the
Company, JGUN, Cameron Chell and the holders of the notes agreed that if this
registration statement is not declared effective on or prior to September 1,
2003, the noteholders could "put" their shares of common stock to Mr. Chell at a
price of $0.475 per share during the period of December 1 - 14, 2003. By letter
dated December 4, 2003, the noteholders agreed to permit the Company until
February 28, 2004 to file all required filing and periodic reports under the
Securities Exchange Act of 1934, as amended, and to amend the period during
which they may "put" their shares issuable upon such conversion to Mr. Chell
from December 1--14, 2003, to March 1 - 14, 2004, in exchange for the extension
of the "put" period and the reduction of the conversion price to $0.25 per
share, provided, that, if such deadline was not satisfied by the Company such
agreement and reduction of the conversion price would be null and void. By
letter, dated February 26, 2004, this deadline and the "put" period were amended
to be April 30, 2004 and May 1 - 14, 2004, respectively. By letter, dated April
29, 2004, the Company requested that such deadline and "put" period be further
amended to be May 30, 2004 and June 1 - 14, 2004, respectively. The Company
believes that, as these notes have been held by the noteholders for an excess of
two years, and none of such noteholders are or have been affiliates of the
Company during the preceding 90 days, the notes may be converted at any time and
the shares of common stock issuable upon such conversion could be resold
pursuant to Rule 144(k), and, provided that the Company files all filings and
periodic reports under the Securities Exchange Act prior to May 31, 2004, these
notes shall be mandatorily converted into shares of common stock. On June 11,
2004, the Company again requested that such deadline and "put" period be further
extended to be August 10, 2004 and August 11-24, 2004, respectively. In
addition, the Company proposed that the notes would be automatically converted
on the earlier of (i) the date that all annual and quarterly reporting
obligations under federal securities laws have been complied with or (ii) July
10, 2004. The conversion price of the notes has been further reduced from $0.25
per share to $0.16 per share. The aggregate number of shares of common stock
issued upon such conversion (principal and unpaid accrued interest thru July 11,
2004 [date of new conversion agreement]) would be approximately 29,358,209,
representing approximately 67.25% of the common stock outstanding giving effect
to such conversion (based upon 14,295,410 shares outstanding at time of filing
the August 31, 2003 Form 10-K) . On August 10, 2004, the Company requested such
deadline and "put" period be further extended to be September 10, 2004 and
September 11-24, 2004, respectively. Effective September 14, 2004, the Company
has asked for another extension to October 11, 2004. One noteholder has
indicated to the Company that it believes that it has a cause of action against
the Company with respect to the foregoing and its rights under such notes, and
20
has threatened to bring such action against the Company. In the event that the
Company should be found to be in default of the notes or the related agreements,
the Company may be required to repay the notes in the event that a settlement is
not reached with the noteholders. In such event the Company does not believe
that it currently has the necessary capital available to repay the notes and
would be required to seek additional sources of capital or seek protection from
creditors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources".
In addition, since this debt is convertible into equity at the option of
the note holder at beneficial conversion rates, an embedded beneficial
conversion feature was recorded as a debt discount and was amortized using the
effective interest rate method over the life of the debt in accordance with EITF
00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments." Total
cost of beneficial conversion feature of Canadian $6,177,647 is recorded as a
discount of the convertible debt which was fully amortized during the year ended
August 31, 2002.
On October 3, 2000, the Company closed the sale of a US$3,000,000
(approximately Canadian $4,740,000) Convertible 10% Debenture to the VC
Advantage Limited Partnership ("VCALP"). As at August 31, 2001, US$1,700,000
(approximately Canadian $2,635,000) has been advanced to the Company. This
unsecured convertible debenture is due three years from issue. The Convertible
Debenture bears interest at 10% per annum, payable upon conversion, redemption
or maturity. The unpaid principal of the debenture bears interest from the date
that it is actually advanced until paid. Interest is payable in cash or stock at
our option. The Convertible Debenture is convertible into common stock, at
US$3.00 per share, in amounts specified by the VCALP. The maximum number of
common shares VCALP will receive is one million. On the close date, the Company
also issued 50,000 warrants to purchase 50,000 common shares at US$3.00 per
share to VCALP. The warrants have a term of four years. The fair value of these
warrants totaling approximately $220,000 was computed using the Black-Scholes
model under the following assumptions: (1) expected life of 1 1/2 years; (2)
volatility of 80% (3) risk free interest of 5.87% and (4) dividend of 0%. The
Company can elect to pay the outstanding loan balance in shares of common stock
at a fixed conversion price of US$3.00 per share. In addition, since this debt
is convertible into equity at the option of the note holder at beneficial
conversion rates, an embedded beneficial conversion feature was recorded as a
debt discount and will be amortized using the effective interest rate method
over the life of the debt in accordance with EITF 00-27. Total cost of
beneficial conversion feature of $1,728,134 and the relative fair value of the
warrants of $220,000 are recorded as a discount of the convertible debentures.
During the year ended August 31, 2001, the Company amortized $563,367 as
interest expense.
On November 30, 2000 the convertible debenture was assigned by VCALP to
CALP II Limited Partnership.
During the 2002 Third Fiscal Quarter, the convertible debenture held by
CALP II Limited Partnership ("CALP II") on behalf of Canadian Advantage Limited
Partnership ("CALP") and Advantage (Bermuda) Fund Ltd. ("ABFL") was exchanged
for a note payable to CALP in the amount of US$1,365,100 and a note payable to
ABFL in the amount of US$504,900. These notes provide for payment of principal
and interest at the rate of 10% per annum on August 31, 2006. The notes are
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 Canadian Imperial Bank of Commerce ("CIBC").
Effective April 15, 2002, the Company entered into an agreement with CALP
to convert the principal amount of the note plus accrued interest into Common
Stock at the rate of US$0.80 pursuant to which CALP received 1,314,000 shares of
the Company. CALP will receive an additional 442,145 shares upon the approval of
the Company's shareholders.
Effective April 15, 2002, the Company also entered into an agreement with
ABFL to convert the principal amount of the note plus accrued interest into
Common Stock at the rate of US$0.80 pursuant to which ABFL received 486,000
shares of the Company. ABFL will receive an additional 163,533 shares upon the
approval of the Company's shareholders.
Certain terms of the convertible debt have been changed including the
fixed conversion price reduced from $3 to $0.80. During the year ended August
31, 2002, the Company recorded additional discount of $677,216 and amortized
$787,294. During the year ended August 31, 2003, the Company recorded additional
discount of $0 and amortized $1,000,504. As of August 31, 2003, outstanding
balance of this debt net of unamortized discount of $154,424 totaled $2,201,166.
As of August 31, 2002, outstanding balance of this debt net of unamortized
discount of $1,154,928 totaled $1,360,311.
21
The conversion of the debt has been approved and the debt will be
converted from debt to equity upon the filling of the registration statement and
issuance of the shares. This convertible debt matured in October 2003, however
CALP and ABFL were managed by Thomas Kerrnighan ("TK"), which has declared
bankruptcy. The Company has been unable to locate the trustee or obtain contact
from any former employee of TK. The debt will remain on the Company's books
indefinitely until a settlement can be reached.
LDS agreed to pay $212,291 payable to HP in regards to the settlement of
claims with a discount of $53,073. The loan is payable in monthly installments
of $4,423 due on the first day of every month, commencing on May 1, 2003 through
April 2007 carrying an interest rate of 0%. This liability has been recorded at
its full settlement value since calculation of imputed interest is considered
immaterial to the accompanying consolidated financial statements.
The Term loan is comprised of the following:
----------------------------------------------------------------
Company 2003 2002
================================================================
Current
Logicorp Data Systems Ltd. [a] -- 79,716
Etelligent Solutions Inc. [b] 1,470 49,278
----------------------------------------------------------------
1,470 128,994
Non-current
Logicorp Data Systems Ltd. [a] -- 152,790
Etelligent Solutions Inc. [b] -- --
----------------------------------------------------------------
-- 281,784
================================================================
[a] Loan bearing interest at Prime plus 1.25% per annum, repayable in
monthly principal installments of $6,643 together with interest. Loan is due
July 31, 2005. Approximate principal repayments are as follows 2003 -$79,716,
2004-$79,716 and 2005-$73,074. Logicorp accelerated the payments in 2004.
[b] Small Business Equipment Loans bearing interest at Prime plus 2.25%
per annum.
In November 2001, the Bank of Montreal made available to the Company a
Demand loan, non-revolving and/or Fixed Rate Term Loan in the amount of
$1,250,000. The loan was for payment of the Matched Fund Term Loan held in the
prior year by The Royal Bank of Canada for properties at 10 Meteor Drive and 775
Pacific Road. Borrowings are repayable by blended monthly principal payments of
$10,417 and interest based on 10-year term which matures in December 2011.
Interest is currently calculated at Prime Rate plus 1.25%. The effective rate at
August 31, 2003 was 4.06% (August 2002 - 5.75%). The principal remaining as of
August 31, 2003 was $789,583 (August 2002 - $1,166,667). The Company may convert
the Demand loan, non-revolving advances in part or in total to a Fixed Rate Term
Loan advances, and may be converted back to Demand loan, non-revolving at
maturity of terms. Fixed Rate Term Loan rates are to be determined based on
applicable rates at time of draw and the available terms are from 1 to 5 years.
The loan is secured by accounts receivables, inventory and equipment of
Interactive and GalaVu under a general security agreement. The Demand loan is
subject to certain financial covenants and restrictions on additional
indebtedness and other related items.
On November 21, 2002, pursuant to a Debt and Security Purchase Agreement
dated on the 29th day of October, 2002, the Company, through its wholly-owned
subsidiary, GalaVu, settled the promissory note (the "Note") issued from the
acquisition of substantially all of the property and assets [excluding accounts
receivable] of GalaVu. The present value of the Note, discounted at the
Company's average borrowing rate (6.5%) amounted to $2,662,698. Arthur Andersen
Inc., (the "Assignor") agreed to assign to the Company all of the Assignor's
right, title and interest, if any, in and to the Note for the amount of $500,000
(the "Purchase Price"). The purchase price was paid in the following manner: A
$150,000 deposit was made upon execution of the agreement and $350,000 was paid
at the time of closing.
22
Loan amount $3,300,000
Discount (637,302)
--------------------------------------
Discounted loan $2,662,698
Payment (500,000)
Amortization of discount 390,724
--------------------------------------
Loan at time of settlement $2,533,422
Payment for settlement (500,000)
Legal Fees 17,793
--------------------------------------
Gain on settlement of debt $2,051,215
======================================
The $350,000 paid at the time of closing to the Assignor, was financed
through a term loan in the principal sum of $375,000. The loan was secured
through a second mortgage on our 10 and 14 Meteor Drive properties and a general
security agreement on the capital assets of GalaVu. This debt was settled with
the sale of GalaVu; the $375,000 debt was repaid and then re-issued to Chell
Group Corporation in the amount of $325,000.
The $325,000 bears interest at a rate of 13% and matures on November 25,
2003 and the monthly payments are for interest only. The loan was extended in
November 2003, to a maturity date of December 15, 2003. The loan was repaid with
the proceeds from the sale of 14 Meteor Drive (see note 6).
In May 2002, we completed a private equity raise for $443,189 Cdn
($290,000 US). The shares were priced at a $1, thus resulting in 290,000 shares
to be issued. At the end of the August 2002, the Company had not yet issued the
shares and thus a loan payable was created until the time at which the Company
would issue the shares. The Company issued the share on October 18, 2002 and the
loan has been decreased by the corresponding share capital entries required.
In December 2002, the three former shareholders of Logicorp Data Systems
Ltd. and Logicorp Service Group Ltd. advanced Logicorp Data Systems Ltd.
$200,000 each, totaling $600,000. These advances were due on demand and did not
carry a stated interest rate. The Company has imputed interest on these advances
at a rate of 9%. During the year ended August 31, 2003, one of the advances was
fully repaid and total payments of approximately $110,000 have been paid against
the remaining advances.
The retirement compensation trusts ("RCA's") were set up pursuant to
section 248(1) of the Income Tax Act of Canada to provide retirement income to
the three individuals who owned Logicorp. Pursuant to the original and amended
purchase agreements of Logicorp, the Company will make monthly payments
including interest in various amounts through December 2005. The loan carries an
interest rate of prime plus 4.75% (8.0% at August 31, 2003, 8.75% at August 31,
2002). The original repayment terms have not been met, but the determination of
breach lies with the individual trustees appointed to monitor each individual's
loan to the Company. The trustee of the former LDS President has demanded full
payment and is part of the lawsuit (Note 12). The trustee for the other former
Logicorp owners are accepting of the current payment terms of $9,750, which
repay the principal and interest components of personal loans that each party
had taken to finance their loans to the Company. No lump sum payments have been
made on the RCA's and no further agreements have been made for a lump sum
payment. Through our bank we currently make cash payments monthly to offset
interest and payment incurred on the primaries loans for the money they loaned
back to Logicorp. This constitutes the repayments we make against the RCA's. The
RCA's then increase by the interest component the primaries charge us for the
loans.
1) During the year ended August 31, 2003, B.O.T.B., a company controlled
by Cameron Chell, advanced Logicorp Data Systems Ltd. $820,000, and during the
period of September 1, 2003 through August 31, 2004, advanced Logicorp Data
Systems Ltd. $318,144. The advances are unsecured, due on demand and do not
carry a stated interest rate. The Company has imputed interest on the advances
at a rate of 9% per annum. As of August 31, 2004, the aggregate amount of such
advances was $1,138,144.
23
2) During the fourth quarter of fiscal 2002, the Company began
negotiations to adjust the purchase price of Logicorp due to an investigation of
claims filed by Logicorp owed by Hewlett-Packard (Canada) Ltd. ("HP"). As a
result, the purchase price for Logicorp has been amended, the issuance of
exchangeable common shares has been decreased by 2,000,000 to 3,355,000 (from
5,355,000 originally) and the second promissory note of $500,000 has been
cancelled. This has resulted in a balance of $200,000 still owed which is
classified as a loan payable, related party on the August 31, 2003 and 2002
balance sheet. In addition, a historical audit of Logicorp resulted in
significant restatement issues which resulted in combined negative book values
of ($2,074,567) as of December 31, 2001 (the date immediately prior to
acquisition date). The purchase price has been adjusted for these events (see
Note 13). The loan remains outstanding as the loan and the shares issued to a
former President of LDS are subject to a suit and countersuit regarding the
former President of LDS. The loan bears no interest and interest is not being
accrued as the company does not view the loan as owed. Interest charges, if any,
are pending the settlement of the lawsuit.
On January 27, 2003, a former President of LDS, filed a wrongful dismissal
claim against LDS and the Company. A round of examinations for discovery has
been held and preparation of the affidavit of records is underway. Further
discoveries were held during the week of September 8, 2003. The Company's
counsel has determined that it is too early in the process to evaluate the
merits of the case. The Company has not accrued any liabilities related to this
claim as of August 31,2003. The Company has filed a counter-suit stating that
the former President was fraudulent in his representation to the Company in
connection with the Company's acquisition of LDS (see Note 12).
The Company's subsidiary CMCG, purchased Logicorp (see note 13[a]) for an
adjusted number of shares 3,355,000 (from 5,355,000 originally). The shares were
exchangeable into Company shares at inception; the fair value of the shares
issued was determined by using an average trading price of the Company's common
stock for a reasonable period before and after the acquisition date, in
accordance with SFAS 141 "Business Combinations". These shares of CMCG are
exchangeable on a one for one basis for common shares of the Company. The
election to exchange is not subject to or contingent on any future events or
conditions and is solely at the option of the sellers. The value of the shares
is $4,852,976 and bears no interest. The shares have not been issued.
The long-term debt consists of the HP loan (8[iv]), the Term loan (8[v] and the
RCA trusts (8[ix]. Approximate future annual principal payments for long-term
debt are as follows:
------------------------------------
Years ended August 31,
2004 $1,305,301
2005 53,073
2006 53,073
2007 7,246
2008 --
Thereafter --
------------------------------------
1,418,693
====================================
Short-term and Long-term debt are presented as follows
----------------------------------------------
2003 2002
==============================================
Current
Term Loan (v) 1,470 128,994
RCA Trust (ix) 1,250,758 741,154
HP Loan (iv) 53,073 --
----------------------------------------------
Current portion 1,305,301 870,148
Non-current
Term Loan (v) -- 152,790
RCA Trust (ix) -- 686,522
HP Loan (iv) 113,392 212,291
----------------------------------------------
Non-current portion 113,392 1,051,603
==============================================
24
At August 31, 2003, we had a working capital deficit of $23,191,579, an
increase of $3,776,645 from working capital deficit of $19,414,934 at August 31,
2002.
A comparison of balance sheet accounts does not provide any relevant
information since all prior operating companies are not listed as discontinued
operations. In addition, there is no historical comparison for our current
operating companies as they were acquired within the 2002 Fiscal Year.
For the 2003 Fiscal Year, we had a net cash outflow of $52,117, a cash
outflow of $315,336 for the 2002 Fiscal Year and $999,192 cash outflow for the
2001 Fiscal Year. The decrease in net cash inflow for the 2003 Fiscal Year was
primarily due to cash provided by operating activities.
Cash used in operating activities for the 2003 Fiscal Year was $480,283.
The major factor contributing to the cash used in operations for the 2003 Fiscal
Year is the net loss with non-cash expenses added back of $4,569,228 and
decrease in deferred revenue of $321,825; major factors contributing to cash
provided by operations were: decreases in accounts receivable, trade of
$1,309,461, increase in accounts payable and accrued liabilities of $1,988,981,
and an increase in accrued interest payable of $899,757. The major factors
contributing to the cash used in operations for the 2002 Fiscal Year include:
net loss with non-cash expenses added back of $8,742,707 and a decrease in
accounts payable and other liabilities of $3,883,743; major factors contributing
to cash provided by operations, were a decrease in accounts receivable of
$3,697,333. Cash used in operating activities for the 2001 Fiscal Year was
$2,858,450. The major factor contributing to the cash used in operations during
the 2001 Fiscal Year was net loss with non-cash expenses added back of
$5,438,340; major factors contributing to cash provided by operations were a
decrease in accounts receivable of $790,018 and an increase of accounts payable
and accrued liabilities of $1,072,244.
Cash provided by investing activities in the 2003 Fiscal Year was
$212,887. This amount resulted from the purchase of property and equipment of
$391,648, offset by the proceeds from disposal of property and equipment of
$434,532 and the proceeds from the sale of GalaVu of $170,003. Cash used in
investing activities in the 2002 Fiscal Year was $779,515. This amount resulted
primarily from the purchase of capital assets totaling $2,098,150, the purchase
of Logicorp and eTelligent, $1,500,000 and $75,000 respectively offset by the
proceeds from the sale of Magic Lantern of $1,850,000 and the proceeds from the
sale of property and equipment of $1,111,000. Cash used in investing activities
in the 2001 Fiscal Year was $3,070,672. This amount resulted primarily from the
purchase of property and equipment of $1,430,962 and the purchase of
Applicationstation.com of $1,689,710.
Cash provided by financing activities in the 2003 Fiscal Year were
$265,307, the increase is primarily made up of increased borrowings against the
bank indebtedness of $336,879, increased borrowings from related parties of
$820,000 and increased borrowings from Logicorp shareholders of $312,191 offset
by repayments to debt of $777,375, line of credit of $203,774 and Logicorp
shareholders of $222,614. Cash provided by financing activities in the 2002
Fiscal Year were $9,268,626 which consisted primarily of the $6,587,622
convertible promissory note offset by payments of debt of $1,408,287. Cash
provided by financing in the 2001 Fiscal Year were $4,929,930. The increase is
primarily due to the sale of the convertible debenture and the bridge financing.
We purchased the Logicorp group of companies and eTelligent Solutions in
Fiscal 2002, both of which are in the Systems Integration segment. We have no
obligation to fund these operations, as they are self-sufficient operations.
INFLATION
The rate of inflation has had little impact on our operations or financial
position during the years ended August 31, 2003, August 31, 2002 and August 31,
2001 and inflation is not expected to have a significant impact on our
operations or financial position during the 2004 Fiscal Year.
We pay a number of our suppliers, including our 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
our gross profit as well as our net income. If the value of the Canadian dollar
falls against the US dollar, our cost of revenues will increase thereby reducing
our gross profit and net income. Conversely, if the value of the Canadian dollar
rises against the US dollar, our gross profit and net income will increase.
25
CRITICAL ACCOUNTING POLICIES
As discussed in our financial statements, the preparation of financial
statements in conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions about future events
that affect the amounts reported in the financial statements and accompanying
notes. Since future events and their effects cannot be determined with absolute
certainty, the determination of estimates requires the exercise of judgment.
Actual results could differ from those estimates, and such difference may be
material to the financial statements. The most significant accounting estimates
inherent in the preparation of our financial statements include estimates as to
the appropriate carrying value of certain assets and liabilities which are not
readily apparent from other sources, primarily accounts receivable, inventory,
property and equipment, intangible assets, deferred revenue, assets and
liabilities of discontinued operations, and rebates and coop fund. Management
bases its estimates on historical experience and on various assumptions which
are believed to be reasonable under the circumstances. We reevaluate these
significant factors as facts and circumstances change. Historically, actual
results have not differed significantly from our estimates.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation", providing
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS 148 also amends
the disclosure provisions of SFAS 123 and Accounting Principles Board (APB)
Opinion No. 28, "Interim Financial Reporting", to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. Amendments to SFAS 123 related to the transition and annual
disclosures are effective for fiscal years ending after December 15, 2002.
Amendments to disclosure requirements of APB Opinion 28 are effective for
interim periods beginning after December 15, 2002. The adoption of SFAS 148 did
not have a material impact on its financial position, results of operations or
cash flows.
In November 2002, FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires that the
guarantor recognize, at the inception of certain guarantees, a liability for the
fair value of the obligation undertaken in issuing such guarantee. FIN 45 also
requires additional disclosure requirements about the guarantor's obligations
under certain guarantees that it has issued. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002 and the
disclosure requirements are effective for financial statement periods ending
after December 15, 2002. The Company adopted FIN No. 45 on September 1, 2002 and
it did not have a material impact on the Company's financial position, results
of operations or cash flows.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities". FIN 46 changed the criteria by which one company
includes another entity in its consolidated financial statements. Previously,
the criteria were based on control through voting interest. FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. A company that consolidates a variable interest entity is called the
primary beneficiary of that entity. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. During October
2003, the FASB deferred the effective date for applying the provisions of FIN 46
until the end of the first interim or annual period ending after December 31,
2003, if the variable interest was created prior to February 1, 2003 and the
public entity has not issued financial statements reporting such variable
interest entity in accordance with FIN 46. On December 24, 2003, the FASB issued
FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable
Interest Entities, (FIN-46R), primarily to clarify the required accounting for
26
interests in variable interest entities. FIN-46R replaces FIN-46 that was issued
in January 2003. FIN-46R exempts certain entities from its requirements and
provides for special effective dates for entities that have fully or partially
applied FIN-46 as of December 24, 2003. In certain situations, entities have the
option of applying or continuing to apply FIN-46 for a short period of time
before applying FIN-46R. While FIN-46R modifies or clarifies various provisions
of FIN-46, it also incorporates many FASB Staff Positions previously issued by
the FASB. Management is currently assessing the impact, if any, FIN 46 may have
on the Company; however, management of the Company does not anticipate the
adoption will have a material impact to the Company's financial position or
results of operations.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and is
effective for contracts entered into or modified after June 30, 2003. This
Statement amends Statement 133 for decisions made (i) as part of the Derivatives
Implementation Group process that effectively required amendments to Statement
133, (ii) in connection with other FASB projects dealing with financial
instruments, and (3) in connection with implementation issues raised in relation
to the application of the definition of a derivative, in particular, the meaning
of an initial net investment that is smaller than would be required for other
types of contracts that would be expected to have a similar response to changes
in market factors, the meaning of underlying, and the characteristics of a
derivative that contains financing components. The adoption of this
pronouncement did not have a material effect on the financial statements.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). Many of those instruments were previously classified as
equity. Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this Statement are consistent
with FASB's proposal to revise that definition to encompass certain obligations
that a reporting entity can or must settle by issuing its own equity shares,
depending on the nature of the relationship established between the holder and
the issuer. While FASB still plans to revise that definition through an
amendment to Concepts Statement 6, FASB decided to defer issuing that amendment
until it has concluded its deliberations on the next phase of this project. That
next phase will deal with certain compound financial instruments including
puttable shares, convertible bonds, and dual-indexed financial instruments. The
adoption of this pronouncement did not have a material effect on the financial
statements.
In December 2003, the FASB issued a revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" which replaces the
previously issued Statement. The revised Statement increases the existing
disclosures for defined benefit pension plans and other defined benefit
postretirement plans. However, it does not change the measurement or recognition
of those plans as required under SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
Specifically, the revised Statement requires companies to provide additional
disclosures about pension plan assets, benefit obligations, cash flows, and
benefit costs of defined benefit pension plans and other defined benefit
postretirement plans. Also, companies are required to provide a breakdown of
plan assets by category, such as debt, equity and real estate, and to provide
certain expected rates of return and target allocation percentages for these
asset categories. The adoption of this pronouncement is not expected to have a
material impact to the Company's financial statements.
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superseded as a result of the issuance
of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial
27
Statements Frequently Asked Questions and Answers ("the FAQ") issued with SAB
101 that had been codified in SEC Topic 13, Revenue Recognition. Selected
portions of the FAQ have been incorporated into SAB 104. While the wording of
SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The adoption of SAB 104 did not
impact the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from changes in foreign currency exchange
rates and interest rates. We and our wholly-owned subsidiaries are located in
Canada and its functional currency is the Canadian dollar.
INTEREST RATE RISKS.
We also had various loans outstanding at August 31, 2003 (approximately
$11,500,000), which bear interest at a fixed rate. A hypothetical 10% adverse
change in the interest rate on this debt would negatively affect net income and
cash flow by approximately $115,000.
The company did not use any derivative financial instruments to manage this
exposure.
FOREIGN EXCHANGE RATE RISKS.
We are subject to foreign currency exchange rate fluctuations in the
Canadian dollar value of foreign currency-denominated transactions. Based on our
average annual net currency positions in fiscal 2003 and 2002, a 10% adverse
change in average annual foreign currency exchange rates would not have been
material to our consolidated financial statements for the years ended August 31,
2003 or 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Set forth below is a list of the consolidated financial statements of the
Company being furnished in this Annual Report on Form 10-K pursuant to the
instructions to Item 8 to Form 10-K and their respective locations herein.
Financial Statement Location
- ------------------- --------
Report of Independent Auditors
Current......................................................... F - 1
Predecessor..................................................... F - 2
Consolidated Balance Sheets....................................... F - 3
Consolidated Statements of Operations............................. F - 4
Consolidated Statements of Shareholders' Equity (Deficit)......... F - 5
Consolidated Statements of Cash Flows............................. F - 6
Notes to Consolidated Financial Statements........................ F - 7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
On July 3, 2003, the Company's Board of Directors terminated the
engagement of Lazar, Levine & Felix, LLP, as its auditors. The reports issued by
Lazar, Levine & Felix LLP on the financial statements for the past two fiscal
years of the Company did not contain an adverse opinion nor a disclaimer of
opinion, and were not qualified or modified as to audit scope or accounting
principles.
There were no disagreements with Lazar, Levine & Felix LLP on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Lazar, Levine & Felix LLP, would have caused Lazar, Levine &
Felix LLP to make reference thereto in their report on the financial statements
for such years or such interim periods.
28
The Company has requested that Lazar, Levine & Felix LLP furnish it with a
letter addressed to the Commission stating whether or not it agrees with the
above statements. A copy of such letter dated, July 21, 2003, is filed as
Exhibit 2 to Form 8-K filed on October 18, 2003.
On August 11, 2003, the Company's Board of Directors ratified the
engagement of Stonefield Josephson, Inc. as its auditors. The decision to retain
this accountant was approved by the Board of Directors. The Company authorized
Lazar, Levine & Felix, LLP to fully respond to any and all inquiries of
Stonefield Josephson, Inc. concerning Lazar, Levine & Felix, LLP termination.
Prior to our engagement of Stonefield Josephson, Inc. the Company
requested that Stonefield Josephson, Inc. assist with auditing the financial
statements for Logicorp, a subsidiary group of the Registrant's, for the twelve
months ended February 28, 2000, four months ended June 30, 2000, twelve months
ended June 30, 2001, and six months ended December 30, 2001. Other than as
described above, during our two most recent fiscal years prior to the date of
engagement, and the subsequent interim period prior to engaging this accountant,
neither the Company (nor someone on the Company's behalf) consulted the newly
engaged accountant regarding any matter.
The Company has allowed Stonefield Josephson, Inc. to review its Form 8-K
before it is filed with the Commission. Stonefield Josephson, Inc. has not
furnished the Company with a clarification, or disagreement with the information
set forth herein.
On October 12, 2000, Ernst & Young LLP ("E&Y"), the independent
accountants who were engaged as the principal accountants to audit our financial
statements resigned as our certifying accountants. E&Y's report on our financial
statements as at August 31, 1999 and for the two years then ended contained no
adverse opinion or disclaimer of opinion, and were not qualified or modified as
to uncertainty, audit scope or accounting principles. During the fiscal year
ended August 31, 1999 and during the subsequent interim period preceding E&Y's
resignation we had no disagreement with E&Y on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure. The facts and circumstances that relate to E&Y's resignation, as far
as we know them, are as follows:
E&Y served as our certifying accountants since 1995. E&Y orally informed
us that pursuant to E&Y's internal rules, E&Y would resign as our certifying
accountants since it was unwilling and therefore unable to rely upon the
representations of Mr. Cameron Chell, our President and Chief Executive Officer,
due to the existence of a Settlement Agreement dated November 6, 1998, between
Cameron Chell, and the Alberta Stock Exchange. On April 3, 2000, our board of
directors appointed Mr. Chell as a director and elected him as our Chair; on
April 3, 2000, Chell.com. Ltd., an Alberta corporation wholly-owned by Mr.
Chell, purchased approximately 16% of our issued and outstanding common stock;
and on April 7, 2000, we advised E&Y of the existence of the Settlement
Agreement. Pursuant to this Settlement Agreement with the Alberta Stock
Exchange, Mr. Chell acknowledged the existence of certain facts that occurred
during 1996 and 1997 while Mr. Chell was a registered representative in Alberta,
Canada, licensed by the Alberta Securities Commission, and he agreed to certain
restrictions imposed by the Alberta Stock Exchange and to pay a Cdn$25,000 civil
fine. Specifically, Mr. Chell acknowledged that he had breached certain duties
of supervision, disclosure, and compliance of the Alberta Stock Exchange in
connection with various offers and sales of securities. Those restrictions
included Mr. Chell's loss of Alberta Stock Exchange approval for a five-year
period and enhanced supervision for a three-year period.
E&Y's unwillingness to rely upon Mr. Cameron Chell's representations were
based upon the existence of the Settlement Agreement with the Alberta Stock
Exchange and not based upon any representations made by Cameron Chell.
On November 1, 2000, our Board of Directors ratified the engagement of
Lazar, Levine & Felix, LLP as our auditors for the year ending August 31, 2000.
We have authorized E&Y to fully respond to any and all inquiries of Lazar,
Levine & Felix, LLP concerning E&Y's resignation.
29
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures as of the end of the period covered
by this report were designed and functioning effectively to provide reasonable
assurance that the information required to be disclosed by us in reports filed
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. We believe that a controls system, no matter how
well designed and operated, cannot provide absolute assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.
(b) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during
our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
CURRENT COMPOSITION
- --------------------------------------------------------------------------------
NAME AGE PRINCIPAL POSITIONS WITH THE COMPANY DIRECTOR
SINCE
================================================================================
David Bolink 36 Chief Executive Officer, Chairman, Director 2003
Andy Quinn 41 Director 2004
Neil Brown 31 Secretary, Corporate Controller N/A
Mr. Bolink was elected at our Annual Shareholders' Meeting held in 2003.
Mr. Quinn was appointed by Mr. Bolink, the then-sole director, to fill a vacancy
of the Board of Directors in 2004. All of our Directors will hold office until
the next succeeding Annual Meeting of Shareholders or until their successors are
duly elected and qualified. There were no resignations of directors due to
differences.
DAVID BOLINK has been our director since November 2003, and also served as
a director from 2000 to 2002. He was a Managing Director of Chell Merchant
Capital Group from September 2000 to January 19, 2001 and served as Chell.com.
Ltd.'s first President from December 1999 to July 2000. Mr. Bolink served as
Director of Business Management of FutureLink Distribution Corp., an application
service provider and a provider of server-based computing services, from May
1998 to December 1999. Mr. Bolink also served as Business Manager of Edmonton
Society for Christian Education from May 1996 to May 1998. From February 1989 to
May 1996, Mr. Bolink served as Asset Manager of Wilson Holdings, a property and
financial management company.
ANDREW W. QUINN, JR. has served as our director since April 2004. He has
been the Business Development Manager, Telecommunications for the Futurelink
Distribution Company from July 1999-February 2000. Mr. Quinn served as the
Executive Vice President for Engyro, Inc., from March 2000-July 2002. Since
September 2002, Mr. Quinn has worked for QuickCompliance, Inc. and currently
serves as the Chief Technology Officer and Vice President Implementation
Services.
NEIL BROWN has been promoted to the position of Director of Operations and
Corporate Controller and the Company's Corporate Secretary, effective June 15,
2003. Neil has served as Assistant Controller of Chell Group and its predecessor
Networks North Inc., since 1999. Previously, Neil served as Canadian Controller
Games Workshop Canada, a retail, wholesale and mail order company.
30
No individual on our Board of Directors possesses all of the attributes of
an audit committee financial expert and no one on our Board of Directors is
deemed to be an audit committee financial expert. In forming our Board of
Directors, we sought out individuals who would be able to guide our operations
based on their business experience, both past and present, or their education.
Our business model is not complex and our accounting issues are straightforward.
Responsibility for our operations is centralized within management, which is
comprised of four people. We rely on the assistance of others, to help us with
the preparation of our financial information. We recognize that having a person
who possesses all of the attributes of an audit committee financial expert would
be a valuable addition to our Board of Directors, however, we are not, at this
time, able to compensate such a person therefore, and we may find it difficult
to attract such a candidate.
CODE OF ETHICS
On July 22, 2004 our Board of Directors adopted a Code of Business Conduct
and Ethics that applies to all of our officers, directors and employees.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than ten percent (10%) of our outstanding
Common Stock, to file with the SEC initial reports of ownership and report
changes in ownership of Common Stock. Such persons are required by SEC
regulations to furnish the Company with copies of all such reports they file. To
our knowledge, based solely on a review of the copies of reports furnished to us
and written or oral representations that no other reports were required for such
persons, all Section 16(a) filing requirements applicable to our officers,
directors and greater than ten percent (10%) beneficial owners have been
complied with respect to the fiscal years ended August 31, 2003 and August 31,
2002.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation
paid or accrued by us during the three years ended August 31, 2003 to the
individuals who served as our Chief Executive Officer, Chief Financial Officer
and Chief Technology Strategist, (collectively, the "Named Executive Officers"),
who received total annual salary and bonuses in excess of US$100,000
(Cdn$157,240) during the 2003 Fiscal Year.
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- -------------------
OTHER ANNUAL SECURITIES UNDER ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION(1) OPTIONS/GRANTED COMPENSATION
YEAR (CDN$) (CDN$) ($) (#) ($)
- ---------------------------------------- ---------------------------------------- ------------------------------------
David Bolink (2) 2004 -- -- -- -- --
Chief Executive Officer -- -- -- -- --
Stephen McDermott(3) 2003 212,703 -- -- -- --
Chief Executive Officer 2002 -- -- -- -- --
Donald Pagnutti (4) 2003 n/a n/a n/a n/a n/a
President, and Chief Financial 2002 160,000 -- -- 250,000 --
Officer 2001 160,000 -- -- -- --
Cameron Chell 2002 -- -- -- -- --
Chief Executive Officer (5) 2001 -- -- -- -- --
- ---------------------------------------- ---------------------------------------- ------------------------------------
NOTES:
(1) Perquisites and other personal benefits received in 2001, 2002 and
2003 did not exceed the lesser of US$50,000 and 10% of the total
annual salary and bonuses for any of the Named Executive Officers.
31
(2) Mr. Bolink was hired subsequent to the Fiscal 2003 year end after
the resignation of Stephen McDermott.
(3) Mr. McDermott was appointed Chief Executive Officer effective June
27, 2002. His salary commenced August 16, 2002 and was less than
US$100,000. Mr. McDermott resigned his position effective May 7,
2004.
(4) Mr. Pagnutti resigned as President and Chief Financial Officer
effective October 31, 2002.
(5) Mr. Chell resigned as Chief Executive Officer effective June 27,
2002.
During the three year period ended August 31, 2002, we did not grant any
restricted stock awards or stock appreciation rights. Additionally, all of our
group life, health, hospitalization, medical reimbursement or relocation plans,
if any, do not discriminate in scope, terms or operation, in favor of the Named
Executive Officers and are generally available to all salaried employees.
Further, no Named Executive Officer received, in any of the periods specified in
the Summary Compensation Table, perquisites and other personal benefits,
securities or property in an aggregate amount in excess of the lesser of $50,000
or 10% of the total salary and bonus reported for the Named Executive Officer in
the fiscal year in which such benefits were received, and no single type of
perquisite or other personal benefits exceeded 25% of the total perquisites and
other benefits reported for the Named Executive Officer in the applicable fiscal
year.
OPTION GRANTS TABLE
The following table sets forth (a) the number of shares underlying options
granted to each Named Executive Officer during the 2003 Fiscal Year, (b) the
percentage the grant represents of the total number of options granted to all
our employees during the 2003 Fiscal Year, (c) the per share exercise price of
each option, (d) the expiration date of each option, and (e) the potential
realized value of each option based on: (i) the assumption of a five (5%)
percent annualized compounded appreciation of the market price of the Common
Stock from the date of the grant of the subject option to the end of the option
term, and (ii) the assumption of a ten (10%) percent annualized compounded
appreciation of the market price of the Common Stock from the date of the grant
of the subject option to the end of the option term.
- ----------------------------------------------------------------------------------------------------------------
Potential Realizable Value
at Assumed Rates of Stock
Price Appreciation for
Option Term
- ----------------------------------------------------------------------------------------------------------------
Name Number of Percentage of Exercise Expiration Date 5% 10%
Shares Total Options Price
underlying Granted to
Options Employees in
Granted Fiscal Year
- ----------------------------------------------------------------------------------------------------------------
Stephen McDermott Nil Nil Nil Nil Nil Nil
Chief Executive
Officer
Donald Pagnutti (1) n/a n/a n/a n/a n/a n/a
President and Chief
Financial Officer
Cameron Chell (2) n/a n/a n/a n/a n/a n/a
Chief Executive
Officer
NOTES:
(1) Mr. Pagnutti resigned as President and Chief Financial Officer
effective October 31, 2002.
(2) Mr. Chell resigned as Chief Executive Officer effective June 27,
2002.
32
OPTIONS EXERCISED AND REMAINING OUTSTANDING
Set forth in the table below is information, with respect to each of the
Named Executive Officers, as to the (a) number of shares acquired during the
2004 Fiscal Year upon each exercise of options granted to such individuals, (b)
the aggregate value realized upon each such exercise (i.e., the difference
between the market value of the shares at exercise and their exercise price),
(iii) the total number of unexercised options held on August 31, 2004,
separately identified between those exercisable and those not exercisable, and
(iv) the aggregate value of in-the-money, unexercised options held on August 31,
2004, separately identified between those exercisable and those not exercisable.
- --------------------------------------------------------------------------------------------------------------------
Securities Aggregate
Acquired on Value Unexercised Options at Value of Unexercised in the Money
Exercise Realized August 31, 2004 Options at August 31, 2004
(#) ($) (#) ($)
- --------------------------------------------------------------------------------------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE(1)
----------- ------------- -------------- ----------------
Stephen McDermott Nil Nil 3,000,000 Nil Nil Nil
NOTE:
(1) The value of the unexercised "in-the-money" options has been
determined by subtracting the exercise price of the options from the
closing Common Share price of US$0.379 on August 30, 2003, and
multiplying by the number of Common Shares that may be acquired upon
the exercise of the options. The current exercise price of the
options is higher than the closing Common Share price of US$0.379,
therefore the Value of the options is nil.
COMPENSATION OF DIRECTORS
Prior to September 8, 2000, each director, not otherwise our full time
employee, was eligible to receive $500 for each meeting of the Board of
Directors or committee thereof which they attended, along with the reimbursement
of their reasonable expenses incurred on our behalf. In addition, each director,
not otherwise our full time employees were eligible to receive 1,500 stock
options annually.
As of December 11, 2000, the Board of Directors formally adopted a
standard arrangement pursuant to which only our outside directors are
compensated for their services in their capacity as directors. This compensation
arrangement is retroactive to September 19, 2000 (the date of the closing of the
Agreement of Purchase and Sale between Networks North Inc., Networks North
Acquisition Corp., Chell.com Ltd. and Cameron Chell).
OUTSIDE DIRECTOR COMPENSATION
- -------------------------------------------------------------------------------
Options Cash (US$)
- -------------------------------------------------------------------------------
Directorship Acceptance Options (one time grant with a 3 45,000
year vesting schedule)
Annual Retainer-Chairman 20,000 10,000
Annual Retainer-Director 6,000
Annual Retainer-Committee Member (over and above
directorship retainer) 3,000
Annual Retainer-Committee Chair (over and above
directorship retainer and committee retainer) 2,000
Board Meeting Attendance Fee 750/mtg.
Committee Attendance Fee 500/mtg.
EMPLOYMENT CONTRACTS WITH NAMED EXECUTIVE OFFICERS
Effective August 16, 2002, we entered into an employment agreement with
Stephen McDermott, pursuant to which Mr. McDermott will serve as our President
and Chief Executive Officer for a period of one year. The contracted salary is
US$120,000(Cdn$183,288). Mr. McDermott resigned his position effective May 7,
2004
33
We do not have any other employment agreements in effect with any other
executive employee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers served as a director or member of the
compensation committee (or group performing similar functions) of another
entity, one of whose executive officers served on the Audit and Compensation
Committee or as a director of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Set forth in the table below is information concerning the ownership, as
of the close of business on July 1, 2004, of the common stock by each person who
is known to us to be the beneficial owner of more than five (5%) percent of the
common stock, our directors and named executive officers, and all directors and
executive officers as a group.
Amount & Nature Percentage
Name and Address (1) of Beneficial Ownership of Class (2)
- ---------------------- ----------------------- ------------
Chell.com Ltd. (3) 498,354 1.6%
114, 1215 -- 13th Street S.E.
Calgary, Alberta T2G 3J4
Cameron Chell 1,225,000 3.8%
Canadian Advantage Limited Partnership (4) 451,868 1.4%
c/o Thomson Kernaghan & Co. Limited
120 Adelaide Street West, Suite 1800
Toronto Ontario M5H 1T1
CEDE & CO 3,406,326 10.6%
Michael J. Rice 1,700,000 5.3%
Naveen Chanana 748,452 2.3%
ISCA Financial Services 637,636 2.0%
Jayvee & CO 4,201,487 13.1%
Stephen McDermott (President and Chief Executive Officer) (5) 3,000,000 9.3%
All directors and executive officers as a group 2 persons 0 0.0%
(1) Unless otherwise stated, the address of the directors and executive officers
of the corporation is c/o Chell Group Corporation, 800 3rd Avenue, 21st floor,
New York, NY, USA 10022.
34
(2) Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of common stock
beneficially owned by them. A person is deemed to be the beneficial owner of
securities that may be acquired by such person within 60 days from the date on
which beneficial ownership is to be determined, upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage ownership
is determined by assuming that options, warrants and convertible securities that
are held by such person (but not those held by any other person) and which are
exercisable within such 60-day period, have been exercised. The percentages
reflected in this table assume the approval of the issuance of shares of our
common stock pursuant to the Logicorp transaction, the issuance of shares of our
common stock pursuant to the conversion of the 8% convertible promissory notes
and the issuance of shares of our common stock pursuant to the conversion of two
promissory notes issued by us.
(3) Cameron Chell is the sole director and shareholder of Chell.com Ltd.
(4) Includes 36,500 shares issuable upon the exercise of Warrants and 442,145
shares of our common stock to be issued upon shareholder approval scheduled for
October 30, 2002.
(5) Consists of options granted in fiscal 2004 to acquire an aggregate of
3,000,000 shares of Common Stock at the exercise price of $0.05 per share. Mr.
McDermott no longer served as an officer or director on and after May 7, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Set forth below is a description of certain transactions between us and
our directors, executive officers, beneficial owners of five percent or more of
the outstanding Common Stock, or members of the immediate family of any of the
foregoing persons, as well as certain business relationships between us and our
directors, which occurred or existed during the 2003 Fiscal Year and subsequent
thereto. Our management believes that the transactions described in this section
were made on terms no less favorable than those that could have been obtained
from third parties.
License Agreement between us, Cameron Chell, and Chell Merchant Capital
Group dated August 31, 2000 whereby Mr. Chell grants us and Chell Merchant
Capital Group the right to use the trademarks "Chell.com", "Chell Merchant
Capital Group" and "Chell Group Corporation" in exchange for the fee of $1.00
per year.
Securities Purchase Agreement with VC Advantage Fund ("VC") on October 3,
2000, for up to US$3,000,000 loan to us. VC received a Convertible Debenture,
which is convertible into our Common, based upon an agreed conversion price of
$3.00 per share. As of November 30, 2000, VC had assigned its rights in this
Agreement to Canadian Advantage Limited Partnership ("CALP II") and a total of
US$1,700,000 has been advanced to the Company. The US$1,700,000 advance is
convertible into 566,667 Common shares. Cameron Chell is a Director and
shareholder of VC Advantage Limited, the general partner of VC. Pursuant to the
assignment of this agreement to CALP II, this is no longer a related transaction
as Mr. Chell has no interests in CALP II.
During the year ended August 31, 2003, B.O.T.B., a company controlled by
Cameron Chell, advanced Logicorp Data Systems $820,000, and during the period of
September 1, 2003 through April 30, 2004, advanced Logicorp Data Systems
$567,399. The advances are due on demand and do not carry a stated interest
rate. The Company has imputed interest on the advances at a rate of 9% per
annum. As of April 30, 2004, the aggregate amount of such advances was
$1,387,399.
The 3,000,000 option issuance to Stephen McDermott was part of the Board
approved compensation package during the 2004 Fiscal Year. The options were for
services rendered to date.
35
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Lazar Levine & Felix, LLP audited our financial statements for the fiscal
year ended August 31, 2001 and 2000. In addition, Lazar Levine & Felix, LLP had
reviewed our 10-Q's for the period and had begun the audit process for the
August 31, 2002 until we hired our new auditors Stonefield Josephson, Inc. in
August 2003. Fees for their services relating to the 2002 fiscal year audit will
be reflected in the period incurred. The aggregate fees billed for professional
services were as follows:
------------------------------------------------------------
Year Audit Fees
------------------------------------------------------------
2003 $797,918
2002 $159,842
2001 $244,560
------------------------------------------------------------
ALL OTHER FEES
No other services were rendered by Stonefield Josephson, Inc., or Lazar
Levine & Felix in fiscal year 2003, 2002 and 2001.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following financial statements and supplementary financial information
are filed as part of this Annual Report on Form 10-K:
Schedule of Valuation and Qualifying Accounts
(b) The following 8-K's have been filed since the Company's last 10-Q: None
(c) The following list sets forth the applicable exhibits (numbered in
accordance with Item 601 of Regulation S-K) required to be filed with this
Annual Report on Form 10-K:
CHELL GROUP CORPORATION
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Location
------ ---------------------- --------
2.1 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.................... +1, Exh. 10.1
3.1 Articles of Incorporation, as amended to date............................ p. 59
3.2 By-Laws, as amended to date.............................................. p. 62
4.1 Specimen Stock Certificate............................................... p. 71
10.1 License Agreement, dated March 23, 1990, between NTN Communications, Inc.
and NTN Interactive Network Inc.......................................... +2, Exh. 10.9
36
Exhibit
Number Description of Exhibit Location
------ ---------------------- --------
10.2 Stock Purchase Agreement, dated as of October 4, 1994, between NTN Canada
and NetStar Enterprises Inc. (formerly, Labatt Communications Inc.)...... +3, Exh. A
10.3 Option, dated as of October 4, 1994, registered in the name of NetStar
Enterprises Inc. (formerly, Labatt Communications Inc)................... +3, Exh. B
10.4 Designation Agreement dated as of October 4, 1994, among NTN Canada,
Inc., NTN Interactive Network Inc. and NetStar Enterprises Inc. (formerly
Labatt Communications Inc.).............................................. +3, Exh. C
10.5 Registration Rights Agreement, dated as of October 4, 1994, between NTN
Canada and NetStar Enterprises Inc. (formerly, Labatt Communications Inc.) +3, Exh. D
10.6 Promissory Note of NTN Interactive Network Inc. registered in the name of
Connolly-Daw Holdings, Inc............................................... +1, Exh. 10.2
10.7 Promissory Note of NTN Interactive Network Inc., registered in the name
of 1199846 Ontario Ltd................................................... +1, Exh. 10.3
10.8 Option Agreement, dated October 1, 1996, among Connolly-Daw Holdings
Inc., NTN Interactive Network Inc. and NTN Canada, Inc................... +1, Exh. 10.5
10.9 Option Agreement, dated October 1, 1996, among 1199846 Ontario Ltd., NTN
Interactive Network Inc. and NTN Canada, Inc............................. +1, Exh. 10.6
10.10 Registration Rights Agreement, dated October 1, 1996, among NTN Canada,
Inc., Connolly-Daw Holdings Inc. and 1199846 Ontario Ltd................. +1, Exh. 10.4
10.11 Employment Agreement dated as of August 31, 1994, between NTN Interactive
Network Inc. and Peter Rona.............................................. +4, Exh. 10.11
10.12 Management Agreement dated October 1, 1996, between Magic Lantern
Communications Ltd. and Connolly-Daw Holdings Inc........................ +4, Exh. 10.12
10.13 Employment Agreement dated October 1, 1996, between Magic Lantern
Communications Ltd. and Douglas Connolly................................. +4, Exh. 10.13
10.14 Employment Agreement dated October 1, 1996, between Magic Lantern
Communications Ltd. and Wendy Connolly................................... +4, Exh. 10.14
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. 10.15
10.16 Promissory Note, dated September 10, 1999, by and between 1373224 Ontario
Limited, as Debtor, and the Holder, as Creditor. ........................ +5, Exh. 10.16
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. 10.17
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. 10.18
10.19 Certificate to the Escrow Agent certifying that the conditions of Closing
have been satisfied or waived............................................ +5, Exh. 10.19
10.20 Certificate to the Escrow Agent certifying that the conditions of Closing
have not been satisfied or waived........................................ +5, Exh. 10.20
10.21 Occupancy and Indemnity 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. 10.21
37
Exhibit
Number Description of Exhibit Location
------ ---------------------- --------
10.22 Order of the Ontario Superior Court of Justice, dated September, 1999,
approving the transaction contemplated herein, and vesting in the
Purchaser the right, title and interest of GalaVu and the Receiver, if
any, in and to the Purchased Assets, free and clear of the right, title
and interest of any other person other than Permitted Encumbrances....... +5, Exh. 10.22
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. 10.23
10.24 Covenant of Networks North Inc. for valuable consideration to allot and
issue and pay to the Receiver 100,000 common shares in accordance with
the Purchase Agreement date September 10, 1999, between 1373224 Ontario
Limited and the Receiver................................................. +5, Exh. 10.24
10.25 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..................................................................... +6, Exh. A
10.26 Valuation of Chell.com Ltd. as of May 31, 2000 by Stanford Keene.......... +6, Exh. B
10.27 Share Purchase Agreement 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, Exhibit 2.1
10.28 Share Purchase Agreement, dated as of April 25, 2003 between DVOD
Networks Inc., and Chell Group Corporation, minus schedules thereto;
10.29 Assignment of Debt and Security, dated April 25, 2003 between Chell Group
Corporation and DVOD Networks Inc;
10.30 Assignment of Debt and Security, dated April 25, 2003 among NTN
Interactive Network Inc., DVOD Networks Inc and GalaVu Entertainment
Network Inc.;
10.31 Form of Assignment of Debt and Security, dated April 25, 2003 among
488605 Ontario Limited, Ruth Margel and DVOD Networks Inc., minus
schedules thereto.
10.32 Stock Purchase Agreement dated as of August 2, 2004, by and among
NewMarket Technology, Inc., the Registrant and Logicorp Data Systems, Ltd. +5, Exh. 10.25
10.33 Bonus Agreement entered into August 2, 2004, by and between the
Registrant and NewMarket Technology. +5, Exh. 10.26
10.34 Form of Promissory Note issued by NewMarket Technology, Inc. to Logicorp
Data Systems, Ltd. +5, Exh. 10.27
10.35 Unanimous Shareholders Agreement dated August 2, 2004 by and among
NewMarket Technology, Inc., the Registrant and Logicorp Data Systems, Ltd. +5, Exh. 10.28
10.36 Registration Rights Agreement dated as of August 2, 2004, is entered into
by and among NewMarket Technology, Inc., and the Registrant. +5, Exh. 10.29
14.1 Code of Ethics .......................................................... 14.1
22 List of Subsidiaries..................................................... p. 92
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
38
- ----------------
+1 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's Current Report on Form 8-K (Date of
Report: October 2, 1996) (File No. 0-18066), filed on October 17, 1996.
+2 All Exhibits so indicated are incorporated herein by reference to the
exhibit 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 listed above in the Company's Current Report on Form 8-K (Date of
Report: October 4, 1994) (File No. 0-18066), filed on October 18, 1994.
+4 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's Annual Report on Form 10-K (Date of
Report: November 27, 1996) (File No. 0-18066), filed on December 16, 1996.
+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,
1997) (File No. 0-18066), filed on December 16, 1996.
+6 All Exhibits so indicated are incorporated herein 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.
+7 All Exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Company's Current Report on Form 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.
EXHIBIT 22. LIST OF SUBSIDIARIES OF CHELL GROUP CORPORATION AS AT AUGUST 31,
2003
Name of Subsidiary (1) Jurisdiction of Incorporation
- ---------------------- -----------------------------
Logicorp Data Systems Ltd. (2).........................................Alberta
Logicorp Service Group Ltd (2).........................................Alberta
123557 Alberta Ltd. (2)................................................Alberta
591360 Alberta Ltd. (2)................................................Alberta
eTelligent Solutions Inc. (3)..........................................Alberta
Chell Merchant Capital Group, Inc......................................Ontario
NTN Interactive Network Inc. (sold December 2003).......................Canada
3484751 Canada Inc......................................................Canada
GalaVu Entertainment Network Inc. (sold April 2003)....................Ontario
Viewer Services (4) ...................................................Ontario
Chell.com (USA) Ltd.....................................................Nevada
- ----------
NOTES:
(1) Unless otherwise indicated, all named entities are wholly-owned
subsidiaries of Chell Group Corporation
(2) Wholly-owned subsidiary of Chell Merchant Capital Group, Inc.
(3) Wholly-owned subsidiary of Logicorp Data Systems Ltd.
(4) Wholly-owned subsidiary of NTN Interactive Network Inc.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: October 22, 2004 By: /S/ David Bolink
------------------------------------
David Bolink, President, CEO and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title(s) Date
- --------- -------- ----
/S/ David Bolink President, October 22, 2004
- ------------------------ Chief Executive Officer and
David Bolink Chief Accounting Officer
/S/ Andy Quinn
- ------------------------ Director October 22, 2004
Andy Quinn
40
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors
Current......................................................... F - 1
Predecessor..................................................... F - 2
Consolidated Balance Sheets....................................... F - 3
Consolidated Statements of Operations............................. F - 4
Consolidated Statements of Shareholders' Equity................... F - 5
Consolidated Statements of Cash Flows............................. F - 6
Notes to Consolidated Financial Statements........................ F - 7 thru
F - 38
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Chell Group Corporation
We have audited the consolidated balance sheets of Chell Group Corporation
(a New York corporation) and subsidiaries as of August 31, 2003 and 2002 and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the years in the two-year period ended August 31,
2003. Our audits also included the financial statement schedule listed in Item
14. These consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Chell Group Corporation and subsidiaries, as of August 31, 2003, and 2002, and
the results of their consolidated operations and their consolidated cash flows
for each of the years in the two-year period ended August 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company's significant recurring
operating losses, working capital deficit, shareholders' deficit, negative cash
flows from operations, and default on certain loan agreements raise substantial
doubt about its ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 16, the Company has restated its financial statements
as of August 31, 2001, and for the year then ended, previously audited by other
auditors.
/s/ Stonefield Josephson, Inc.
- ------------------------------
Stonefield Josephson, Inc.
Irvine, California
May 15, 2004, except
for Note 20[c] and
20[d], for which the
date is May 26, 2004
and August 8, 2004
respectively
F-1
INDEPENDENT AUDITORS REPORT
The Board of Directors
Chell Group Corporation
Toronto, Ontario
We have audited the accompanying consolidated balance sheets of Chell
Group Corporation and subsidiaries as of August 31, 2001 and 2000 and the
related consolidated statements of operations and shareholders' equity and cash
flows for each of the two years in the period ended August 31, 2001. 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 audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chell Group
Corporation and subsidiaries as of August 31, 2001 and 2000, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ LAZAR LEVINE & FELIX LLP
- ----------------------------
Lazar Levine & Felix LLP
New York, New York
November 16, 2001
F-2
CHELL GROUP CORPORATION
CONSOLIDATED BALANCE SHEETS
(Expressed in Canadian dollars)
=============================================================================================================================
AUGUST 31, 2003 August 31, 2002
$ $
=============================================================================================================================
ASSETS
CURRENT
Cash and cash equivalents 327,685 107,258
Accounts receivable, trade - net of allowance for doubtful
accounts of $356,195 and $160,000, respectively 3,560,286 4,944,843
Other receivables -- 31,406
Inventory 208,340 268,980
Prepaid expenses 76,077 --
Property held for sale 1,177,045 --
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 5,349,433 5,352,487
=============================================================================================================================
Property and equipment, net 638,143 3,460,763
Licenses, net of accumulated amortization -- 47,015
Goodwill 276,794 276,794
Other assets 63,600 109,696
Assets of discontinued operations - assets held for sale 969,292 4,133,911
- -----------------------------------------------------------------------------------------------------------------------------
7,297,262 13,380,666
=============================================================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT
Bank overdraft 908,432 603,740
Bank indebtedness 3,935,166 2,990,914
Accounts payable and accrued liabilities 5,469,224 4,613,824
Accrued interest payable 1,347,220 655,050
Deferred revenue 297,243 422,980
Short-term advances 312,191 --
Current portion, long-term debt 1,305,301 870,148
Payable on acquisition 4,852,976 4,852,976
Loan payable, related party 1,020,000 200,000
Short-term note and loan payable, other -- 443,189
Mortgages on buildings held for sale 1,114,583 1,166,667
Convertible debt 7,978,676 7,947,933
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 28,541,012 24,767,421
=============================================================================================================================
Long-term debt, net of current portion 113,392 1,051,603
Liabilities of discontinued operations 1,546,454 4,542,884
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 30,200,858 30,361,908
=============================================================================================================================
COMMITMENTS AND CONTINGENT LIABILITIES -- --
CONVERTIBLE PREFERRED SERIES B SHARES: 454,545 SHARES [August 2002 - 7,294 7,294
454,545]
SHAREHOLDERS' DEFICIT
10,795,410 common shares [August 2002 - 10,504,913] 733,997 712,652
Due from shareholder -- (227,365)
Additional paid in capital 26,655,538 26,220,561
Accumulated other comprehensive income 1,150,558 215,097
Accumulated deficit (51,450,983) (43,909,481)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' DEFICIT (22,910,890) (16,988,536)
=============================================================================================================================
7,297,262 13,380,666
=============================================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements
F-3
CHELL GROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31
[Expressed in Canadian dollars]
=============================================================================================================================
2003 2002 2001
(Restated)
$ $ $
=============================================================================================================================
REVENUE
Product sales 30,321,968 32,468,400 --
Service sales 2,178,128 1,739,524 --
Other -- -- 16,595
- -----------------------------------------------------------------------------------------------------------------------------
32,500,096 34,207,924 16,595
- -----------------------------------------------------------------------------------------------------------------------------
COST OF SALES
Product sales 28,088,752 30,725,499 --
Service sales 291,496 594,488 --
- -----------------------------------------------------------------------------------------------------------------------------
28,380,248 31,319,987 --
GROSS PROFIT 4,119,848 2,887,937 16,595
OPERATING EXPENSES
Selling, general and administrative expenses 8,656,468 7,622,873 7,258,609
Write off of leasehold improvements 163,142 -- 355,560
Depreciation and amortization 1,043,948 1,027,242 594,803
Impairment of goodwill -- 10,489,549 --
- -----------------------------------------------------------------------------------------------------------------------------
9,863,558 19,139,664 8,208,972
- -----------------------------------------------------------------------------------------------------------------------------
Loss on extinguishments of debt -- 521,120 --
Interest expense 2,462,516 10,123,183 1,146,708
Loss from equity investment in Engyro -- -- 301,100
Loss on disposal of investments/property 248,587 1,838,140 --
Miscellaneous -- 1,627 --
- -----------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before provision for income taxes (8,454,813) (28,735,797) (9,640,185)
Provision for income taxes -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (8,454,813) (28,735,797) (9,640,185)
- -----------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
Loss on disposal/sale of subsidiary (net of applicable income tax of $0) (829,199) (305,091) (937,711)
Loss from discontinued operations (net of applicable income tax of $0) (308,705) (1,710,649) (1,169,743)
Gain on settlement of debt 2,051,215 -- --
- -----------------------------------------------------------------------------------------------------------------------------
GAIN (LOSS) FROM DISCONTINUED OPERATIONS 913,311 (2,015,740) (2,107,454)
- -----------------------------------------------------------------------------------------------------------------------------
NET LOSS (7,541,502) (30,751,537) (11,747,639)
Deemed dividend on preferred shares -- (137,016) --
- -----------------------------------------------------------------------------------------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS (7,541,502) (30,888,553) (11,747,639)
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) PER SHARE:
Basic and diluted from continuing operations (0.79) (2.93) (1.15)
Basic and diluted from discontinued operations 0.08 (.20) (0.25)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss per share (0.71) (3.13) (1.40)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS:
Net loss before dividends on preferred shares (7,541,502) (30,751,537) (11,747,639)
Other comprehensive income - foreign currency translation 935,461 215,097 --
- -----------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS (6,606,041) (30,536,440) (11,747,639)
- -----------------------------------------------------------------------------------------------------------------------------
=============================================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements
F-4
CHELL GROUP CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
(Expressed in Canadian dollars)
Accumulated Accumulated Total
Additional other retained shareholders'
paid in Due from comprehensive earnings equity
Preferred shares Common shares capital shareholder income (deficit) (deficit)
------------------------------------------------
Shares Amount Shares Amount
====================================================================================================================================
Balance, 900,000 10,917 2,925,141 191,122 10,454,669 -- -- (1,273,289) 9,383,419
August 31,
2000
(restated -
Note 16)
Purchase of
assets and
issuance of
shares -- -- 5,426,772 372,923 2,229,291 -- -- -- 2,602,214
Shares
issued in
lieu of
salary -- -- 131,974 9,484 315,577 -- -- -- 325,061
Settlement
of debt -- -- 36,602 2,694 109,085 -- -- -- 111,779
Preferred
shares
converted (900,000) (10,917) 300,000 13,065 (9) -- -- -- 2,139
Warrants -- -- -- -- 117,359 -- -- -- 117,359
Receivable
from
stockholder -- -- -- -- -- (25,086) -- (25,086)
Consulting
services
rendered -- -- 145,000 10,405 456,218 -- -- -- 466,623
Exercise of
62,750 stock
options -- -- 62,750 4,416 208,637 -- -- -- 213,053
Beneficial
conversion
on debt -- -- -- -- 1,959,144 -- -- -- 1,959,144
Net loss
(restated -
Note 16) -- -- -- -- -- -- -- (11,747,639) (11,747,639)
====================================================================================================================================
Balance,
August 31,
2001
(restated -
Note 16) -- -- 9,028,239 604,109 15,849,971 (25,086) -- (13,020,928) 3,408,066
Settlement
of debt -- -- 1,226,986 90,126 1,833,280 -- -- -- 1,923,406
Loss on
extinguishmen
of debt -- -- -- -- 521,120 -- -- -- 521,120
Preferred
shares
issued -- -- -- -- 169,225 -- -- -- 169,225
Foreign
currency
translation
adjustment -- -- -- -- -- -- 215,097 -- 215,097
Receivable
from
stockholder -- -- -- -- -- (202,279) -- -- (202,279)
Deemed
dividend on
Preferred
shares issued -- -- -- -- 137,016 -- -- (137,016) --
Warrants
issued as
compensation -- -- -- -- 947,711 -- -- -- 947,711
Beneficial
conversion
feature on
Gunnar
convertible
note -- -- -- -- 5,743,924 -- -- -- 5,743,924
Beneficial
conversion
feature on
change of
terms on
convertible
note -- -- -- -- 677,216 -- -- -- 677,216
Consulting
services
rendered -- -- 63,500 4,674 111,189 -- -- -- 115,863
Exercise of
186,188
stock options -- -- 186,188 13,743 229,909 -- -- -- 243,652
Net loss -- -- -- -- -- -- -- (30,751,537) (30,751,537)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
August 31,
2002 -- -- 10,504,913 712,652 26,220,561 (227,365) 215,097 (43,909,481) (16,988,536)
Sale of
common stock -- -- 290,000 21,309 434,977 -- -- -- 456,286
Share
adjustment -- -- 497 36 -- -- -- -- 36
Payable from
stockholder -- -- -- -- -- 227,365 -- -- 227,365
Foreign
currency
translation
adjustment -- -- -- -- -- -- 935,461 -- 935,461
Net loss -- -- -- -- -- -- -- (7,541,502) (7,541,502)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE,
AUGUST 31,
2003 -- -- 10,795,410 733,997 26,655,538 -- 1,150,558 (51,450,983) (22,910,890)
====================================================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements
F-5
CHELL GROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31
(Expressed in Canadian dollars)
==================================================================================================================
2003 2002 2001
(Restated)
$ $ $
==================================================================================================================
OPERATING ACTIVITIES
Net loss (7,541,502) (30,751,537) (11,747,639)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,591,256 1,019,396 3,040,407
(Gain) loss on retirement of debt (2,051,215) 521,120 --
Amortization of long-term debt discount 1,016,232 -- --
Due from shareholder expense 227,365 -- 355,560
Impairment of assets 163,242 -- --
Provision for doubtful accounts 196,195 299,918 --
Loss on sale of subsidiary 829,199 305,091 --
Loss on disposal/sale of capital assets and investments -- 1,838,140 --
Accretion of interest on non-interest bearing promissory notes -- -- 183,513
Amortization of discount on Gunnar note -- 6,531,218 --
Impairment of goodwill -- 10,489,549 --
Interest cost from amortization of discount -- -- 589,628
Deferred taxes -- (59,173) --
Services rendered for shares -- 115,863 659,359
Warrants issued -- 947,711 174,084
Write-off of prepaids arising from Chell asset purchase -- -- 367,235
Write-off of assets arising from discontinued operations -- -- 939,513
Changes in assets and liabilities:
Decrease (increase) in short-term investments -- -- 250,051
Decrease (increase) in accounts receivable, trade 1,309,461 3,697,333 790,018
Decrease (increase) in other receivables -- 84,814 133,580
Decrease (increase) in income taxes receivable -- 46,365 (11,977)
Decrease (increase) in inventory 38,949 (181,439) 100,626
Decrease (increase) in prepaid expenses 15,712 742,490 98,779
Decrease (increase) in other assets 85,781 -- 42,859
Decrease (increase) in assets from discontinued operations -- -- 103,710
Increase (decrease) in accounts payable and accrued liabilities 1,988,981 (3,883,743) 1,072,244
Increase (decrease) in accrued interest payable 899,757 -- --
Increase (decrease) in income taxes payable 72,129 -- --
Increase (decrease) in deferred revenue (321,825) (782,660) --
- ------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (480,283) (9,019,544) (2,858,450)
==================================================================================================================
INVESTING ACTIVITIES
Purchase of property and equipment (391,648) (2,098,150) (1,430,962)
Proceeds from disposal of property and equipment 434,532 1,111,000 --
Proceeds from sale of GalaVu 170,003 -- --
Purchase of Logicorp -- (1,500,000) --
Purchase of eTelligent Solutions -- (75,000) --
Proceeds from sale of Magic Lantern -- 1,850,000 --
Proceeds from sale of Interlynx -- -- 50,000
Increase in deposit on purchase -- -- (1,689,710)
Due from shareholder -- (227,365) --
Note receivable -- 160,000 --
- ------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 212.887 (779,515) (3,070,672)
==================================================================================================================
F-6
==================================================================================================================
2003 2002 2001
(Restated)
$ $ $
==================================================================================================================
FINANCING ACTIVITIES
Bank indebtedness 336,879 3,480,223 --
Net borrowings on line of credit (203,774) 4,579,849 --
Increase in notes and loans payable 820,000 3,973,189 5,006,134
Payment on Logicorp note (222,614) (1,800,000) --
Borrowing from Logicorp shareholders 312,191 200,000 --
Repayment of notes and loans payable (777,375) (1,408,287) (102,447)
Proceeds from exercise of options -- 243,652 26,243
- ------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 265,307 9,268,626 4,929,930
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
EFFECTS OF FOREIGN EXCHANGE (50,028) 215,097 --
- ------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS DURING THE
PERIOD FROM CONTINUING OPERATIONS (52,117) (315,336) (999,192)
CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS 272,544 66,173 --
Cash and cash equivalents, beginning of period 107,258 356,421 1,355,613
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 327,685 107,258 356,421
==================================================================================================================
Income taxes paid -- -- 98,491
Interest paid 791,368 412,388 146,781
2003 Fiscal Year - Non cash items arose for the issuance of the Company's
common stock. The common stock was issued for a $456,286, Cdn ($290,000 US)
raise of funds which had been raised in Fiscal 2002 as classified previously as
a liability (Note 10b)
2002 Fiscal Year - Non cash items arose from the purchase of Logicorp
Group of Companies and eTelligent Solutions during the 2002 Fiscal Year. They
are $2,677,782 of property & equipment and $5,000,000 of goodwill.
2001 Fiscal Year - Non cash items arose from the purchase of Chell.com
assets during the 2001 Fiscal Year. They are $1,936,272 of property & equipment,
$107,589 of goodwill, $45,044 of prepaids, $1,404 in other accounts receivable
and in addition shares were issued. Other assets of $174,084 arose from the
issue of warrants, shares were issued for consulting fees and salaries in the
amount of $659,359, shares were issued for a debt payment on the GalaVu purchase
in the amount of $115,165, write-off of leaseholds of $355,560 and write-off of
prepaids from Chell purchase of $367,235.
The accompanying notes are an integral part of these consolidated financial
statements.
1. DESCRIPTION OF BUSINESS AND OPERATIONS
Chell Group Corporation [the "Company"] was incorporated under the laws of
the State of New York on May 12, 1986. The Company is the holding company for
NTN Interactive Network Inc. ["Interactive"], GalaVu Entertainment Network Inc.
["GalaVu"], Chell Merchant Capital Group ["CMCG"], and Chell.com USA ("Chell.com
USA"), all of which are wholly-owned operating companies. The Company also owns
all of the outstanding stock of 3484751 Canada Inc., a corporation the Company
established and incorporated under the Canada Business Corporations Act on April
20, 1998. 3484751 Canada Inc. was incorporated for the sole purpose of owning a
property, purchased in 1998, on behalf of the Company, which is currently
unoccupied. CMCG owns all the outstanding stock of Logicorp Data Systems Ltd.
["LDS"], Logicorp Service Group Ltd. ["LSG"], 123557 Alberta Ltd. and 591360
Alberta Ltd. (collectively "Logicorp"). LDS also owns all the outstanding stock
of eTelligent Solutions Inc., ["eTelligent"]. Interactive owns all of the
outstanding stock of 1113659 Ontario Ltd., which is inactive.
LDS was incorporated on March 31, 1988 as an Alberta, Canada Corporation
and is registered in the provinces of British Columbia, Saskatchewan and
Ontario, Canada. LDS is a computer service organization, which specializes in
the supply and integration of computer products. LDS serves both large and small
organizations and is particularly valued by organizations having complex data
and communication configurations.
F-7
LSG was incorporated on December 10, 1993 under the name 591363 Alberta
Ltd., as an Alberta, Canada Corporation. On February 28, 1995, LSG changed its
name to Logicorp Service Group Ltd. LSG is a computer service organization
specializing in the servicing of computer products in Edmonton. LSG serves both
as a warranty depot for manufacturers of computer products and a technical
resource for small, medium and large commercial businesses.
eTelligent was incorporated on July 21, 2000. eTelligent is a team of
business system consultants specializing in implementing and integrating
e-business, CRM (customer relationship management) and financial services
solutions from Microsoft Great Plains. eTelligent is comprised of professional
accountants and information technology specialists, all certified through
Microsoft Great Plains University.
CMCG is incorporated under the Ontario Business Corporations Act and is
the parent company for Logicorp Data Systems Ltd. ("LDS"), Logicorp Service
Group Ltd. ("LSG"), 591360 Alberta Ltd. and 123557 Alberta Ltd. eTelligent
Solutions Inc. is a wholly-owned subsidiary of LDS. These subsidiaries of CMCG
(collectively "Logicorp") operate in the information technology systems
integration industry, predominantly in western Canada.
Interactive is incorporated under the Canada Business Corporations Act and
has signed a license agreement [the "NTNC license"] with NTN Communications,
Inc., an unrelated Delaware company, for exclusive representation of their
interactive communications for all industry sectors in Canada. This interactive
entertainment network allows viewers to participate actively with a variety of
television programs, trivia and sports games. Present subscribers to the
Company's networks are hotels, restaurants, bars and university clubs. Each
subscriber either purchases the system hardware directly or rents the system
from Interactive. Interactive purchases the subscriber system from NTN
Communications, Inc. and various other suppliers. Following the installation,
each subscriber pays a monthly fee to Interactive for the program content and
maintenance services, which ranges from $650 to $750. The monthly fees for
rental systems range from approximately $255 to $290. On December 15, 2003, the
Company sold certain assets of Interactive (see Note 4).
GalaVu is incorporated under the Ontario Business Corporations Act and is
a technology-based entertainment provider of interactive in-room entertainment
systems for small and mid-sized hotels. GalaVu's interactive system is based
upon proprietary technology and provides a suite of products including movies on
demand, premium television programming and other information and entertainment
services. Effective April 25, 2003, the Company sold GalaVu (see Note 4).
The Company's primary market to date has been Canada.
GOING CONCERN ASSUMPTION
The accompanying consolidated 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 has reported net losses attributable to common shareholders
of $7,541,502, $30,888,553 and $11,747,639 for the years ended August 31, 2003,
2002 and 2001, respectively, and has an accumulated deficit of $51,450,983 as of
August 31, 2003. Also, the Company has negative cash flows from operations for
each of the years ended August 31, 2003, 2002 and 2001. In addition, the Company
has working capital deficit of $23,191,579 and net asset deficit of 22,903,596
as of August 31, 2003. Furthermore, as discussed in Note 8, the Company is in
default on certain loan agreements. These factors raise substantial doubt about
the Company's ability to continue as a going concern.
The Company cannot be certain that anticipated revenues from operations
will be sufficient to satisfy its ongoing capital requirements. Management's
belief is based on the Company's operating plan, which in turn is based on
assumptions that may prove to be incorrect. If the Company's financial resources
are insufficient, the Company may require additional financing in order to
execute its operating plan and continue as a going concern. The Company cannot
predict whether this additional financing will be in the form of equity, debt,
or another form. The Company may not be able to obtain the necessary additional
capital on a timely basis, on acceptable terms, or at all. In any of these
events, the Company may be unable to implement its current plans for expansion,
repay its debt obligations as they become due or respond to competitive
pressures, any of which circumstances would have a material adverse effect on
its business, prospects, financial condition and results of operations.
F-8
Should these financing sources fail to materialize, management would seek
alternate funding sources through sale of common and/or preferred stock. The
Company's business plans for 2004 contemplate obtaining additional working
capital through refinancings or restructurings of its existing loan agreements,
reducing operating overhead (which has already begun through workforce
consolidation), and sales of some of its existing subsidiaries including sale of
NTN in December 2003 (see Note 4). If management is unable to raise additional
capital and expected significant revenues do not result in positive cash flow,
the Company will not be able to meet its obligations and may have to cease
operations. 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 in the future.
The accompanying financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
2. ECONOMIC DEPENDENCE
Interactive is dependent upon NTN Communications, Inc. as its sole
supplier for the transmission of program content to the Company's subscribers.
In the event that NTN Communications, Inc., which operates under the
going-concern assumption, terminates the transmission of program content, the
Company believes, but cannot assure, that such services are likely to be
continued by others. As of June 30, 2004, NTN Communications, Inc. had
shareholders' equity of $24,034,000 and working capital of $10,481,00 according
to its unaudited balance sheet included in its quarterly report. NTN
Communications, Inc. has reported a quarterly net loss for the quarter ended
June 30, 2004 of $1,074,000 and a net loss of $2,368,000 for the six months
ended June 30, 2004. It reported an unaudited net loss for the year ended
December 31, 2003 of $2,711,000. All such amounts referred to in this paragraph
are quoted in US dollars.
In December 2003, the Company completed the sale of assets and liabilities
of Interactive (see Note 4). During the years ended August 31, 2003, 2002, and
2001, the Company paid commission of $1,502,370, $1,772,375, and $1,865,974,
respectively, in Canadian dollars, to NTN Communications, Inc.
3. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
They are expressed in Canadian dollars, which is the currency of the primary
economic environment in which operations are conducted.
CONSOLIDATION POLICY
These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries: CMCG (which includes Logicorp and
eTelligent), Interactive, GalaVu, 3484751 Canada Inc., Chell.com USA Inc., and
Magic. In December 2003, the Company completed the sale of assets and
liabilities of Interactive (see Note 4). Effective April 25, 2003, the Company
sold its wholly-owned subsidiary GalaVu (see Note 4). Effective March 18, 2002,
the Company sold Magic and its wholly-owned subsidiary Tutorbuddy and its 75%
ownership of STI for cash consideration of $1,850,000 (see Note 4). The
Company's consolidated financial statements have been restated to reflect
Interactive, GalaVu, and Magic as discontinued operations for all periods
presented. The Company uses the equity method for investments in which it owns
less than 50% but over 20%.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
F-9
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has the following financial instruments within its
consolidated financial statements: accounts receivable, bank indebtedness,
accounts payable, accrued liabilities, accrued interest, convertible debt and
long-term debt.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
The carrying amount approximates fair value because of the short maturity
of these instruments: accounts receivable, bank indebtedness accrued liabilities
and accounts payable.
The carrying amount for accrued interest approximates fair value because
the interest accruals are based upon the actual or imputed interest rate from
contractual debt agreements or other obligations, thus making the amount easily
determined.
The carrying amount for long-term debt approximates fair value because the
amounts are based upon the amount from contractual debt agreements or other
obligations, thus making the amount easily determined.
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 that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. The most significant accounting estimates
inherent in the preparation of our financial statements include estimates as to
the appropriate carrying value of certain assets and liabilities which are not
readily apparent from other sources, primarily accounts receivable, inventory,
property and equipment, intangible assets, deferred revenue, assets and
liabilities of discontinued operations, rebates and coop fund. Actual results in
subsequent periods could differ from management's estimates and those
differences could be material.
REVENUE RECOGNITION
Revenue from product sales is recognized when the product is shipped to
customers. For maintenance contracts, revenue is recognized ratably over the
life of the related contract. Provisions for discounts to customers, estimated
returns and allowances and other price adjustments are provided for in the same
periods the related revenue is recorded. Outbound shipping charges to customers
are included in net sales.
Software sales are recognized in accordance with the American Institute of
Certified Public Accountants Statement of Position (SOP) 97-2, "Software Revenue
Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions." Pursuant to SOP
97-2, software sales are recognized on sales contracts when all of the following
conditions are met: persuasive evidence of an agreement exists (e.g., a signed
contract is obtained), delivery has occurred, the total sales price is fixed or
determinable, collectability is probable, and any uncertainties with regard to
customer acceptance are insignificant. For those contracts that include a
combination of software and services, sales are allocated among the different
elements based on company-specific evidence of fair value of each element. Sales
allocated to software are recognized as the above criteria are met. Sales
allocated to services are recognized as services are performed and accepted by
the customer or, for maintenance agreements, ratably over the life of the
related contract.
Revenue for resale of software and technology equipment and service fee is
recognized based on guidance provided in Securities and Exchange Commission
(SEC) Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," as amended, (SAB 101). Software and technology equipment resale
revenue is recognized when all of the components necessary to run software or
hardware have been shipped. Service revenues include maintenance fees for
providing system updates for software products, user documentation and technical
support and are recognized over the life of the contract. Other service
revenues, including training and consulting, are recognized as the services are
performed. The Company records an allowance for uncollectible accounts on a
customer-by-customer basis as appropriate.
F-10
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash which mature in less than three
months from the date of issue. The carrying value of cash equivalents
approximates their fair values.
ACCOUNTS RECEIVABLE
The Company's division in the computer reselling business often adjusts
its product prices after the products are shipped due to price errors. The
Company estimates an allowance for price adjustments at the end of each
reporting period based on the historical price adjustment to its sales. In
addition, the Company estimates the allowance for doubtful accounts
periodically. The Company has $316,195 in allowance for doubtful accounts and
$40,000 in allowance for price adjustments as of August 31, 2003 compared to
$120,000 for doubtful accounts and $40,000 in allowance for price adjustments as
of August 31, 2002. No such allowance was accrued prior to the acquisition of
this division on January 1, 2002.
Changes in the allowance for doubtful accounts are as follows:
2003 2002
---------- ----------
Beginning balance $ 160,000 $ 227,000
Increase through acquisition
of Logicorp Data
Systems -- 270,000
Provision for doubtful accounts 203,448 (11,223)
Write-offs (7,253) (218,477)
Reclassification to
discontinued operations -- (107,300)
---------- ----------
Ending balance $ 356,195 $ 160,000
========== ==========
The Company's policies for allowance for doubtful accounts are as follows:
1) all amounts over 365 days outstanding are provided for 100% and are sent to
collections, and 2) an evaluation of all amounts/customers that have amounts
outstanding in the 90+ days outstanding are reviewed to determine the reasons
for the delay in receiving payment and thus are assigned a probability of
collection. The probability is determined based on historical experience for the
company. Any account receivable under 60% probability of collection is allowed
for.
The policy for charging off uncollectible trade receivables are as
follows: 1) all amounts over 365 days are directly written-off as soon as they
are allowed for, and 2) amounts are also written-off if settlement has been
reached with the customer to decrease the amount owing.
It is reasonably possible that the Company's estimate of the allowance for
doubtful accounts and price adjustments will change.
CONCENTRATION OF CREDIT RISK
The Company generally extends credit to its customers, who are
concentrated in the government units and large corporations, and performs
ongoing credit evaluations of its customers. Typically, the Company does not
require collateral.
INVENTORY
Inventory consists of finished goods held for sale or rent, which are
valued at the lower of cost, using the first-in, first-out method, or net
realizable value.
F-11
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization of equipment are provided over the estimated
useful lives of 1 to 3 years using the straight-line method. Computer equipment
is amortized on a straight-line basis over 3 years. Software is amortized over
the following: server and enterprise software is amortized on a straight-line
basis over 3 years, desktop and other operational software is amortized on a
straight-line basis over 1 year. Autos are amortized on a straight-line basis
over 3 years. Leasehold improvements are amortized on a straight-line basis over
the shorter of the economic useful lives or the lease term. Buildings are
amortized on a straight-line basis over the economic useful lives of 25 years.
EVALUATION OF LONG-LIVED ASSETS
Effective September 1, 2002, and in accordance with SFAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the Company requires
long-lived assets to be held and used to be analyzed for impairment whenever
events or changes in circumstances indicate that the related carrying amounts
may not be recoverable. The adoption of SFAS 144 did not have a material effect
on the Company's financial statements. The Company evaluates at each balance
sheet date whether events and circumstances have occurred that indicate possible
impairment. If there are indications of impairment, the Company uses future
undiscounted cash flows of the related asset or asset grouping over the
remaining life in measuring whether the assets are recoverable. In the event
such cash flows are not expected to be sufficient to recover the recorded asset
values, the assets are written down to their estimated fair value. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
value of the assets, less the costs to sell. For comparative purposes with the
2003 balance sheet, the Company has presented the 2002 balance sheet following
the guidance in SFAS 144 for long-lived assets held for sale.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price of an acquired
enterprise or assets over the fair values of the identifiable assets acquired
and liabilities assumed. Effective September 1, 2001, we adopted SFAS 142,
Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill and
certain intangibles no longer be amortized, but instead tested for impairment at
least annually and at any other time if events occur or circumstances indicate
that the carrying amount of goodwill may not be recoverable. Prior to September
1, 2001, goodwill was stated at cost less accumulated amortization. The net
effect of the adoption of SFAS 142 on results of operations prior to September
1, 2001 would not have a material effect on the consolidated financial results
of the Company as the amortization of the goodwill was allocated to the
discontinued operations.
SFAS 142 requires that goodwill be tested for impairment at the reporting
unit level (operating segment or one level below an operating segment) on an
annual basis (Aug 31st for the Company) and between annual tests in certain
circumstances. Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assigning assets and
liabilities to reporting units, assigning goodwill to reporting units, and
determining the fair value of each reporting unit. Significant judgments
required to estimate the fair value of reporting units include estimating future
cash flows, determining appropriate discount rates and other assumptions.
Changes in these estimates and assumptions could materially affect the
determination of fair value and/or goodwill impairment for each reporting unit.
On an ongoing basis, management reviews the valuation and amortization of
the licenses and the valuation of goodwill, taking into consideration any events
and circumstances which might have impaired the fair value. The Company assumes
there is an impairment if the carrying amount is greater than the expected net
future cash flows. The amount of impairment, if any, is measured based on
projected discounted future cash flows, using a discount rate that reflects the
Company's average cost of funds.
Circumstances that could trigger an impairment test include but are not
limited to: a significant adverse change in the business climate or legal
factors; an adverse action or assessment by a regulator; unanticipated
competition; loss of key personnel; the likelihood that a reporting unit or
significant portion of a reporting unit will be sold or otherwise disposed;
results of testing for recoverability of a significant asset group within a
reporting unit; and recognition of a goodwill impairment loss in the financial
statements of a subsidiary that is a component of a reporting unit.
F-12
Due to the substantial increase in operating losses and severe negative
cash flows of Logicorp Data Systems Ltd. and Logicorp Service Group Ltd. since
the acquisitions, the Company assessed the fair value of these reporting units
and determined that the carrying amount of the reporting unit goodwill exceeds
the implied fair value of that goodwill. Accordingly, an impairment loss of
$10,489,549 is recorded in the accompanying consolidated statements of
operations for the year ended August 31, 2002. Measurement of the fair value of
these reporting units is based on present value techniques of estimated future
cash flows.
The goodwill remaining on our consolidated balance sheets in the amount of
$276,794 as of August 31, 2003 and 2002 arose from the purchase of eTelligent
and this goodwill is allocated to the systems integration segment.
OTHER ASSETS
Other assets include long-term deposits which are related to our leased
facilities and are held until settlement of account.
DEFERRED REVENUE
Deferred Revenue is recorded when payments are received in advance of the
Company's performance in the underlying service agreement. Deferred revenue is
amortized ratably over the period in which the services are provided.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities, and their respective tax
basis. Deferred tax assets, including tax loss and credit carry forwards, 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 deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax expense represents the change during the
period in the deferred tax assets and deferred tax liabilities. The components
of the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics. Realization of the
deferred tax asset is dependent upon generating sufficient taxable income in
future years. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
COMPREHENSIVE INCOME
The Company's consolidated financial statements are reported in Canadian
dollars since the majority of its assets are located in Canada and majority of
its operations took place in Canada. Transactions for Chell Group Corporation,
the registrant, (excluding all the subsidiaries) are conducted in U.S. dollars
and all the related assets and liabilities are translated at exchange rates in
effect at the end of the year. Accounts for statements of operations of Chell
Group Corporation (excluding all the subsidiaries) are translated at weighted
average rates for the year. Gains and losses from translation of foreign
currency financial statements into Canadian dollars are included in other
comprehensive income (loss). The foreign currency translation adjustment in
other comprehensive income was $935,461 and $215,097, for the years ended August
31, 2003 and August 31, 2002, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized over the vesting period based on the excess, if any, on the date
of grant of the fair value of the Company's shares over the employee's exercise
F-13
price. When the exercise price of the option is less than the fair value price
of the underlying shares on the grant date, deferred stock compensation is
recognized and amortized to expense in accordance with Financial Accounting
Standards Board ("FASB") Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation-an Interpretation of APB Opinion No.
25," over the vesting period of the individual options. Accordingly, if the
exercise price of the Company's employee options equals or exceeds the market
price of the underlying shares on the date of grant, no compensation expense is
recognized. Options or shares awards issued to non-employees are valued in
accordance with SFAS 123 using the Black-Scholes pricing model and expensed over
the period services are provided.
EMPLOYEE STOCK OPTIONS
The Company has adopted a Long-Term Incentive Plan [the "Plan"] designed
to compensate key employees of our Company for the performance of their
corporate responsibilities. The benefits to employees under the Plan are
dependent upon improvement in market value of the Company's common shares. The
Plan offers selected key employees the opportunity to purchase common shares
through the exercise of a stock option. An option entitles the employee to
purchase common shares from the Company at a price determined on the date the
option is granted. The option exercise price is the closing trading price of the
stock on the day prior to the grant date. The options vest over a four-year
period from the grant date, at the rate of 25% per year. Options granted prior
to August 31, 1998 vest over a two-year period from the grant date, 50% after
one year and 50% at the end of the second year. The options expire five years
after the grant date. The Plan also provides that selected key employees may
receive common shares as an award of Restricted Stock. Restricted Stock consists
of common shares that are awarded subject to certain conditions, such as
continued employment with the Company or an affiliate for a specified period. Up
to 20% of the outstanding common stock, on a fully diluted basis on the date of
the grant, excluding outstanding options may be issued under the Plan.
The following is a summary of outstanding stock options:
WEIGHTED
AVERAGE
EXERCISE
PRICE TOTAL
U.S. $ #
========================================================================
BALANCE AS AT AUGUST 31, 2000 1,297,000
Issued 4.33 94,500
Exercised 2.68 (62,750)
Expired 2.40 (3,750)
- -----------------------------------------------------------------------
BALANCE AS AT AUGUST 31, 2001 1,325,000
Issued 0.95 1,731,215
Exercised 0.83 (186,188)
Expired 6.25 (1,326,187)
- -----------------------------------------------------------------------
BALANCE AS AT AUGUST 31, 2002 1,543,840
Issued 0.0 0
Exercised 0.0 0
Expired 0.96 (1,224,609)
- -----------------------------------------------------------------------
BALANCE AS AT AUGUST 31, 2003 1.00 319,231
=======================================================================
EXERCISE PRICE RANGES EXPIRATION TOTAL
U.S. $ DATE #
=======================================================================
1.00 November 1, 2011 95,106
1.00 November 30, 2011 224,125
- -----------------------------------------------------------------------
BALANCE AS AT AUGUST 31, 2003 319,231
=======================================================================
The number of stock options that are exercisable at August 31, 2003, 2002
and 2001 is 319,231, 959,906 and 761,163, respectively.
The weighted average fair value of options granted was U.S. $0.00 during
2003, $0.936 during 2002, and $1.17 during 2001.
F-14
The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with the provisions of APB 25. Accordingly, because
the exercise price of the employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense has been
recognized in the consolidated financial statements for these plans.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if we had accounted for the
Company's employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option valuation model with the following assumptions for 2003,
2002, and 2001: (a) risk-free interest rate of 4.35% for 2003, 5.09% for 2002
and 5.39% for 2001; dividend yield of 0% for 2003, 2002 and 2001; volatility
factor of 931.8% for 2003, 120.5% for 2002, and 70.7% for 2001; and a weighted
average expected life of the options of 8 years for 2003, 9 years for 2002 and 3
years for 2001.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
Had compensation cost for these stock options been determined consistent
with SFAS No. 123, the Company's net loss and net loss per share would have been
increased to the following pro forma amounts:
- ------------------------------------------------------------------------------------------
2003 2002 2001
(restated)
$ $ $
- ------------------------------------------------------------------------------------------
Net loss as reported (7,541,502) (30,888,553) (11,747,639)
Add: Stock-based employee compensation
expense included in reported net loss, net
of related tax effect -- -- --
Deduct: Total stock-based employee
compensation expense determined under fair
value-based method for all awards, net
of related tax effect -- (1,381,607) (1,253,205)
- ------------------------------------------------------------------------------------------
Pro forma net loss (7,541,502) (32,270,160) (13,000,844)
==========================================================================================
Basic and diluted loss per share as reported (0.71) (3.13) (1.40)
Pro forma basic and diluted loss per share (0.71) (3.27) (1.49)
==========================================================================================
LOSS PER SHARE
Basic loss per share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding for the
period excluding contingent shares issued in accordance with SFAS No. 128,
Earnings per Share. Diluted earnings per share are calculated in accordance with
the treasury stock method (which assumes that proceeds from the exercise of all
warrants and options are used to repurchase common stock at market value) and
are based on the weighted average number of common shares and dilutive common
share equivalents outstanding. The Company has outstanding options and warrants
of 391,231, 1,543,840 and 1,325,000 as of August 31, 2003, 2002 and 2001,
respectively. These options and warrants are not included in the calculation of
diluted loss per share as their effect is anti-dilutive.
F-15
REBATES AND COOP FUNDS
The Company's wholly-owned subsidiary, Logicorp Data Systems Ltd.,
receives rebates and marketing campaign reimbursements ("coop funds") from
manufacturers based on sales volume and based on special pricing for its
customers. Rebates are classified as reduction of cost of sales, while coop
funds are classified as reductions of selling and marketing expenses. Such
expenses for each reporting period are summarized as follows for the period from
January 1, 2002 (effective date of the acquisition of Logicorp Data Systems
Ltd.) to August 31, 2003:
- ------------------------------------------------------------------------------------------
2003 2002 2001
==========================================================================================
Rebates 1,574,651 197,744 --
Coop Funds 157,750 277,278 --
- ------------------------------------------------------------------------------------------
Total 1,732,401 475,022 --
- ------------------------------------------------------------------------------------------
ADVERTISING
The Company expenses advertising, promotion, and marketing costs when
incurred. Such expenses are summarized as follows:
- ------------------------------------------------------------------------------------------
2003 2002 2001
==========================================================================================
Advertising 17,022 34,458 29,561
Promotion 147,769 63,344 64,424
Marketing 4,725 27,443 43,482
- ------------------------------------------------------------------------------------------
Total 169,516 125,245 137,467
- ------------------------------------------------------------------------------------------
Advertising costs are dealt with on a case by case basis. Any advertising
that is purchased that is longer than one month in nature is setup as a
short-term asset in prepaids and is expensed over the length of the period. If
the length of the term is longer than one year, the amount would be classified
as other assets. All other advertising costs are expensed when incurred. As of
August 31, 2003, the Company had no prepaid advertising expenses longer than one
year in nature.
SHIPPING AND HANDLING COSTS
The Company's shipping and handling costs are included in cost of sales in
the accompanying consolidated statements of operations for all periods
presented.
WARRANTY COST
The Company does not provide any warranties on its products. Warranties
that are provided are the liability of the manufacturers.
BUSINESS ACQUISITIONS
Effective January 1, 2002, the Company acquired 100% of Logicorp Data
Systems Ltd., Logicorp Service Group Ltd., 123557 Alberta Ltd., and 591360
Alberta Ltd. Effective June 1, 2002, Logicorp Data Systems Ltd. acquired 100% of
the shares of eTelligent Solutions Inc. The operating results of these
subsidiaries are included in the accompanying consolidated statements of
operations from the date of acquisition (see Note 13).
DISCONTINUED OPERATIONS
The discontinued operations include the operating results of (1) Magic
from September 1, 2001 to March 18, 2002, the date Magic was sold; (2) GalaVu
for the period from September 1, 2001 to April 25, 2003, the date GalaVu was
sold, and (3) Interactive for the period from September 1, 2001 to August 31,
2003. Operating results of the above mentioned subsidiaries for the years ended
August 31, 2003, 2002 and 2001 have been reported as discontinued operations in
the accompanying consolidated statements of operations. See Note 4.
F-16
RECLASSIFICATIONS
Certain 2002 and 2001 balances have been reclassified to conform to the
fiscal year 2003 presentation. These reclassifications had no effect on
previously reported results of operations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation", providing
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS 148 also amends
the disclosure provisions of SFAS 123 and Accounting Principles Board (APB)
Opinion No. 28, "Interim Financial Reporting", to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. Amendments to SFAS 123 related to the transition and annual
disclosures are effective for fiscal years ending after December 15, 2002.
Amendments to disclosure requirements of APB Opinion 28 are effective for
interim periods beginning after December 15, 2002. The adoption of SFAS 148 did
not have a material impact on its financial position, results of operations or
cash flows.
In November 2002, FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires that the
guarantor recognize, at the inception of certain guarantees, a liability for the
fair value of the obligation undertaken in issuing such guarantee. FIN 45 also
requires additional disclosure requirements about the guarantor's obligations
under certain guarantees that it has issued. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002 and the
disclosure requirements are effective for financial statement periods ending
after December 15, 2002. The Company adopted FIN No. 45 on September 1, 2002 and
it did not have a material impact on the Company's financial position, results
of operations or cash flows.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities". FIN 46 changed the criteria by which one company
includes another entity in its consolidated financial statements. Previously,
the criteria were based on control through voting interest. FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. A company that consolidates a variable interest entity is called the
primary beneficiary of that entity. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. During October
2003, the FASB deferred the effective date for applying the provisions of FIN 46
until the end of the first interim or annual period ending after December 31,
2003, if the variable interest was created prior to February 1, 2003 and the
public entity has not issued financial statements reporting such variable
interest entity in accordance with FIN 46. On December 24, 2003, the FASB issued
FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable
Interest Entities, (FIN-46R), primarily to clarify the required accounting for
interests in variable interest entities. FIN-46R replaces FIN-46 that was issued
in January 2003. FIN-46R exempts certain entities from its requirements and
provides for special effective dates for entities that have fully or partially
applied FIN-46 as of December 24, 2003. In certain situations, entities have the
option of applying or continuing to apply FIN-46 for a short period of time
before applying FIN-46R. While FIN-46R modifies or clarifies various provisions
of FIN-46, it also incorporates many FASB Staff Positions previously issued by
the FASB. Management is currently assessing the impact, if any, FIN 46 may have
on the Company; however, management of the Company does not anticipate the
adoption will have a material impact to the Company's financial position or
results of operations.
F-17
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and is
effective for contracts entered into or modified after June 30, 2003. This
Statement amends Statement 133 for decisions made (i) as part of the Derivatives
Implementation Group process that effectively required amendments to Statement
133, (ii) in connection with other FASB projects dealing with financial
instruments, and (3) in connection with implementation issues raised in relation
to the application of the definition of a derivative, in particular, the meaning
of an initial net investment that is smaller than would be required for other
types of contracts that would be expected to have a similar response to changes
in market factors, the meaning of underlying, and the characteristics of a
derivative that contains financing components. The adoption of this
pronouncement did not have a material effect on the financial statements.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). Many of those instruments were previously classified as
equity. Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this Statement are consistent
with FASB's proposal to revise that definition to encompass certain obligations
that a reporting entity can or must settle by issuing its own equity shares,
depending on the nature of the relationship established between the holder and
the issuer. While FASB still plans to revise that definition through an
amendment to Concepts Statement 6, FASB decided to defer issuing that amendment
until it has concluded its deliberations on the next phase of this project. That
next phase will deal with certain compound financial instruments including
puttable shares, convertible bonds, and dual-indexed financial instruments. The
adoption of this pronouncement did not have a material effect on the financial
statements.
In December 2003, the FASB issued a revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" which replaces the
previously issued Statement. The revised Statement increases the existing
disclosures for defined benefit pension plans and other defined benefit
postretirement plans. However, it does not change the measurement or recognition
of those plans as required under SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
Specifically, the revised Statement requires companies to provide additional
disclosures about pension plan assets, benefit obligations, cash flows, and
benefit costs of defined benefit pension plans and other defined benefit
postretirement plans. Also, companies are required to provide a breakdown of
plan assets by category, such as debt, equity and real estate, and to provide
certain expected rates of return and target allocation percentages for these
asset categories. The adoption of this pronouncement is not expected to have a
material impact to the Company's financial statements.
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superseded as a result of the issuance
of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers ("the FAQ") issued with SAB
101 that had been codified in SEC Topic 13, Revenue Recognition. Selected
portions of the FAQ have been incorporated into SAB 104. While the wording of
SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The adoption of SAB 104 is not
expected to have a material impact on the consolidated financial statements.
F-18
4. DISCONTINUED OPERATIONS
SALE OF INTERACTIVE
Pursuant to an asset purchase agreement dated the 15th day of December,
2003, the Company sold to NTN Communications, Inc. (Amex: NTN) the assets and
certain liabilities of NTN Interactive Network, Inc. The Company sold NTN
Interactive Network's assets for approximately USD$1.55 million. The
consideration was composed of USD$250,000 in cash, USD$650,000 in shares of
unregistered NTN common stock (approximately 238,000 shares valued at the
closing market price on the date of sale which was $2.73 per share). The Company
intends to hold the shares of NTN for an indeterminate period of time, no less
than the required time for Rule 144 restrictions to be removed. The remainder of
the purchase price was based upon the application of unpaid licensing payables
(approximating USD$650,000) owed to NTN Communications, Inc., at the closing of
the transaction.
The Company has adopted SFAS 144 and as a result the Fiscal 2002 and
Fiscal 2001 balances have been restated in order to conform with the
presentation of Fiscal 2003 financial presentation. Interactive is reported as
part of the discontinued business segment (previously entertainment segment).
At the date of sale, the assets of Interactive were tested for
recoverability in accordance with SFAS 144 which resulted in no impairment to
recognize.
In an effort to streamline and focus the Company's resources on its core
business segment of systems integration, all other segments were decided to be
discontinued. Interactive had historically been profitable, provided positive
cash flows and faced little or no competition; however the organization no
longer strategically fit with the Company and the assets were sold.
The following is a listing of the major classes of assets and liabilities
of Interactive as of August 31, 2003 and 2002 (combined with GalaVu on the
consolidated balance sheet as of August 31, 2002):
- ------------------------------------------------------------
INTERACTIVE: 2003 2002
- ------------------------------------------------------------
Accounts receivable $ 252,026 $ 338,394
Fixed assets 437,540 464,348
Other current assets 98,092 335,743
Intangible assets 181,634 130,509
- ------------------------------------------------------------
Assets $ 969,292 $ 1,268,994
- ------------------------------------------------------------
- ------------------------------------------------------------
INTERACTIVE: 2003 2002
- ------------------------------------------------------------
Cash overdraft $ 272,544 $ --
Accounts payable 959,769 603,407
Accrued liabilities 260,657 407,941
Other current liabilities 53,484 --
- ------------------------------------------------------------
Liabilities $(1,546,454) $(1,011,348)
- ------------------------------------------------------------
F-19
Summarized operating results of Interactive's discontinued operations are as
follows:
- -------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
August 31, August 31, August 31,
2003 2002 2001
===============================================================================
Sales $ 5,755,244 $ 4,613,673 $ 2,386,401
Net income from discontinued
operations, net of tax $ 8,408 $ 1,021,845 $ 609,366
Loss on disposal of discontinued
operations, net of tax -- -- --
- -------------------------------------------------------------------------------
SALE OF GALAVU
Pursuant to a Share Purchase Agreement dated 25th day of April, 2003, the
Company sold to DVOD Networks Inc., an Ontario corporation ("DVOD"), all of the
issued and outstanding shares of capital stock of GalaVu Entertainment Network
Inc., a technology-based entertainment provider ("GalaVu") for $1.00 (Canadian).
Concurrently, the Company assigned to DVOD or caused its subsidiaries to assign
to DVOD, for $2.00 (Canadian) promissory notes and other receivables of GalaVu,
the Company or its subsidiaries in the aggregate amount of $1,672,608
(Canadian). At the same time 488605 Ontario Limited, a non-affiliated Canadian
corporation ("488605") and Ruth Margel (one of the note holders, an unrelated
party) assigned a note payable by GalaVu in the principal amount of $375,000
(Canadian) to DVOD in return for $170,000 (Canadian) paid by DVOD and a new note
in the amount of $325,000 (Canadian) payable by 3484751 Canada Inc., a Canadian
corporation and subsidiary of the Company, which such new note was issued to
reflect additional advances made by 488605 and Ruth Margel to the Company or
subsidiaries of the Company in the past. There have been no defaults on this
agreement. GalaVu is reported as part of the discontinued business segment
(previously entertainment segment).
In an effort to streamline and focus the Company's resources on its core
business segment of systems integration, all other segments were decided to be
discontinued. Since the GalaVu was no longer considered a priority for the
Company's resources, GalaVu was not receiving the capital funding it required
for growth. The Management of GalaVu approached the Company's management to
inquire about selling GalaVu. Since GalaVu no longer strategically fit with the
Company, GalaVu was sold.
At the date of sale, the assets of GalaVu were tested for recoverability in
accordance with SFAS 144 which resulted in no impairment to recognize.
The following is a listing of the major classes of assets and liabilities
of GalaVu as of August 31, 2002 (combined with Interactive on the consolidated
balance sheet as of August 31, 2002):
----------------------------------------
GALAVU: 2002
----------------------------------------
Accounts receivable $ 583,837
Fixed assets 2,211,894
Other current assets 69,186
----------------------------------------
Assets $ 2,864,917
----------------------------------------
----------------------------------------
GALAVU: 2002
----------------------------------------
Accounts payable 886,489
Accrued liabilities 291,890
Long-term debt 2,353,157
----------------------------------------
Liabilities $ 3,531,536
----------------------------------------
F-20
Summarized operating results of GalaVu's discontinued operations are as
follows:
- -------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
August 31, August 31, August 31,
2003(1) 2002 2001
===================================================================================================================
Sales $ 3,226,759 $ 5,564,277 $ 2,937,189
Net loss from discontinued operations, net of tax (317,113) (1,516,355) (602,293)
Gain on retirement of debt (see reconciliation in Note 8) 2,051,215 -- --
Loss on disposal of discontinued operations, net of tax (829,199) -- --
- -------------------------------------------------------------------------------------------------------------------
1) Period is through April 25, 2003, the date when GalaVu was sold.
SALE OF MAGIC LANTERN COMMUNICATIONS LTD. ("MAGIC")
Effective March 18, 2002, the Company completed this sale for cash
consideration of $1,850,000. Summarized operating results of Magic's
discontinued operations are as follows:
- ---------------------------------------------------------------------------------------------------
Year Ended Year Ended
August 31, August 31,
2002 2001
===================================================================================================
Sales $ 1,621,287 $ 4,616,992
Net loss from discontinued operations, net of tax (1,216,139) (511,143)
Loss on disposal of discontinued operations, net of tax (305,901) --
- ---------------------------------------------------------------------------------------------------
In an effort to streamline and focus the Company's resources on its core
business segment of systems integration, all other segments were decided to be
discontinued. Since Magic was no longer considered a priority for the Company's
resources, Magic was not receiving the capital funding it required for growth.
The Management of Magic approached the Company's management to inquire about
selling Magic. Since Magic no longer strategically fit with the Company, Magic
was sold. Magic is reported as part of the discontinued business segment
(previously education segment).
SALE OF INTERLYNX MULTIMEDIA INC. ("INTERLYNX")
During fiscal 2001, the Company sold Interlynx for cash consideration of
$50,000 and a $45,000 promissory note receivable.
Summarized operating results of Interlynx discontinued operations are as
follows:
- ------------------------------------------------------------------------------------------------------
Year Ended August Year Ended August
31, 2002 31, 2001
======================================================================================================
Sales N/A $ 313,555
Net loss from discontinued operations, net of tax N/A (665,673)
Loss on disposal of discontinued operations, net of tax N/A (937,711)
- ------------------------------------------------------------------------------------------------------
The Company's financial statements have been restated to reflect Interlynx
as a discontinued operation for all periods presented. Interlynx is reported as
part of the discontinued business segment (previously E-commerce segment).
F-21
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
2003 2002
============================================== ==============================================
COST ACCUMULATED NET BOOK Cost Accumulated Net book
DEPRECIATION VALUE depreciation value
$ $ $ $ $ $
- ----------------------------------------------------------------------------------------------------------------------------------
Land 1 -- -- -- 785,500 -- 785,500
Buildings 1 -- -- -- 1,396,963 206,151 1,190,812
Equipment 1,161,135 937,227 223,908 1,094,650 713,963 380,687
Software 397,714 341,499 56,215 335,900 231,946 103,954
Automobiles 23,300 23,300 -- 23,300 21,055 2,245
Computer Equipment 1,653,840 1,519,132 134,708 1,856,983 1,400,393 456,590
Leasehold improvements 2 1,012,144 788,832 223,312 1,149,693 608,718 540,975
- ----------------------------------------------------------------------------------------------------------------------------------
4,248,133 3,609,990 638,143 6,642,989 3,182,226 3,460,763
==================================================================================================================================
1) In Fiscal 2003, the Company reclassified land and buildings to
"Property held for sale" in the accompanying consolidated balance
sheet (Note 6).
2) CMCG subleases its property and a $163,142 impairment of the
leaseholds has been determined and has been expensed as "write-off
of leasehold improvements". The leaseholds have been written down to
the value of the future income from the sublease.
Depreciation and amortization of property and equipment was $1,030,645 for
2003, $1,019,396 for 2002, and $586,957 for 2001.
6. PROPERTY HELD FOR SALE
During the fiscal year ended August 31, 2003, we made the determination to
sell Interactive. Upon the Company receiving a letter of intent for Interactive,
it was reasonably determined that the sale would occur, as evident by the
December 15, 2003 sale (see Note 4). Since receiving the LOI, there would be no
operations occupying the property at 14 Meteor drive and thus we made the
determination to sell the building and its property. Simultaneously, since the
property at 10 Meteor drive was vacant also, we made the determination to sell
this property also. Therefore, both properties have been classified as "Property
held for sale" in the accompanying consolidated balance sheet as of August 31,
2003.
During the fiscal year ended August 31, 2003, we owned an approximately
25,000 square foot parcel of land, located at 14 Meteor Drive in Toronto,
Ontario, on which stands a 12,500 square foot, one story building. On December
19, 2003, we sold this land and building to an unrelated third party for
approximately $730,000 and recorded a gain on the sale of approximately $100,000
(net of costs).
During the fiscal year ended August 31, 2003, we owned an approximately
29,000 square foot parcel of land, located at 10 Meteor Drive, Toronto, Ontario,
on which stands a 14,000 square foot, two story building. We sold this land and
building to an unrelated party on March 7, 2004 for approximately $710,000. The
Company anticipates a gain of approximately $70,000 (net of costs).
The details of the properties held for sale are listed below:
- ----------------------------------------------------------------------------
3484751
Canada Ltd. Interactive Total
- ----------------------------------------------------------------------------
Furniture & Fixtures NBV 12,184 - 12,184
Building 318,991 342,370 661,361
Land 265,000 238,500 503,500
- ----------------------------------------------------------------------------
Property held for sale 596,175 580,870 1,177,045
============================================================================
F-22
We have two mortgages associated with the properties: a demand-loan with
the Bank of Montreal (principal remaining - $789,583) and a second mortgage from
Harvey Margel ($325,000). The Bank of Montreal demanded payment for its mortgage
upon learning of the intention to sell Interactive, for which the assets were
used as collateral. The Margel mortgage was originally due in November 2003 and
was extended to December upon the settlement of the first property sale. All
mortgages associated with the properties were paid in full subsequent to year
end. As a result, we have classified the assets as "property held for sale" in
current assets and the corresponding mortgages as current liabilities,
respectively, due to the sale of the properties subsequent to year end.
7. INCOME TAXES
The provision for income taxes consists of the following:
- ------------------------------------------------------------------------------
2003 2002 2001
(restated)
$ $ $
- ------------------------------------------------------------------------------
Current and deferred
FEDERAL -- -- --
PROVINCIAL -- -- --
- ------------------------------------------------------------------------------
-- -- --
==============================================================================
The difference between the provision for income taxes and the amount
computed by applying the combined basic federal and provincial income tax rate
of 39.3% for 2003, 39.3% for 2002, and 42.1% for 2001 to income before income
taxes is as set out below:
- ------------------------------------------------------------------------------
2003 2002 2001
Taxes on continuing operations (restated)
$ $ $
- ------------------------------------------------------------------------------
STATUTORY RATE APPLIED TO LOSS FROM
CONTINUING OPERATIONS (3,322,742) (11,293,168) (4,051,216)
Benefit of current year's losses
not recognized (change in valuation
allowance) 3,125,547 11,080,091 3,734,669
Expenses not deductible for
tax purposes 197,195 213,077 316,547
- ------------------------------------------------------------------------------
-- -- --
==============================================================================
- ------------------------------------------------------------------------------
2003 2002 2001
Taxes on discontinued operations (restated)
$ $ $
- ------------------------------------------------------------------------------
STATUTORY RATE APPLIED TO GAIN (LOSS)
FROM DISCONTINUED OPERATIONS 358,931 (792,186) (675,025)
Loss of subsidiary sold during the
year (121,321) (672,285) (539,922)
Capital (gain) loss on sale
of subsidiary (480,253) 119,901 1,064,133
Benefit of current year's losses
not recognized
(change in valuation allowance) 242,643 1,344,570 150,814
- ------------------------------------------------------------------------------
-- -- --
==============================================================================
For the years ended August 31, 2003, 2002, and 2001, the Company incurred
net operating losses and, accordingly, no provision for income taxes has been
recorded. In addition, no benefit for income taxes has been recorded due to the
uncertainty of the realization of any tax assets.
As at August 31, 2003, the Company's deferred tax assets primarily
relating to the benefit of realizing losses available for carry forward and the
timing difference of the write-off of property and equipment, net of a full
valuation allowance of $24,500,000, was nil. As at August 31, 2002, the
Company's deferred tax assets primarily relating to the benefit of realizing
losses available for carry forward and the timing difference of the write-off of
property and equipment, net of a full valuation allowance of $16,750,000, was
nil. Based on the available objective evidence, including the Company's history
of losses, management believes it is more likely than not that the net deferred
tax assets will not be fully realizable. Accordingly, the Company provided for a
full valuation allowance against its net deferred tax assets at August 31, 2003
and 2002.
F-23
At August 31, 2003, the Company and certain subsidiaries have loss carry
forwards of approximately $40,000,000 that can be carried forward against future
taxable income. The loss carry forwards began to expire in 2003.
8. LOANS AND NOTES PAYABLE/ BANK INDEBTEDNESS
Loans and notes payable consist of the following:
2003 2002
$ $
- ----------------------------------------------------------------------------
BANK DEBT
Bank indebtedness [i] 3,935,166 2,990,914
Bank overdraft [i] 908,432 603,740
- ----------------------------------------------------------------------------
4,843,598 3,594,654
- ----------------------------------------------------------------------------
CONVERTIBLE DEBT
Convertible promissory notes [ii] 5,777,510 6,587,622
Debenture payable [iii] 2,201,166 1,360,311
- ----------------------------------------------------------------------------
7,978,676 7,947,933
- ----------------------------------------------------------------------------
OTHER LOANS
HP loan [iv] 166,465 212,291
Term loan[v] 1,470 281,824
Mortgages on buildings held for sale [vi] 1,114,583 1,166,667
Short-term loan other [vii] -- 443,189
Short-term advances [viii] 312,191 --
RCA Trusts [ix] 1,250,758 1,427,676
Related parties [x] 1,020,000 200,000
Payable on acquisition [xi] 4,852,976 4,852,976
- ----------------------------------------------------------------------------
8,718,443 8,584,623
- ----------------------------------------------------------------------------
TOTAL DEBT, NOTES AND INDEBTEDNESS 21,540,717 20,127,210
============================================================================
[i] The bank indebtedness consists of debts from the following entities:
- ------------------------------------------------------------------------------
Company 2003 2002
==============================================================================
Logicorp Data Systems Ltd. ("LDS") [a] 3,852,790 2,872,850
eTelligent Solutions Inc. 82,376 118,064
- ------------------------------------------------------------------------------
3,935,166 2,990,914
==============================================================================
[a] In March 2001, LDS entered into a line of credit agreement with HSBC
Bank of Canada. Bank advances are payable on demand. The loan agreement
covers (i) a demand revolving operating loan up to $3,700,000; (ii)
equipment loan up to $300,000; (iii) demand Evergreen Capital loan/lease
facility up to $300,000; and (iv) loan on forward exchange contracts up to
$500,000. The operating loan carries an interest rate of 0.82% over the
prime rate while the equipment and Evergreen Capital loans carry an
interest rate equal to, at the option of the Company, (a) 1.05% over the
prime rate at the end of each month; or (b) a fixed rate agreed to by both
the Bank and the Company. Under the terms of the agreement, the Company can
borrow, under the operating loan and 31% of the forward exchange contracts
outstanding, up to an aggregate of (i) 70% of acceptable accounts
receivable and (ii) 50% of the lesser of cost or current market value of
its inventory not to exceed $750,000. The effective rate at August 31, 2003
was 4.32%. Borrowings under the line are subject to certain financial
covenants and restrictions on additional indebtedness and other related
items. As of August 31, 2003, the Company is in violation of maximum debt
to net worth and minimum working capital covenants. The loans are secured
F-24
by the assets of the Company under a general security agreement, and are
guaranteed by the Logicorp Service Group Ltd., through a security agreement
and are also personally guaranteed by the former shareholders of LDS. Under
the terms of the line of credit agreement, the bank may declare all
outstanding amounts immediately due and payable. The Bank has not called
the loan. A forbearance agreement was signed that expired in October 2003.
The Company has signed a new forbearance agreement that will extend to
October 31, 2004 and anticipates signing a longer forbearance before the
end of October 31, 2004.
On January 22, 2002, Mr. Chell guaranteed liabilities of Logicorp
to its principal lender, HSBC, in the amount of Cdn$1.0 million. On
December 24, 2002, Mr. Chell guaranteed trade credit of Logicorp to Synnex
in the amount of approximately Cdn. $1.0 million. On January 7, 2003, the
board determined that the Company would grant 3.5 million shares (actual
issuance of shares occurred in Fiscal 2004) of common stock to Mr. Chell
for such guarantees and other consideration in support of the Company. The
valuation on the shares was determined by the 10 day preceding trading
average of the Company's common stock, which resulted in an approximate
$134,000 US$ compensation expense recorded in Fiscal 2003. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a description of the loans.
[b] The bank line of credit consists of debts from the following entities:
- ---------------------------------------------------------------------------
Company 2003 2002
===========================================================================
Logicorp Data Systems Ltd. ("LDS") 908,432 603,740
eTelligent Solutions Inc. 0 0
- ---------------------------------------------------------------------------
908,432 603,740
===========================================================================
[ii] On December 1, 2001, the Company offered to certain investors 8%
convertible notes up to a maximum amount of US$ 8,000,000 in a private
placement. The Company received approximately Cnd$6,587,622 through this
offering. Under the terms of this offering, the notes are convertible into
shares of common stock at a price of the greater of (1) 50% of the average
closing bid prices for the ten trading days prior to conversion or (2) US$0.50.
These notes were due August 9, 2002. On April 9, 2002 all of the holders of the
notes signed commitments to voluntarily convert the notes based on the
conversion price per the terms of the agreement, which was determined to be
US$0.95 per share. This conversion was subject to shareholder approval. The
conversion of these notes would have resulted in the issuance of approximately
4,389,000 shares representing approximately 20% of the total common shares
outstanding after the issuance, and diluting the current common stockholders. As
of August 31, 2003, none of these shares has been issued and the outstanding
amount of the convertible notes was classified as liabilities. As of December 2,
2002, the Company, Joseph Gunnar & Co., LLC ("JGUN"), the placement agent in
this offering, and the holders of these notes entered into a settlement
agreement providing that the conversion price for these notes shall equal 85% of
the two day weighted average trading price of the common stock for the five
trading days preceding effective date of the registration statement under the
Securities Act of 1933, as amended, relating to the resale of the shares of
common stock issuable upon such conversion, provided, that such conversion price
cannot be greater than $0.75 or less than $0.40. Effective January 7, 2003, the
Company, JGUN, Cameron Chell and the holders of the notes agreed that if this
registration statement is not declared effective on or prior to September 1,
2003, the noteholders could "put" their shares of common stock to Mr. Chell at a
price of $0.475 per share during the period of December 1 - 14, 2003. By letter
dated December 4, 2003, the noteholders agreed to permit the Company until
February 28, 2004 to file all required filing and periodic reports under the
Securities Exchange Act of 1934, as amended, and to amend the period during
which they may "put" their shares issuable upon such conversion to Mr. Chell
from December 1--14, 2003, to March 1 - 14, 2004, in exchange for the extension
of the "put" period and the reduction of the conversion price to $0.25 per
share, provided, that, if such deadline was not satisfied by the Company such
agreement and reduction of the conversion price would be null and void. By
letter, dated February 26, 2004, this deadline and the "put" period were amended
to be April 30, 2004 and May 1 - 14, 2004, respectively. By letter, dated April
29, 2004, the Company requested that such deadline and "put" period be further
amended to be May 30, 2004 and June 1 - 14, 2004, respectively. The Company
believes that, as these notes have been held by the noteholders for an excess of
two years, and none of such noteholders are or have been affiliates of the
Company during the preceding 90 days, the notes may be converted at any time and
the shares of common stock issuable upon such conversion could be resold
pursuant to Rule 144(k), and, provided that the Company files all filings and
periodic reports under the Securities Exchange Act prior to May 31, 2004, these
notes shall be mandatorily converted into shares of common stock. On June 11,
F-25
2004, the Company again requested that such deadline and "put" period be further
extended to be August 10, 2004 and August 11-24, 2004, respectively. In
addition, the Company proposed that the notes would be automatically converted
on the earlier of (i) the date that all annual and quarterly reporting
obligations under federal securities laws have been complied with or (ii) July
10, 2004. The conversion price of the notes has been further reduced from $0.25
per share to $0.16 per share. The aggregate number of shares of common stock
issued upon such conversion (principal and unpaid accrued interest thru July 11,
2004 [date of new conversion agreement]) would be approximately 29,358,209,
representing approximately 67.25% of the common stock outstanding giving effect
to such conversion (based upon 14,295,410 shares outstanding at time of filing
the August 31, 2003 Form 10-K) . On August 10, 2004, the Company requested such
deadline and "put" period be further extended to be September 10, 2004 and
September 11-24, 2004, respectively. Effective September 14, 2004, the Company
has asked for another extension to October 11, 2004. One noteholder has
indicated to the Company that it believes that it has a cause of action against
the Company with respect to the foregoing and its rights under such notes, and
has threatened to bring such action against the Company. In the event that the
Company should be found to be in default of the notes or the related agreements,
the Company may be required to repay the notes in the event that a settlement is
not reached with the noteholders. In such event the Company does not believe
that it currently has the necessary capital available to repay the notes and
would be required to seek additional sources of capital or seek protection from
creditors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources".
In addition, since this debt is convertible into equity at the option of
the note holder at beneficial conversion rates, an embedded beneficial
conversion feature was recorded as a debt discount and was amortized using the
effective interest rate method over the life of the debt in accordance with EITF
00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments." Total
cost of beneficial conversion feature of Canadian $6,177,647 is recorded as a
discount of the convertible debt which was fully amortized during the year ended
August 31, 2002.
[iii] On October 3, 2000, the Company closed the sale of a US$3,000,000
(approximately Canadian $4,740,000) Convertible 10% Debenture to the VC
Advantage Limited Partnership ("VCALP"). As at August 31, 2001, US$1,700,000
(approximately Canadian $2,635,000) has been advanced to the Company. This
unsecured convertible debenture is due three years from issue. The Convertible
Debenture bears interest at 10% per annum, payable upon conversion, redemption
or maturity. The unpaid principal of the debenture bears interest from the date
that it is actually advanced until paid. Interest is payable in cash or stock at
our option. The Convertible Debenture is convertible into common stock, at
US$3.00 per share, in amounts specified by the VCALP. The maximum number of
common shares VCALP will receive is one million. On the close date, the Company
also issued 50,000 warrants to purchase 50,000 common shares at US$3.00 per
share to VCALP. The warrants have a term of four years. The fair value of these
warrants totaling approximately $220,000 was computed using the Black-Scholes
model under the following assumptions: (1) expected life of 1 1/2 years; (2)
volatility of 80% (3) risk free interest of 5.87% and (4) dividend of 0%. The
Company can elect to pay the outstanding loan balance in shares of common stock
at a fixed conversion price of US$3.00 per share. In addition, since this debt
is convertible into equity at the option of the note holder at beneficial
conversion rates, an embedded beneficial conversion feature was recorded as a
debt discount and will be amortized using the effective interest rate method
over the life of the debt in accordance with EITF 00-27. Total cost of
beneficial conversion feature of $1,728,134 and the relative fair value of the
warrants of $220,000 are recorded as a discount of the convertible debentures.
During the year ended August 31, 2001, the Company amortized $563,367 as
interest expense.
On November 30, 2000 the convertible debenture was assigned by VCALP to
CALP II Limited Partnership.
During the 2002 Third Fiscal Quarter, the convertible debenture held by
CALP II Limited Partnership ("CALP II") on behalf of Canadian Advantage Limited
Partnership ("CALP") and Advantage (Bermuda) Fund Ltd. ("ABFL") was exchanged
for a note payable to CALP in the amount of US$1,365,100 and a note payable to
ABFL in the amount of US$504,900. These notes provide for payment of principal
and interest at the rate of 10% per annum on August 31, 2006. The notes are
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 Canadian Imperial Bank of Commerce ("CIBC").
F-26
Effective April 15, 2002, the Company entered into an agreement with CALP
to convert the principal amount of the note plus accrued interest into Common
Stock at the rate of US$0.80 pursuant to which CALP received 1,314,000 shares of
the Company. CALP will receive an additional 442,145 shares upon the approval of
the Company's shareholders.
Effective April 15, 2002, the Company also entered into an agreement with
ABFL to convert the principal amount of the note plus accrued interest into
Common Stock at the rate of US$0.80 pursuant to which ABFL received 486,000
shares of the Company. ABFL will receive an additional 163,533 shares upon the
approval of the Company's shareholders.
Certain terms of the convertible debt have been changed including the
fixed conversion price reduced from $3 to $0.80. During the year ended August
31, 2002, the Company recorded additional discount of $677,216 and amortized
$787,294. During the year ended August 31, 2003, the Company recorded additional
discount of $0 and amortized $1,000,504. As of August 31, 2003, outstanding
balance of this debt net of unamortized discount of $154,424 totaled $2,201,166.
As of August 31, 2002, outstanding balance of this debt net of unamortized
discount of $1,154,928 totaled $1,360,311.
The conversion of the debt has been approved and the debt will be
converted from debt to equity upon the filling of the registration statement and
issuance of the shares. This convertible debt matured in October 2003, however
CALP and ABFL were managed by Thomas Kerrnighan ("TK"), which has declared
bankruptcy. The Company has been unable to locate the trustee or obtain contact
from any former employee of TK. The debt will remain on the Company's books
indefinitely until a settlement can be reached.
[iv] LDS agreed to pay $212, 291 payable to HP in regards to the settlement of
claims with a discount of $53,073. The loan is payable in monthly installments
of $4,423 due on the first day of every month, commencing on May 1, 2003 through
April 2007 carrying an interest rate of 0%. This liability has been recorded at
its full settlement value since calculation of imputed interest is considered
immaterial to the accompanying consolidated financial statements.
[v] The Term loan is comprised of the following:
- ---------------------------------------------------------------------------
Company 2003 2002
===========================================================================
Current
Logicorp Data Systems Ltd. [a] -- 79,716
Etelligent Solutions Inc. [b] 1,470 49,278
- ---------------------------------------------------------------------------
1,470 128,994
Non-current
Logicorp Data Systems Ltd. [a] -- 152,830
Etelligent Solutions Inc. [b] -- --
- ---------------------------------------------------------------------------
-- 281,824
===========================================================================
[a] Loan bearing interest at Prime plus 1.25% per annum, repayable in
monthly principal installments of $6,643 together with interest. Loan is due
July 31, 2005. Approximate principal repayments are as follows 2003 -$79,716,
2004-$79,716 and 2005-$73,074. Logicorp accelerated the payments in 2004.
[b] Small Business Equipment Loans bearing interest at Prime plus 2.25%
per annum.
[vi] In November 2001, the Bank of Montreal made available to the Company a
Demand loan, non-revolving and/or Fixed Rate Term Loan in the amount of
$1,250,000. The loan was for payment of the Matched Fund Term Loan held in the
prior year by The Royal Bank of Canada for properties at 10 Meteor Drive and 775
Pacific Road. Borrowings are repayable by blended monthly principal payments of
$10,417 and interest based on 10-year term which matures in December 2011.
Interest is currently calculated at Prime Rate plus 1.25%. The effective rate at
August 31, 2003 was 4.06% (August 2002 - 5.75%). The principal remaining as of
August 31, 2003 was $789,583 (August 2002 - $1,166,667). The Company may convert
the Demand loan, non-revolving advances in part or in total to a Fixed Rate Term
F-27
Loan advances, and may be converted back to Demand loan, non-revolving at
maturity of terms. Fixed Rate Term Loan rates are to be determined based on
applicable rates at time of draw and the available terms are from 1 to 5 years.
The loan is secured by accounts receivables, inventory and equipment of
Interactive and GalaVu under a general security agreement. The Demand loan is
subject to certain financial covenants and restrictions on additional
indebtedness and other related items.
On November 21, 2002, pursuant to a Debt and Security Purchase Agreement
dated on the 29th day of October, 2002, the Company, through its wholly-owned
subsidiary, GalaVu, settled the promissory note [the "Note"] issued from the
acquisition of substantially all of the property and assets [excluding accounts
receivable] of GalaVu. The present value of the Note, discounted at the
Company's average borrowing rate (6.5%) amounted to $2,662,698. Arthur Andersen
Inc., (the "Assignor") agreed to assign to the Company all of the Assignor's
right, title and interest, if any, in and to the Note for the amount of $500,000
(the "Purchase Price"). The purchase price was paid in the following manner: A
$150,000 deposit was made upon execution of the agreement and $350,000 was paid
at the time of closing.
The following is a reconciliation of the gain on settlement of the debt:
Loan amount $ 3,300,000
Discount (637,302)
-----------------------------------------------------
Discounted loan $ 2,662,698
Payment (500,000)
Amortization of discount 370,724
-----------------------------------------------------
Loan at time of settlement $ 2,533,422
Payment for settlement (500,000)
Legal Fees 17,793
-----------------------------------------------------
-----------------------------------------------------
Gain on settlement of debt $ 2,051,215
=====================================================
The $350,000 paid at the time of closing to the Assignor, was financed
through a term loan in the principal sum of $375,000. The loan was secured
through a second mortgage on our 10 and 14 Meteor Drive properties and a general
security agreement on the capital assets of GalaVu. This debt was settled with
the sale of GalaVu; the $375,000 debt was repaid and then re-issued to Chell
Group Corporation in the amount of $325,000.
The $325,000 bears interest at a rate of 13% and matures on November 25,
2003 and the monthly payments are for interest only. The loan was extended in
November 2003, to a maturity date of December 15, 2003. The loan was repaid with
the proceeds from the sale of 14 Meteor Drive (see Note 6).
[vii] In May 2002, the Company completed a private equity raise for $456,286 Cdn
($290,000 US). The shares were priced at a $1, thus resulting in 290,000 shares
to be issued. At the end of the August 2002, the Company had not yet issued the
shares and thus a loan payable was created until the time at which the Company
would issue the shares. The Company issued the shares on October 18, 2002 and
the loan has been decreased by the corresponding share capital entries required.
[viii] In December 2002, the three former shareholders of Logicorp Data Systems
Ltd. and Logicorp Service Group Ltd. advanced Logicorp Data Systems Ltd.
$200,000 each, totaling $600,000. These advances were due on demand and did not
carry a stated interest rate. The Company has imputed interest on these advances
at a rate of 9%. During the year ended August 31, 2003, one of the advances was
fully repaid and total payments of approximately $110,000 have been paid against
the remaining advances.
[ix] The retirement compensation trusts ("RCA's") were set up pursuant to
section 248(1) of the Income Tax Act of Canada to provide retirement income to
the three individuals who owned Logicorp. Pursuant to the original and amended
purchase agreements of Logicorp, the Company will make monthly payments
including interest in various amounts through December 2005. The loan carries an
interest rate of prime plus 4.75% (8.0% at August 31, 2003, 8.75% at August 31,
2002). The original repayment terms have not been met, but the determination of
breach lies with the individual trustees appointed to monitor each individual's
loan to the Company. The trustee of the former LDS President has demanded full
F-28
payment and is part of the lawsuit (Note 12). The trustee for the other former
Logicorp owners are accepting of the current payment terms of $9,750, which
repay the principal and interest components of personal loans that each party
had taken to finance their loans to the Company. No lump sum payments have been
made on the RCA's and no further agreements have been made for a lump sum
payment. Through our bank we currently make cash payments monthly to offset
interest and payment incurred on the primaries loans for the money they loaned
back to Logicorp. This constitutes the repayments we make against the RCA's. The
RCA's then increase by the interest component the primaries charge us for the
loans.
[x] 1) During the year ended August 31, 2003, B.O.T.B., a company controlled
by Cameron Chell, advanced Logicorp Data Systems Ltd. $820,000, and during the
period of September 1, 2003 through August 31, 2004, advanced Logicorp Data
Systems Ltd. $318,144. The advances are unsecured, due on demand and do not
carry a stated interest rate. The Company has imputed interest on the advances
at a rate of 9% per annum. As of August 31, 2004, the aggregate amount of such
advances was $1,138,144.
2) During the fourth quarter of fiscal 2002, the Company began
negotiations to adjust the purchase price of Logicorp due to an investigation of
claims filed by Logicorp owed by Hewlett-Packard (Canada) Ltd. ("HP"). As a
result, the purchase price for Logicorp has been amended, the issuance of
exchangeable common shares has been decreased by 2,000,000 to 3,355,000 (from
5,355,000 originally) and the second promissory note of $500,000 has been
cancelled. This has resulted in a balance of $200,000 still owed which is
classified as a loan payable, related party on the August 31, 2003 and 2002
balance sheet. In addition, a historical audit of Logicorp resulted in
significant restatement issues which resulted in combined negative book values
of ($2,074,567) as of December 31, 2001 (the date immediately prior to
acquisition date). The purchase price has been adjusted for these events (see
Note 13). The loan remains outstanding as the loan and the shares issued to a
former President of LDS are subject to a suit and countersuit regarding the
former President of LDS. The loan bears no interest and interest is not being
accrued as the company does not view the loan as owed. Interest charges, if any,
are pending the settlement of the lawsuit.
On January 27, 2003, a former President of LDS, filed a wrongful dismissal
claim against LDS and the Company. A round of examinations for discovery has
been held and preparation of the affidavit of records is underway. Further
discoveries were held during the week of September 8, 2003. The Company's
counsel has determined that it is too early in the process to evaluate the
merits of the case. The Company has not accrued any liabilities related to this
claim as of August 31, 2003. The Company has filed a counter-suit stating that
the former President was fraudulent in his representation to the Company in
connection with the Company's acquisition of LDS (see Note 12).
[xi] The Company's subsidiary CMCG purchased Logicorp (see note 13[a]) for
an adjusted number of shares 3,355,000 (from 5,355,000 originally). The shares
were exchangeable into Company shares at inception; the fair value of the shares
issued was determined by using an average trading price of the Company's common
stock for a reasonable period before and after the acquisition date, in
accordance with SFAS 141 "Business Combinations". These shares of CMCG are
exchangeable on a one for one basis for common shares of the Company. The
election to exchange is not subject to or contingent on any future events or
conditions and is solely at the option of the sellers. The value of the shares
is $4,852,976 and bears no interest. The shares have not been issued.
The long-term debt consists of the HP loan (8[iv]), the Term loan (8[v]) and the
RCA trusts (8[ix]). Future annual principal payments for long-term debt are as
follows:
-----------------------------------------------------
Years ended August 31,
2004 $1,305,301
2005 53,073
2006 53,073
2007 7,246
2008 --
Thereafter --
-----------------------------------------------------
1,418,693
=====================================================
F-29
Current and non-current portions of long-term debt are presented as follows:
- ---------------------------------------------------------------------------
2003 2002
===========================================================================
Current
Term Loan (v) 1,470 128,994
RCA Trust (ix) 1,250,758 741,154
HP Loan (iv) 53,073 --
- ---------------------------------------------------------------------------
Current portion 1,305,301 870,148
Non-current
Term Loan (v) -- 152,790
RCA Trust (ix) -- 686,522
HP Loan (iv) 113,392 212,291
- ---------------------------------------------------------------------------
Non-current portion 113,392 1,051,603
===========================================================================
9. COMMITMENTS
[a] Commissions expense to NTN Communications, Inc.
Pursuant to an agreement dated March 23, 1990, Interactive pays
commissions to NTN Communications, Inc. when the related revenues are earned at
the rate of U.S. $2,205 per year per subscriber. Interactive also pays NTN
Communications, Inc. a royalty fee equal to 25% of the net revenues as defined
in the agreement derived from all services except for certain hospitality and
special projects that existed at March 23, 1990; a royalty fee equal to the
production quotation submitted by NTN Communications, Inc. plus 10% of the gross
profit of special projects [special broadcasts for a non-continuous selective
event]; and a one-time royalty fee equal to NTN Communications, Inc.'s
production costs for any new programming developed by Interactive to be added to
the existing programming schedule. The agreement expires on December 31, 2015.
The Company sold certain assets and liabilities to NTN Communications,
Inc. effective December 15, 2003 (see Note 4).
Total amounts expensed under this agreement were $1,502,370 for 2003,
$1,770,275 for 2002 and $1,865,675 for 2001.
[b] Lease commitments
During the fiscal year ended August 31, 2002, Chell Merchant Capital Group
("CMCG") leased 12,043 square feet of office space in Suites 301, 500 and 700 in
a building located at 630 - 8th Avenue S.W. Calgary, Alberta, T2P 1G6. The
combined annual rent of the three suites was Cdn$199,000. Effective October
2002, we subleased this space to unaffiliated third parties upon the
discontinuation of the operations of CMCG for Cdn$144,000 per annum, plus taxes.
The lease and sublease agreements expire on January 31, 2005.
Our obligations, less applicable taxes, under this lease and sublease
agreement are outlined as follows:
- ------------------------------------------------------------------------------
Years ended August 31, Lease agreement Sublease income Our obligation
- ------------------------------------------------------------------------------
2004 199,000 (144,000) 55,000
2005 82,917 (60,000) 22,917
- ------------------------------------------------------------------------------
281,917 (204,000) 77,917
==============================================================================
Logicorp leases approximately 17,502 square feet in Edmonton, 11,800
square feet in Calgary and approximately 4,500 square feet in Vancouver for
approximately annual rent of $220,350, $115,640 and $62,300 respectively. The
leases expire as follows: Edmonton - December 2006, Calgary - July 31, 2012, and
Vancouver - March 31, 2007. These leases are included in the future minimum
lease table that follows.
F-30
The future minimum for all annual lease payments under operating leases are as
follows:
Years ended August 31,
-----------------------------------------------------
2004 $ 394,650
2005 343,068
2006 366,669
2007 268,556
2008 and beyond 750,200
-----------------------------------------------------
$2,123,143
=====================================================
Operating lease expenses were $682,084 for 2003, $682,084 for 2002, and $398,073
for 2001.
[c] Employment agreements
Effective August 16, 2002, we entered into an employment agreement with
Stephen McDermott, pursuant to which Mr. McDermott will serve as our President
and Chief Executive Officer for a period of one year. The contracted salary is
US$120,000(Cdn$183,288). Mr. McDermott resigned his position effective May 7,
2004.
We do not have any other employment agreements in effect with any other
executive employee.
10. STOCKHOLDERS' EQUITY
[a] AUTHORIZED SHARES
The Company's authorized share capital comprises 50,000,000 common shares
(increased from 20,000,000 shares on February 28, 2001), with a par value of
$0.068 [U.S. $0.0467] per share and 1,500,000 non-cumulative Series B preferred
shares with a par value of $0.016 [U.S. $0.010] per share. The Series B
preferred shares are voting and convertible such that 3 preferred shares are
exchangeable for 1 common share, at the option of the holders.
[b] ISSUED AND OUTSTANDING SHARES
Common shares outstanding at August 31, 2003 and 2002 were 10,795,410 and
10,504,913, respectively. At August 31, 2003, there are 454,545 Series B
convertible preferred shares issued and outstanding that have a par value of
US$0.01 per share (454,545 August 31, 2002). There is a limitation on the
conversion feature whereby preferred shares are not convertible if the
conversion would result in the holder owning more than 5% of the outstanding
common shares of the Company. As of September 14, 2004, the maximum number of
shares the preferred shares can be converted to is 714,771, which is 5% of the
total shares outstanding.
In May 2002, the Company completed a private equity raise for $456,286 Cdn
($290,000 US). The shares were priced at a $1, thus resulting in 290,000 shares
to be issued. At the end of the August 2002, the Company had not yet issued the
shares and thus a loan payable was created until the time at which the Company
would issue the shares. The Company issued the shares on October 18, 2002.
[c] RESERVED FOR FUTURE ISSUANCES
As of December 29, 2003, the Company has reserved 3,822,073 common shares
for future issuance. This is comprised of 319,231 options outstanding as of
August 31, 2003 and 3,502,842 warrants, of which 466,342 were outstanding as of
August 31, 2003.
F-31
[d] WARRANTS OUTSTANDING
The Company has the following warrants outstanding:
--------------------------------------------------------------------------------------------
Number Price Remaining Avg.
============================================================================================
Warrants outstanding as of August 31, 2001 50,000 $3.00 2.8 years
Issued 416,342 $1.00-2.00 3.0 years
--------------------------------------------------------------------------------------------
Warrants outstanding as of August 31, 2002 466,342 $1.00-3.00 2.5 years
Issued 0 0 0
--------------------------------------------------------------------------------------------
Warrants outstanding as of August 31, 2003 466,342 $1.00-3.00 1.5 years
============================================================================================
11. LOSS PER SHARE
Loss per share was calculated in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share." The following table sets
forth the computation of basic and diluted loss per share for the years ended
August 31:
- ----------------------------------------------------------------------------------------------------------------------
2003 2002 2001
(restated)
$ $ $
======================================================================================================================
NUMERATOR:
Net loss (numerator for basic and diluted loss per share) from
continuing operations (8,454,813) (28,735,797) (9,640,185)
Net income (loss) (numerator for basic and diluted income (loss) per
share) from discontinued operations 913,311 (2,015,740) (2,107,454)
Deemed preferred stock dividends -- (137,016) --
======================================================================================================================
Net loss applicable to common stockholders (numerator for basic and (7,541,502) (30,888,553) (11,747,639)
diluted loss per share)
======================================================================================================================
DENOMINATOR FOR BASIC LOSS PER SHARE - adjusted weighted average number
of shares and assumed conversions 10,757,273 9,879,836 8,393,589
EFFECT OF DILUTIVE SECURITIES
Convertible preferred shares -- -- --
Convertible promissory notes -- -- --
Employee stock options -- -- --
- ----------------------------------------------------------------------------------------------------------------------
DENOMINATOR FOR DILUTED LOSS PER SHARE - adjusted weighted average
number of shares and assumed conversions 10,757,273 9,879,836 8,393,589
======================================================================================================================
Basic and diluted loss per share from continuing operations (0.79) (2.93) (1.15)
Basic and diluted income (loss) per share from discontinued operations
0.08 (0.20) (0.25)
- ----------------------------------------------------------------------------------------------------------------------
Net loss per share (0.71) (3.13) (1.40)
======================================================================================================================
During the year ended August 31, 2003, 290,000 common shares were issued.
No preferred shares or warrants were issued.
At August 31, 2003, options to purchase 319,231 common shares, warrants to
purchase 466,342 common shares and convertible preferred to 539,771 commons
shares were outstanding. These securities were not included in the diluted loss
per share calculation because the effect would be anti-dilutive.
During the year ended August 31, 2002, 454,545 Series B preferred shares
were issued. In addition, at August 31, 2002, options to purchase 1,543,840
common shares and warrants to purchase 466,342 common shares were outstanding.
These securities were not included in the diluted loss per share calculation
because the effect would be anti-dilutive.
F-32
At August 31, 2001, 900,000 preferred shares convertible to 300,000 common
shares were exercised and are no longer outstanding. In addition, at August 31,
2001, options to purchase 1,325,000 common shares and warrants to purchase
50,000 common shares were outstanding. These securities were not included in the
diluted loss per share calculation because the effect would be anti-dilutive.
12. CONTINGENT LIABILITIES
On January 27, 2003, a former President of LDS, filed a wrongful dismissal
claim against LDS and the Company. A round of examinations for discovery has
been held and preparation of the affidavit of records is underway. Further
discoveries were held during the week of September 8, 2003. The Company's
counsel has determined that it is too early in the process to evaluate the
merits of the case. The Company has not accrued any liabilities related to this
claim as of August 31, 2003. The Company has filed a counter-suit stating that
the former President was fraudulent in his representation to the Company in
connection with the Company's acquisition of LDS.
In June 2001, a former employee filed a wrongful dismissal claim against
LDS. Subsequently the employee offered to settle for which LDS rejected. No
further action has taken place since October 2001 and accordingly, LDS believes
it will prevail and has not accrued any liabilities on the accompanying
financial statements related to this claim.
On June 12, 1992, the Company filed a lawsuit against an unrelated
company, Interactive Network Inc. of Mountain view, California, U.S.A. and its
president. The suit seeks a non-infringement declaration with respect to a
Canadian patent. This action was discontinued on September 9, 1998.
On June 18, 1992, Interactive Network Inc., (Interactive) commenced a
lawsuit against us, NTN Communications and our NTN subsidiary in the Federal
Court of Canada, Trial Division, Montreal, Quebec, under the title INTERACTIVE
NETWORK, INC. v. NTN COMMUNICATIONS, INC., NTN SPORTS, INC. AND NTN CANADA, INC.
This action alleges that Interactive granted NTN Communications the right to use
the Interactive Patent, which right Communications then improperly licensed to
our NTN subsidiary and us. Interactive alleges that the license agreement
between NTN Communications and our NTN subsidiary and us infringes upon the
Interactive Patent. The action seeks a declaration of the validity of the
Interactive Patent, an injunction restraining us from further infringement, and
either damages (in an unspecified amount) or an accounting of profits derived
from certain games used in Canada. Except for the aforementioned pleadings, no
proceedings or discovery have been undertaken in this action.
We believe that the licenses granted to us by NTN Communications are valid
and that the patent infringement claims underlying this action will ultimately
be proven to be unfounded. We intend to vigorously defend our position and to
prosecute the Interactive position in the action; however, there can be no
assurance that any or all of these actions will be decided in favor of us. We
believe, based in part upon the advice of outside, independent counsel, that the
costs of defending and prosecuting these actions will not have a material
adverse effect upon our financial position.
In its Quarterly Report on Form 10-Q, for the quarter ended September 30,
1996, NTN Communications stated that "[w]ith the courts [SIC] assistance,
[Communications] and [Interactive] have been able to reach a resolution of all
pending disputes in the United States and have agreed to private arbitration
regarding any future licensing, copyright or infringement issues which may arise
between the parties." The disputes referred to in the NTN Communications Form
10-Q involved litigation in the United States involving allegations similar to
the allegations underlying the actions between Interactive and us. In the NTN
Communication Form 10-Q, NTN Communications also noted that "no substantive
action has been taken in the furtherance of" the Company Action or Interactive
Action.
Canada Customs and Revenue Agency is currently in discussions with the
Company regarding a potential liability with respect to withholding tax on
certain amounts paid to Communications. An assessment of approximately $550,000
has been made to date by Canada Customs and Revenue Agency and the Company has
filed a notice of objection. Management and counsel believe that it has valid
defenses with respect to these matters and, accordingly, no amount has been
F-33
recorded in these consolidated financial statements. In the event that such
matters are settled in favor of Canada Customs and Revenue Agency, the amounts
could be material and would be recorded in the period in which they became
determinable. In December 2003, the Company entered into an agreement to sell
certain operating assets and liabilities of NTN Interactive Network Inc. to NTN
Communications. As part of the agreement, NTN Communications will assume the
liabilities related to this claim, if any.
In May 2002, a former consultant filed a claim against CMCG. The
consultant claims that he is owed commissions, options and expenses related to
his time working at Interlynx. The consultant has offered to settle for which
CMCG has rejected. CMCG believes that firstly, it is not responsible for a
lawsuit against Interlynx and secondly, that the consultants claims are
unjustified. This lawsuit is scheduled for trial at the end of October, 2004.
CMCG believes it will prevail and has not accrued liabilities on the
accompanying financial statements related to this claim.
The Company and its subsidiaries are not a party or subject to any other
material pending legal proceedings, other than ordinary routine litigation
incidental to its business. To the knowledge of management no other proceedings
of a material nature have been or are contemplated against the Company.
13. BUSINESS ACQUISITIONS
[a] PURCHASE OF LOGICORP DATA SYSTEMS LTD., LOGICORP SERVICE GROUP LTD., 123557
ALBERTA LTD. AND 591360 ALBERTA LTD.
Effective January 1, 2002, the Company acquired 100% of the outstanding
common stock of Logicorp Data Systems Ltd. ("LDS"), Logicorp Service Group Ltd.,
123557 Alberta Ltd. and 591360 Alberta Ltd. (collectively "Logicorp") for a
collective purchase price of $13,879,686. Logicorp is a Canadian systems
integrator handling all aspects of IT systems integration and solutions
development, including network integration and management, desktop support,
hardware/software procurement, systems architecture design and consulting.
Systems Integration is an area of business in which the Company can offer
systems solutions to companies of various sizes. These solutions can be through
the delivery and installation of computer hardware solutions; through offering
services to companies to aid in their business processes or infrastructures or
through personalized solutions aided for growing technology with their
organization.
The acquisition was recorded using the purchase method of accounting and,
accordingly, the purchase price has been allocated as set out below:
$
- ---------------------------------------------------------------------------
Goodwill (see below for discussion on amended
purchase price and impairment) 13,429,307
Accounts receivable 8,252,652
Inventory 738,081
Fixed assets 2,366,038
Other current assets 783,932
Accounts payable and accrued expenses (8,800,327)
Other current liabilities (2,889,997)
- ---------------------------------------------------------------------------
13,879,686
- ---------------------------------------------------------------------------
The purchase price was satisfied by $1,500,000 in cash, the issuance
of two non-interest bearing promissory notes with a maturity value of $2,300,000
(see Note 8[xi]) and the issuance of 5,355,000 shares of CMCG which had a fair
value approximating $10,000,000. As the shares were exchangeable into Company
shares at inception, the fair value of the shares issued was determined by using
an average trading price of the Company's common stock for a reasonable period
before and after the acquisition date, in accordance with SFAS 141 "Business
Combinations". These shares of CMCG are exchangeable on a one for one basis for
common shares of the Company. The election to exchange is not subject to or
contingent on any future events or conditions and is solely at the option of the
sellers. The first promissory note with a maturity value of $1,800,000 was due
June 30, 2002. Prior to payment of the first promissory note, the Company had
the option to adjust the purchase price by substituting the $1,800,000 note for
an interest-free promissory note in the amount of $2,040,000 one half of which
would be due June 30, 2002 and the second half would be due December 31, 2002.
The Company did not make this election and paid the $1,800,000 promissory note
in cash. The second promissory note has a maturity value of $500,000 and was
initially due March 31, 2003.
F-34
In addition, the purchase price may be adjusted upwards because the
Company is required to pay an amount by which the earnings before taxes,
interest, depreciation and amortization (EBITDA) of Logicorp exceeds $1,000,000
for the year ended December 31, 2002. The purchase price may be adjusted
downward by three times the amount that EBITDA for this period is less than
$1,000,000.
The purchase price could be further adjusted on June 30, 2002, in the
event that the weighted average closing stock price of the Company's common
shares for the 10 trading days prior to June 30, 2002 was less than US$1.00. The
weighted average closing stock price was greater than US$1.00 during this period
and accordingly, no adjustment to the purchase price was required.
During the fourth quarter of fiscal 2002, the Company began negotiations
to adjust the purchase price of Logicorp due to an investigation of claims filed
by Logicorp owed by Hewlett-Packard (Canada) Ltd. ("HP"). As a result, the
purchase price for Logicorp has been amended, the issuance of exchangeable
common shares has been decreased by 2,000,000 to 3,355,000 (from 5,355,000
originally) and the second promissory note of $500,000 has been cancelled. This
has resulted in a balance of $200,000 still owed which is classified as a loan
payable, related party on the August 31, 2003 and 2002 balance sheet. In
addition, a historical audit of Logicorp resulted in significant restatement
issues which resulted in combined negative book values of ($2,074,567) as of
December 31, 2001 (the date immediately prior to acquisition date). The purchase
price has been adjusted for these events. For financial reporting purposes,
goodwill is being allocated to the integrated systems segment. For tax purposes,
all of the goodwill is expected to be deductible. The following is the revised
purchase price allocation which was recorded in the fourth quarter of fiscal
2002:
AMENDED PURCHASE PRICE $
----------------------------------------------------------------
Goodwill (see below for discussion on impairment) 10,489,549
Accounts receivable 7,754,995
Inventory 377,016
Fixed assets 743,118
Other current assets 489,817
Accounts payable and accrued expenses (6,056,814)
Line of credit (3,119,979)
Other current liabilities (1,401,728)
Long Term debt (861,425)
----------------------------------------------------------------
8,414,549
----------------------------------------------------------------
As a result of the financial statement restatement issue discussed above,
and in addition to the significant operating losses incurred by the Logicorp
entities subsequent to the acquisition date, management of the Company has
determined that an impairment of goodwill had occurred as of August 31, 2002.
Accordingly, the $10,489,549 was written off in its entirety effective in the
fourth quarter of fiscal 2002.
The operating results of Logicorp are included in the Company's
consolidated statements of operations from the effective date of acquisition
(January 1, 2002).
Pro forma information (Unaudited)
The following pro forma information on results of operations assumes that
Logicorp was purchased at the beginning of each period presented.
- -----------------------------------------------------------------------------------------------
For Year Ended
Aug 31, 2002 Aug 31, 2001
- -----------------------------------------------------------------------------------------------
$ $
Revenues 48,640,400 61,926,494
Net loss (28,146,376) (10,606,336)
Net loss per share - basic and diluted (2.85) (1.26)
- -----------------------------------------------------------------------------------------------
F-35
The pro forma information is presented for informational purposes only and
is not necessarily indicative of the results of operations that actually would
have been achieved had the acquisition been consummated as of that time, nor is
it intended to be a projection of future results.
[b] PURCHASE OF ETELLIGENT SOLUTIONS INC.
Effective June 1, 2002, Logicorp Data Systems Ltd. acquired 100% of the
shares of eTelligent Solutions Inc. ("eTelligent"), for a purchase price of
$165,000 which was payable as follows: $75,000 was paid at the date of closing
and the balance is to be paid by four interest free promissory notes due on the
following dates: $22,500 payable on March 1, 2003, June 1, 2003, September 1,
2003 and January 1, 2004.
The purchase price may be adjusted downward dollar for dollar by the
amount that the earnings before taxes of eTelligent from June 1, 2002 until
October 31, 2003 is less than $245,000. However, the purchase price cannot be
less than $150,000.
The purchase price may be adjusted upward eighty cents for every dollar
that eTelligent's earnings before taxes exceed $245,000 from June 1, 2002 until
October 31, 2003. The purchase price may be further adjusted:
a. By any increase in the Loans above $75,000
b. By any increase in the eTelligent line of credit before June 1, 2002
above $135,000, or
c. If the Term Loan was increased above $65,000 before June 1, 2002
The operating results related to the acquisition are included in the
Company's consolidated statements of operations from the date of acquisition.
Pro-forma information has not been provided for the prior years because it is
not material.
F-36
14. SEGMENT INFORMATION
The Company operates in the entertainment, education and merchant
services industries. Reportable segments have been identified by the Company due
to differences in the services of the systems integration, entertainment,
education and merchant services industries. Corporate relates to costs that are
not associated with a specific industry segment, but are required for the
operations of the Company. The Company assigns any goodwill from acquisitions to
the segment in which the acquisition occurred. Currently the only goodwill the
company has is associated with the purchase of eTelligent which is in the
systems integration segment. In Fiscal 2002, the goodwill impairment of
$10,489,549 associated with the purchase of Logicorp was expensed to the systems
integration segment. Business segment information for the years ended August 31,
2003, 2002 and 2001 are as follows:
2003 2002 2001
$ $ $
Restated
===========================================================================================
Revenue
Systems Integration 32,500,096 34,205,614 --
Corporate -- 2,310 16,595
===========================================================================================
32,500,096 34,207,924 16,595
- -------------------------------------------------------------------------------------------
Operating loss
Systems Integration (3,034,169) (1,162,568) --
Merchant Service -- -- (5,076,619)
Corporate (2,709,541) (15,089,159) (3,115,758)
- -------------------------------------------------------------------------------------------
(5,743,710) (16,251,727) (8,192,377)
- -------------------------------------------------------------------------------------------
Net loss attributable to shareholders
Systems Integration (3,659,647) (12,173,848) --
Merchant Service -- -- (6,524,427)
Corporate (4,795,166) (16,698,965) (3,115,758)
Discontinued Operations 913,311 (2,015,740) (2,107,454)
- -------------------------------------------------------------------------------------------
(7,541,502) (30,888,553) (11,747,639)
- -------------------------------------------------------------------------------------------
Total assets
Systems Integration 4,534,621 6,435,982 --
Merchant Service -- -- 1,589,465
Education -- -- 128,986
Corporate 1,793,349 2,810,773 3,170,689
Discontinued Operations 969,292 4,133,911 4,648,078
- -------------------------------------------------------------------------------------------
7,297,262 13,380,666 9,537,218
- -------------------------------------------------------------------------------------------
Capital expenditures
Systems Integration 275,104 127,737 --
Corporate 24,896 7,355 46,978
- -------------------------------------------------------------------------------------------
300,000 135,092 46,978
- -------------------------------------------------------------------------------------------
Depreciation & Amortization
Systems Integration 573,186 425,692 --
Merchant Service -- -- 431,967
Corporate 470,762 601,550 162,836
- -------------------------------------------------------------------------------------------
1,043,948 1,027,242 594,803
- -------------------------------------------------------------------------------------------
Interest expense
Systems Integration 625,479 182,209 --
Corporate 1,837,037 9,940,974 1,146,708
- -------------------------------------------------------------------------------------------
2,462,516 10,123,183 1,146,708
- -------------------------------------------------------------------------------------------
Operating profit (loss) is equal to profit (loss) before income taxes and
minority interest, and includes deductions for items such as interest and
depreciation and amortization. Identifiable assets by industry are those assets
used in our operations in each industry. Corporate assets are principally cash
and cash equivalents, short-term investments and intangible assets.
Our business segment revenues are all generated primarily between customers in
Canada and the United States.
F-37
The 2002 and 2001 comparative segment information has been reclassified
from statements previously presented to conform to the presentation of the 2003
segment information.
15. RELATED PARTY TRANSACTIONS
Payable to /Due from Shareholders
Included in shareholders' deficit is $nil at August 31, 2003, and $227,365
at August 31, 2002, of amounts due from shareholders. $202,279 due from and
$1,066,043 payable to, was advanced during the years ended August 31, 2002 and
2003, respectively. The amounts are non-interest bearing, unsecured and are due
on demand and have been reclassified to payables.
Loans
During the year ended August 31, 2003, B.O.T.B., a company controlled by
Cameron Chell, advanced Logicorp Data Systems Ltd. $820,000, and during the
period of September 1, 2003 through April 30, 2004, advanced Logicorp Data
Systems $567,399. The advances are due on demand and do not carry a stated
interest rate. The Company has imputed interest on the advances at a rate of 9%
per annum. As of April 30, 2004, the aggregate amount of such advances was
$1,387,399.
16. RESTATED FINANCIAL STATEMENTS
[a] DISCOUNT ON CONVERTIBLE DEBT (FISCAL 2001 RESTATEMENT)
On October 3, 2000, the Company closed the sale of a $4,740,000 (US$3,000,000)
Convertible 10% Debenture of which $2,635,000 (US$1,700,000) has been advanced.
EITF-00-27 requires the debt to be discounted resulting from any beneficial
conversion feature. The Company did not book the discount on the debt and
therefore had to make an adjustment to the Fiscal 2001 financial statements. As
a result, the Company has now recorded a beneficial conversion feature of
$1,728,134 and has amortized $563,367 for the year ended August 31, 2001. There
were warrants associated with the debt and the Company recognized a $220,000
cost associated with these warrants. The Company had previously expensed $77,215
and recorded $175,491 in other assets, for which both amounts have now been
reversed out completely because a portion of the proceeds has been allocated to
the value of the warrants.
The following table presents the impact for each of the restatements in fiscal
2001:
As Previously As Restated in
Reported 10-K/A for 2001
- -------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 2001
Balance sheet:
Other Assets 388,802 212,541
Long-term debt 5,884,339 4,523,822
Share Capital
Capital in excess of par value 14,143,533 15,849,971
Deficit (12,499,514) (13,020,928)
Statement of operations:
Selling, general and administration 16,250,171 16,181,604 [a]
Interest and bank charges 881,398 1,471,379 [a]
Net loss (9,622,841) (11,747,639)
EPS
Basic and diluted loss per share $ 1.34 $ 1.40
[a] before discontinued operations presentation in 2002 10-K.
F-38
17. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES
Investments in unconsolidated subsidiaries and other investees in which
the Company exercises significant influence are recorded on the equity method,
adjusted for the Company's proportionate share of their undistributed earnings
or losses.
Investments carried on the equity method of accounting during 2002 and 2001 were
as follows (there were no investments in and advances to unconsolidated
subsidiaries for 2003):
Percent Owned
cDemo Inc. (written off in 2001) 14.3%
Engyro Inc. (written off in 2001) 22.1%
Wareforce Inc. (written off in 2002; see Note 18) $176,518
At August 31, 2002, the investment in Wareforce Inc. was deemed to be
permanently impaired and has been written off to loss on disposal of
investment/property in the statement if operations for 2002. At August 31, 2001,
the Company's proportionate share of undistributed losses for cDemo Inc. and
Engyro Inc. exceeded its investment and advances by $301,100. Accordingly, the
Company's investment has been reduced to zero and $301,100 has been recorded as
an expense in the statement of operations in 2001. In addition, due to dilution
in the cDemo Inc. and Engyro Inc., our current position is not greater than 5%.
The percent owned in the above table represents the position owned at the date
the investment was written off in the noted Fiscal Year.
18. LOSS ON DISPOSAL OF INVESTMENT/PROPERTY
On November 22, 2000, the Company entered into an agreement with Chell.com
Ltd. to participate in the purchase of a 51% interest in the shares of
ApplicationStation.com, Inc. The Company has provided a deposit of $1,661,622 to
Chell.com Ltd. for its 25% share of the 51% interest in the shares of
ApplicationStation.com, Inc. The purchase transaction did not close. A demand
for repayment has been sent to Chell.com Ltd. It does not appear that the
deposit will be recoverable. It has therefore been written off in the 2002
Fiscal Year.
At August 31, 2002, the $176,518 investment in Wareforce Inc. was deemed
to be permanently impaired and has been written off in the statement if
operations for 2002.
F-39
19. QUARTERLY INFORMATION (UNAUDITED)
The summarized quarterly financial data presented below reflects all adjustments
which, in the opinion of management, are of a normal and recurring nature
necessary to present fairly the results of operations for the periods presented.
(dollars in thousands except per share data)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL FOURTH THIRD SECOND FIRST
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED 8/31/2003
Total net sales 32,500,096 4,478,138 11,282,334 10,655,631 6,083,993
Gross profit 4,119,848 703,374 1,487,964 1,123,892 804,618
(Loss) before income taxes --
and discontinued operations (8,454,813) (2,417,745) (1,630,372) (2,067,079) (2,339,617)
Net (loss) attributable to common
shareholders (7,541,502) (2,142,195) (2,023,001) (2,405,330) (970,976)
NET (LOSS) PER SHARE: --
Basic and diluted from continuing
operations (0.79) (0.19) (0.15) (0.19) (0.26)
Basic and diluted from discontinued
operations 0.08 0.03 (0.04) (0.03) 0.15
- -----------------------------------------------------------------------------------------------------------------------
NET (LOSS) PER SHARE (0.71) (0.20) (0.19) (0.22) (0.09)
- -----------------------------------------------------------------------------------------------------------------------
--
(Loss) from discontinued operations (308,705) 275,553 436,567 (338,251) (682,574)
(Loss) on disposal/sale of
subsidiary (829,199) (3) (829,196) -- --
Gain on disposal of debt 2,051,215 -- -- -- 2,051,215
YEAR ENDED 8/31/2002
Total net sales 34,207,924 6,807,495 17,783,115 9,615,690 1,625
Gross profit 2,887,937 547,339 1,511,110 827,864 1,625
(Loss) before income taxes --
and discontinued operations (28,735,797) (17,326,399) (8,769,811) (1,710,560) (929,027)
Net (loss) attributable to common
shareholders (30,888,553) (15,359,856) (11,473,025) (2,934,633) (1,121,039)
NET (LOSS) PER SHARE: --
Basic and diluted from continuing
operations (2.93) (1.69) (0.95) (0.18) (0.11)
Basic and diluted from discontinued
operations (0.20) 0.23 (0.29) (0.12) (0.02)
- -----------------------------------------------------------------------------------------------------------------------
NET (LOSS) PER SHARE (3.13) (1.46) (1.24) (0.30) (0.13)
- -----------------------------------------------------------------------------------------------------------------------
(Loss) from discontinued operations (1,710,649) 1,970,693 (2,401,976) (1,087,057) (192,012)
(Loss) on disposal/sale of
subsidiary (305,091) (3,853) (301,238) -- --
F-40
20. SUBSEQUENT EVENTS
[a] SALE OF BUILDINGS AND LAND
During the fiscal year ended August 31, 2003, we owned an approximately
25,000 square foot parcel of land, located at 14 Meteor Drive in Toronto,
Ontario, on which stands a 12,500 square foot, one story building. On December
19, 2003, we sold this land and building to an unrelated third party for
approximately $730,000 and recorded a gain on the sale of approximately
$100,000.
During the fiscal year ended August 31, 2003, we owned an approximately
29,000 square foot parcel of land, located at 10 Meteor Drive, Toronto, Ontario,
on which stands a 14,000 square foot, two story building. We sold this land and
building to an unrelated party on March 7, 2004 for approximately $710,000. The
Company anticipates a gain of approximately $70,000.
[b] RESIGNATION OF STEPHEN MCDERMOTT (CEO)
Effective April 28, 2004, Stephen McDermott resigned his posts of Chief
Executive Officer and Chairman of the Board. Dave Bolink, current Board Member
has been appointed Chief Executive Officer and Chairman of the Board.
[c] SALE OF LOGICORP
Effective August 8, 2004, the Company's previously wholly-owned
subsidiaries, Logicorp Data Systems Inc., and Logicorp Service Group Inc.
(together, "Logicorp") issued common shares to NewMarket Technologies
("NewMarket"), a publicly-traded company for $2.1 million USD, such that
NewMarket holds 51% of the outstanding equity securities of Logicorp. In
exchange for 51% of these subsidiaries, NewMarket will pay Logicorp $1.1 million
in cash at closing. An additional $1.0 million will be paid to Logicorp
according to the terms of a $1.0 million, 24-month promissory note. As a result
of this transaction, the Company holds the remaining 49% of the outstanding
shares of Logicorp.
Twelve (12) months following the first anniversary of the purchase of the
51% interest, if Logicorp has achieved annual sales of at least $18,000,000 with
at least a breakeven profit, Chell Group will have an option to require
NewMarket to acquire the remaining 49% of the sellers remaining stock for a
purchase price of $1,900,000 to be paid in NewMarket stock with piggyback
registration rights. NewMarket will have an equal right to require the sale of
Chell Group's remaining 49% stock position in Logicorp under the same
performance conditions.
[d]1109822 ALBERTA INC.
Subsequent to year end, on May 26, 2004, the Company founded a new
Canadian subsidiary corporation, 1109822 Alberta Ltd. This wholly-owned
subsidiary was created to act as a holding company for investments in various
sectors, including electronic payment processing. 1109822 Alberta Ltd. has
purchased 33 Units of a Canadian limited partnership, Tech Income Limited
Partnership 1 ("Tech Income") for CDN$495,000 (approximately US$390,000 at
current exchange rates). Tech Income was founded in early 2004 with the
objective of building products and services to compete in the growing online
payment processing industry. Tech Income is currently carrying on business as
"Broker Payment Systems" or "BPS". This is an electronic payment transfer system
which facilitates payments and transfers of funds securely and in real time to
and from equity brokerage firms for investing clients. BPS is currently
marketing this system in the United States. Management of the Company (and its
subsidiary) believes that the Chell Group can better profit from the expected
growth in this sector by pooling resources with Tech Income (and its existing
product offering) rather than by moving into this area alone. The most recent
information provided to us by Tech Income (as at September 15, 2004) shows that
1109822 Alberta Ltd. holds approximately 32% of Tech Income's issued and
outstanding units. This position may be diluted as Tech Income continues to sell
units to other investors. The Company expects to account for this under the
equity method of accounting.
F-41
Broker Payment Management Inc., which works with Tech Income in
distributing the BPS products and services, has been invested in directly by the
Company ($495,000 Cdn was advance on June 18, 2004). Chell Group currently (as
at September 15, 2004) holds approximately 19% of Broker Payment Management
Inc.'s equity shares. The Company expects to account for this under the cost
method of accounting.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Costs Charged to Balance at End
Beginning of Year and Expenses Other Accounts Deductions Year
- ----------------------------------------------------------------------------------------------------------------------------------
For the fiscal year ended August 31, 2001
Allowance for doubtful accounts $ 178,000 $ 166,500 $ -- $ (117,500) $ 227,000
==================================================================================================================================
For the fiscal year ended August 31, 2002
Allowance for doubtful accounts $ 227,000 $ 270,000 [a] $ (229,700) $ (70,218) $ 160,000
==================================================================================================================================
For the fiscal year ended August 31, 2003
Allowance for doubtful accounts $ 160,000 $ -- $ 148,913 $ 47,282 $ 356,195
==================================================================================================================================
[a] added from Logicorp acquisition in January 2002.
CHELL GROUP CORPORATION
FORM 10-K
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Location
- ------- ---------------------- --------
2.1 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...................................................................................+1, Exh. 10.1
3.1 Articles of Incorporation, as amended to date...............................................................p. 59
3.2 By-Laws, as amended to date.................................................................................p. 62
4.1 Specimen Stock Certificate..................................................................................p. 71
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 as of October 4, 1994, between NTN Canada and NetStar
Enterprises Inc. (formerly, Labatt Communications Inc.)................................................+3, Exh. A
10.3 Option, dated as of October 4, 1994, registered in the name of NetStar Enterprises Inc.
(formerly, Labatt Communications Inc)..................................................................+3, Exh. B
10.4 Designation Agreement dated as of October 4, 1994, among NTN Canada, Inc., NTN Interactive
Network Inc. and NetStar Enterprises Inc. (formerly Labatt Communications Inc.)........................+3, Exh. C
10.5 Registration Rights Agreement, dated as of October 4, 1994, between NTN Canada and NetStar
Enterprises Inc. (formerly, Labatt Communications Inc.)................................................+3, Exh. D
10.6 Promissory Note of NTN Interactive Network Inc. registered in the name of Connolly-Daw
Holdings, Inc.......................................................................................+1, Exh. 10.2
F-42
Exhibit
Number Description of Exhibit Location
- ------- ---------------------- --------
10.7 Promissory Note of NTN Interactive Network Inc., registered in the name of 1199846 Ontario
Ltd.................................................................................................+1, Exh. 10.3
10.8 Option Agreement, dated October 1, 1996, among Connolly-Daw Holdings Inc., NTN Interactive
Network Inc. and NTN Canada, Inc....................................................................+1, Exh. 10.5
10.9 Option Agreement, dated October 1, 1996, among 1199846 Ontario Ltd., NTN Interactive
Network Inc. and NTN Canada, Inc....................................................................+1, Exh. 10.6
10.10 Registration Rights Agreement, dated October 1, 1996, among NTN Canada, Inc., Connolly-Daw
Holdings Inc. and 1199846 Ontario Ltd...............................................................+1, Exh. 10.4
10.11 Employment Agreement dated as of August 31, 1994, between NTN Interactive Network Inc. and
Peter Rona.........................................................................................+4, Exh. 10.11
10.12 Management Agreement dated October 1, 1996, between Magic Lantern Communications Ltd. and
Connolly-Daw Holdings Inc..........................................................................+4, Exh. 10.12
10.13 Employment Agreement dated October 1, 1996, between Magic Lantern Communications Ltd. and
Douglas Connolly...................................................................................+4, Exh. 10.13
10.14 Employment Agreement dated October 1, 1996, between Magic Lantern Communications Ltd. and
Wendy Connolly.....................................................................................+4, Exh. 10.14
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. 10.15
10.16 Promissory Note, dated September 10, 1999, by and between 1373224 Ontario Limited, as
Debtor, and the Holder, as Creditor. ..............................................................+5, Exh. 10.16
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. 10.17
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. 10.18
10.19 Certificate to the Escrow Agent certifying that the conditions of Closing have been
satisfied or waived................................................................................+5, Exh. 10.19
10.20 Certificate to the Escrow Agent certifying that the conditions of Closing have not been
satisfied or waived................................................................................+5, Exh. 10.20
10.21 Occupancy and Indemnity 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. 10.21
10.22 Order of the Ontario Superior Court of Justice, dated September, 1999, approving the
transaction contemplated herein, and vesting in the Purchaser the right, title and interest
of GalaVu and the Receiver, if any, in and to the Purchased Assets, free and clear of the
right, title and interest of any other person other than Permitted Encumbrances....................+5, Exh. 10.22
F-43
Exhibit
Number Description of Exhibit Location
- ------- ---------------------- --------
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. 10.23
10.24 Covenant of Networks North Inc. for valuable consideration to allot and issue and pay to
the Receiver 100,000 common shares in accordance with the Purchase Agreement date September
10, 1999, between 1373224 Ontario Limited and the Receiver.........................................+5, Exh. 10.24
10.25 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..................... ...........+6, Exh. A.
10.26 Valuation of Chell.com Ltd. as of May 31, 2000 by Stanford Keene...................................+6, Exh. B.
10.27 Share Purchase Agreement 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, Exhibit 2.1
10.28 Share Purchase Agreement, dated as of April 25, 2003 between DVOD Networks Inc., and Chell
Group Corporation, minus schedules thereto;
10.29 Assignment of Debt and Security, dated April 25, 2003 between Chell Group Corporation and
DVOD Networks Inc;
10.30 Assignment of Debt and Security, dated April 25, 2003 among NTN Interactive Network Inc.,
DVOD Networks Inc and GalaVu Entertainment Network Inc.;
10.31 Form of Assignment of Debt and Security, dated April 25, 2003 among 488605 Ontario Limited,
Ruth Margel and DVOD Networks Inc., minus schedules thereto.
10.32 Stock Purchase Agreement dated as of August 2, 2004, by and among NewMarket
Technology, Inc., the Registrant and Logicorp Data Systems, Ltd. +5, Exh. 10.25
10.33 Bonus Agreement entered into August 2, 2004, by and between the Registrant and
NewMarket Technology. +5, Exh. 10.26
10.34 Form of Promissory Note issued by NewMarket Technology, Inc. to Logicorp Data Systems,
Ltd. +5, Exh. 10.27
10.35 Unanimous Shareholders Agreement dated August 2, 2004 by and among NewMarket
Technology, Inc., the Registrant and Logicorp Data Systems, Ltd. +5, Exh. 10.28
10.36 Registration Rights Agreement dated as of August 2, 2004, is entered into by and among
NewMarket Technology, Inc., and the Registrant. +5, Exh. 10.29
14.1 Code of Ethics
22 List of Subsidiaries...................................................................................p. 92
- ----------
+1 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's Current Report on Form 8-K (Date of
Report: October 2, 1996) (File No. 0-18066), filed on October 17, 1996.
+2 All Exhibits so indicated are incorporated herein by reference to the
exhibit 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 listed above in the Company's Current Report on Form 8-K (Date of
Report: October 4, 1994) (File No. 0-18066), filed on October 18, 1994.
F-44
+4 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's Annual Report on Form 10-K (Date of
Report: November 27, 1996) (File No. 0-18066), filed on December 16, 1996.
+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,
1997) (File No. 0-18066), filed on December 16, 1996.
+6 All Exhibits so indicated are incorporated herein 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.
+7 All Exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Company's Current Report on Form 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.
F-45
EXHIBIT 22. LIST OF SUBSIDIARIES OF CHELL GROUP CORPORATION AS AT AUGUST 31,
2003
Name of Subsidiary(1) Jurisdiction of Incorporation
- --------------------- -----------------------------
Chell Merchant Capital Group, Inc........................................Ontario
Logicorp Data Systems Ltd. (2) ..........................................Alberta
Logicorp Service Group Ltd. (2) .........................................Alberta
123557 Alberta Ltd. (2) .................................................Alberta
591360 Alberta Ltd. (2) .................................................Alberta
eTelligent Solutions Inc. (3) ...........................................Alberta
NTN Interactive Network Inc...............................................Canada
1113659 Ontarion Ltd. ("Viewer Services) (4).............................Ontario
3484751 Canada Inc........................................................Canada
GalaVu Entertainment Network Inc. .......................................Ontario
Chell.com (USA) Ltd.......................................................Nevada
- ----------
Notes:
(1) Unless otherwise indicated, all named entities are wholly-owned
subsidiaries of Chell Group Corporation.
(2) Wholly-owned subsidiary of Chell Merchant Capital Group.
(3) Wholly-owned subsidiary of Logicorp Data Systems Ltd...
(4) Wholly-owned subsidiary of NTN Interactive Network Inc.
F-46