As filed with the Securities and Exchange Commission on March 26,
2003 Registration No. 333-98397
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-1
AMENDMENT NO. 4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Commission file number 333-98397
LINGO MEDIA INC.
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(Exact name of Registrant as specified in its charter)
Ontario, Canada 2741
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(Jurisdiction of incorporation (Primary Standard Industrial
or organization) Classification Code Number
151 Bloor Street West, Suite 890, Toronto, Ontario, Canada M5S 1S4
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(Address of principal executive offices)
David M. Loev, Esq.,
David M. Loev, Attorney at Law
2777 Allen Parkway, Suite 1000,
Houston, Texas 77019,
(713) 524-4110
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(Name, Address, Including Zip Code, And Telephone Number, Including Area Code Of
Agent For Service
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of Proposed Proposed
Each Class Amount to Maximum Maximum Amount of
Of be Offering Aggregate Registration
Securities to Registered Price per Offering Fee
be Registered Share (1) Price (1)
Common
Stock, no 4,700,000 .08125 $381,875 35.13
Par value
Per share
Shares of
Common Stock 3,275,000 .08125 $266,093.75 24.45
Underlying
Warrants
Total 7,975,000 $647,968.75 59.58
Estimated solely for the purpose of computing the amount of the registration fee
pursuant to Rule 457 under the Securities Act of 1933. The Company's average of
the Company's bid and ask price on the TSX Venture Exchange was US$.08125 for
purposes of this section.
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
LINGO MEDIA, INC.
Resale of 4,700,000 shares of common stock and 3,275,000
shares of common stock underlying warrants
The prospectus relates to the registration of the resale of 4,700,000 shares of
our common stock and 3,275,000 shares of common stock underlying warrants by the
selling stockholders listed on page 59. Shares offered by the selling
stockholders may be sold by one or more of the following methods:
ordinary brokerage transactions in which a broker solicits purchases; and
face to face transactions between the selling stockholders and purchasers
without a broker.
Selling stockholders will sell at the set price of $.40 per share until such
time as our shares are quoted on the OTC Bulletin Board and then thereafter at
prevailing market prices or privately negotiated prices. We sold 1,000,000
units, each unit priced at $.10 and consisting of one common share and one-half
common share purchase Class C warrant. The Class C warrants are exercisable at
$.15 per share. We sold 3,700,000 units at $.10 per unit, each unit consisting
of one common share and three quarters of one Class D warrant. Each Class D
warrant entitles the holder to purchase one common share for an exercise price
of $.12 per share. Selling stockholders, including those warrant holders who are
selling stockholders, will sell at the set price of $.40 per share until such
time as our shares are quoted on the OTC Bulletin Board and then thereafter at
prevailing market prices or privately negotiated prices. A current prospectus
must be in effect at the time of the sale of the shares of common stock
discussed above. We will not receive any proceeds from the resale of common
stock by the selling stockholders. The selling stockholders will be responsible
for any commissions or discounts due to brokers or dealers. We will pay all of
the other offering expenses.
Each selling stockholder or dealer selling the common stock is required to
deliver a current prospectus upon the sale. In addition, for the purposes of the
Securities Act of 1933, selling stockholders may be deemed underwriters.
Therefore, the selling stockholders may be subject to statutory liabilities if
the registration statement, which includes this prospectus, is defective by
virtue of containing a material misstatement or failing to disclose a statement
of material fact. We have not agreed to indemnify any of the selling
stockholders regarding such liability.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD RETAIN OR ACQUIRE OUR
STOCK ONLY AFTER CONSIDERING THE RISKS ASSOCIATED WITH US. WE URGE YOU TO READ
THE "RISK FACTORS" SECTION BEGINNING ON PAGE 8ALONG WITH THE REST OF THIS
PROSPECTUS BEFORE YOU MAKE YOUR INVESTMENT DECISION.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is March 31, 2003
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TABLE OF CONTENTS
Page
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Prospectus Summary 3
The Offering 6
Summary Consolidated Financial Data 7
Risk Factors 8
Identity of Directors, Senior Management and Advisors 20
Selected Financial Data 22
Market Information 24
Description of Securities 24
Forward-Looking Statements 25
Business Overview 26
Capitalization and Indebtedness 26
Operating and Financial Review and Prospects 39
Directors and Senior Management 47
Principal Shareholders 52
Related Party Transactions 53
Plan of Distribution and Selling Stockholders 59
Taxation 63
Qualitative and Quantitative Disclosures and Market Risk 64
Memorandum and Articles of Association 73
Validity of Securities 78
Experts 78
Where You Can Find More Information 78
Financial Statements 79
Indemnification of Directors and Officers 80
Recent Sales of Unregistered Securities 81
Exhibits and Financial Statement Schedules 83
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
PROSPECTUS SUMMARY
Item 3. Summary Information, Risk Factors, and Ratio of Earnings to Fixed
Charges
This summary highlights material information found in greater detail elsewhere
in this document. In addition to this summary, we urge you to read the entire
document carefully, especially the discussion of the risks of investing in our
ordinary shares under "Risk Factors," before deciding to buy our ordinary
shares. References in this document to "Lingo Media," the "Company," "we,"
"our" and "us" refer to Lingo Media Inc., an Ontario company, and its
subsidiaries.
During the year ended December 31, 2001, we had revenues of $333,691, a gross
profit of $291,553, and a loss of $44,706.
Our auditors have expressed substantial doubt regarding our ability to continue
as a going concern, based on operating losses we have incurred since inception.
THE COMPANY
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Introduction
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Lingo Media is a provider of language learning products for the domestic and
international markets, with a particular emphasis on China and Canada. The
products include traditional media, i.e. books, audiocassettes, CD-ROMs, and
supplemental products. Additionally, the Company is developing an online
service for English language learning.
The Company's executive office is located at:
151 Bloor Street West, #890
Toronto, Ontario, Canada M5S 1S4
Telephone: (416) 927-7000
Facsimile: (416) 927-1222
e-mail: iatique@lingomedia.com
website: www.lingomedia.com
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The contact person is:
Imran Atique, Secretary and Treasurer.
The Company's fiscal year ends December 31st.
The Company's common shares trade on the TSX Venture Exchange under the symbol
"LMD.V".
History and Development
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Incorporation and Name Changes
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The Company was incorporated under the name Alpha Publishing Inc. pursuant to
the Business Corporations Act (Alberta) on April 22, 1996. The name was changed
to Alpha Ventures Inc. on May 24, 1996. Pursuant to Articles of Continuance
effective April 22, 1998, the Company was continued as an Ontario company under
the provisions of the Business Corporations Act (Ontario) under the name, Alpha
Communications Corp. The name was changed to Lingo Media Inc. on July 4,2000.
The Company currently has four subsidiaries: Lingo Media Ltd "LML", Lingo Media
International Inc. "LMII", EnglishLingo, Inc. "ELI" and Mail Box Kids
Corporation "MBK".
LML was incorporated pursuant to the Business Corporations Act (Ontario) on
November 21, 1994 under the name Alpha Corporation. Alpha Corporation changed
its name to Lingo Media Ltd on August 25, 2000.
LMII was incorporated pursuant to the Companies Act of Barbados on September 11,
1996 under the name International Alpha Ventures Inc. On May 13, 1997,
wholly-owned subsidiary's name was changed to International Alpha Media, Inc.
and then was changed to Lingo Media International Inc. on September 20, 2000.
ELI was incorporated under the laws of Delaware on April 6, 1999. On June 9,
1999, its articles were amended to increase its authorized capital and to
include certain provisions with respect to the liability and indemnification of
directors. On May 18, 2000 its name was changed from Yangtze OnLine, Inc. to
EnglishLingo, Inc. ELI is 100% owned by the Company.
MBK was incorporated under the laws of Delaware on November 10, 1998. On
December 22, 1998, the articles of the company were amended to increase the
authorized capital and to include certain provisions with respect to the
liability and indemnification of directors. MBK is owned 57.5% by the Company.
The only asset of MBK which was a children software program was transferred to
LMII and this company has been inactive for last two years.
THE OFFERING
Common Stock to be Resold 4,700,000 shares of common stock and
3,275,000 shares of common stock underlying
warrants
Common Stock Outstanding 20,733,287 Shares
Use of Proceeds The Company will receive no proceeds from the
resale of shares of common stock, but will
receive proceeds from the exercise of
warrants.
Limited Market Outside
of the U.S. Prior to this offering, there has been a
limited public market for our shares of common
stock on the TSX Venture Exchange under the
stock symbol LMD.
No Market in U.S. Prior to this offering, there has been no
public market for our shares of common stock
in the U.S. We provide no assurance that
there will be a market in the United States in
the future for our common stock. In the event
a market develops for our common stock, it
will likely be sporadic and volatile.
Determination of Offering
Price The initial public trading price of our shares
of common stock will be determined by market
makers independent of us.
Risk Factors The securities offered hereby involve a high
degree of risk. See "Risk Factors".
Common Stock Outstanding After
Offering Assuming No Exercise
Of Warrants 20,733,287 shares of common stock
Common Stock Outstanding
After Offering Assuming Exercise
of Warrants 24,008,287 shares of common stock
SUMMARY CONSOLIDATED FINANCIAL DATA
You should read the following summary financial data in conjunction with
our consolidated financial statements and the related notes, "Selected Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this document. Our financial
statements are reported in Canadian dollars and presented in accordance with
Canadian generally accepted accounting principles and reconciled to U.S.
generally accepted accounting principles in the, footnotes, for the fiscal years
ended December 31, 2001, December 31, 2000, December 31, 1999, and December 31,
1998 as well as the 13 months ended December 31, 1997 which was the Company's
first audit report and includes an additional month to reflect the period since
inception. The financial reports mentioned above have all been audited by KPMG
LLP and information for the nine months ended September 30, 2002 and September
30, 2001 are unaudited.
When we refer to "Canadian dollars" and "$" in this document, we are
referring to Canada dollars, the legal currency of Canada. When we refer to
"U.S. dollars," and "US$" in this document, we are referring to United States
dollars, the legal currency of the United States.
Please note that the US GAAP reconciliation numbers in the following table
are selected from the note 19 of the December 31, 2001 statements and note 8 of
the Interim statements as of September 30, 2002.
Expressed in Canadian Dollars
Nine Months Ended September 30, Year Ended December 31, 13 Months
2002 2001 2001 2000 1999 1998 1997
STATEMENT OF
OPERATIONS
DATA:
Revenue $ 1,032,322 $ 84,051 $ 333,691 $ 527,051 $ 732,127 $ 1,926,786 $1,316,085
Cost of sales 386,523 - 42,138 371,668 475,957 1,608,956 751,490
Gross profit 645,799 84,051 291,553 155,383 256,170 317,830 564,595
(loss)
General and 418,439 356,139 406,961 661,170 472,671 458,408 544,335
administrative
expenses
Operating income (loss) 9,766 (344,476) (253,832) (649,997) (420,421) (307,557) (43,819)
Gain on sale - 197,719 197,719 - - - -
of subsidiary
Gain on 101,438 - - - 143,962 - -
issuance of
shares of
subsidiary
Net income 111,203 (146,757) (44,706) (774,997) (276,459) (307,557) 8,090
(loss)
Net income
(loss) per
ordinary
share:
Basic and $ .00 $ (.01) $ (.00) $ (.05) $ (.03) $ (.03) $ (.00)
diluted
Weighted 17,281,401 15,966,978 16,095,471 14,567,994 10,783,827 10,615,499 8,729,597
Average
number of
common shares
outstanding
US GAAP net 79,029 (243,459) (467,000) (1,103,000) (219,000) (150,000)
profit (loss)
US GAAP basic (0.00) (0.01) (0.04) (0.08) (0.01) (0.01)
loss per
share
September 30, As of December 31, 13 Months
BALANCE SHEET 2002 2001 2000 1999 1998 1997
DATA:
Cash $ 35,062 $ 7,473 $ 44,207 - - $ 45,610
Working 409,437 (85,471) (78,085) (791,646) (401,445) 197,912
capital
Total assets 1,971,253 1,883,377 1,749,181 1,182,633 1,238,140 1,325,883
Short-term 131,903 411,096 195,700 561,302 428,884 288,200
Borrowings
and current
portion of
long term debt
Long term debt - 54,480 47,250 92,950 143,650 198,575
Shareholders' 1,581,220 1,211,572 1,142,778 75,903 352,362 352,719
equity
US GAAP equity 554,656 123,085 (511,000) 228,000 123,000 77,000
RISK FACTORS
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The Company is subject to a number of risks and uncertainties. If any of the
following risks occur, our business, results of operations and financial
condition would likely suffer. In any such events, the market price of our
common stock could decline and you may lose all or part of your investment in
our shares of common stock.
RISKS ASSOCIATED WITH DOING BUSINESS IN CHINA
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Risk of Failing to Achieve Market Acceptance
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Although the Company has secured a commitment from People Education Press in
Beijing for EFL materials, there can be no assurance that the educational system
in China will continue to accept the educational publications produced by the
Company. In addition, although the use of the Internet in China is growing, the
success of the Company's on-line educational services in that country will
depend in large part on the widespread continued adoption of the Internet for
general and educational use. In the event of failure to achieve or maintain
such market acceptance, there could be a material adverse impact on the
development of such on-line educational services on the Internet that in turn
could have a negative impact on the Company.
Government Regulation of the Internet in China May Reduce Our Sales or Increase
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Our Expenses
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The Company's planned on-line educational services in China may be subject to
various laws and regulations relating to Internet usage and access. The
regulatory environment related to such usage and access may evolve to address
issues such as privacy, content, copyrights, distribution and characteristics
and quality of products and services. The enactment of further regulatory
mechanisms laws or regulations may impede the development and implementation of
such services on the Internet and, in turn, could decrease the demand for the
products and services that the Company provides as well as increase the
Company's costs of doing business. The extent and applicability of existing
laws to the Internet in China in respect of issues such as content ownership,
privacy, rights of publicity, language requirements and content restrictions are
uncertain and could expose the Company to significant liabilities. In addition,
the extent and application of any new laws and regulations to the Internet could
have a material adverse effect on the Company.
Our Limited Experience in China May Impede Our Success
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The Company has limited experience in the provision of traditional educational
publishing and on-line services in China. Although the Company has retained the
services of Canadian and Chinese educators to assist the Company with these
endeavors, there can be no assurance that the Company will be able to attract
and retain qualified personnel with relevant experience for the continued
management and development of this area of its business.
Integration and Operation of EnglishLingo May Result in Reduced Company Efforts
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The investment by the Company in the operations of EnglishLingo, Inc. may be
accompanied by risks commonly encountered as businesses diversify into new areas
of operation. Such risks include, among other things, the difficulty of
assimilating the operations and personnel of the new areas of operation, the
potential disruption of the Company's ongoing business, the distraction of
management from the business of the Company, the inability of management to
maximize the financial and strategic position of the Company, the maintenance of
uniform standards, controls, procedures and policies and the impairment of
relationships with employees and clients as a result of any integration of new
management personnel. The failure to successfully integrate the new business
operations of the Company could have a material adverse effect on the Company's
business, revenues, operating results and financial condition.
Continuation Of Existing Strategic Alliances Is Important to the Company's
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Success
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The Company has developed strategic alliances in the form of Master Agreements
to Develop, Publish, Sell Products And Product Agreements with People Education
Press "PEP", Foreign Language Teaching and Research Press "FLTRP", Renzhen Group
"RG" and China International Publishing Group "CIPG". The Company has also
formed a marketing alliance with Clever Software Group Co., Ltd., a leading
educational software company in China. The termination of these alliances may
have an adverse effect on the Company's results of operation and financial
conditions in the traditional educational publishing and web learning services
sectors if the Company were unable to develop suitable substitute arrangements.
The Growth Of The Company's Business Is Dependent On Government Budgetary
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Policy, Particularly The Allocation Of Funds To Sustain The Growth Of The
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English Language Learning And Training Programs In China
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The Company's customers in China, excluding Clever Software Group Co. Ltd and
Renzhen Group, are directly or indirectly owned or controlled by the state
government of China. Accordingly, their business strategies, capital
expenditure budgets and spending plans are largely decided in accordance with
government policies, which, in turn, are determined on a centralized basis at
the highest level by the State Planning Commission of the PRC. As a result, the
growth of our business is heavily dependent on government policies for English
language learning and training. Despite the high priority currently accorded by
the government to this area, and a high level of funding allocated by the
government to this sector, insufficient government allocation of funds to
sustain its growth in the future could reduce the demand for our products and
services and have a material adverse effect on our ability to grow our business.
Political And Economic Policies Of The Chinese Government Could Affect Our
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Industry In General And Our Competitive Position In Particular
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Since the establishment of the PRC in 1949, the Communist Party has been the
governing political party in China. The highest bodies of leadership are the
Politburo of the Communist Party, the Central Committee and the National
People's Congress. The State Council, which is the highest institution of
government administration, reports to the National People's Congress and has
under its supervision various commissions, agencies and ministries, including
Ministry of Foreign Trade and Economic Co-operation "MOFTEC". Since the late
1970s, the Chinese government has been reforming the Chinese economic system.
Reforms have included decollectivization of farms; legalization of interregional
and international trade by individuals and businesses; legalization of markets
in most goods and services; elimination of price controls; and privatization of
some state-owned productive assets. Reforms began in the farming sector and
rural industry, and were later implemented in various service industries. In
the last five years, China has also begun dismantling large state monopolies in
heavy industry. Although the Company believes that economic reform and the
macroeconomic measures adopted by the Chinese government have had and will
continue to have a positive effect on the economic development in China, there
can be no assurance that the economic reform strategy will not from time to time
be modified or revised. Such modifications or revisions, if any, could have a
material adverse effect on the overall economic growth of China and investment
in the English language learning and training sectors in China. Such
developments could reduce, perhaps significantly, the demand for our products
and services. There is no guarantee that the Chinese government will not impose
other economic or regulatory controls that would have a material adverse effect
on our business. Furthermore, changes in political, economic and social
conditions in China, adjustments in policies of the Chinese government or
changes in laws and regulations could adversely affect our industry in general
and our competitive position in particular. Changes in government policies
might include increased restrictions on the nature of business activities that
foreign-owned enterprises may perform or additional tax/fee/license requirements
for foreign-owned enterprise; increased restrictions on the publishing industry,
including restrictions on the nature of business activities that publishers may
perform; additional tax/fee/license requirements; requirements to publish or not
to publish certain content; and direct state supervision or control of
publisher's activities; and more intensive approval requirements for educational
materials.
The Markets In Which the Company Sells its Services And Products Are Highly
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Competitive And We May Not Be Able To Compete Effectively
- ------------------------------------------------------------------
The educational publishing market in China is rapidly changing. Competitors to
the Company's strategic co-publishing partners in the market mainly include
provincial educational publishing companies such as Yilin Educational Press and
Shanghai Foreign Language Educational Press. In addition, there are many large
multinational educational publishing companies with substantial, existing
publishing operations in Asian markets including China that have significantly
greater financial, technological, marketing and human resources. Should
additional multinational educational publishing companies decide to enter the
English language learning and training market in China, this could hurt the
Company's future profitability and erode its market share.
Our competitors, some of whom have greater financial, technical and human
resources than us, may be able to respond more quickly to new and emerging
technologies and changes in customer requirements or devote greater resources to
the development, promotion and sale of new products or services. It is possible
that competition in the form of new competitors or alliances, joint ventures or
consolidation among existing competitors may decrease our market share.
Increased competition could result in fewer customer engagements, reduced gross
margins and loss of market share, any one of which could materially and
adversely affect our profits and overall financial condition.
Economic Risks Associated With Doing Business
- --------------------------------------------------
The Chinese economy has experienced uneven growth across geographic and economic
sectors and has recently been slowing. There can be no assurance that the
economic slow down will not continue. The China economy is also experiencing
deflation which may continue in the future. The current economic situation may
adversely affect our profitability over time as expenditures for English as a
Foreign Language product may decrease due to the results of slowing domestic
demand and deflation. In addition, the Chinese government may implement changes
in fiscal policy that could increase our costs of operating our business in
China or slow demand for our products. We cannot predict what effects changes
in Chinese government policies may have on our business or results of
operations.
Inflation And Currency Matters May Reduce Our Sales
- ----------------------------------------------------------
In recent years, the Chinese economy has experienced periods of rapid growth as
well as relatively high rates of inflation, which in turn has resulted in the
periodic adoption by the Chinese government of various corrective measures
designed to regulate growth and contain inflation. Since 1993, the Chinese
government has implemented an economic program designed to control inflation,
which has resulted in the tightening of working capital available to Chinese
business enterprises. The recent Asian financial crisis has resulted in a
general reduction in domestic production and sales, and a general tightening of
credit, throughout China.
Restrictions On Currency Exchange May Limit Our Ability To Distribute Profits,
- --------------------------------------------------------------------------------
If Any, Or To Use Revenues From Our Chinese business Effectively, Which May
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Adversely Affect Our Ability To Meet Our Obligations Outside Of China
- -------------------------------------------------------------------------------
Substantially all of the revenues and operating expenses of our Chinese business
are denominated in Renminbi or RMB. The Renminbi is currently freely
convertible under the "current account", which includes dividends, trade and
service-related foreign exchange transactions, but not under the "capital
account", which includes foreign direct investment.
Currently, Chinese publishing companies which are a party to co-publishing
agreements with foreign publishers, such as our Master Agreements with PEP,
FLTRP, RG and CIPG may purchase foreign exchange for settlement of "current
account transactions", including payment of dividends, without the approval of
the State Administration for Foreign Exchange. However, we cannot assure you
that the relevant Chinese governmental authorities will not limit or eliminate
the Company's ability or the Company's Co-Publishing partners' ability to
purchase and retain foreign currencies in the future.
Since a significant amount of our future revenues will be in the form of US
dollars linked to the pegged exchange rate of Renminbi, any future restrictions
on currency exchange may limit our ability to utilize revenue generated in
Renminbi to fund our business activities outside China.
Foreign exchange transactions are still subject to limitations and require
government approval. This could affect the ability of our existing or future
Chinese partners to obtain foreign exchange. Effective December 1, 1998, all
foreign exchange transactions involving the Renminbi must take place through
authorized banks in China at the prevailing exchange rates quoted by the
People's Bank of China.
We May Suffer Currency Exchange Losses If The Renminbi Depreciates Relative To
- --------------------------------------------------------------------------------
The United States Dollar
- ---------------------------
Our reporting currency is the Canadian Dollar. However, substantially all
revenues from China activities are denominated in US dollars linked to the
pegged exchanged rate of the Renminbi. Our assets and revenues are expressed in
our Canadian Dollar. Financial statements will decline in value if the Renminbi
depreciates relative to the Canadian and United States Dollar. Any such
depreciation could adversely affect the market price of our common stock. Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may decide to enter into hedging transactions in the future, the
availability and effectiveness of these hedges may be limited and we may not be
able to successfully hedge our exposure at all. In addition, our currency
exchange losses may be magnified by Chinese exchange control regulations that
restrict our and our Chinese partners' ability to convert Renminbi into United
States Dollars.
OTHER RISK FACTORS
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Dependence on Michael P. Kraft, the Company's Chief Executive Officer, As Well
- --------------------------------------------------------------------------------
as Other Executives
- ---------------------
The Company's future success is dependent on the success and ability of its key
management and product development teams. The Company has obtained keyman
insurance on its senior executive in the amount of $1,000,000. The loss of key
personnel or the inability to attract and retain highly qualified personnel,
consultants or advisors, particularly with respect to the Company's intended
expansion into on-line educational services in China, could adversely affect the
Company's business. The Company faces competition for such personnel from other
companies and organizations. There can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. The inability of the
Company to retain and attract the necessary personnel or the loss of services of
any of its key personnel could have a material adverse effect on the Company.
Risk of the Company's Failure to Manage its Growth Effectively As It Attempts to
- --------------------------------------------------------------------------------
Expand Operations in Canada and in China
- ----------------------------------------------
As the Company endeavors to increase its sales and develop new lines of
business, it will be subject to a number of risks associated with the management
of such growth. These risks include increased responsibilities for existing
personnel, the need to hire additional qualified personnel and, in general,
higher levels of operating expenses. In order to manage current operations and
any future growth effectively, the Company will need to continue to implement
and improve its operational, financial and management information systems and to
hire, train, motivate, manage and retain qualified employees. In particular, as
the Company proceeds with anticipated development of on-line and traditional
educational services for the Chinese market, it will need to ensure that
adequate mechanisms are in place to address potential growth from the largely
untapped Chinese marketplace and to ensure that the Company has hired, trained
and retained employees that are familiar with that marketplace. There can be no
assurance that the Company will be able to manage such growth effectively, that
its management, personnel or systems will be adequate to support the Company's
operations or that the Company will be able to achieve the increased levels of
revenue commensurate with the increased levels of operating expenses associated
with this growth. In the event the Company is unable to manage its growth
effectively due to expenses exceeding sales, the timing of expenses becoming
due or other reasons, the Company may be forced to reduce or curtail operations.
The Company's Customer Base Is Concentrated And The Loss Of One Or More Of the
- --------------------------------------------------------------------------------
Customers Could Cause the Company's Business To Suffer Significantly
- ----------------------------------------------------------------------------
We have derived and believe that we will continue to derive a significant
portion of our revenues from a limited number of large customers. In 1999, four
customers accounted for 92% of our revenues. In 2000, three different customers
accounted for 100% of our revenues. In 2001, two customers accounted for 93% of
our revenues with a new customer accounting for 74% of such revenues. The loss,
cancellation or deferral of any large contract by any of our large customers
would have a material adverse effect on our revenues, and consequently our
profits. In addition, there can be no assurance that we will continue to bring
in new significant customers.
Technological Changes May Reduce the Company's Sale of Its Products and Services
- --------------------------------------------------------------------------------
Both the traditional publishing industry and the on-line services industry
continue to experience technological change. The publishing industry continues
to evolve from traditional mechanical format printing to full digital printing.
The inability of the Company to keep pace with the new technologies and
standards in the print industry could render its products and services
non-competitive. The Company's future success will depend on its ability to
address the increasingly sophisticated needs of its customers by producing and
marketing enhancements to its products and services that respond to
technological changes or customer requirements. The Company may be required to
invest significant capital in additional technology in order to remain
competitive. In addition, the provision of on-line services is characterized by
continuing improvements in technology that results in the frequent introduction
of new products, short product life cycles and continual improvement in product
price/performance characteristics. A failure on the part of the Company to
effectively manage a product transition will directly affect the demand for the
Company's products and the profitability of the Company's operations.
Exchange Rate Fluctuations May Reduce the Company's Revenues or Increase the
- --------------------------------------------------------------------------------
Company's Expenses
- -------------------
The Company does transact some business involving currencies other than the
Canadian currency in both purchasing and selling goods and services. The
Company is exposed to fluctuations in foreign currency exchange rates that may
have an adverse effect on the Company's businesses.
Growth of Multimedia Products May Compete With and Reduce the Company's
- --------------------------------------------------------------------------------
Publishing Activities
- ----------------------
The traditional media platform is being increasingly challenged by the growing
body of multimedia products. Multimedia products serve as ancillary tools to
traditional publishing mediums such as print but can also serve as stand-alone
interactive tools replacing traditional publishing mediums. Although the
Company is continuing its own publishing activities using multimedia interactive
mediums, the continued growth of multimedia products may detract from the
viability of traditional publishing activities.
Dependence on Key Contractors for Maintenance of High Quality Editorial Content
- --------------------------------------------------------------------------------
A key component of the continued success of the traditional publishing
activities of the Company will be the ability of the Company to maintain high
quality editorial content. The Company must continue to develop new and
innovative materials to sustain its educational publishing activities in order
to ensure the continued viability of the traditional publishing aspects of its
business. Although the Company continues to retain leading educators to develop
content for its educational publications, there can be no assurance that the
Company will be able to continue hiring leading educators to maintain the
current high levels of editorial content for future publications.
Reduction in Spending by Federal and Provincial Governments in Canada of
- --------------------------------------------------------------------------------
Educational Curriculum Development May Reduce Our Sales
- -------------------------------------------------------------
Recent funding cuts by both federal and provincial governments in Canada to all
forms of educational institutions have presented a major hurdle to the Canadian
publishing industry over the last several years. In an effort to meet
deficit-reduction targets, both levels of government in Canada have
significantly cut funding for, amongst other things, textbook purchases. Any
further change in curriculum development and selection policies by governmental
bodies responsible for those activities, both in Canada and in other countries,
may have a negative effect on the Company's strength and profitability.
Competition is Likely to Have A Tremendous Impact on Our Business
- ---------------------------------------------------------------------------
The Canadian publishing industry is large and diverse with many competing
participants. While the Company's particular area of concentration in
educational books does not face the level of competition as other areas of the
publishing industry, the Company does face competition within the Canadian
marketplace from other competitors that have larger and substantially greater
resources than the Company. In addition, other publishing companies may expand
their range of activities to directly compete in these segments. Competition to
provide educational print services in Canada is largely based on price, product
innovation and quality, timeliness of product delivery and ability to service
the specialized needs of customers. There can be no assurance that the Company
will be able to compete effectively with its publishing competitors. In
addition, although the Company is unaware of any specific competitor competing
in on-line educational services marketplace in China, the Company faces
considerable competition from traditional educational publishing companies and
from educational software providers in China both of which offer the same or
similar services as are available from the Company's traditional publishing
operations and will be available via the Company's on-line educational services.
In addition, it is anticipated that as the world's largest market becomes more
open to foreign involvement, in the Chinese marketplace in general and in
educational programs in particular, the level of competition will further
intensify.
Risk of Specialty Publishing Clients Utilizing forms of Promotion and
- ------------------------------------------------------------------------------
Advertising That Compete With Those Offered by the Company
- ------------------------------------------------------------------
The specialty publishing business is a form of promotion and advertising. There
can be no assurances that the Company's specialty publishing clients will
continue to use their promotional and advertising expenditures on such forms of
promotion and advertising or will not increase their utilization of other forms
of advertising and promotion such as billboards, newspapers and radio/television
commercials.
We May Need Additional Capital In The Future And It May Not Be Available On
- --------------------------------------------------------------------------------
Acceptable Terms
- -----------------
For the nine months ended September 30, 2002, we had revenues of $1,032,322, and
as of September 30, 2002 we had cash of $35,062, accounts receivable of
$685,436, and current liabilities of $390,034. We will not receive any proceeds
from the resale of the shares registered in this offering, but may receive
proceeds from the exercise of warrants. We believe that our current cash on
hand along with our accounts receivable and recurring sales, will satisfy our
working capital requirements for at least the next twelve months. After that,
we may need to raise additional funds in order to finance our operations. The
Company presumes that corporate growth will be funded both out of positive cash
flow and from the sale of equity and/or debt to help generate needed capital.
Insuring that capital is available to increase production, sales and marketing
capacity and to provide support materials and training in the market place is
essential to success. We cannot assure you that financing will be available on
terms favorable to us, or at all. If adequate funds are not available on
acceptable terms, we may be forced to curtail or cease our operations. Even if
we are able to continue our operations, the failure to obtain financing could
have a substantial adverse effect on our business and financial results.
Risk of Continued History of Losses
- ----------------------------------------
The Company has had a history of losses and there is no assurance that it can
reach profitability in the future. The Company will require significant
additional funding to meet its business objectives. Capital will need to be
available to help expand not only the production capacity of the corporation's
vendors but also to improve market penetration and sales through an increasing
distribution network.
Our Auditors Have Expressed Substantial Doubt About Our Ability to Continue As A
- --------------------------------------------------------------------------------
Going Concern
- --------------
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph when the financial statements are affected by
conditions and events that cast doubt on the Company's ability to continue as a
going concern, such as those described in note 1 to the consolidated financial
statements. Our financial statements do not include any adjustments that might
result from the outcome of that uncertainty. The auditors' report to the
shareholders dated May 3, 2002, is expressed in accordance with Canadian
reporting standards which do not permit a reference to such events and
conditions in the auditors' report when these are adequately disclosed in the
financial statements.
General Economic Conditions May Negatively Affect the Company's Sales
- -----------------------------------------------------------------------------
From time to time, the markets in which the Company sells its products
experience weak economic conditions that may negatively affect the Company's
sales. Any general economic, business or industry conditions that cause
customers to reduce or delay their investments in educational publications and
products may have a negative effect on the Company's strength and profitability.
The Company may experience some seasonal trends in the sale of its publications.
For example, sales of published materials experience seasonal fluctuations with
higher sales in the third calendar quarter and first calendar quarter.
You May Experience Difficulty Selling Our Stock Due to the Lack of Public
- ---------------------------------------------------------------------------
Market for Our Common Stock
------------------------------
Prior to this prospectus, there has been no public trading market for our common
stock in the U.S. Upon the registration statement becoming effective, the common
stock will not be listed on a national securities exchange, Nasdaq, or on the
OTC Bulletin Board. Management's strategy is to list the common stock on the OTC
Bulletin Board as soon as practicable. However, to date we have not solicited
any such securities brokers to become market-makers of our common stock. There
can be no assurance that an active trading market for the common stock will
develop or be sustained upon the registration statement becoming effective or
that the market price of the common stock will not decline below the initial
public trading price. The initial public trading price will be determined by
market makers independent of us.
Upon the registration statement becoming effective, the common stock will not be
listed on a national securities exchange, Nasdaq, or on the OTC Bulletin Board.
Management's strategy is to list the common stock on the OTC Bulletin Board as
soon as practicable. However, to date we have not solicited any such securities
brokers to become market-makers of our common stock. The initial public trading
price will be determined by market makers independent of us.
Our Public Trading Market, If And When It Develops, Will Likely Be Highly
- --------------------------------------------------------------------------------
Volatile
- --------
Prior to this Offering, there has been no public market for our common shares.
If a public trading market does develop, the market price of our common shares
could fluctuate substantially due to:
Quarterly fluctuations in operating results;
Announcements of new products or services by us or our competitors;
Technological innovations by us or our competitors;
General market conditions or market conditions specific to our or our
customer's industries; or
Changes in earning estimates or recommendations by analysts.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has at times been instituted
against the company. If we become subject to securities litigation, we could
incur substantial costs and experience a diversion of management's attention and
resources.
Risk of Purchasing Our Securities at a Substantially Higher Price Than Was
- --------------------------------------------------------------------------------
Previously Purchased
- ---------------------
Our public offering price is $.40 per share, which is substantially higher than
the $.10 per share paid for by our selling stockholders. Therefore, purchasers
of our securities in the public market will be paying significantly more per
share and the selling stockholders may continue selling shares resulting in
downward pressure on our stock.
Risk of Selling Stockholders and Broker-Dealers or Agents Being Deemed Statutory
- --------------------------------------------------------------------------------
Underwriters; Investors Cause of Action Limited
- ----------------------------------------------------
The selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be considered to be underwriters within the meaning of
the Securities Act for the sales. An underwriter is a person who has purchased
shares from an issuer with a view towards distributing the shares to the public.
Any commissions received by the broker-dealers or agents and any profit on the
resale of the shares purchased by them may be considered to be underwriting
commissions or discounts under the Securities Act. As the selling stockholders
are selling the securities and the Company is not selling the securities,
purchasers of our securities in the open market will have no recourse against
the Company. The selling stockholders will have potential liability for a
mistake in the Company's prospectus. The ability of an investor to pursue an
against a selling stockholder may be difficult, and the likelihood of recovery
may be minimal.
Shareholder Control May Result in a Change of Our Management
- ---------------------------------------------------------------------
Approximately 15% of the issued and outstanding common shares of the Company
including options and warrants which are exercisable within 60 days are held by
officers and directors of the Company. As a result, the shareholders will be
able to exercise significant influence over all matters requiring shareholder
approval, including the election of directors and significant corporate
transactions.
We Intend To Apply To Be Listed On The NASD OTC Electronic Bulletin Board, Which
- --------------------------------------------------------------------------------
Can Be A Volatile Market
- ----------------------------
We intend to apply to have our common shares quoted on the OTC Electronic
Bulletin Board, a NASD sponsored and operated quotation system for equity
securities. It is a more limited trading market than the NASDAQ Small Cap
Market, and timely, accurate quotations of the price of our common shares may
not always be available. You may expect trading volume to be low in such a
market. Consequently, the activity of only a few shares may affect the market
and may result in wide swings in price and in volume.
Once our common shares are listed on the NASD OTC Bulletin Board, they will be
subject to the requirements of Rule 15(g)9, promulgated under the Securities
Exchange Act as long as the price of our common shares is below $5.00 per share.
Under such rule, broker-dealers who recommend low-priced securities to persons
other than established customers and accredited investors must satisfy special
sales practice requirements, including a requirement that they make an
individualized written suitability determination for the purchaser and receive
the purchaser's consent prior to the transaction. The Securities Enforcement
Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure
in connection with any trade involving a stock defined as a penny stock.
Generally, the Commission defines a penny stock as any equity security not
traded on an exchange or quoted on NASDAQ that has a market price of less than
$5.00 per share. The required penny stock disclosures include the delivery,
prior to any transaction, of a disclosure schedule explaining the penny stock
market and the risks associated with it. Such requirements could severely limit
the market liquidity of the securities and the ability of purchasers to sell
their securities in the secondary market.
The stock market has experienced significant price and volume fluctuations, and
the market prices of companies, have been highly volatile. Investors may not be
able to sell their shares at or above the then current, OTCBB price. In
addition, our results of operations during future fiscal periods might fail to
meet the expectations of stock market analysts and investors. This failure could
lead the market price of our common shares to decline.
There Is Uncertainty As To the Company's Shareholders' Ability To Enforce Civil
- --------------------------------------------------------------------------------
Liabilities Both In and Outside of the United States
- ------------------------------------------------------------
The preponderance of our assets are located outside the United States and are
held through companies incorporated under the laws of Canada, Barbados, and
arrangements established in China. Our current operations are conducted in
China. In addition, a majority of our directors and officers are nationals
and/or residents of countries other than the United States. All or a
substantial portion of the assets of these persons are located outside the
United States. As a result, it may be difficult for shareholders to effect
service of process within the United States upon these persons. In addition,
investors may have difficulty enforcing, both in and outside the United States,
judgments based upon the civil liability provisions of the securities laws of
the United States or any state thereof.
Forward-Looking Statements In This Filing May Not Be Accurate
- ---------------------------------------------------------------------
Included in this Form F-1 Registration Statement are various forward-looking
statements that can be identified by the use of forward looking terminology such
as "may", "will", "expect", "anticipate", "estimate", "continue", "believe", or
other similar words. We have made forward-looking statements with respect to
the following, among others:
- - the Company's goals and strategies;
- - the Company's ability to obtain licenses/permits to operate in China;
- - the importance and expected growth of English as a Foreign Language in
China;
- - the Company's revenues;
- - the Company's potential profitability; and
- - the Company's need for external capital.
These statements are forward-looking and reflect our current expectations. They
are subject to a number of risks and uncertainties, including but not limited
to, changes in the economic and political environments in China, changes in
technology and changes in the Internet marketplace. In light of the many risks
and uncertainties surrounding China and the Internet marketplace, prospective
purchasers of our shares should keep in mind that we cannot guarantee that the
forward-looking statements described in this Form F-1 will transpire.
Item 4. Information With Respect To The Registrant And The Offering.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
- -----------------------------------------------------
DIRECTORS
- ---------
Table No. 1 lists as of March 25, 2003 the names of the Directors of the
Company.
Table No. 1
Directors
Name (1) Age Date First Elected/Appointed
- ----------------------------------------------------------------------------
Richard J.G. Boxer (2)(3) 54 November 1996
Richard H. Epstein (3) 39 July 2001
Chen Geng (3) 32 July 2001
Michael P. Kraft (3) 39 November 1996
Scott Remborg (2)(3) 54 July 2000
- ----------------------------------------------------------------------------
(1) The business address of each Director is 151 Bloor St. West, Ste. 890,
Toronto, Ontario Canada M5S 1S4.
(2) Member of Audit Committee.
(3) Resident/Citizen of Ontario, Canada.
SENIOR MANAGEMENT
- -----------------
Table No. 2 lists, as of March 25, 2003, the names of the Senior Management
of the Company. The Senior Management serves at the pleasure of the Board of
Directors.
Table No. 2
Senior Management
Date of
First
Name (1) Position Age Appointment
- ----------------------------------------------------------------------------
Michael P. Kraft(2) President/CEO 39 April 1996
Imran Atique Secretary/Treasurer 26 September 2001
Khurram R. Qureshi(3) Chief Financial Officer 40 April 1998
- ----------------------------------------------------------------------------
(1) The business address of each member of Senior Management is 151 Bloor
Street West, Toronto, Ontario, Canada M5S 1S4
(2) He spends 80% of his time on the affairs of the Company.
(3) He spends 20% of his time on the affairs of the Company.
Michael P. Kraft's business functions, as President/CEO of the Company, include
strategic planning, business development, product development, financing and
banking, and reporting to the Board of Directors.
Imran Atique's business functions, as Secretary and Treasurer of the Company,
include assisting the Chief Financial Officer and the President in all financial
matters and assisting the Board of Directors in carrying out their duties.
Khurram R. Qureshi's business functions, as Chief Financial Officer of the
Company, include financial administration, project management, accounting,
providing support to the President/CEO in financing issues.
ADVISORS No Disclosure Necessary.
- --------
AUDITORS
- --------
The Company's auditors for its financial statements for each of the preceding
three years was KPMG LLP, Chartered Accountants, 4100 Yonge Street #200,
Toronto, Ontario, Canada M2P 2H3.
SELECTED FINANCIAL DATA
-----------------------
Our financial statements are reported in Canadian dollars and presented in
accordance with Canadian generally accepted accounting principles and reconciled
to U.S. generally accepted accounting principles in the, footnotes, for the
fiscal years ended December 31, 2001, December 31, 2000, December 31, 1999, and
December 31, 1998 as well as the 13 months ended December 31, 1997 which was the
Company's first audit report and includes an additional month to reflect the
period since inception. The financial reports mentioned above have all been
audited by KPMG LLP and information for the nine months ended September 30, 2002
and September 30, 2001 are unaudited
The selected financial data should be read in conjunction with the financial
statements and other financial information included elsewhere in the
Registration Statement.
The Company has not declared any dividends since incorporation and does not
anticipate that it will do so in the foreseeable future. The present policy of
the Company is to retain future earnings for use in its operations and the
expansion of its business.
Please note that the US GAAP reconciliation numbers in the following table are
selected from the note 19 of the December 31, 2001 statements and note 8 of the
Interim statements as of September 30, 2002.
Selected Financial Data
Expressed in Canadian Dollars
Nine Months Ended
September 30, Year Ended December 31, 13 Months
2002 2001 2001 2000 1999 1998 1997
STATEMENT OF
OPERATIONS
DATA:
Revenue $ 1,032,322 $ 84,051 $ 333,691 $ 527,051 $ 732,127 $ 1,926,786 $1,316,085
Cost of sales 386,523 - 42,138 371,668 475,957 1,608,956 751,490
Gross profit 645,799 84,051 291,553 155,383 256,170 317,830 564,595
(loss)
General and 418,439 356,139 406,961 661,170 472,671 458,408 544,335
Administrative
Expenses
Operating 9,766 (344,476) (253,832) (649,997) (420,421) (307,557) (43,819)
income (loss)
Gain on sale - 197,719 197,719 - - - -
of subsidiary
Gain on 101,438 - - - 143,962 - -
issuance of
shares of
subsidiary
Net income 111,203 (146,757) (44,706) (774,997) (276,459) (307,557) 8,090
(loss)
Income Taxes. . 94,097
Net income
(loss) per
ordinary
share:
Basic and $ (.00) $ (.01) $ (.00) $ (.05) $ (.03) $ (.03) $ (.00)
Diluted
Weighted 17,281,401 15,966,978 16,095,471 14,567,994 10,783,827 10,615,499 8,729,597
Average
number of
common shares
outstanding
US GAAP net 79,029 (243,459) (467,000) (1,103,000) (219,000) (150,000)
profit (loss)
US GAAP basic (0.00) (0.01) (0.04) (0.08) (0.01) (0.01)
loss per
share
September 30, As of December 31, 13 Months
BALANCE SHEET 2002 2001 2000 1999 1998 1997
DATA:
Cash $ 35,062 $ 7,473 $ 44,207 - - $ 45,610
Working 409,437 (85,472) (78,085) (791,646) (401,445) 197,912
Capital
Total assets 1,971,253 1,883,377 1,749,181 1,182,633 1,238,140 1,325,883
Short-term 131,903 411,096 195,700 561,302 428,884 288,200
Borrowings
and current
portion of
long term debt
Long term debt - 54,480 47,250 92,950 143,650 198,575
Shareholders' 1,581,220 1,211,572 1,142,778 75,903 352,362 352,719
Equity
US GAAP equity 554,656 123,085 (511,000) 228,000 123,000 77,000
<FN>
(1) a)Under US GAAP SFAS 123, companies are encouraged but not required to
include in compensation the fair value of stock options granted to
employees. On a pro-forma basis, the expensing of such "costs" would have
increased reported loss by $271,881; $1,127,018 and $499,894 or Fiscal
2001, Fiscal 2000 and Fiscal 1999, respectively; the effects on pro-forma
disclosure of applying SFAS 123 are not likely to be representative of the
effects on pro-forma disclosures in future years. The weighted average
estimated fair value at date of grant, as defined by SFAS 123, for options
granted in Fiscal 2000 was $0.45 (1999 - $0.18).
b) Under US GAAP, development costs are expensed as incurred: 2001 -
$168,184; 2000 - $348,689; and 1999 - $144,874.
c) Under US GAAP, development costs amortized under Canadian GAAP would be
reversed to calculate Loss per Share: 2001 - $43,910; 2000 - $74,500; and
1999 - $82,916.
d) Under US GAAP, software development costs are expensed as incurred: 2001
- $ nil; 2000 - $30,957; and 1999 - $93,227.
e) Under US GAAP, compensation expense based on the fair market value of
stock options granted in exchange for services from consultants is
recorded: 2001 - $59,983; 2000 - $22,500; and 1999 - $35,500.
f) On 5/28/2001, the Company sold its investment in AlphaCom Corporation
and recorded a gain on sale of discontinued operations of $197,720.
MARKET INFORMATION
------------------
The Company's common shares began trading on the Alberta Stock Exchange in
Calgary, Alberta, Canada under its former name Alpha Ventures Inc. in November
1996. The Alberta Stock Exchange was absorbed by the Canadian Venture Exchange,
which was absorbed by the TSX Venture Exchange. The Company's listing was
automatically transferred from the Alberta Stock Exchange to the TSX Venture
Exchange "TSX VEN" as a Tier 2 company. The current stock symbol on the TSX VEN
is "LMD".
The TSX Venture Exchange ("Exchange") currently classifies Issuers into
different tiers based on standards, including historical financial performance,
stage of development and financial resources of the Issuer at the time of
listing. Specific Minimum Listing Requirements for each industry segment in
each of Tier 1 and Tier 2 have been established by the Exchange.
Policy 2.1 of the Exchange outlines the Minimum Listing Requirements for each
industry segment in Tier 1 and Tier 2. Under this policy, Lingo Media Inc. is a
Tier 2 Issuer in the industry segment category of Technology or Industrial.
Each industry segment is further divided into categories. Quantitative minimum
requirements for listing for the industry segment Technology or Industrial and
Tier 2 are provided in Section 4.3 of Exchange Policy 2.1.
Similarly, Policy 2.5 of the Exchange sets out the minimum standards to be met
by Issuers to continue to qualify for listing in each Tier, referred to as Tier
Maintenance Requirements ("TMR"). A Tier 2 Issuer which fails to meet one of
the Tier 2 TMR will not automatically be suspended or designated as "Inactive".
The Exchange will provide notice of failure to meet one of the Tier 2 TMR and
will allow the Issuer 6 months from the date of notice to meet the requirement,
failing which the Exchange may designate the Issuer as Inactive. If a Tier 2
Issuer fails to meet more than one Tier 2 TMR, notice will be given to the
Issuer by the Exchange and if the requirements are not met within 90 days of the
notice, the Exchange will designate the Issuer as Inactive and apply the
restrictions on Inactive Issuers retroactively. An Inactive Issuer may continue
to trade on Tier 2 of the Exchange for 18 months from the date it is designated
as Inactive. If the Issuer does not meet all of the applicable Tier 2 TMR
within that 18 month period, its listed shares may be suspended from trading by
the Exchange.
To maintain a listing as an active Tier 2 Issuer, an Issuer must meet all Tier 2
TMR for its industry segment as set out in Section 4 of the Exchange Policy 2.5.
The table below lists the volume of trading and high, low and closing sales
prices on the TSX Venture Exchange (Alberta Stock Exchange) for the Company's
common shares for: the last thirteen fiscal quarters; and the last five fiscal
years.
TSX Venture Exchange
Common Shares Trading Activity
Expressed in Canadian Dollars
- Sales -
Period Canadian Dollars
Ended Volume High Low Closing
- ---------------------------------------------------------------------------------
Monthly
February 3,800 0.15 0.09 0.10
January 44,250 0.09 0.08 0.08
December 307,000 0.10 0.05 0.10
November 52,000 0.10 0.05 0.09
October 87,000 0.10 0.05 0.05
September 5,000 0.11 0.09 0.09
August - - - -
July 32,500 0.13 0.12 0.13
June 23,500 0.13 0.12 0.13
May 129,300 0.10 0.03 0.10
April 20,500 0.15 0.09 0.10
Quarterly
12/31/2003 446,000 0.10 0.05 0.10
9/30/2002 37,500 0.13 0.09 0.09
6/30/2002 173,300 0.13 0.10 0.13
3/31/2002 176,000 0.15 0.04 0.10
12/31/2001 1,614,236 0.12 0.04 0.12
9/30/2001 174,776 0.18 0.07 0.07
6/30/2001 206,700 0.20 0.10 0.11
3/31/2001 122,600 0.35 0.15 0.20
12/30/2000 502,950 0.50 0.18 0.40
9/30/2000 292,100 0.60 0.30 0.45
6/30/2000 590,900 1.00 0.35 0.50
3/31/2000 7,359,200 1.40 0.10 0.90
12/31/1999 249,400 0.25 0.05 0.25
9/30/1999 40,400 0.07 0.07 0.07
6/30/1999 196,000 0.10 0.10 0.10
3/31/1999 69,999 0.17 0.09 0.17
Yearly
12/31/2002 832,800 0.15 0.04 0.10
12/31/2001 2,118,312 0.35 0.04 0.12
12/31/2000 8,745,150 1.40 0.10 0.40
12/31/1999 554,800 0.25 0.05 0.25
12/31/1998 1,094,300 0.45 0.10 0.19
12/31/1997 1,178,200 0.55 0.23 0.34
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. These forward-looking
statements relate to analyses and other information which are based on forecasts
of future results and estimates of amounts not yet determinable. When our
management makes assumptions for such forecasts, it makes them in light of the
information it currently has available.
Many of the forward-looking statements are identified by their use of terms and
phrases such as "anticipate", "believe", "could", "estimate", expect", "intend",
"should", "may", "plan", "potential", "predict", "project", "will" and similar
terms and phrases and may include references to assumptions. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including the risks described in
"Risk Factors" and elsewhere in this prospectus. You are cautioned not to place
undue reliance on these forward-looking statements, which reflect our views only
as of the date of this prospectus. We undertake no obligation to update these
statements or publicly to release the result of any revisions to these
statements to reflect events or circumstances after the date of this prospectus
or to reflect the occurrence of unanticipated events.
Such forward-looking statements in this prospectus include, among others, our
current intent, belief or expectations regarding the following:
- - The Company's goals and strategies;
- - The Company's ability to obtain licenses/permits to operate in China;
- - The importance and expected growth of English as a Foreign Language in
China;
- - The Company's revenues;
- - The Company's potential profitability; and
- - The Company's need for external capital.
CAPITALIZATION AND INDEBTEDNESS
-------------------------------
The following table sets forth the capitalization and indebtedness of the
Company as of September 30, 2002 in Canadian dollars.
Capitalization and Indebtedness
September 30, 2002
Expressed in Canadian Dollars
Long-Term Portion of Long-Term Debt $0
Long-Term Loans Payable $0
Shareholders' equity:
Common Shares, no par value;
Unlimited Number of shares authorized,
20,733,827 shares issued and outstanding $3,077,391
Deferred Stock Based Compensation ($3,958)
Retained Earnings (deficit) ($1,492,213)
Net Stockholders' Equity $1,581,220
TOTAL CAPITALIZATION $1,581,220
Stock Options Outstanding 2,498,340
Warrants Outstanding: 3,275,000
AS OF March 25, 2003, THE ONLY MATERIAL CHANGE IN INDEBTEDNESS WITHIN THE
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LAST 60 DAYS RELATES TO A $100,000 SECURED LOAN BY 867214 ONTARIO LTD., A
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COMPANY CONTROLLED BY RICHARD J.G. BOXER.
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BUSINESS OVERVIEW
-----------------
Background
Lingo Media is a provider of language learning products to domestic and
international markets, with a particular emphasis on China and Canada. The
products include traditional media, such as books, audio, CD-ROM, and
supplemental products. Additionally, the Company is developing an online
service for English language learning.
Lingo Media's strengths and opportunities lie in its approach to the development
of original language learning materials-including English as a Second/Foreign
Language (ESL/EFL) and Language Arts for English speakers. In China, the
Company pre-sells its program to educational ministries through co-publishing
with local publishers, while retaining full copyright ownership and distribution
rights for all other markets. In Canada, the Company has received Ontario
Ministry of Education approval for one of its elementary programs.
Additionally, Lingo Media through its subsidiary EnglishLingo, Inc. intends to
launch EnglishNIHAO.com which plans include the presentation of online language
exercises, quizzes, course modules and innovative contests. It is anticipated
that some of the materials and services will be offered free while others will
be provided on a paid subscription basis. The Company plans to leverage the
valuable publishing and distribution relationships it has established in China.
Consequently, Lingo Media is working with a local strategic partner, Clever
Software Group Co., Ltd., and plans to launch the online service in the first
quarter of 2003. As of March 25, 2003, the online service has not been
launched.
BUSINESS FOCUS
- ---------------
Publishing Activities
- ----------------------
CHINA
Lingo Media has spent four years developing English as a Foreign Language (EFL),
products, programs, and relationships in the Chinese market. Learning to
communicate in English is seen as a top priority for Chinese school students and
young adult learners. Along with learning how to use a PC, English skills are
perceived as a key determinant of their future levels of prosperity. The
Company's EFL book, audio and CD-based programs are unique in that they have a
special focus on the spoken language. In addition to developing learning
materials, considerable resources have been expended on the development of
relationships with leading Chinese publishers, both in the education and trade
sectors, as well as in extensive marketing and pre-selling of Lingo Media's
programs.
The Company is capitalizing on its co-development approach in the Chinese
market. Lingo Media sees its relationships with leading Chinese publishers; its
Canadian and Chinese author teams; and its original custom-developed content as
key factors in opening up the Chinese educational market. The Company has
secured long-term publishing contracts for the Kindergarten to Grade 12 (K-12)
and higher educational markets, which it anticipates will generate ongoing
revenue streams from the sale of its programs.
People's Education Press"PEP":
- --------------------------------
People's Education Press, a division of China's State Ministry of Education,
publishes 80% of educational materials for the K-12 market throughout China, for
all subjects, including English. PEP has a readership of more than 150 million
students. Lingo Media has four programs in development with PEP. Three series
target the elementary market of 100 million students: PEP Primary English (for
grades 3 to 6 as Chinese students must now begin learning English in Grade 3);
Starting Line (Grades 1-6); and Beginning English for Young Learners (Grades
1-2). The Junior Reading Comprehension series is for junior middle school
students. Initial levels of all four programs were launched in September 2001.
All series include textbooks, activity books, audiocassettes, teacher resource
books, and supplementary materials.
Foreign Language Teaching and Research Press "FLTRP":
- ---------------------------------------------------------
In April 2000, Lingo Media secured a publishing agreement to co-develop, publish
and sell Subject-Based English with FLTRP, China's leading university and
reference publisher. This series is required in order to meet the education
curriculum mandated by the State Ministry of Education in China that all 3rd and
4th year university students take intensive English studies specifically related
to their majors. The project calls for the development of multiple volumes for
each of the six subject areas on an ongoing basis through the summer of 2003,
with the first levels launching in September 2002.
Guangzhou Renzhen English Production Group "Renzhen Group":
- ---------------------------------------------------------------
Lingo Media completed a co-publishing agreement for two language-learning
programs with Renzhen Group in December 2000. Renzhen Group is one of China's
leading privately owned language learning publishers of book and audiocassette
packages focusing on wholesaling to bookstores and newsstands throughout China,
as well as on its growing mail order business. The two programs include English
In Business Communications - a series of six self-study books and 12
audiocassettes providing specialized English training; and The Out Loud Program:
Rhymes, Rhythms and Patterns for Language Learning - a set of student books and
audiocassette packages with 3 levels. Renzhen Group will be providing its
internal pre-production resources including illustration, design, and layout in
China giving Lingo Media a competitive front-end cost advantage with its plans
to export this program into international educational markets.
China International Publishing Group (CIPG):
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Foreign Languages Press is a subsidiary of China's largest publishing group,
China International Publishing Group. CIPG develops and distributes books to
Chinese retail bookstores, in addition to producing selected texts and
supplemental books for the educational market. Lingo Media signed a contract
with CIPG in June of 1998 to co-publish an English for Special Purposes Series
and has recently released the English for Hosts book and audiocassette package.
CANADA
Lingo Media adapted The Out Loud Program: Rhymes, Rhythms and Patterns for
Language Learning and created a school edition in the summer of 2001 for the
primary school market.
The Company has successfully entered the Ontario education market. The Ontario
Ministry of Education has approved and listed The Out Loud Program: Rhymes,
Rhythms and Patterns for Language Learning as part of their early reading
strategy intended to enhance the reading ability of primary school children.
The Out Loud Program which now includes student textbooks, teacher's source
books, poster cards and audiocassettes was launched in Ontario in November 2001.
Marketing began on a Canada-wide basis in January 2002 and The Out Loud Program
was launched in the United States at the International Reading Association
Annual Conference in April 2002 in San Francisco.
E-Learning Activities:
- ----------------------
Lingo Media has a strategic relationship in place with one of China's leading
educational software companies, Clever Software Group Co., Ltd., for the launch
of an English language-learning portal. Now at 26.5 million, the number of
Internet users in China is growing at a furious pace; it has doubled every 6
months over the past 2 years. This makes electronic delivery of Lingo Media's
content over the web a natural extension. In Clever Software, the Company has
identified a strategic partner not only for development of the online service,
but also for marketing of the service. Clever will play a key role in
generating traffic to the site. With 22 district sales offices, and staff of
1,200, Clever has established an enviable relationship with students and
educators throughout China. Lingo Media's business model with the Clever
partnership is based on a combination of subscription and e-commerce revenues.
E-LEARNING
CHINA:
Use of Lingo Media's EFL experience, relationships and content.
Relationship with Clever Software Group Co., Ltd.
BUSINESS PHILOSOPHY
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Lingo Media specializes in the publishing of materials for language learning.
LIN'GO - probably from the French Provincial for "tongue"; originally from
Latin. Strange or incomprehensible language or speech: as a foreign language or
the special vocabulary of a specific field of interest.
LIN'GO ME'DI.A - a company whose goal is to make the English language accessible
to precisely targeted and researched markets through the development of unique
books, tapes, CDs, videos, and online content. With its international partners
in research, distribution and marketing and teams of writers and educators,
Lingo Media is equipped to profit from the coming growth in English language
learning. There are two distinct markets: English as a Second Language (ESL) is
the study of English in a country where the native tongue is English, whereas
English as a Foreign Language (EFL) is the study of the English language in a
country where the native tongue is not English. English for Special Purposes
(ESP) is an extension of English language learning.
Over the past decade, English has become the international language; it's the
lingua franca of the Internet, the international tongue for professionals
ranging from banking to air transportation, and the language of technology and
science. As the world shrinks, trade, commerce and communication are
increasingly global. Country after country is now recognizing that the future
will belong to those who are proficient in the English language. The Company is
on the cusp of huge growth in English language acquisition; not by people
wanting to emigrate but by people wanting the competitive advantage of English
language skills in their home country.
The Lingo Media Approach
To gain maximum penetration and acceptance in a country, materials must reflect
the culture of the learners. Yet, all too often, English as a Foreign Language
(EFL) materials are merely repackaged English as a Second Language (ESL)
materials originally intended for an emigrant market. At Lingo Media, we team
top North American writers and educators with their counterparts in our target
countries and work with local publishers and educational organizations to ensure
that we are creating the right kinds of materials - materials that will be the
backbone of an EFL curriculum.
What makes learning English more accessible to an audience? Two simple concepts
that are easy to see but challenging to implement: quality and relevance. Our
core philosophy is to develop English language learning materials that are
customized to the market we are trying to reach. Our approach involves:
Researching and understanding the market
The whole process begins with relationship building and communication. We talk
with key organizations; associations and ministries in a country to better
understand needs and concerns. We look for the right niche for the Company, and
then seek local partners/stakeholders to develop/produce a customized program.
Moreover, we search for individuals in market countries who can manage the
Company's affairs. These individuals become our links to that country's
community and culture.
Creating bilateral author teams
Once we have Lingo Media liaisons in place, we establish a team of writers from
North America with writers from the target country. This team's goal is to
ensure that materials serve the intended market and meet the highest educational
standards.
Developing original culturally relevant material
We've found the multiple-perspective approach of dual-country author teams adds
immensely to the quality and relevance of the programs we publish. Moreover,
our people in the field within the target country are constantly measuring the
development of the program; does the material serve the intended audience? Is
everything on track?
Comprehensive product development
Because we know that a language-learning program needs to serve a number of
different groups, we consider the requirements of all of the ultimate users:
administrators, teachers and students. Each group will have its own
perspective, which we integrate into an approach that works for all.
Collaborative partnerships
We know that when clients are involved with the process of developing programs,
they are much more likely to be pleased with the results. In fact, because our
partners are so involved with every stage of program development from content
creation through distribution, we think of our clients as strategic team
members.
Understanding the Market
- --------------------------
The challenges of understanding the culture, mores, needs and infrastructure of
China are more than offset by the potential to capture the largest English
language learning and training market in the world.
Historically, the importance of education has been a high priority in China,
where children take care of their parents later in life, and by extension where
parents do everything they can to contribute to their children's prosperity. As
parents are now able to have only one child, resources are channeled even more
intensively to ensure their child's success. Next to learning how to use a PC,
learning how to speak English is considered critical for future prosperity.
However, because it is only in recent years that English has been taught at all,
enormous resources will be required to meet these educational needs. The market
is vast and diverse, encompassing EFL and ESP studies for children, adolescents
and adults.
China
We selected China as our first country of exploration because, it is the largest
EFL market in the world. In China, Lingo Media has forged links and established
partnerships with Chinese government organizations and private businesses in
order to help us maximize our market penetration.
Bilateral Authoring Teams
September 2000 marked the launch of the Company's first pilot program in China:
Let's Learn English! Beginning English for Young Learners. The program was
developed by an international team of educational writers: Jack Booth, David
Booth, Linda Booth and Larry Swartz (the award winning Canadian authors of the
elementary language arts text Impressions), together with Meng Yanjun, Zhang
Lingdi, and Lin Li from the Beijing Educational Commission.
Relevant Material
Our teams ensure that program material is relevant and culturally appropriate,
as well as educationally sound. Beginning English for Young Learners for
example, was specifically created for China, and addresses the need to focus on
spoken English.
Collaborative Partnerships
Throughout the preparation and production of Beginning English for Young
Learners, we benefited from a close practical relationship with our local
partner. The Beijing Educational Commission assembled a Chinese author team to
work with the Canadian authors. Such a relationship enhanced the quality of the
materials produced, and ensured the success of the program.
Comprehensive Product Development
Before we even started developing a program such as Beginning English for Young
Learners, we spent time forging relationships with select government authorities
and educational publishing experts. We needed to understand their perspective on
English language learning and their criteria when developing a curriculum. By
asking the right questions, and listening to the answers, we were ready by July
1999 to begin delivering a solution. Now that the pilot program has launched in
Beijing, we're listening again. Our plan is for this program to be implemented
nationally. That means our relationship will continue with Beijing Educational
Commission and the Company's distribution partner, Peoples Education Press as we
collect and assess relevant feedback.
Products
- --------
Programs for Children:
- ----------------------
Series: Beginning English For Young Learners
Launch Date: In process, not launched yet
Type of Program: English as a Foreign Language (EFL)
English as a Second Language (ESL)
Description: A series of student books, audiocassettes, teacher
resource books and ancillary materials. The program
promotes oral language use through partner-based
activities suited for both large and small groups.
It enhances listening, speaking and emerging literacy
skills, using an activity-based approach.
Components: Student Books: 4
Audiocassettes: 8
Teacher Resource Books: 2
Target Audience: Elementary Schools: Grade 1 and 2
Author Teams: Canada: David Booth, Jack Booth,
Linda Booth, Larry Swartz
China: Meng Yanjun, Zhang Lingdi, Lin Li
Publisher: Lingo Media
China School Edition: Co-Publisher -
People's Education Press
Series: PEP Primary English
Launch Date: September 2001
Type of Program: English as a Foreign Language (EFL)
English as a Second Language (ESL)
Description: A series of student books, audiocassettes, teacher
Resource books and ancillary materials. The program
employs a variety of learning strategies to promote
interactive, two-way communication as students
explore the content through task-based activities.
Components: Student Books: 8
Audiocassettes: 8
Teacher Resource Books: 8
Ancillary Materials: in development
Target Audience: Elementary Schools: Grade 3-6
Author Teams: Canada: David Booth, Jack Booth,
Linda Booth, Larry Swartz
China: Gong Yafu, Wu Yuexin
Publisher: Lingo Media
China School Edition: Co-Publisher -
People's Education Press
Series: Starting Line
Launch Date: September 2001
Type of Program: English as a Foreign Language (EFL)
English as a Second Language (ESL)
Description: A series of student books, audiocassettes, teacher
Resource books and ancillary materials. The program
employs interactive, two-way communication to help
and encourage students to build word power in
listening, speaking, reading, and writing as they
participate in task-based activities designed for use
in multi-level classrooms.
Components: Student Books: 12
Audiocassettes: 12
Teacher Resource Books: 12
Ancillary Materials: in development
Target Audience: Elementary Schools: Grade 1-6
Author Teams: Canada: David Booth, Jack Booth,
Linda Booth, Larry Swartz
China: Gong Yafu, Li Jinchun
Publisher: Lingo Media
China School Edition: Co-Publisher -
People's Education Press
Series: The Out Loud Program: Rhymes, Rhythms and Patterns
for Language Learning
Launch Date: September 2001
Type of Program: Language Arts
English as a Second Language (ESL)
English as a Foreign Language (EFL)
Description: A series of student books, audiocassettes, teacher
Resource books and ancillary materials. The program
is based on the principle that becoming fluent in a
language depends largely on the participants being
involved in authentic, interactive discourse using
the language. As young learners experience the sounds
of the English language found in these fascinating
and inviting materials, they are immediately working
with the language, participating in its structures
and vocabulary from the inside out. This program
presents teachers with hundreds of helpful models of
the English language to explore with students.
Components: School Edition
Student Books: 6
Audiocassettes: 6
Teacher Resource Books: 6
Poster Sets(20): 6
Trade Edition
Student Books: 3
Audiocassettes: 3
Target Audience: Elementary 3/: Grades K-2
Author Team: Canada: Larry Swartz, David Booth,
Jack Booth, Linda Booth
Publisher: Lingo Media
Canada School Edition: Publisher -
Lingo Media
China Trade Edition: Co-Publisher -
Renzhen Group
Program for Juveniles
- ---------------------
Series: Junior Reading Comprehension
Launch Date: March 2001
Type of Program: English as a Foreign Language (ESP)
English as a Second Language (EFL)
Description: A series of student books to supplement the widely
used PEP textbooks for grades 7-9. These supplemental
books provide a wide range of reading selections and
follow-up activities, language games, puzzles, and
other sources for developing comprehension.
Components: Student Books: 6
Target Audience: Junior Middle Schools: Grades 7-9
Author Team: Canada: David Booth, Jack Booth,
Linda Booth, Larry Swartz
Publisher: Lingo Media
China School Edition: Co-Publisher -
People's Education Press
Programs for Higher Education
- -----------------------------
Series: Subject-Based English
Launch Date: In process, not launched yet
Type of Program: English for Special Purposes (ESP)
Description: A series of student text books, audiocassettes, and
teacher resource books. The first set of six subjects
includes Law, Mathematics, Physics, Geological
Prospecting and Mining, Biology, and Transportation.
This program is required in order to meet the
Curriculum mandated by the Chinese State Ministry of
Education stating that all third and fourth year
students not majoring in English must take English
courses related to their subject area.
Components: Student textbooks: 6
Audiocassettes: 12
Teacher Resource Books: 6
Target Audience: Third and fourth year university students majoring in
subjects other than English
Author Teams: Canada: William Marshall, Brigid Fitzgerald
China: Bu Yukun
Publisher: Lingo Media
China School Edition: Co-Publisher -
Foreign Languages Teaching and
Research Press
Programs for Professionals
- --------------------------
Series: English in Business Communications
Launch Date: February 2001
Type of Program: English for Special Purposes (ESP)
Description: A series of self-study books and audiocassettes for
Adult English learners focused on specific English
language needs for a variety of professions and
occupations. The series is designed to develop and
enhance listening comprehension, vocabulary
development and pronunciation. Subject areas include
Insurance, Marketing, Meetings, Negotiations,
Banking, Presentations and English for Hosts.
Components: Self-Study Books: 6
Audiocassettes: 12
Target Audience: Self-Study Adult Market
Author Team: William Marshall, Bridgid Fitzgerald
Publisher: Lingo Media
China Trade Editions: Co-Publishers:
English for Hosts - Foreign Languages Press
English in Insurance - Renzhen Group
English in Marketing - Renzhen Group
English in Meetings - Renzhen Group
English in Negotiations - Renzhen Group
English in Banking - Renzhen Group
English in Presentations - Renzhen Group
United States vs. Foreign Sales/Assets
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During the fiscal years ended December 31, 2001, 2000 and 1999, respectively,
$21,068, $482,991 and $649,067 of sales revenue were generated in Canada.
During the fiscal years ended December 31, 2001, 2000 and 1999, respectively,
$nil, $nil and $nil of sales revenue were generated in the United States.
During the fiscal years ended December 31, 2001, 2000 and 1999, respectively,
$312,623, $44,060, and $nil of sales revenue were generated in China.
During the fiscal years ended December 31, 2001, 2000 and 1999, respectively,
$nil, $nil and $83,060 of sales revenue were generated in the United Kingdom and
Australia/New Zealand.
At December 31, 2001, December 31, 2000 and December 31, 1999, substantially
all of the Company's assets were located in Canada.
Dependency upon Patents/Licenses/Contracts/Processes
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The Company has no dependency on Patents and Licenses but the Company is
dependent on the contracts in China with various Chinese Publishers.
Seasonality
- -----------
The Company may experience some seasonal trends in the sale of its publications.
For example, sales of educational published materials experience seasonal
fluctuations with higher sales in the Spring (second calendar quarter) and Fall
(fourth calendar quarter).
RESEARCH AND DEVELOPMENT, TRADEMARKS, LICENSES, AND ETC.
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Research and Development
- --------------------------
During the years ended December 31, 2001, 2000 and 1999, respectively, the
Company expended $168,184, $379,646 and $238,101 on research and development,
under the categories of "development costs" and "software development costs".
These expenditures were primarily directed at developing products for the China
market.
Trademarks
- ----------
The Company owns the trademarks: Lingo Media, EnglishLingo and EnglishNihao.
Property, Plant and Equipment
- --------------------------------
The Company's executive offices are located in rented premises of approximately
1,674 sq. ft. at 151 Bloor Street West, #890, Toronto, Ontario, Canada M5S 1S4.
The Company began occupying these facilities, through its subsidiary Lingo Media
Ltd. in November 1994.
The Company is outsourcing its manufacturing, warehousing and distribution
services.
Employees
- ---------
As of March 25, 2003, the Company had five active employees, including the
executives. As of December 31, 2001, December 31, 2001, December 31, 2000 and
December 31, 1999, there were five, four, six, and four employees (including the
executives), respectively. None of the Company's employees are covered by
collective bargaining agreements.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
- -------------------------------------------------
The following discussion for the fiscal years ended December 31, 2001, December
31, 2000, and December 31, 1999, and for the nine months ended September 30,
2002 and September 30, 2001 should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto.
The following discussion contains forward-looking statements that are subject to
significant risks and uncertainties. Readers should carefully review the risk
factors described herein and in other documents the Company files from time to
time with the SEC.
OVERVIEW
- --------
The Company is a provider of language learning products to international
markets, with a particular emphasis on China and more recently in Canada. The
products include traditional media, such as books, audio, and CD-ROM, with the
recent addition of the Internet as a medium for accessing its products and
services.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ----------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ materially from those estimates and assumptions.
In management's opinion, Revenue Recognition, Development Costs, Acquired
publishing Content, Software Development Costs and Use of estimates as presented
in the financial statements of the year ended December 31, 2001 are critical
accounting policies and are as follows:
Revenue recognition:
Revenue from the sale of publishing and ancillary products is recognized upon
delivery and as long as all vendor obligations have been satisfied. Amounts
received in advance of revenue recognition are recorded as customer deposits.
Development costs:
Development costs associated with pre-operating expenses of Alpha Media(TM),
Alpha Publishing(TM) and Alpha Brand Name Books(TM) have been capitalized. In
addition, the Company has capitalized pre-operating costs relating to
establishing a business base in the United States and the development of
business in China. Pre-operating costs are capitalized until the commencement of
commercial operations and then amortized on a straight-line basis, over a
maximum of five years. The carrying value is assessed on a periodic basis to
determine if a write-down is required.
Acquired publishing content:
The costs of obtaining the English as a Foreign Language ("EFL") program
entitled "Communications: An Interactive EFL Program" and an international
folktale series entitled
"Stories Lost and Found: The Universe of Folktale" have been capitalized and are
being amortized over a five-year period. The carrying value is assessed on a
periodic basis to determine if a write-down is required.
Software development costs:
The Company has deferred software development costs incurred in connection with
a computer software program to be used by children in reading and writing that
promotes and facilitates the development of communication skills in the English
language. Software development costs are deferred once technological feasibility
for a product is established.
Software development costs are amortized on a straight-line basis over a maximum
of three years. The carrying value is assessed on a periodic basis to determine
if a write-down is required.
Use of estimates:
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting year. Actual
results could differ from those estimates. The Company's deferred costs relating
to pre-operating expenses and certain other intangible assets have been stated
at cost less accumulated amortization on the basis that amounts will be
recoverable from commercial operations. The Company supports the carrying value
of these assets based on the undiscounted value of expected future operating
income. Significant changes in these estimates of future operating income could
result in material impairments of development costs, software development costs
and acquired publishing content.
These policies involve management's judgment and analysis in recording the
current year revenues and forecasting the revenues for upcoming year, which
impact the valuation of Acquired Publishing Content, development Costs and
Software development costs.
RESULTS OF OPERATIONS
-----------------------
Nine Months Ended September 30, 2002 vs. Nine Months Ended September 30,2001
- -----------------------------------------------------------------------------
Revenues for the nine months ending September 30, 2002 were $1,032,322 compared
to $84,051 in the same period last year, a 1,128% increase. The increase in
revenues is principally due to the launch of three of the Company's publishing
programs in China resulting in revenues of $648,945 and the launch of an
elementary school publishing program in Canada resulting in revenues of
$375,877.
Cost of sales for the nine months ended September 30, 2002 were $386,523 as
compared to nil during the same period ended September 30, 2001. This
difference in cost of sales was due to the difference in the nature of revenue
in the respective periods. Revenue for the nine months ended September 30, 2001
was from royalty income as opposed to revenue for the nine months ended
September 30, 2002 which was from direct publishing and co-publishing. There
were no direct costs attributable to the royalty income earned in the first nine
months of 2001.
Selling, general and administrative costs consist of costs incurred at the
corporate level including executive compensation, consulting fees,
administration, marketing and shareholder services and professional fees. Such
expenses were $418,439 for the nine months ended September 30, 2002 as compared
to $356,139 for the nine months ended September 30, 2001, an increase of 17%.
Executive compensation increased from $89,568 for the nine months ended
September 30, 2001 to $95,845 for the nine months ended September 30, 2002.
Consulting fees and employee compensation decreased to $101,072 for the nine
months ended September 30, 2002 from $111,063 for the nine months ended
September 30, 2001. Administrative expenses comprised of rent, telephone, and
office expenses increased from $144,611 for the nine months ended September 30,
2001 to $158,393 for the nine months ended September 30, 2002. Marketing
expenses increased to $9,139 for the nine months ended September 30, 2002 from
$1,476 for the nine months ended September 30, 2001. Shareholder services and
professional fees increased to $91,266 for the nine months period ended
September 30, 2002 from $9,420 for the same period ended September 30, 2001. The
Company is receiving a grant in the amount of $50,000, of which $37,500 will
reduce selling, general and administrative expenses for the nine months ended
September 30, 2002. The Company received oral confirmation from the Minister of
Heritage confirming the grant. The increase in executive compensation,
administrative expenses and marketing expenses were due to the Company's
increased activity and management's efforts to increase sales. Shareholder
services and professional fees for the period ended September 30, 2001 were
lower due to management's successful negotiations of credit notes for
approximately $48,172, therefore, the actual shareholder services and
professional fees amounted to $57,592 for the first nine months of the year
2001. The increase in shareholder services and professional fees was due to the
increased costs associated with the Company's efforts to become publicly traded
in the United States.
Amortization of capital assets and deferred assets increased by 291% from
$48,985 for the nine months ended September 30, 2001 to $191,712 for the nine
months ended September 30, 2002. The increase was due to increased amortization
of deferred costs.
The Company reported net income of $111,203, ($0.00) per share for the nine
months ended September 30, 2002 compared to a net loss of $146,757, ($0.01) per
share for the nine months ended September 30, 2001. Net loss for the nine
months ended September 30, 2002 reflects a gain on the issuance of shares of a
subsidiary in the amount of 101,438 and income taxes of $94,097. Net loss for
the nine months ended September 30, 2001 reflects a gain on sale of subsidiary
of $197,719.
Fiscal Year Ended December 31, 2001 vs. Fiscal Year Ended December 31, 2000 and
- --------------------------------------------------------------------------------
Fiscal Year Ended December 31, 1999
- ----------------------------------------
The Company was a specialty publisher and distributor of books, audios, CDs and
other complementary multimedia products. The Company's efforts were focused in
two main areas: custom trade publishing, through both the development of
proprietary content to produce original branded books and the re-purposing of
existing books for promotional purposes; and original educational publishing
through the development of products and programs in the educational publishing
market in China and Canada. Currently, the Company is only focusing its efforts
on educational publishing both in China and Canada.
Revenues
- --------
The Company generated revenue from developing proprietary content and
customizing it for sale through specific distribution channels. Revenue has
declined from $732,127 in 1999 to $527,051 for the year ended December 31, 2000
to $333,691 for the year ended December 31, 2001. The Company's revenue
decreased in Canada and other countries from $732,127 in 1999, to $482,991 in
2000 and $21,068 in 2001 and increased in China from nil in 1999 to $44,060 2000
to $312,623 in 2001 due to the decline in the specialty publishing market in
Canada and other countries and due to the Company's effort to change its focus
from Specialty Publishing in Canada to Educational Publishing in China.
Cost of Sales
- -------------
The Company's cost of sales consists of those of costs incurred during
pre-production, manuscript development and printing. These costs were reduced
from $475,957 in 1999 to $371,688 in 2000 and to $42,138 for the year ended
December 31, 2001, reflecting the Company's strategy of focusing on business
that was more profitable, which corresponded with the decrease in revenues for
custom publishing. The increase in gross margin in 2001 to 87% from 29% in 2000
reflected the Company's strategy of focusing on business that was more
profitable compared to the margin earned from one sale, Sears during the year
ended December 31, 2000. Gross margin in 1999 was 35% which also reflected the
Company's strategy of focusing on business that was more profitable. Until
December 31, 2000, the Company's revenues were derived from trade publishing
projects. Each project had its own gross margin which was different from the
other projects, therefore there is fluctuation in the total gross margin during
the years ended December 31, 1999, 2000, and 2001.
Expenses
- --------
General and Administrative Expenses. General and administrative costs consist
- -------------------------------------
of those costs incurred at the corporate level including executive compensation,
consulting fees, administration, travel, and business development. The expenses
increased from $505,313 in 1999 to $661,770 in 2000 and then decreased to
$406,961 in 2001. The decrease in general and administrative costs was due to
management's efforts to decrease costs. The Company took a number of steps to
reduce its administrative expenses; but, incurred professional fees in creating
legal agreements with the Chinese Publishers, the public distribution of shares
in the Company's US subsidiary AlphaCom Corporation in April 1999, and
completion of various China co-publishing agreements during the year 2000.
Breakdown of general and administrative expenses for the year ended December 31,
- --------------------------------------------------------------------------------
2001 versus December 31, 2000. Advertising and promotion expenses decreased by
- ------------------------------
$26,312 from $29,724 for the year ended December 31, 2000 to $3,412 for the year
ended December 31, 2001 due to the Company's change in business from trade
publishing to educational publishing which requires less promotional costs.
Executive compensation decreased $17,377 or 13% from $134,523 for the year ended
December 31, 2000 to $117,146 for the year ended December 31, 2001 due to
Michael P. Kraft, the Company's Chief Executive Officer and President agreeing
to a reduction in salary. Consulting fees and employee compensation decreased
$47,964 or 28% from $169,406 for the year ended December 31, 2000 to $121,442
for the year ended December 31, 2001 due to a decrease in the Company's
workforce as it moved from trade publishing to educational publishing.
Administration decreased $199,356 or 60% from $330,955 for the year ended
December 31, 2000 to $131,600 for the year ended December 31, 2001 due to the
decrease in expenses associated with the change in the Company's business from
trade publishing to educational publishing as well the renegotiation of existing
contracts. Publishing grants from the Canadian government were $141,958 for the
year ended December 31, 2000 as compared to no grants for the year ended
December 31, 2001. Such grants reduce the administration expenses. Shareholder
services and professional fees decreased $105,159 or 76% from $138,520 for the
year ended December 31, 2000 to $33,362 for the year ended December 31, 2001
principally due to a reduction in legal fees from the prior year.
Breakdown of general and administrative expenses for the year ended December 31,
- --------------------------------------------------------------------------------
2000 compared to year ended December 31, 1999.
- -----------------------------------------------------
Advertising and promotion expenses decreased from $32,642 for the year ended
December 31, 1999 to $29,724 for the year ended December 31, 2000. Executive
compensation increased by $81,523 or 154% from $53,000 for the year ended
December 31, 1999 to $134,523 for the year ended December 31, 2000 due to the
amended contract with Michael P. Kraft, our President and Chief Executive
Officer. Consulting fees and employee compensation decreased $53,518 or 24%
from $222,924 for the year ended December 31, 1999 to $169,406 for the year
ended December 31, 2000 due to a decrease in the Company's workforce as the
Company moved from trade publishing to educational publishing. Administration
costs increased 119,972 or 57% from $210,984 for the year ended December 31,
1999 to $330,955 for the year ended December 31, 2000 due to an increase in
costs due to increased communication and development in China. Publishing
grants from the Canadian government were $129,967 for the year ended December
31, 1999 compared to $141,958 for the year ended December 31, 2000. Such grants
reduce the administration expenses. Shareholder services and professional fees
increased $22,790 or 20% from $115,731 for the year ended December 31, 1999 to
$138,520 for the year ended December 31, 2001 due to an increase in professional
fees as the Company began reporting in US GAAP.
Amortization and Depreciation. The Company amortizes the pre-operating
- -------------------------------
development/software-development costs over a five -year period. Total
amortization/depreciation expenses, including such pre-operating cost
amortization, were $84,774 in 2001, $87,112 in 2000 and $89,785 in 1999.
Interest on Long-Term Debt and Other Interest/Bank Charges. Interest on
- -----------------------------------------------------------------
long-term debt decreased from $44,688 in 1999 to $12,509 in 2000 and increased
to $48,952 in 2001. The increase in 1999 reflected a greater level of
borrowing; the decrease in 2000 reflected the retirement of the "shareholder
loan" in 2000 and the reduction in bank indebtedness in 2000; and the increase
in 2001 was due to project financing secured in August 2001.
Other Interest/Bank Charges rose from $36,805 in 1999 to $44,589 in 2000 and
then declined to $4,698 in 2001. The increase related to costs of borrowing
more funds and lending fees paid for project financing and the decrease resulted
from the decrease in borrowed funds.
Gain on Sale of Subsidiary and Gain on Sale of Shares.
- ---------------------------------------------------------------
The Company recorded a gain on the sale of a subsidiary of $197,719 for the year
ended December 31, 2001 resulting from the sale of its majority-owned
subsidiary, AlphaCom Corporation. There were no similar transactions during
fiscal 2000 or fiscal 1999.
The Company had a gain in April 1999 of $143,962 when it sold 1% of the
outstanding shares of AlphaCom Corporation to the public. The Company recorded
a gain of $48,750 on the issuance of shares by English Lingo, Inc. a subsidiary
of the Company, during fiscal 2001. AlphaCom Corporation was a marketing and
distribution company
Income Taxes. The Company follows the Canadian Institute of Chartered
- -------------
Accountants recommendations on accounting for income taxes using the assets and
liabilities method. Future income taxes (previously referred to as deferred
taxes) are measured using income tax rates expected to apply to taxable income
in the years in which the temporary differences are expected to be recovered or
settled. The effects of changes in the tax rates are recognized in the income
in the period they are enacted. These tax benefits are $125,000 at the end of
1999. The income tax asset was expensed in Fiscal 2000 as the Company did not
anticipate that it would generate profit levels that exceeded the tax losses.
The Company recognized a tax expense of $37,343 during the year ended December
31, 2001.
Loss for the Year
- -----------------
The Company reported a consolidated net loss of ($44,706) or ($0.00) for the
year ended December 31, 2001 compared to a net loss of ($774,997) or ($0.05) per
share for Fiscal 2000 compared to a loss of ($276,459) or ($0.03) per share for
Fiscal 1999.
The weighted average number of shares increased to 16,095,471 in 2001 from
14,567,994 in 2000, from 10,783,827 in 1999. The increase in 2000 was the
result of the March/April 2000 private placement of 5,000,000 units and the
result in 2001 was due to a private placement of 1,000,000 units in November
2001.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
For the nine months ended September 30, 2002, we had revenues of
$1,032,322, and as of September 30, 2002, we had cash of $35,062, accounts
receivable of $685,436, and current liabilities of $390,034. We will not
receive any proceeds from the resale of the shares registered in this offering,
but may receive proceeds from the exercise of warrants. We believe that our
current cash on hand along with our accounts receivable and recurring sales,
will satisfy our working capital requirements for at least the next twelve
months. After that, we may need to raise additional funds in order to finance
our operations.
As of March 25, 2003 we did not have any principal commitments to raise
capital for the Company. Although we have no material commitments for capital
expenditures, we expect our capital requirements to increase significantly over
the next several years as we increase sales and administration infrastructure.
Our future liquidity and capital funding requirements will depend on numerous
factors, including, but not limited to, the cost and timing of the expansion of
our sales and marketing efforts.
We currently do not maintain any lines of credit nor do we have any
agreements for additional sources of financing.
In the future, we may be required to seek additional capital by selling debt or
equity securities, curtailing operations, selling assets, or otherwise be
required to bring cash flows in balance when it approaches a condition of cash
insufficiency. The sale of additional equity securities, if accomplished, may
result in dilution to our shareholders. We cannot assure you, however, that
financing will be available in amounts or on terms acceptable to us, or at all.
Development Costs:
- -------------------
Development costs associated with pre-operating expenses of Alpha Media(TM),
Alpha Publishing(TM) and Alpha Brand Name Books(TM) have been capitalized. In
addition, the Company has capitalized pre-operating costs relating to
establishing a business base in the United States and the development of
business in China. Under Canadian GAAP, pre-operating costs are capitalized
until the commencement of commercial operations and then amortized on a
straight-line basis, over five years. The recoverability of any unamortized
development costs is reviewed on an ongoing basis. Under United States GAAP,
these costs are expensed as incurred.
Software Development Costs:
- -----------------------------
Under Canadian GAAP, the Company has deferred software development costs
incurred in connection with a computer software program to be used by children
in educational writing and literacy. Software development costs are deferred
once technological feasibility for a product is established. The deferred
software development costs are being amortized over a maximum of three years,
beginning in 2001. The carrying value is assessed on a periodic basis to
determine if a write-down is required. Under United States GAAP, the software
development costs would be expensed as incurred.
Bank Indebtedness
- -----------------
The Company had available a line of credit of up to $250,000, bearing interest
at Canadian prime rate plus 1% annually. The line of credit was secured by a
general security agreement; until June 2000, the line of credit was also secured
by a personal guarantee by a relative of a director, the father of Michael P.
Kraft. The $145,000 outstanding at December 31, 2000 was repaid in full in
March 2001 and after the repayment no further borrowings were available under
the $250,000 line of credit.
Our obligations as of September 30, 2002, were as follows:
Expressed in Canadian Dollars
Obligation Expiring Balance
- ---------- ---------------- --------
Rent January 31, 2006 $133,000
- ----------------- ---------------- --------
Equipment Lease 1 November 1, 2002 $ 2,116
- ----------------- ---------------- --------
Equipment Lease 2 May 1, 2006 $ 11,273
- ----------------- ---------------- --------
Nine Months Ended September 30, 2002
- -----------------------------------------
Proceeds from a private placement completed in March 2002 in the amount of
$370,000 were used to repay Standard Mercantile Bancorp. debt of $364,621.
The Company had working capital of $409,437 as of September 30, 2002. The
Company had cash of $35,062 and accounts receivable of $685,436 as of September
30, 2002.
Cash Provided By Operating Activities for the nine months ended September 30,
2002 totaled $24,233 largely attributable to changes in accounts payable of
$53,151; work in process of $100,380 and accounts receivable of $(348,596).
Cash Used in Investing Activities for the nine months ended September 30, 2002
was $(11,970) attributable to deferred expenses and an increase in capital
assets.
Cash Used in Financing Activities for the nine months ended September 30, 2002
was $15,327, including the issuance of capital stock of $349,000 and a decrease
in long-term debt of $333,673.
Fiscal Year Ended December 31, 2001
- ----------------------------------------
Proceeds from a private placement completed in November 2001 in the amount of
$100,000 were used for working capital requirements.
The Company had a working capital deficit of $85,471 at December 31, 2001 along
with cash of $7,473 and accounts receivable of $336,840.
Cash Used in Operating Activities for the Fiscal Year Ended December 31, 2001
totaled ($354,676), including the ($44,706) Net Loss. Significant adjustments
included: ($197,719) from gain on sale of subsidiary; $43,910 amortization of
"development costs", $67,099 in short-term investments; ($193,173) in accounts
receivable; ($50,329) work in progress; ($33,087) accounts payable and accrued
liabilities; and ($50,250) in customer deposits.
Cash Used in Investing Activities for the Fiscal Year ended December 31, 2001
was ($18,184), representing: ($168,184) in development costs and $150,000 from
the proceeds on sale of subsidiary.
Cash Provided by Financing Activities for the Fiscal Year Ended December 31,
2001 was $336,126 including ($145,000) for repayment of bank indebtedness;
$566,713 increase in long-term debt; ($199,087) repayment of long-term debt; and
$113,500 from the issuance of capital stock.
Fiscal Year Ended December 31, 2000 A private placement of 5,000,000 units was
- --------------------------------------
completed in March/April 2000, raising net proceeds of $1.8 million. Each unit
consisted of a common share, one-half of an "A warrant" entitling the holder to
purchase an additional common share at $0.50 until September 30, 2000 extended
to December 15, 2000, and one-half of an "B warrant" entitling the holder to
purchase an additional common share at $1.00 until September 30, 2001. The "A
Warrants" and "B Warrants" expired unexercised.
These funds were used to help pay for increased "development costs", "software
development costs", the repayment of debt, and increased
"selling/general/administrative costs". These costs rose during 2000 because of
increased activity related to developing and preparing to market new products in
China.
Cash Used in Operating Activities for the Fiscal Year Ended December 31, 2000
totaled ($866,637), including the ($774,997) Net Loss. Significant adjustments
included: $12,612 amortization of capital assets; $74,500 amortization of
"development costs", $125,000 in future income taxes, and ($303,752) in net
changes in non-cash working capital items, including a ($110,396) increase in
accounts receivable related to Sears Custom Publishing project.
Cash Used in Investing Activities for the Fiscal Year ended December 31, 2000
was ($425,951), representing: ($30,957) in software development costs; ($46,305)
purchase of capital assets; and ($348,689) in development costs.
Cash Provided by Financing Activities for the Fiscal Year Ended December 31,
2000 was $1,316,510 including: the aforementioned $1.8 million private
placement; ($420,362) repayment of long-term debt; and ($105,000) repayment of
bank indebtedness.
Fiscal Year Ended December 31, 1999
- ----------------------------------------
During Fiscal 1999 and at December 31, 1999, the Company raised $175,493 (net)
from a series of borrowings: the Company increased its credit line bank
indebtedness by $75,000 to $250,000; and the Company initiated a shareholder
loan, of $93,775 with Michael P. Kraft & Associates Inc., a company owned by
Michael P. Kraft, President/CEO/Director of the Company.
These funds were used to help pay for increased "development costs", "software
development costs", and increased "selling/ general/administrative costs".
These costs rose during 1999 because of increased activity related to developing
and preparing to market new products in China.
Cash Provided by Operating Activities for the Fiscal Year Ended December 31,
1999 totaled $71,109, including the ($276,459) Net Loss. Significant
adjustments included: $82,916 amortization of pre-operating costs; $6,869
amortization of capital assets; and $257,783 in net changes in non-cash working
capital items, including a $142,375 increase in accounts payable/accrued
liabilities, a $110,296 reduction in accounts receivable, and ($96,916) customer
deposit related to IMG and Loblaws projects.
Cash Used in Investing Activities for the Fiscal Year ended December 31, 1999
was ($246,602), representing: ($144,874) of deferred development costs;
($93,227) of deferred software development costs; and ($8,501) purchase of
capital assets.
Cash Provided by Financing Activities for the Fiscal Year Ended December 31,
1999 was $195,778, including bank indebtedness of $108,716, increase in
long-term debt of $137,762 and repayment of long-term debt of $(50,700).
RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
- --------------------------------------------------------------------------------
PRINCIPLES ("GAAP"):
- ---------------------
Development Costs/Software-Development Costs/Options to Consultants
- -------------------------------------------------------------------
Under US GAAP, development costs and software development costs are expensed as
incurred.
Prior to January 1, 2002, the Company did not recognize compensation expense
under Canadian GAAP when stock or stock options were issued to consultants.
Under United States GAAP, the Company has always recorded compensation expense
based on the fair value of stock or stock options granted in exchange for
services from consultants.
Stock-based compensation disclosure
- -------------------------------------
The Company measures compensation expense relating to employee stock option
plans for United States GAAP purposes using the intrinsic value method specified
by APB Opinion No. 25, which in the Company's circumstances would not be
materially different from compensation expense as determined under Canadian
GAAP.
Statement of comprehensive income
- ------------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards
for the reporting and disclosure of comprehensive income and its components in
financial statements. Components of comprehensive income or loss include net
income or loss and all other changes in other non-owner changes in equity, such
as the change in the cumulative translation adjustment and the unrealized gain
or loss for the year on "available-for-sale" securities. For all periods
presented, comprehensive income is the same as net income.
Calculation of Loss For the Year
- -------------------------------------
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") as applied in Canada. In the following
respects, GAAP as applied in the United States differs from that applied in
Canada.
If United States GAAP were employed, the loss in each year would be adjusted as
follows:
Expressed in Canadian Dollars
2001 2000 1999
Loss for the year, Canadian GAAP ($44,706) ($774,997) ($276,459)
Impact of US GAAP and adjustments:
(144,874)
Development costs (168,184) (348,689)
Amortization of development costs 43,910 74,500 82,916
- (93,227)
Software development costs (30,957)
Amortization of Software Development Costs 10,349 - -
Compensation expense ($59,983) ($22,500) ($35,500)
Loss for the year, US GAAP ($218,614) ($1,102,643) ($467,144)
The consolidated financial statements are prepared in accordance with GAAP as
applied in Canada. In the following respects, GAAP as applied in the United
States differs from that applied in Canada:
Expressed in Canadian Dollars
September 30, 2002 September 30, 2001
- ------------------------------------------------------------------------------------------------------
Net income (loss) for the period - Canadian GAAP $ 17,106 $(146,757)
Impact of U.S. GAAP and adjustments:
Development costs (a) (10,313) (94,626)
Amortization of development costs 89,607 39,728
Software development costs (b) - -
Amortization of software development costs 41,395 -
Compensation expense (c) (58,767) (41,804)
- --------------------------------------------------------------------------------------------------------
Gain (Loss) for the year - U.S. GAAP $ 79,029 $(243,459)
Calculation of earnings per share:
- --------------------------------------
Under both US and Canadian GAAP, basic earnings per share are computed by
dividing the net income for the year available to common shareholders, as
measured by the respective accounting principles (numerator), by the weighted
average number of common shares outstanding during that year (denominator).
Basic earnings per share exclude the dilutive effect of potential common shares.
Diluted earnings per share under Canadian GAAP and US GAAP give effect to all
potential common shares outstanding during the year. Potential common shares
consist of the incremental common shares issuable upon the exercise of stock
options using the treasury stock method.
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share under U.S. GAAP as required by SFAS 128:
Expressed in Canadian Dollars
2001 2000 1999
============ ============ ===========
numerator for basic and diluted loss per share
=================================================
Loss - US GAAP $ (218,614) ($1,102,643) ($467,144)
================================================= ============ ============ ===========
Denominator for basic and diluted loss per share:
=================================================
Weighted average common shares 16,095,471 14,567,994 10,783,827
================================================= ============ ============ ===========
Basic and diluted loss per share - US GAAP ($0.01 ) ($0.08) ($0.04)
================================================= ============ ============ ===========
Directors and Senior Management
Date of
First
Election or
Name Position Age Appointment
- -----------------------------------------------------------------
Michael P. Kraft President/CEO/Director 39 November 1996
Khurram R. Qureshi Chief Financial Officer 40 April 1997
Richard J.G. Boxer Director 54 November 1996
Richard H. Epstein Director 39 July 2001
Chen Geng Director 32 July 2001
Scott Remborg Director 54 July 2000
Imran Atique Secretary/Treasurer 26 September 2001
Michael P. Kraft has served as President, Chief Executive Officer and Director
of the Company since its inception in April 1996. Since June 1999, Mr. Kraft
has served as Chief Executive Officer, Secretary and Director of EnglishLingo,
Inc., a subsidiary of the Company. Since December 2000, Mr. Kraft has also
served as the President of EnglishLingo, Inc. Since 1994, Mr. Kraft has served
as President, Chief Executive Officer, Director and co-founder of Lingo Media
Ltd. (formerly Alpha Corporation), a subsidiary of the Company that pre-sells or
licenses book, audio and other complementary multi-media products through
traditional and alternative distribution channels in Canada and international
markets. From 1990 to early 1993, Mr. Kraft was Vice-President of Madison
Marketing Limited, a specialty book publisher. He received a Bachelor of Arts
in Economics from York University in Toronto in 1985. Also, he has been a
Director of Canadian Shield Resources Inc. since 1996. Also, he had been
President, CEO and Secretary of AlphaCom Corporation, a subsidiary of the
Company that was sold in May 2001.
Khurram R. Qureshi, Chief Financial Officer of the Company since June 1997, and
brings to Lingo Media Inc. over thirteen years of experience in the field of
finance and accounting, including experience working for several public
companies. Mr. Qureshi graduated from York University (Toronto), with a
Bachelors Degree in Administrative Studies and qualified as a Chartered
Accountant in 1990. From 1987 to 1996, he gained valuable experience while
working with Kraft, Berger, Grill, Schwartz, Cohen & March LLP. Mr. Qureshi
also has served as Chief Financial Officer of other private and public
companies. In addition, Mr. Qureshi served as Chief Financial Officer of
AlphaCom Corporation, a subsidiary of the Company that was sold in May 2001.
Richard J.G. Boxer has served as Director of the Company since April 1996. Mr.
Boxer serves as the President of Buckingham Capital Corporation, a private
merchant banking company, which provides capital and financial advice to both
private and public corporations. He is on the board of a number of private
companies. Mr. Boxer received an M.B.A. from York University in 1976 and
received his Chartered Accountant designation in 1973.
Richard H. Epstein has served as a Director of the Company since July 2001. Mr.
Epstein is a partner in Gowling Lafleur Henderson LLP. Called to the Bar in
1992, his practice includes restructuring, corporate finance, and mergers and
acquisitions. Since 1999, Mr. Epstein has been providing advice to the Company
on various matters. He received his BSc from McGill University in 1986 and his
LLB from Osgoode Hall Law School in 1990.
Chen Geng has served as a Director of the Company since July 2001. Since June
1999, Mr. Geng has served as a Director of EnglishLingo, Inc., a subsidiary of
the Company. From June 1999 through March 2001, Mr. Geng served as Vice
President for EnglishLingo, Inc. Mr. Geng was Managing Director - Greater China
Region of Lingo Media from June 1999 to June 2001. Prior to joining Lingo
Media, he was a Chinese Trade Commissioner promoting bilateral trade and
investment between China and Canada. From 1996 to 1999, Mr. Chen was the Consul
for Economic and Commercial Development at the Chinese Consulate in Toronto, and
held a senior post at the Canada Desk in the Chinese Ministry of Foreign Trade
and Economic Cooperation (MOFTEC) from 1992 to 1996. Mr. Chen received his BA
from Beijing Foreign Studies University in 1992.
Scott Remborg has served as a Director of the Company since July 2001. Mr.
Remborg has served as Chairman of the Board of EnglishLingo, Inc., a subsidiary
of the Company since June 1999. Mr. Remborg served as the President of
EnglishLingo, Inc. from June 1999 through December 2000. Mr. Remborg served as
a Consultant to EnglishLingo, Inc. from July 1999 to December 2000. He is the
General Manager, E-business at Air Canada since mid-January 2001. From 1994 to
1998, Mr. Remborg was senior Vice-President, Internet of MediaLinx Interactive,
Inc. of Toronto a new media company that developed and implemented the Sympatico
Internet portal on behalf of Bell Canada and Stetnor Alliance. Prior to that,
he was Vice-President, Business Development for Ivation Datasystems Inc. of
Toronto, a software and consulting company developing software solutions for the
government markets.
Imran Atique has served as Secretary and Treasurer of the Company since
September 2001 and began as a consultant in August 2000. He brings six years
accounting experience to Lingo Media. Mr. Atique received his Bachelor's of
Commerce (Honours) from St. Mary's University (Halifax) in 1999 and is currently
enrolled in the MBA program at York University (Toronto) and the Certified
Management Accountants (CMA) program with the Society of Management Accounts of
Ontario
The Directors have served in their respective capacities since their election
and/or appointment and will serve until the next Annual General Meeting or until
a successor is duly elected, unless the office is vacated in accordance with the
Articles/By-Laws of the Company.
The Senior Management serves at the pleasure of the Board of Directors with
management service contracts but without term of office, except as disclosed
herein.
Despite the Company's Executive Officers spending material portions of their
time on businesses other than the Company, the Company believes that they devote
sufficient time to the Company to properly carry out their duties.
No Director and/or Executive Officer has been the subject of any order,
judgment, or decree of any governmental agency or administrator or of any court
or competent jurisdiction, revoking or suspending for cause any license, permit
or other authority of such person or of any corporation of which he is a
Director and/or Executive Officer, to engage in the securities business or in
the sale of a particular security or temporarily or permanently restraining or
enjoining any such person or any corporation of which he is an officer or
director from engaging in or continuing any conduct, practice, or employment in
connection with the purchase or sale of securities, or convicting such person of
any felony or misdemeanor involving a security or any aspect of the securities
business or of theft or of any felony.
There are no arrangements or understandings between any two or more Directors or
Executive Officers, pursuant to which he was selected as a Director or Executive
Officer. There are no family relationships between any two or more Directors or
Executive Officers.
Compensation Summary
- ---------------------
The table below sets forth information concerning the compensation paid, during
each of the last three fiscal years (as applicable), to the Company's chief
executive officer and other executive officers of the Company and its
subsidiaries who received total remuneration, determined on the basis of base
salary and bonuses in excess of $100,000 during the last three fiscal years
ended December 31 (the "Named Executive Officers").
Summary Compensation Table
Expressed in Canadian Dollars
Annual Compensation Long Term Compensation
Name Year Salary (1) Bonus Other Annual Compensation Awards Payouts
and (1)(2)
Principal
Position
Securities Restricted LTIP(4) All Other
Under Shares or Payouts Compensation
Options/SARS Restricted
(3)Granted Share
Units
Michael P. 2001 100,000 - 12,146.40 500,000 - - 5,000
Kraft(5) 2000 73,000 - 11,522.73 nil - - 50,000(6)
1999 36,000 - 12,000 nil - - nil
<FN>
(1) Paid by Lingo Media Ltd., a wholly-owned subsidiary of the Company.
(2) These amounts include automobile allowance.
(3) Stock appreciation rights.
(4) Long term incentive plans.
(5) Mr. Kraft's salary of $100,000 per year was paid by Lingo Media Ltd. to his holding company, Michael P.
Kraft & Associates Inc.
(6) Represents success fees.
Management Agreement. Michael P. Kraft provides his services pursuant to a
Management Agreement dated May 1,1998 (and most recently amended on June 30,
2000) between Michael P. Kraft Associates Inc. ("MPK Inc.") pursuant to which
Lingo Media Ltd. (formerly Alpha Corporation), a wholly-owned subsidiary of the
Company, engaged MPK Inc. to provide administration and management services.
Pursuant to the June 2000 amendment, Lingo Media Ltd. is to pay MPK Inc. $10,000
per month beginning July 2000 in addition to providing an allowance for a health
plan and life insurance policy. MPK Inc. is to be reimbursed for all travel,
entertainment and other expenses actually and properly incurred. The Management
Agreement also provides for a reasonable automobile allowance and a success fee
based on the aggregate amount arranged for project debt and equity financing.
MPK Inc. is a private corporation controlled by Michael P. Kraft,
President/CEO/Director of the Company.
Director Compensation. The Company has no formal plan for compensating its
- ----------------------
Directors for their service in their capacity as Directors. Directors are
entitled to reimbursement for reasonable travel and other out-of-pocket expenses
incurred in connection with attendance at meetings of the Board of Directors.
The Board of Directors may award special remuneration to any Director
undertaking any special services on behalf of the Company other than services
ordinarily required of a Director. Other than indicated below no Director
received any compensation for his services as a Director, including committee
participation and/or special assignments.
Change of Control Remuneration. The Company has no plans or arrangements in
- ---------------------------------
respect of remuneration received or that may be received by Executive Officers
of the Company in Fiscal 2001 to compensate such officers in the event of
termination of employment (as a result of resignation, retirement, change of
control) or a change of responsibilities following a change of control, where
the value of such compensation exceeds US$60,000 per Executive Officer.
Other Compensation. No Executive Officer/Director received "other compensation"
- ------------------
in excess of the lesser of US$25,000 or 10% of such officer's cash compensation,
and all Executive Officers/Directors as a group did not receive other
compensation which exceeded US$25,000 times the number of persons in the group
or 10% of the compensation.
Bonus/Profit Sharing/Non-Cash Compensation. Except for the stock option program
- ------------------------------------------
discussed herein, the Company has no material bonus or profit sharing plans
pursuant to which cash or non-cash compensation is or may be paid to the
Company's Directors or Executive Officers.
Pension/Retirement Benefits. No funds have been set aside or accrued by the
- ----------------------------
Company to provide pension, retirement or similar benefits for Directors or
Executive Officers.
Board Practices
- ---------------
Board of Director Committees.
- --------------------------------
The Company only has an Audit Committee, which recommends to the Board of
Directors the engagement of the independent auditors of the Company and reviews
with the independent auditors the scope and results of the Company's audits, the
Company's internal accounting controls, and the professional services furnished
by the independent auditors to the Company. The Audit Committee met twice in
Fiscal 2001 and twice during Fiscal 2002-to-date. The current members of the
Audit Committee are: Richard J.G. Boxer and Scott Remborg.
Principal Shareholders. The table below lists, as of March 25, 2003,
- -----------------------
Directors and Executive Officers who beneficially own the Company's voting
securities and the amount of the Company's voting securities owned by the
Directors and Executive Officers as a group. The table includes all
persons/companies where the Company is aware that they have 5% or greater
beneficial interest in the Company's securities.
SHAREHOLDINGS OF DIRECTORS AND EXECUTIVE OFFICERS
SHAREHOLDINGS OF 5% SHAREHOLDERS
TITLE AMOUNT AND NATURE PERCENT
OF OF BENEFICIAL OF
CLASS NAME OF BENEFICIAL OWNER OWNERSHIP CLASS
- ---------------------------------------------------------------
COMMON MICHAEL P. KRAFT (1) 3,676,823 17.3%
COMMON KRAFT INVESTMENTS CORP. 1,781,597 8.6%
COMMON RICHARD A. SHERMAN (2) 1,733,437 8.3%
COMMON 1077431 ONTARIO LIMITED 1,426,082 6.9%
COMMON RICHARD J. G. BOXER (3) 576,167 2.8%
COMMON SCOTT REMBORG (4) 188,667 *
COMMON CHEN GENG (5) 188,667 *
COMMON KHURRAM R. QURESHI (6) 45,000 *
COMMON RICHARD H. EPSTEIN (7) 85,417 *
COMMON IMRAN ATIQUE (8) 200,000 *
COMMON CHEBUCTO INTERNATIONAL (9) 1,500,000 7.1%
DIRECTORS/OFFICERS AS A GROUP (7 PERSONS) 4,973,073 22.5%
- ----------------------------------------------------------------
* Less than 1%.
(1) Includes options to purchase 566,667 shares exercisable within 60 days.
1,781,597 shares are held indirectly by Kraft Investments Corp. a private
company controlled by Mr. Kraft. Includes 159,061 shares held in the registered
retirement savings plan. Includes 1,169,498 shares owned by members of his
family.
(2) Includes options to purchase 90,000 shares exercisable within 60 days,
1,426,082 shares held by 1077431 Ontario Limited, a private company controlled
by Mr. Sherman. Includes 120,365 shares owned by members of his family.
(3) Includes options to purchase 91,667 shares exercisable within 60 days,
warrants to purchase 150,000 shares exercisable within 60 days, and 34,500
shares are held indirectly by Buckingham Capital Corp., a private company
controlled by Mr. Boxer.
(4) Includes options to purchase 171,667 shares exercisable within 60 days.
(5) Includes options to purchase 150,667 shares exercisable within 60 days.
(6) Includes options to purchase 45,000 share exercisable within 60 days.
(7) Includes options to purchase 41,667 shares exercisable within 60 days
and warrants to purchase 18,750 shares exercisable within 60 days
(8)Includes options to purchase 100,000 shares exercisable within 60 days.
(9) Includes warrants to purchase 500,000 shares exercisable within 60 days.
# Based on 20,733,827 shares outstanding as of March 25, 2002 and stock
options and warrants held by each beneficial holder exercisable within sixty
days.
Related Party Transactions
--------------------------
Michael P. Kraft, President/CEO/Director
- -------------------------------------------
Mr. Kraft is compensated indirectly through Michael P. Kraft & Associates, Inc.,
as discussed herein.
Richard A. Sherman. Richard Sherman was paid sales commissions and fees that
- --------------------
totaled $0, $31,532 and $27,925 for Fiscal 2001, Fiscal 2000 and Fiscal 1999,
respectively.
Funds Owed to Officers/Directors
- -----------------------------------
Officers/Directors have lent the Company funds during the last several years to
alleviate the corporate need for working capital; this has included
interest/non-interest-bearing advances and promissory notes. Principal owed
totaled:
Expressed in Canadian Dollars
Name 12/31/01 12/31/00 12/31/99
- ----------------------------------------------------------------
Michael P. Kraft(1) $41,805(2) $93,775 $0
(1) Loans made by Michael P. Kraft & Associates Inc. which is controlled by
=======================================================================
Michael P. Kraft.
=================
(2) Includes $36,805 owed to LMK Capital Corporation which is a company
===================================================================
owned by the wife of Michael P. Kraft.
======================================
Interest Payable to Officers/Directors
- -----------------------------------------
Officers/Directors have lent the Company funds during the last several years to
alleviate the corporate need for working capital; this has included interest and
non-interest-bearing advances and promissory notes. Officer/Director loans
obtained after January 1, 2001, bear interest at 12% per annum, and shareholder
loans obtained prior to January 1, 2001, bear interest at 10% per annum.
Interest payable totaled:
Officer/Director Loans obtained after January 1, 2001, bear interest at 12% per
annum and shareholder loans obtained prior to January 1, 2001 bear interest at
10% per annum.
Expressed in Canadian Dollars
Name 12/31/2001 12/31/2000 12/31/1999
- ----------------------------------------------------------------
Michael P. Kraft & Associates
Inc.(1) $8,963 $7,374 $3,112
(1) Controlled by Michael P. Kraft
In March 2001, Michael P. Kraft & Associates Inc., a company controlled by
Michael P. Kraft, loaned the Company $25,000 which loan bears interest at 12%
per annum. As of the date of this filing, the Company has repaid Michael P.
Kraft & Associates Inc. in full.
From August2002 through November 2002, LMK Capital Corporation, a company
controlled by the wife of Michael P. Kraft, loaned the Company an aggregate of
$155,000, which loan bears interest at 12% per annum. As of the date of this
filing, the Company owes LMK Capital Corporation principal in the amount of
$75,500.
In October 2002, 867214 Ontario Ltd., a company controlled by Richard J.G.
Boxer, loaned the Company $100,000 which loan bore interest at 12% per annum and
was paid in full in December 2002. 867214 Ontario Ltd. has reloaned the
Company $100,000 in February 2003 which bears interest at 12% per annum and is
secured by the assets of the Company. As of the date of this filing, the
Company has a principal balance owing of $100,000.
Other than as disclosed above, there have been no transactions since December
31, 1997, or proposed transactions, which have materially affected or will
materially affect the Company in which any director, executive officer, or
beneficial holder of more than 10% of the outstanding common stock, or any of
their respective relatives, spouses, associates or affiliates has had or will
have any direct or material indirect interest. Management believes the
transactions referenced above were on terms at least as favorable to the Company
as the Company could have obtained from unaffiliated parties.
Stock Options
- --------------
TSX Venture Exchange Rules and Policies
- --------------------------------------------
The terms and conditions of incentive options granted by the Company are done in
accordance with the rules and policies of the TSX Venture Exchange ("TSX VEN"),
including the number of common shares under option, the exercise price and
expiration date of such options, and any amendments thereto.
Such "terms and conditions", including the pricing of the options, expiration
and the eligibility of personnel for such stock options; are described below.
The TSX VEN policy in respect of incentive stock options provides that
shareholder approval is not required if the aggregate number of common shares
that may be reserved for issuance pursuant to incentive stock options does not
exceed 10% of the issued common shares of the Company, 5% to any one individual
and 2% to any consultant at the time of granting.
Shareholder approval of the grant of incentive stock options is required
pursuant to the rules of the TSX VEN where the grant will result in the Company
having options outstanding which, in aggregate, are exercisable to acquire over
10% (to a maximum of 20%) of the outstanding common shares of the Company.
In addition, disinterested shareholders (all shareholders excluding insiders and
associates of insiders) approval is required pursuant to the rules of the TSX
VEN where:
(a) grant of incentive stock options could result at any time in:
(i) the Company having options outstanding to insiders which,
in aggregate, are exercisable to acquire over 20% of the
outstanding common shares of the Company; or
(ii) the issuance to insiders, within a one year period, of
common shares which, in aggregate, exceed 10% of the
outstanding common shares of the Company; or
(iii) the issuance to any one insider and such insider's
associates, within a one year period, of common shares
which, in aggregate, exceed 5% of the outstanding common
shares of the Company; or
(iv) the issuance to any consultant of common shares which, in
aggregate, exceed 2% of the outstanding common shares of
the Company; or
(b) the Company is proposing to decrease the exercise price of
stock options held by any insiders.
Company Stock Option Plans
- -----------------------------
Initial Plan
Until November 13, 1996, the Company had a stock option plan (the "Initial
Plan") whereby the directors could grant options to directors, officers,
employees and consultants of the Company. The number of common shares subject
to option and granted under the Initial Plan was limited to ten percent in the
aggregate, and five percent with respect to any one optionee, of the number of
issued and outstanding common shares of the Company then outstanding at prices
and on other terms which corresponded with the rules of the Alberta Stock
Exchange in regard to stock options. As of March 25, 2003, there were no
options outstanding under the Initial Plan.
1996 Plan
Effective November 13, 1996, a new stock option plan (the "1996 Plan") was
adopted by the board of directors of the Company to encourage ownership of
common shares by directors, senior officers, employees and consultants of the
Company and its subsidiaries. Options could be granted under the Subsequent
Plan only to directors, senior officers, employees, consultants and personal
holding corporations controlled by a director or senior officer of the Company
and its subsidiaries as designated from time to time by the board of directors.
The number of shares that may be reserved for issuance under the Initial Plan
and under the 1996 Plan is limited to 1,078,000 common shares, provided that the
board has the right, from to time, to increase such number subject to the
approval of the shareholders of the Company and to obtaining all necessary
regulatory approval. The maximum number of common shares that could be reserved
for issuance to any one person under the 1996 Plan is 5% of the common shares
outstanding at the time of the grant (calculated on a non-diluted basis) less
the number of shares reserved for issuance to such person under any option to
purchase common shares granted as a compensation or incentive mechanism. Any
shares subject to an option granted under the 1996 Plan that for any reason were
cancelled or terminated prior to exercise will be available for a subsequent
grant under the 1996 Plan.
The option price of any common shares cannot be less than the closing price of
the shares on the day immediately preceding the day upon which the option is
granted. Options granted under the 1996 Plan were exercisable during a period
not exceeding five years, subject to earlier termination upon the termination of
the optionee's employment, upon the optionee ceasing to be an employee, senior
officer, director or consultant of the Company or any of its subsidiaries, as
applicable, or upon the optionee retiring, becoming permanently disabled or
dying. The options are non-transferable. The 1996 Plan contains provisions for
adjustment in the number of shares issuable there under in the event of a
subdivision, consolidation, reclassification or change of the common shares, a
merger or other relevant changes in the Company's capitalization. The board of
directors may from time to time amend or revise the terms of the 1996 Plan or
may terminate the 1996 Plan at any time.
The 1996 Plan provides that the Company may provide financial assistance in
respect of options granted under the 1996 Plan by means of loans to optionees.
No loans were granted by the Company pursuant to the 1996 Plan.
As of March 25, 2003, there are 370,000 reserved for issuance pursuant to
options granted under the 1996 Plan.
2000 Plan
A new stock option plan was adopted by the board of directors of the Company on
May 30, 2000 to encourage ownership of common shares by directors, officers,
employees and consultants of the Company. In accordance with the rules of the
Canadian Venture Exchange, (the predecessor of the TSX VEN) this plan was
approved by shareholders on July 4, 2000 at the Company's Annual Meeting. At
that time, the number of shares reserved for issuance under this plan was
limited to 2,384,074 common shares less the number of shares reserved for
issuance pursuant to options granted under the Initial Plan and under the 1996
Plan. By approval of the shareholders at the Company's Annual and Special
Meeting held on June 28, 2002, this plan was amended (this new stock option
plan, as amended being hereinafter called the "2000 Plan") to increase the
number of options to purchase common shares that may be granted under the plan
from 2,384,074 to 4,416,765 common shares.
The rules of the TSX VEN require that the number of shares reserved for issuance
under a stock option plan be set at a fixed number. Te amount of common shares
from time to time reserved under the 2000 Plan is not necessarily reflective of
the number of options that are outstanding at any given time because options
that are exercised do not replenish the number reserved, but are merely an
indication of the number of potential shares in respect of which a listing fee
has been paid to the TSX VEN upon the Company's common shares that are listed on
the TSX VEN.
Options may be granted under the 2000 Plan only to directors, officers,
employees, consultants and personal holding corporations controlled by a
director of officer of the Company as designated from time to time by the board
of directors.
The number of shares which may be reserved for issuance under the 2000 Plan is
currently limited to 4,146,765 common shares less the number of shares reserved
for issuance pursuant to options granted under the Initial Plan (currently nil
shares) and under the 1996 Plan (currently 610,000 shares), provided the number
of shares reserved for issuance under stock options granted at any time under
the 2000 Plan do not exceed 10% of the Company's then issued and outstanding
shares. In addition, the board has the right, from time to time, to increase
such number subject to the approval of the relevant exchange on which the shares
are listed and the approval of the shareholders of the Company. The maximum
number of common shares which may be reserved for issuance to any one person
under the 2000 Plan is 5% of the common shares outstanding at the time of the
grant less the number of shares reserved for issuance to such person under any
option to purchase common shares granted as a compensation or incentive
mechanism. Any shares subject to an option granted under the Initial Plan, the
1996 Plan or the 2000 Plan, which for any reason is cancelled/terminated prior
to exercise, will be available for a subsequent grant under the 2000 Plan.
The option price of any common shares cannot be less than the closing price of
the shares on the day immediately preceding the day upon which the option is
granted less any permitted discount.
Section 2.6 (a) of Policy 4.4 of TSX Venture Exchange provides that the minimum
exercise price of an incentive stock option plan (such as the Stock Option Plan
for Lingo Media Inc.) must not be less than the "Discounted Market Price".
Policy 1.1 of the Exchange defines "Discounted Market Price" to mean the last
closing price of the Issuer's Listed Shares before either the issuance of a news
release respecting the granting of options or the filing of the Price
Reservation Form (Form 4N) required to fix the price at which the securities are
to be issued ("Market Price") less a discount, which shall not exceed the amount
set forth below, subject to a minimum price of Cdn$0.10:
CLOSING PRICE DISCOUNT
- ------------- --------
Up to $0.50 (Cdn) 25%
$0.51 to $2.00 (Cdn) 20%
Above $2.00 (Cdn) 15%
Options granted under the 2000 Plan may be exercised during a period not
exceeding five years, subject to earlier termination upon the termination of the
optionee's employment, upon the optionee ceasing to be an employee, officer,
director or consultant of the Company or of its subsidiaries, as applicable, or
upon the optionee retiring, be coming permanently disabled or dying.
Options granted to optionees vest over an 18-month period with no greater than
16.67% of any options granted to an optionee vesting in any three-month period
or such longer period as the board may determine. The options under the 2000
Plan will be non-transferable. The 2000 Plan contains provisions for adjustment
in the number of shares issuable thereunder in the event of a subdivision,
consolidation, reclassification or change of the common shares, a merger of
other relevant changes in the Company's capitalization. The board of directors
may from time to time amend or revise the terms of the 2000 Plan or may
terminate the 2000 Plan at any time.
The 2000 Plan provides that the Company may provide financial assistance in
respect of options granted under the 2000 Plan by means of loans to optionees.
Under the terms of the 2000 Plan, the Company may, but is not obligated to, loan
to an optionee the funds required to exercise any particular option. The 2000
Plan provides that any such loan will be for a term not exceeding ten years and
will be non-interest bearing. Any such loan will be repayable at maturity or
upon the death of the optionee or earlier in certain other circumstances. Any
loans made under the 2000 Plan are to be secured by a pledge of the shares
acquired upon the exercise of the option exercised being funded to a trustee for
such purposes. In the event that any loan amount is not fully repaid when due
the trustee holding the pledged shares is entitled to realize on the shares
being held by it as security for the loan. Loans made under the 2000 Plan are
made on a full recourse basis. The 2000 Plan provides that any shares acquired
pursuant to loans made under the 2000 Plan may be sold by the optionee from time
to time provided that an amount equal to the aggregate option exercise price or
the balance of the loan is applied in repayment of the loan. Any financial
assistance so provided under the 2000 Plan will be subject to and made in
accordance with all applicable laws and regulatory policies at the time of
making the loan.
As of March 25, 2003, options to purchase an aggregate of 1,973,340 common
shares are outstanding under the 2000 Plan.
The names and titles of the Directors/Executive Officers of the Company to whom
outstanding stock options have been granted and the number of common shares
subject to such options are set forth in the Table below as of March 25,
2003, as well as the number of options granted to Directors and all employees as
a group.
Stock Options Outstanding
Expressed in Canadian Dollars
Number of Shares of $
Common Exer. Grant Expir'n
Name Stock Price Date Date
- ---- ------ ------ ------ ------
Michael P. Kraft 400,000 $.10 10/9/02 10/9/07
Michael P. Kraft 500,000 $0.12 6/07/01 6/07/06
Richard J.G. Boxer 50,000 $0.45 5/16/00 5/16/05
Richard J.G. Boxer 50,000 $0.10 11/01/01 11/01/06
Scott Remborg 130,000 $0.50 9/30/00 9/13/05
Scott Remborg 50,000 $0.10 11/01/01 11/01/06
Chen Geng 100,000 $0,20 5/25/99 5/25/04
Chen Geng 50,000 $0.10 11/01/01 11/01/06
Khurram R. Qureshi 25,000 $0.22 5/12/98 5/12/03
Khurram R. Qureshi 20,000 $0.22 5/20/98 5/20/03
Richard H. Epstein 50,000 $0.10 11/01/01 11/01/06
Imran Atique 100,000 $0.22 02/15/01 02/15/06
Total Officers/Directors 1,480,000
Legal/Arbitration Proceedings
- ------------------------------
The Directors and the management of the Company know of no material, active or
pending, legal proceedings against them; nor is the Company involved as a
plaintiff in any material proceeding or pending litigation.
The Directors and the management of the Company know of no active or pending
proceedings against anyone that might materially adversely affect an interest of
the Company.
PLAN OF DISTRIBUTION AND SELLING STOCKHOLDERS
This prospectus relates to the resale of 4,700,000 shares of common stock by the
selling stockholders as well as the resale of 3,275,000 shares of common stock
underlying warrants. The table below sets forth information with respect to the
resale of shares of common stock and the resale of shares of common stock
underlying warrants by the selling stockholders. We will not receive any
proceeds from the resale of common stock by the selling stockholders for shares
currently outstanding. However, we may receive proceeds from the exercise of
the warrants.
Resale of Common Stock by Selling Stockholders
Stockholder Shares Amount Shares Percentage
Beneficially Offered Beneficially (if
Owned Before (Assuming Owned After greater
Resale all Shares Resale than 1%)
Immediately
Sold)
Richard J. G. Boxer
155 Dawlish Ave.,
Toronto, Ontario
M4N 1H6
571,166(1)(15) 350,000(1)(2)(15) 221,166(3) 2.7%
Chebucto Services
(International) Ltd.,
Sunstead, 9 Farringdon
Close, Paradise Heights, St.
James, Barbados
1,500,000(4)(14) 1,500,000(4)(14) 0 7.1%
Richard H. Epstein
534 Roselawn Ave.
Toronto, Ontario
M5N 1J8
60,416(6)(5)(15) 43,750(6)(15) 16,666(7)
Fred Grespan
64 Fairfield Ave.
Kitchener, Ontario
N2H 6C1
1,443,750(8)(15) 1,443,750(8)(15) 0 6.8%
Paul E. Grespan
230 Old Chicopee Drive
Kitchener, Ontario
N2A 4W6
1,575,000(9)(15) 1,575,000(9)(15) 0 7.4%
Robert B. Raphael
1750 Steeles Ave West 1,181,250(10)(15) 1,181,250(10)(15) 0 5.6%
Unit #2
Concord, Ontario
L4K 2L7
Sander Sigal 1,575,000(11)(15) 1,575,000(11)(15) 0 7.4%
65 Lawrie Road
Thornhill, Ontario
L4J 3N6
Ann Singer 306,250(12) (15) 306,250(12) (15) 0 1.5%
14 Kainona Ave.
Toronto, Ontario M3H 3HM
RBC Dominion Securities Inc.
Suite 2120
5140 Yonge Street
North York, Ontario, M2N 6L7 500,000(13) (15) 500,000(13) (15) 0 2.4%
<FN>
(1) Includes 150,000 shares underlying Class D warrants
(2) Includes options exercisable within 60 days to
purchase 86,666 shares.
(3) Includes 150,000 shares underlying options exercisable within 60 days
and 71,166 shares of common stock.
(4) Includes 500,000 shares underlying Class C warrants.
(5) Includes options exercisable within 60 days to
purchase 16,666 shares.
(6) Includes 18,750 shares underlying Class D warrants.
(7) Includes 16,666 shares underlying options exercisable within 60 days.
(8) Includes 618,750 shares underlying Class D warrants.
(9) Includes 675,000 shares underlying Class D warrants.
(10) Includes 506,250 shares underlying Class D warrants.
(11) Includes 675,000 shares underlying Class D warrants.
(12) Includes 131,250 shares underlying Class D warrants.
(13) Includes 500,000 shares underlying Class D warrants held by RBC Dominion
Securities Inc. on behalf of Chebucto Services (International) Ltd. As
stated in footnote 4 above.
(14) The Class C Warrants expiring November 23, 2002 exercisable at $0.15
were extended until November 23, 2003 at $0.15 per share.
(15) Class D warrants are exercisable at $0.10 per share until March 30,
2003, the original expiry date. The expiry date of the Class D warrants
was extended by the Company pursuant to the approval of the TSX Venture
Exchange for an additional 9 months from March 31, 2003 to December 31,
2003 at $0.12 per share. According to the TSX Venture Exchange policy,
the exercise price of the Class D warrants at the time of the
application for approval of the extension has to be higher than the
market price of the shares. On March 19, 2003 the closing market price
for our shares was $0.11. Accordingly, the exercise price for the Class
D warrants during the 9 month extension period is $0.12 per share.
The 4,700,000 shares offered by the selling stockholders as well as the resale
of 3,275,000 shares of common stock underlying the warrants may be sold by one
or more of the following methods, without limitation, with the exception of the
shares and shares underlying warrants being registered for Richard J.G. Boxer
and Richard H. Epstein which are subject to resale pursuant to Rule 144 as
discussed below:
- - ordinary brokerage transactions and transactions in which the broker
solicits purchases; and
- - face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the
selling stockholders may arrange for other brokers or dealers to
participate.
Such brokers or dealers may receive commissions or discounts from the selling
stockholders in amounts to be negotiated. Such brokers and dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act, in connection with such sales. The selling
stockholder or dealer effecting a transaction in the registered securities,
whether or not participating in a distribution, is required to deliver a
prospectus. As a result of such shares being registered under the Securities
Act, holders who subsequently resell such shares to the public may be deemed to
be underwriters with respect to such shares of common stock for purposes of the
Securities Act with the result that they may be subject to certain statutory
liabilities if the registration statement to which this prospectus relates is
defective by virtue of containing a material misstatement of omitting to
disclose a statement of material fact. We do not have any plans regarding the
use of specific broker-dealers for distribution nor do we have any agreements or
understandings with such entities. We have not agreed to indemnify any of the
selling stockholders regarding such liability.
The shares and shares underlying warrants owned by Richard J.G. Boxer and
Richard H. Epstein are subject to the resale provisions of Rule 144 as they are
Directors of the Company and are treated as affiliates pursuant to Rule 144. In
general, under Rule 144 of the Securities Act as currently in effect, beginning
90 days after this registration statement is declared effective by the SEC, a
person (or persons whose shares are aggregated) who has beneficially owned
restricted shares for at least one year, including a person who may be deemed an
affiliate, is entitled to sell within any three-month period a number of shares
of Common Stock that does not exceed the greater of 1% of the then-outstanding
shares of our Common Stock (approximately 207,338 shares after giving effect to
this Offering) and the average weekly trading volume of our common stock during
the four calendar weeks preceding such sale. Sales under Rule 144 of the
Securities Act are subject to certain restrictions relating to manner of sale,
notice and the availability of current public information about us. A person
who is not our affiliate at any time during the 90 days preceding a sale, and
who has beneficially owned shares for at least two years, would be entitled to
sell such shares immediately following this Offering without regard to the
volume limitations, manner of sale provisions or notice or other requirements of
Rule 144 of the Securities Act. However, the transfer agent may require an
opinion of counsel that a proposed sale of shares comes within the terms of Rule
144 of the Securities Act prior to effecting a transfer of such shares.
Upon the registration statement becoming effective, the common stock will not be
listed on a national securities exchange, NASDAQ, or on the OTC Bulletin Board.
Management's strategy is to list the common stock on the OTC Bulletin Board as
soon as practicable. However, to date we have not solicited any such securities
brokers to become market-makers of our common stock. Selling stockholders will
sell at the set price of $.40 per share until such time as our shares are quoted
on the OTC Bulletin Board and then thereafter at prevailing market prices or
privately negotiated prices.
Expenses of the Issue
=====================
Expressed in Canadian Dollars
=============================
SEC Registration Fee $60.00
==================== ======
Legal Fees and Expenses $25,000
======================= =======
Accounting $7,500
========== ======
Miscellaneous $1,000
============= ======
Total $33,560
===== =======
SHARE CAPITAL
-------------
Common Share Description
- --------------------------
Registrar/Common Shares Outstanding/Shareholders
- --------------------------------------------------
The Company's common shares are issued in registered form and the following
information is taken from the records of Computershare Trust Company of Canada
(located in Calgary, Alberta, Canada), the registrar and transfer agent for the
common shares.
On July 15, 2002, the shareholders' list for the Company's common shares showed
25 registered shareholders and 20,733,827 shares issued and outstanding. Six of
these shareholders were U.S. residents, owning 812,700 shares representing
approximately four percent of the issued and outstanding common shares.
Common Share Description
- --------------------------
All of the authorized common shares of the Company are of the same class and,
once issued, rank equally as to dividends, voting powers, and participation in
assets. Holders of common shares are entitled to one vote for each share held
of record on all matters to be acted upon by the shareholders. Holders of
common shares are entitled to receive such dividends as may be declared from
time to time by the Board of Directors, in its discretion, out of funds legally
available therefore.
Upon liquidation, dissolution or winding up of the Company, holders of common
stock are entitled to receive pro rata the assets of Company, if any, remaining
after payments of all debts and liabilities. No shares have been issued subject
to call or assessment. There are no pre-emptive or conversion rights and no
provisions for redemption or purchase for cancellation, surrender, or sinking or
purchase funds.
Provisions as to the modification, amendment or variation of such shareholder
rights or provisions are contained in the Business Corporations Act (Ontario).
Unless the Business Corporations Act or the Company's Articles or Memorandum
otherwise provide, any action to be taken by a resolution of the members may be
taken by an ordinary resolution or by a vote of a majority or more of the shares
represented at the shareholders' meeting.
There are no restrictions on the repurchase or redemption of common shares of
the Company while there is any arrearage in the payment of dividends or sinking
fund installments.
Preference Share Description
The Company has not issued any preference shares. The unlimited number of
no-par preference shares designated in the Company's certificate of
incorporation is "blank check" preference shares, which authorizes the board of
directors to authorize and issue one or more series of preference shares with
the designations, rights and preferences as determined, from time to time, by
the board of directors. The board of directors is authorized to make such
designations without shareholder approval.
Share Purchase Warrants
- -----------------------
As of March 25, 2003, there were warrants outstanding to purchase 3,275,000
shares of our common stock, comprised of 500,000 Class C warrants to acquire
500,000 shares with an exercise price of $0.15 per share for each warrant which
had an original term of 12 months expiring on November 23, 2002 but were
extended for an additional 12 months until November 23, 2003 at $0.15 per
share;; and 2,775,000 Class D warrants to acquire 2,775,000 shares at an
exercise price of $0.10 per share until March 30, 2003, the original expiry
date. The expiry date of the Class D warrants was extended by the Company
pursuant to the approval of the TSX Venture Exchange for an additional 9 months
from March 31, 2003 to December 31, 2003 at $0.12 per share. According to the
TSX Venture Exchange policy, the exercise price of the Class D warrants at the
time of the application for approval of the extension has to be higher than the
market price of the shares. On March 19, 2003 the closing market price for our
shares was $0.11. Accordingly, the exercise price for the Class D warrants
during the 9 month extension period is $0.12 per share.
Authorized/Issued Capital. As of March 25,2003 and December 31, 2001, the
- --------------------------
authorized capital of the Company was an unlimited number of common shares
without par value and there were 20,733,827 and 17,033,827 common shares issued
and outstanding, respectively.
Memorandum and Articles of Association
--------------------------------------
Objects and Purposes
- --------------------
The Company's corporation number as assigned by the Ontario Ministry of Consumer
and Commercial Relations is 4020-1165. The Company's Articles of Incorporation
do not contain the Company's purpose or its objectives, as neither is required
under the laws of Ontario.
Disclosure of Interest of Directors
- -----------------------------------
No director of the Company is permitted to vote on any resolution to approve a
material contract or transaction in which such director has a material interest.
Subject to the Articles of Incorporation and any unanimous shareholder
agreement, the board may fix their remuneration.
Borrowing Powers of Directors, Bylaws The board of directors may from time to
- -------------------------------------
time:
- ---
(i) borrow money upon the credit of the Corporation;
(ii) issue, reissue, sell or pledge debt obligations of the
Corporation;
(iii) subject to the Act, give a guarantee on behalf of the
Corporation to secure performance of an obligation of any
person; and
(iv) mortgage, hypothecate, pledge or otherwise create a
security interest in all or any property of the
Corporation, owned or subsequently acquired, to secure any
debt obligations of the Corporation.
Delegation of Power to Borrow, Bylaws
- ------------------------------------------
The board may by resolution delegate all or any of the powers conferred on them
by paragraphs (i) and (iii) of section 3.10 hereof, to any one or more of the
directors, the Managing Director, the executive committee, the Chairman of the
Board (if any), the President, any Vice-President, the Secretary, the Treasurer,
any Assistant Secretary, any Assistant Treasurer or the General Manager.
Director Qualification and Retirement
- -------------------------------------
Neither the Articles of Incorporation nor the Bylaws of the Company discuss the
retirement or non-retirement of directors under an age limit requirement, and
there is no number of shares required for director qualification.
Description of Rights, Preferences and Restrictions
- ---------------------------------------------------
Attaching to Each Class of Shares
- ---------------------------------
a) Class/Number of Shares. The Company's Articles of Incorporation provide
------------------------
that: the Corporation is authorized to issue two classes of shares, namely an
unlimited number of Preferred Shares without nominal or par value ("Preferred
Shares") and an unlimited number of Common Shares ("Common Shares").
b) Common Shares. The holders of Common Shares shall be entitled:
--------------
1) to vote at all meetings of shareholders, except meetings at
which only holders of a specified class of shares are entitled to vote, and on
every poll taken at every such meeting, or adjourned meeting, every holder of
Common Shares shall be entitled to one vote in respect of each Common Share
held; and
2) subject to the rights of the holders of Preferred Shares, to receive the
remaining property of the Corporation upon a dissolution; and
3) subject to the rights of the holders of Preferred Shares, to receive all
other dividends declared by the Corporation.
c) Preferred Shares. The Preferred Shares as a class shall carry and be subject
----------------
to the following rights, privileges, restrictions and conditions:
1) Directors' Rights to Issue in One or More Series. The
Preferred Shares may at any time or from time to time be issued in one or more
series, each series to consist of such number of shares as may before the issue
thereof be determined by the Directors by resolution; the Directors of the
Company may (subject as hereinafter provided) by resolution fix, from time to
time before the issued thereof, the designation, rights, privileges,
restrictions and conditions attaching to the shares of such series including,
without limiting the generality of the foregoing (1) the issue price, (2) the
rate, amount or method of calculation of dividends and whether the same are
subject to change of dividends and whether the same are subject to change or
adjustment, (3) whether such dividends shall be cumulative, non-cumulative or
partly cumulative, (4) the dates, manner and currencies of payments of dividends
and the dates from which dividends shall accrue, (5) the redemption and/or
purchase prices and terms and conditions of redemption and/or purchase, with or
without provision for sinking or similar funds, (6) conversion and/or exchange
and/or classification rights, (7) the voting rights if any, and/or (8) other
provisions, the whole subject to the following provisions, and to the issue of
Certificate(s) of Amendment setting forth such designations, rights, privileges,
restrictions and conditions attaching to the shares of each series.
2) Ranking of Preferred Shares. The Preferred Shares shall be
entitled to preference over the Common Shares of the Corporation and over any
other shares ranking junior to the Preferred Shares with respect to payment of
dividends and distribution of assets in the event of liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, or any other
distribution of the assets of the Corporation among its shareholders for the
purpose of winding up its affairs and may also be given such other preferences
not inconsistent with paragraphs (1) and (2) hereof over the Common Shares of
the Corporation and over any other shares ranking junior to the Preferred Shares
as may be determined in the case of each series of Preferred Shares authorized
to be issued.
3) Amendment with Approval of Holders of Preferred Shares. The
rights, privileges, restrictions and conditions attaching to the Preferred
Shares as a class may be repealed, altered, modified, amended or amplified by
Certificate(s) of Amendment, but in each case with the approval of the holders
of Preferred Shares (only as a class but not as individual series) given as
hereinafter specified.
4) Approval of Holders of Preferred Shares. Subject to the
Provisions of the Business Corporations Act, any consent or approval given by
the holders of Preferred Shares as a class shall be deemed to have been
sufficiently given if it shall have been given in writing by the holders of at
least sixty-six and two-thirds percent (66 / %) of the outstanding Preferred
Shares or by a resolution passed at a meeting of holders of Preferred Shares
duly called and held upon not less than fifteen days' notice at which the
holders of at least a majority of the outstanding Preferred Shares are present
or are represented by proxy and carried by the affirmative vote of not less than
sixty-six and two-thirds percent of the votes cast at such meetings, in addition
to any other consent or approval required by the Business Corporation Act. If
at any such meeting the holders of a majority of the outstanding Preferred
Shares are not present or represented by proxy within one-half hour after the
time appointed for such meeting, then the meeting shall be adjourned to such
date not less than fifteen days thereafter and to such time and place as may be
designated by the Chairman, and not less than ten days' written notice shall be
given of such adjourned meeting. At such adjourned meeting the holders of the
Preferred Shares present or represented by proxy may transact the business for
which the meeting was originally convened and a resolution passed by the
affirmative vote of not less than sixty-six and two-thirds percent of the votes
cast at such meeting shall constitute the consent or approval of the holders of
Preferred Shares. On every poll taken at every meeting, every holder of
Preferred Shares shall be entitled to one vote in respect of each share held.
Subject to the foregoing, the formalities to be observed in respect of the
giving or waiving of notice of any such meeting and the conduct thereof shall be
those from time to time prescribed in the Bylaws of the Corporation with respect
to meetings of shareholders. Any consent or approval given by the holders of
Preferred Shares or a series as a class shall be deemed to have been
sufficiently given if in the same manner as provided herein regarding holders of
Preferred Shares as a class.
d) Dividend Rights. The Company's Bylaws provide that holders of common shares
---------------
shall be entitled to receive dividends and the Company shall pay dividends
thereon, as and when declared by the board of directors of the Company out of
moneys properly applicable to the payment of dividends, in such amount and in
such form as the board of directors may from time to time determine and all
dividends which the directors may declare on the common shares shall be declared
and paid in equal amounts per share on all common shares at the time
outstanding, subject to the prior rights of any shares ranking senior to the
common shares with respect to priority in the payment of dividends.
e) Voting Rights. Neither the Company's Bylaws nor its Articles of
Incorporation provide for the election or re-election of directors at staggered
intervals.
f) Redemption Provisions. The Company may purchase any of its issued common
----------------------
shares subject to the provisions of the Ontario Business Corporations Act.
g) Sinking Fund Provisions. Neither the Company's Articles of Incorporation nor
-----------------------
its Bylaws contain sinking fund provisions.
h) Liability to Further Capital Calls by the Company. Neither the Company's
----------------------------------------------------
Articles of Incorporation nor its Bylaws contain provisions allowing the Company
to make further capital calls with respect to any shareholder of the Company.
i) Discriminatory Provisions Based on Substantial Ownership. Neither the
--------------------------------------------------------------
Company's Articles of Incorporation nor its Bylaws contain provisions that
discriminate against any existing or prospective holders of securities as a
result of such shareholder owning a substantial number of shares.
j) Miscellaneous Provisions. Neither the Articles of Incorporation nor the
-------------------------
Bylaws of the Company address the process by which the rights of holders of
stock may be changed. The general provisions of the Ontario Business
Corporations Act apply to this process, and require shareholder meetings and
independent voting for such changes.
A meeting of shareholders may be called at any time by resolution or by the
Chairman of the Board or by the President and the Secretary shall cause notice
of a meeting of shareholders to be given when directed so to do by resolution of
the board or by the Chairman or the Board or the President.
The board shall call an annual meeting of the shareholders not later than
eighteen (18) months after the Corporation comes into existence and subsequently
not later than fifteen (15) months after holding the last preceding annual
meeting.
A special meeting of shareholders may be called at any time and may be held in
conjunction with an annual meeting of shareholders.
Meeting of shareholders shall be held at the place within Canada determined by
the board from time to time. Notwithstanding the above subsection, a meeting of
shareholders may be held outside Canada if all the shareholders entitled to vote
at that meeting so agree, and a shareholder who attends a meeting of
shareholders held outside Canada is deemed to have so agreed except when he
attends the meeting for the express purpose of objecting to the transaction of
any business on the grounds that the meeting is not lawfully held.
Neither the Articles of Incorporation nor the Bylaws of the Company discuss
limitations on the rights to own securities or exercise voting rights thereon.
Although not expressly enumerated in the Articles, pursuant to Canadian
regulations, shareholder ownership must be disclosed by any shareholder who owns
more than 10% of the Company's common stock.
There is no provision of the Company's Articles of Incorporation or Bylaws that
would delay, defer or prevent a change in control of the Company, and that would
operate only with respect to a merger, acquisition, or corporate restructuring
involving the Company (or any of its subsidiaries). The Company's Bylaws do not
contain a provision indicating the ownership threshold above which shareholder
ownership must be disclosed. With respect to the matters discussed in this Item
10B, the law applicable to the Company is not significantly different from
United States law. Neither the Articles of Incorporation nor Bylaws contain
provisions governing changes in capital that are more stringent than the
conditions required by law.
The Ontario Business Corporations Act contains provisions that require a
"special resolution" for effecting certain corporate actions. Such a "special
resolution" requires a three-quarters vote of shareholders rather than a simple
majority for passage. The principle corporate actions for which the Company
would require a "special resolution" include:
a. Changing its name;
b. Changing the place where its registered office is situated;
c. Adding, changing or removing any restriction on the business
or businesses that the corporation may carry on;
d. Certain reorganizations of the corporation and alterations of
share capital;
e. Increasing or decreasing the number of directors or the
minimum or maximum number of directors;
f. Any amendment to its articles regarding constraining the
issue or transfer of shares to persons who are not resident
Canadians; and
g. Dissolution of the corporation.
Dividends and Paying Agents
- ------------------------------
The Company has not declared any dividends on its common shares for the last
five years and does not anticipate that it will do so in the foreseeable future.
The present policy of the Company is to retain future earnings for use in its
operations and the expansion of its business.
Notwithstanding the aforementioned: the Company is unaware of any dividend
restrictions; has no specific procedure for the setting of the date of dividend
entitlement; but might expect to set a record date for stock ownership to
determine entitlement; has no specific procedures for non-resident holders to
claim dividends, but might expect to mail their dividends in the same manner as
resident holders. The Company has not nominated any financial institutions to
be the potential paying agents for dividends in the United States.
Quantitative and Qualitative Disclosures About Market Risks
-----------------------------------------------------------
Monetary assets and liabilities denominated in foreign currencies are translated
into Canadian dollars at the exchange rates prevailing at the consolidated
balance sheet date. Non-monetary assets and liabilities are translated at
historical rates. Transactions in foreign currencies are translated into
Canadian dollars at the approximate rates prevailing at the dates of the
transactions. Foreign exchange gains and losses are included in loss for the
year.
Integrated foreign operations of subsidiaries are translated into Canadian
dollars at exchange rates prevailing at the consolidated balance sheet date for
monetary items and at exchange rates prevailing at the transaction dates for
non-monetary items. Revenue and expenses are translated at exchange rates
prevailing during the year. Exchange gains and losses are included in loss
during the year.
The Company is exposed to foreign currency risk through its activities outside
of Canada. Unfavorable changes in the exchange rate may affect the operating
results of the Company. The Company is also exposed to foreign exchange risk as
a substantial amount of its revenue is denominated in U.S. dollars and Chinese
Rminibi ("RMB").
The Company does not actively use derivative instruments to reduce its exposure
to foreign currency risk.
EXCHANGE RATES
- ---------------
In this Registration Statement, unless otherwise specified, all dollar amounts
are expressed in Canadian Dollars ($). The Government of Canada permits a
floating exchange rate to determine the value of the Canadian Dollar against the
U.S. Dollar (US$).
The table sets forth the rate of exchange for the Canadian Dollar at the end of
the five most recent fiscal periods ended December 31st, the average rates for
the period, and the range of high and low rates for the period. The data for
each month during the previous ten months is also provided.
For purposes of this table, the rate of exchange means the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York. The table sets forth the
number of Canadian Dollars required under that formula to buy one U.S. Dollar.
The average rate means the average of the exchange rates on the last day of each
month during the period.
U.S. Dollar/Canadian Dollar
Average High Low Close
- -----------------------------------------------------------------
February 2003 1.51 1.53 1.49 1.49
January 2003 1.54 1.57 1.52 1.52
December 2002 1.56 1.58 1.55 1.58
November 2002 1.57 1.59 1.55 1.56
October 2002 1.58 1.59 1.56 1.56
September 2002 1.58 1.59 1.55 1.59
August 2002 1.57 1.59 1.55 1.56
July 2002 1.55 1.59 1.51 1.58
June 2002 1.53 1.55 1.51 1.51
May 2002 1.55 1.57 1.53 1.53
April 2002 1.58 1.60 1.56 1.57
March 2002 1.59 1.60 1.58 1.59
February 2002 1.60 1.61 1.59 1.60
January 2002 1.60 1.61 1.59 1.59
Fiscal Year Ended 12/31/2002 1.57 1.61 1.51 1.58
Fiscal Year Ended 12/31/2001 1.55 1.60 1.49 1.59
Fiscal Year Ended 12/31/2000 1.50 1.56 1.44 1.50
Fiscal Year Ended 12/31/1999 1.49 1.53 1.44 1.44
Fiscal Year Ended 12/31/1998 1.49 1.57 1.41 1.54
Fiscal Year Ended 12/31/1997 1.39 1.44 1.34 1.43
Fiscal Year Ended 12/31/1996 1.36 1.38 1.33 1.37
=================================================================
Exchange Controls
- -----------------
Except as discussed herein, the Company is unaware of any Canadian federal or
provincial laws, decrees, or regulations that restrict the export or import of
capital, including foreign exchange controls, or that affect the remittance of
dividends, interest or other payments to non-Canadian holders of the common
shares. The Company is unaware of any limitations on the right of non-Canadian
owners to hold or vote the common shares imposed by Canadian federal or
provincial law or by the charter or other constituent documents of the Company.
Taxation
--------
A brief description of provisions of the tax treaty between Canada and the
United States is included below, together with a brief outline of certain taxes,
including withholding provisions, to which United States security holders are
subject under existing laws and regulations of Canada. The consequences, if
any, of provincial, state and local taxes are not considered.
Security holders should seek the advice of their own tax advisors, tax counsel
or accountants with respect to the applicability or effect on their own
individual circumstances of the matters referred to herein and of any
provincial, state or local taxes.
Material Canadian Federal Income Tax Consequences
The discussion under this heading relates to the principal Canadian federal
income tax consequences of acquiring, holding and disposing of shares of common
stock of the Company for a shareholder of the Company who is not a resident of
Canada but is a resident of the United States and who will acquire and hold
shares of common stock of the Company as capital property for the purposes of
the Income Tax Act (Canada) (the "Canadian Tax Act"). This summary does not
apply to a shareholder who carries on business in Canada through a "permanent
establishment" situated in Canada or performs independent personal services in
Canada through a fixed base in Canada if the shareholder's holding in the
Company is effectively connected with such permanent establishment or fixed
base. This information is based on the provisions of the Canadian Tax Act and
the regulations thereunder and on an understanding of the administrative
practices of Canada Customs and Revenue Agency, and takes into account all
specific proposals to amend the Canadian Tax Act or regulations made by the
Minister of Finance of Canada as of the date hereof. This discussion is not a
substitute for independent advice from a shareholder's own Canadian and U.S. tax
advisors.
The provisions of the Canadian Tax Act are subject to income tax treaties to
which Canada is a party, including the Canada-United States Income Tax
Convention (1980), as amended (the "Convention").
Dividends on Common Shares and Other Income. Under the Canadian Tax Act, a
non-resident of Canada is subject to Canadian withholding tax at the rate of 25
percent on dividends paid or deemed to have been paid to him or her by a
corporation resident in Canada. The Convention limits the rate to 15 percent if
the shareholder is a resident of the United States and the dividends are
beneficially owned by and paid to such shareholder, and to 5 percent if the
shareholder is also a corporation that beneficially owns at least 10 percent of
the voting stock of the payor-corporation.
The amount of a stock dividend (for tax purposes) would be equal to the amount
by which the paid up or stated capital of the Company had increased because of
the payment of such dividend. The Company will furnish additional tax
information to shareholders in the event of such a dividend. Interest paid or
deemed to be paid on the Company's debt securities held by non-Canadian
residents may also be subject to Canadian withholding tax, depending upon the
terms and provisions of such securities and any applicable tax treaty.
The Convention exempts from Canadian income tax dividends paid to a religious,
scientific, literary, educational or charitable organization or to an
organization constituted and operated exclusively to administer a pension,
retirement or employee benefit fund or plan, if the organization is a resident
of the United States and is exempt from income tax under the laws of the United
States.
Dispositions of Common Shares. Under the Canadian Tax Act, a taxpayer's capital
gain or capital loss from a disposition of a share of common stock of the
Company is the amount, if any, by which his or her proceeds of disposition
exceed (or are exceeded by, respectively) the aggregate of his or her adjusted
cost base of the share and reasonable expenses of disposition. One-half of a
capital gain (the "taxable capital gain") is included in income, and one-half of
a capital loss in a year (the" allowable capital loss") is deductible from
taxable capital gains realized in the same year. The amount by which a
shareholder's allowable capital loss exceeds the taxable capital gain in a year
may be deducted from a taxable capital gain realized by the shareholder in the
three previous or any subsequent year, subject to adjustment when the capital
gains inclusion rate in the year of disposition differs from the inclusion rate
in the year the deduction is claimed.
If a share of common stock of the Company is disposed of to the Company other
than in the open market in the manner in which shares would normally be
purchased by the public, the proceeds of disposition will, in general terms, be
considered as limited to the paid-up capital of the share and the balance of the
price paid will be deemed to be a dividend. In the case of a shareholder that
is a corporation, the amount of any capital loss otherwise determined may be
reduced by the amount of dividends previously received in respect of the shares
disposed of, unless the corporation owned the shares for at least 365 days prior
to sustaining the loss and (together with corporations, persons and other
entities, with whom the corporation was not dealing at arm's length) did not own
more than five percent of the shares of any class of the corporation from which
the dividend was received. These loss limitation rules may also apply where a
corporation is a member of a partnership or a beneficiary of a trust that owned
the shares disposed of.
Under the Canadian Tax Act, a non-resident of Canada is subject to Canadian tax
on taxable capital gains, and may deduct allowable capital losses, realized on a
disposition of "taxable Canadian property." Shares of common stock of the
Company will constitute taxable Canadian property of a shareholder at a
particular time if the shareholder used the shares in carrying on business in
Canada, or if at any time in the five years immediately preceding the
disposition 25 percent or more of the issued shares of any class or series in
the capital stock of the Company belonged to one or more persons in a group
comprising the shareholder and persons with whom the shareholder did not deal at
arm's length.
The Convention relieves United States residents from liability for Canadian tax
on capital gains derived on a disposition of shares unless (a) the value of the
shares is derived principally from "real property" in Canada, including the
right to explore for or exploit natural resources and rights to amounts computed
by reference to production, (b) the shareholder was resident in Canada for 120
months during any period of 20 consecutive years preceding, and at any time
during the 10 years immediately preceding, the disposition and the shares were
owned by him when he or she ceased to be resident in Canada, or (c) the shares
formed part of the business property of a "permanent establishment" that the
holder has or had in Canada within the 12 months preceding the disposition.
Material United States Federal Income Tax Considerations
The following discussion is based upon the sections of the Internal Revenue Code
of 1986, as amended (the "Code"), Treasury Regulations, published Internal
Revenue Service ("IRS") rulings, published administrative positions of the IRS
and court decisions that are currently applicable. This discussion does not
consider the potential effects, both adverse and beneficial, of any recently
proposed legislation that, if enacted, could be applied, possibly on a
retroactive basis, at any time. Holders and prospective holders of shares of
the Company should consult their own tax advisors about the Federal; state,
local and foreign tax consequences of purchasing, owning and disposing of shares
of the Company.
U.S. Holders. As used herein, a "U.S. Holder" includes a holder of shares of
the Company who is a citizen or resident of the United States, a corporation
created or organized in or under the laws of the United States or of any
political subdivision thereof, any entity that is taxable as a corporation for
U.S. tax purposes and any other person or entity whose ownership of shares of
the Company is effectively connected with the conduct of a trade or business in
the United States. A U.S. Holder does not include persons subject to special
provisions of Federal income tax law, such as tax exempt organizations,
qualified retirement plans, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, broker-dealers,
nonresident alien individuals or foreign corporations whose ownership of shares
of the Company is not effectively connected with conduct of trade or business in
the United States, shareholders who acquired their stock through the exercise of
employee stock options or otherwise as compensation and shareholders who hold
their stock as ordinary assets and not as capital assets.
Distributions on Shares of the Company. U.S. Holders receiving dividend
distributions (including constructive dividends) with respect to shares of the
Company are required to include in gross income for United States Federal income
tax purposes the gross amount of such distributions to the extent that the
Company has current or accumulated earnings and profits as defined under U.S.
Federal tax law, without reduction for any Canadian income tax withheld from
such distributions. Such Canadian tax withheld may be credited against the U.S.
Holder's United States Federal income tax liability or, alternatively, may be
deducted in computing the U.S. Holder's United States Federal taxable income by
those who itemize deductions. (See discussion that is more detailed at "Foreign
Tax Credit" below). To the extent that distributions exceed current or
accumulated earnings and profits of the Company, they will be treated first as a
return of capital up to the U.S. Holder's adjusted basis in the shares and
thereafter as gain from the sale or exchange of the shares. Preferential tax
rates for net capital gains are applicable to a U.S. Holder that is an
individual, estate or trust. There are currently no preferential tax rates for
long-term capital gains for a U.S. Holder that is a corporation.
Dividends paid on the shares of the Company are not expected to be eligible for
the dividends received deduction provided to corporations receiving dividends
from certain United States corporations. A U.S. Holder that is a corporation
may be entitled to a 70% deduction of the United States source portion of
dividends received from the Company (unless the Company qualifies as a "foreign
personal holding company" or a "passive foreign investment company", as defined
below) if such U.S. Holder owns shares representing at least 10% of the voting
power and value of the Company.
In the case of foreign currency received as a dividend that is not converted by
the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have
a tax basis in the foreign currency equal to its U.S. dollar value on the date
of receipt. Any gain or loss recognized upon a subsequent sale or other
disposition of the foreign currency, including the exchange for U.S. dollars,
will be ordinary income or loss. However, for tax years after 1997, an
individual whose realized foreign exchange gain does not exceed U.S. $200 will
not recognize that gain, to the extent that there are not expenses associated
with the transaction that meet the requirement for deductibility as a trade or
business expense (other than travel expenses in connection with a business trip
or as an expense for the production of income).
Foreign Tax Credit. A U.S. Holder who pays (or has withheld from distributions)
Canadian income tax with respect to the ownership of shares of the Company may
be entitled, at the option of the U.S. Holder, to either a deduction or a tax
credit for such foreign tax paid or withheld. It will be more advantageous to
claim a credit because a credit reduces United States Federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on a year-by-year basis and applies to
all foreign taxes paid by (or withheld from) the U.S. Holder during that year.
There are significant and complex limitations that apply to the credit, among
which is the general limitation that the credit cannot exceed the proportionate
share of the U.S. Holder's United States Federal income tax liability that the
U.S. Holder's foreign source income bears to his or its worldwide taxable
income. In the determination of the application of this limitation, the various
items of income and deduction must be classified into foreign and domestic
sources. Complex rules govern this classification process. There are further
limitations on the foreign tax credit for certain types of income such as
"passive income", "high withholding tax interest", "financial services income",
and "shipping income". The availability of the foreign tax credit and the
application of the limitations on the credit are fact specific and holders and
prospective holders of shares of the Company should consult their own tax
advisors regarding their individual circumstances.
In the case of certain U.S. Holders that are corporations (other than
corporations subject to Subchapter S of the Code), owning 10% or more of the
Company's Common Shares, a portion of the qualifying Canadian income tax paid by
the Company will also be available as a foreign tax credit for U.S. federal
income tax purposes, at the election of the U.S. Holder.
Disposition of Shares of the Company. A U.S. Holder will recognize a gain or
loss upon the sale of shares of the Company equal to the difference, if any,
between (i) the amount of cash plus the fair market value of any property
received, and (ii) the shareholder's tax basis in the shares of the Company.
This gain or loss will be a capital gain or loss if the shares are a capital
asset in the hands of the U.S. Holder, and will be a short-term or long-term
capital gain or loss depending upon the holding period of the U.S. Holder.
Gains and losses are netted and combined according to special rules in arriving
at the overall capital gain or loss for a particular tax year. Deductions for
net capital losses are subject to significant limitations. Corporate capital
losses (other than losses of corporations electing under Subchapter S or the
Code) are deductible to the extent of capital gains. Non-corporate taxpayers
may deduct net capital losses, whether short-term or long-term, up to U.S.
$3,000 a year (U.S. $1,500 in the case of a married individual filing
separately). For U.S. Holders that are individuals, any unused portion of such
net capital loss may be carried over to be used in later tax years until such
net capital loss is thereby exhausted. For U.S. Holders that are corporations
(other than corporations subject to Subchapter S of the Code), an unused net
capital loss may be carried back three years from the loss year and carried
forward five years from the loss year to be offset against capital gains until
such net capital loss is thereby exhausted.
Other Considerations
In the following circumstances, the above sections of this discussion may not
describe the United States Federal income tax consequences resulting from the
holding and disposition of shares of the Company:
Foreign Personal Holding Company. If at any time during a taxable year more
than 50% of the total combined voting power or the total value of the Company's
outstanding shares is owned, directly or indirectly, by five or fewer
individuals who are citizens or residents of the United States and 60% (50% in
subsequent years) or more of the Company's gross income for such year was
derived from certain passive sources (e.g., from dividends received from its
subsidiaries), the Company would be treated as a "foreign personal holding
company". In that event, U.S. Holders that hold shares of the Company (on the
earlier of the last day of the Company's tax year or the last date on which the
Company was a foreign personal holding company) would be required to include in
gross income for such year their allowable portions of such passive income to
the extent the Company does not actually distribute such income.
Foreign Investment Company. If 50% or more of the combined voting power or
total value of the Company's outstanding shares are held, directly or
indirectly, by citizens or residents of the United States, United States
domestic partnerships or corporations, or estates or trusts other than foreign
estates or trusts (as defined by the Code Section 7701 (a)(31)), and the Company
is found to be engaged primarily in the business of investing, reinvesting, or
trading in securities, commodities, or any interest, it is possible that the
Company might be treated as a "foreign investment company" as defined in Section
1246 of the Code, causing all or part of any gain realized by a U.S. Holder
selling or exchanging shares of the Company to be treated as ordinary income
rather than capital gain.
Passive Foreign Investment Company. As a foreign corporation with U.S. Holders,
the Company will be treated as a passive foreign investment company ("PFIC"), as
defined in Section 1297 of the Code, if 75% or more of its gross income in a
taxable year is passive income, or the average percentage of the Company's
assets (by value) during the taxable year which produce passive income or which
are held for production of same is at least 50%. Passive income is defined to
include gross income in the nature of dividends, interest, royalties, rents and
annuities; excess of gains over losses from certain transactions in any
commodities not arising inter alia from a PFIC whose business is actively
involved in such commodities; certain foreign currency gains; and other similar
types of income. Foreign mining companies that are in the exploration stage may
have little or no income from operations and/or may hold substantial cash and
short-term securities that pay interest and dividends while awaiting expenditure
in connection with the business. Given the complexities of determining what
expenditures may be deductible and of how assets held for production of active
income should be valued, the Company, based on advice from its professional
advisers, cannot conclude whether it is a PFIC.
It is not the intention of the Company to be considered a PFIC and the Company
does not consider this to be a material risk. In the event that it were to
become classified as a PFIC, the following should be taken into consideration.
U.S. Holders owning shares of a PFIC are subject to a special tax and to an
interest charge based on the value of deferral of U.S. tax attributable to
undistributed earnings of a PFIC for the period during which the shares of the
PFIC are owned. This special tax would apply to any gain realized on the
disposition of shares of a PFIC. In addition, the gain is subject to U.S.
federal income tax as ordinary income, taxed at top marginal rates, rather than
as capital gain income. The special tax would also be payable on receipt of
excess distributions (any distributions received in the current year that are in
excess of 125% of the average distributions received during the 3 preceding
years or, if shorter, the shareholder's holding period). If, however, the U.S.
Holder makes a timely election to treat a PFIC as a qualified electing fund
("QEF") with respect to such shareholder's interest and the Company provides an
annual information statement, the above-described rules will not apply. The
Company will provide such an information statement upon request from a U.S.
Holder for current and prior taxable years. Instead, the electing U.S. Holder
would include annually in his gross income his pro rata share of the PFIC's
ordinary earnings and any net capital gain regardless of whether such income or
gain was actually distributed. A U.S. Holder of a PFIC treated as a QEF can,
however, further elect to defer the payment of United States Federal income tax
on such income and gain inclusions, with tax payments ultimately requiring
payment of an interest factor. In addition, with a timely QEF election, the
electing U.S. Holder will obtain capital gain treatment on the gain realized on
disposition of such U.S. Holder's interest in the PFIC. Special rules apply to
U.S. Holders who own their interests in a PFIC through intermediate entities or
persons.
Effective for tax years of U.S. Holders beginning after December 31, 1997, U.S.
Holders who hold, actually or constructively, marketable stock of a foreign
corporation that qualifies as a PFIC may elect to mark such stock to the market
(a "mark-to-market election"). If such an election is made, such U.S. Holder
will not be subject to the special taxation rules of PFIC described above for
the taxable years for which the mark-to-market election is made. A U.S. Holder
who makes such an election will include in income for the taxable year an amount
equal to the excess, if any, of the fair market value of the shares of the
Company as of the close of such tax year over such U.S. Holder's adjusted basis
in such shares. In addition, the U.S. Holder is allowed a deduction for the
lesser of (i) the excess, if any, of such U.S. Holder's adjusted tax basis in
the shares over the fair market value of such shares as of the close of the tax
year, or (ii) the excess, if any of (A) the mark-to-market gains for the shares
in the Company included by such U.S. Holder for prior tax years, including any
amount which would have been included for any prior year but for Section 1291
interest on tax deferral rules discussed above with respect to a U.S. Holder,
who has not made a timely QEF election during the year in which he holds (or is
deemed to have held) shares in the Company and the Company is a PFIC
("Non-Electing U.S. Holder"), over (B) the mark-to-market losses for shares that
were allowed as deductions for prior tax years. A U.S. Holder's adjusted tax
basis in the shares of the Company will be increased or decreased to reflect the
amount included or deducted as a result of mark-to-market election. A
mark-to-market election will apply to the tax year for which the election is
made and to all later tax years, unless the PFIC stock ceases to be marketable
or the IRS consents to the revocation of the election.
The IRS has issued proposed regulations that would treat as taxable certain
transfers of PFIC stock by a Non-Electing U.S. Holder that are not otherwise
taxed, such as gifts, exchanges pursuant to corporate reorganizations, and
transfers at death. In such cases, the basis of the Company's shares in the
hands of the transferee and the basis of any property received in the exchange
for those shares would be increased by the amount of gain recognized. A U.S.
Holder who has made a timely QEF election (as discussed herein) will not be
taxed on certain transfers of PFIC stock, such as gifts, exchanges pursuant to
corporate reorganizations, and transfers at death. The transferee's basis in
this case will depend on the manner of the transfer. The specific tax effect to
the U.S. Holder and the transferee may vary based on the manner in which the
shares of the Company are transferred. Each U.S. Holder should consult a tax
advisor with respect to how the PFIC rules affect their tax situation.
The PFIC and QEF election rules are complex. U.S. Holders should consult a tax
advisor regarding the availability and procedure for making the QEF election as
well as the applicable method for recognizing gains or earnings and profits
under the foregoing rules.
Controlled Foreign Corporation. If more than 50% of the voting power of all
classes of stock or the total value of the stock of the Company is owned,
directly or indirectly, by citizens or residents of the United States, United
States domestic partnerships and corporations or estates or trusts other than
foreign estates or trusts, each of whom own 10% or more of the total combined
voting power of all classes of stock of the Company ("United States
shareholder"), the Company could be treated as a "controlled foreign
corporation" under Subpart F of the Code. This classification would effect many
complex results including the required inclusion by such United States
shareholders in income of their pro rata share of "Subpart F income" (as
specially defined by the Code) of the Company. Subpart F requires current
inclusions in the income of United States shareholders to the extent of a
controlled foreign corporation's accumulated earnings invested in "excess
passive" assets (as defined by the Code). In addition, under Section 1248 of the
Code, a gain from the sale or exchange of shares by a U.S. Holder who is or was
a United States shareholder at any time during the five year period ending with
the sale or exchange is treated as ordinary dividend income to the extent of
earnings and profits of the Company attributable to the stock sold or exchanged.
Because of the complexity of Subpart F, and because it is not clear that Subpart
F would apply to the U.S. Holders of shares of the Company, a more detailed
review of these rules is outside of the scope of this discussion.
If the Company is both a PFIC and controlled foreign corporation, the company
will not be treated as a PFIC with respect to United States shareholders of the
controlled foreign corporation. This rule will be effective for taxable years
of the Company ending with or within such taxable years of United States
shareholders.
Summary
- -------
Management believes this discussion covers all material tax consequences.
Nevertheless, this is not intended to be, nor should it be construed to be,
legal or tax advice to any holder of common shares of the Company Holders and
prospective holders are encouraged to consult their own tax advisers with
respect to their particular circumstances.
Validity of Securities
----------------------
The validity of the shares will be passed upon for us by David M. Loev, Attorney
at Law, Houston, TX.
Experts
-------
Our financial statements as of December 31, 2001, and December 31, 2000 (Balance
sheets)and Income statement for all of the three years (December 31, 2001, and
December 31, 2000, December 31, 1999) in the period ended December 31, 2001,
included in this Registration Statement have been so included in reliance on the
report of KPMG LLP, independent certified public accountants given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
-----------------------------------
We have filed with the Securities and Exchange Commission a registration
statement on Form F-1 under the Securities Act in connection with the offering
of our shares. This prospectus, which forms a part of our registration
statement, does not contain all of the information set forth in the registration
statement, certain items of which are contained in the exhibits and schedules of
the registration statement. For further information with respect to our company
and shares offered, you should refer to the registration statement and the
accompanying exhibits. With respect to each contract, agreement or other
document filed as an exhibit to the registration statement, you should refer to
the exhibit for a more complete discussion of the matter. The registration
statement and the exhibits thereto filed by us with the Securities and Exchange
Commission may be inspected at the public reference facilities of the Securities
and Exchange Commission listed below.
Upon completion of this offering, we will become subject to the
informational requirements of the Exchange Act. Under the Exchange Act, we will
be required to file periodic reports and other information with the Securities
and Exchange Commission, including annual reports on Form 20-F and quarterly and
other interim reports on Form 6-K. You may inspect such reports and other
information we file with the Securities and Exchange Commission in accordance
with the Exchange Act at the public reference facilities maintained by the
Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, Room
1024, N.W., Washington, D.C. 20549. Copies of such material may also be obtained
from the Public Reference Section of the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may
obtain information regarding the Washington D.C. Public Reference Room by
calling the Securities and Exchange Commission at 1-800-SEC-0330 or by
contacting the Securities and Exchange Commission over the internet at its
website at http://www.sec.gov.
As a foreign private issuer, we will be exempt from the rules under Section 14
of the Exchange Act prescribing the furnishing and consent of proxy statements,
and our officers, directors and principal shareholders will be exempt from the
reporting and short swing profit recovery provisions contained in Section 16 of
the Exchange Act with respect to their purchases and sales of shares. In
addition, we will not be required under the Exchange Act to file periodic
reports and financial statements with the Securities and Exchange Commission as
frequently or as promptly as U.S. companies whose securities are registered
under the Exchange Act. However, we intend to furnish our shareholders with
annual reports in English containing financial statements which will be audited
and reported on, with an opinion expressed, by an independent public accounting
firm, prepared in accordance with U.S. GAAP.
Item 5. Disclosure of Commission Position on Indemnification For Securities Act
Liabilities.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Financial Statements
Consolidated Financial Statements
(In Canadian dollars)
LINGO MEDIA INC.
Years ended December 31, 2001, 2000 and 1999
AUDITORS' REPORT
To the Board of Directors of Lingo Media Inc.
We have audited the consolidated balance sheets of Lingo Media Inc. as at
December 31, 2001 and 2000 and the consolidated statements of operations and
deficit and cash flows for each of the years in the three-year period ended
December 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 Canadian generally accepted auditing
standards and United States generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2001
and 2000 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2001 in accordance with
Canadian generally accepted accounting principles.
/s/ KPMG LLP
- ----------------------
KPMG LLP
Chartered Accountants
Toronto, Canada
May 3, 2002
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA -UNITED STATES REPORTING
DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph when the financial statements are affected by
conditions and events that cast doubt on the Company's ability to continue as a
going concern, such as those described in note 1 to the financial statements.
Our report to the shareholders, dated May 3, 2002, is expressed in accordance
with Canadian reporting standards which do not permit a reference to such events
and conditions in the auditors' report when these are adequately disclosed in
the financial statements.
/s/ KPMG LLP
- ----------------------
KPMG LLP
Chartered Accountants
Toronto, Canada
May 3, 2002
LINGO MEDIA INC.
Consolidated Balance Sheets
(In Canadian dollars)
December 31, 2001 and 2000
2001 2000
- ----------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 7,473 $ 44,207
Short-term investments - 67,099
Accounts receivable 336,840 170,523
Loan receivable (note 3) 34,383 62,401
Prepaid expenses 52,778 86,787
Work in progress 100,380 50,051
- -----------------------------------------------------------------------------------------
531,854 481,068
Capital assets, net (note 4) 51,388 64,235
Development costs, net (note 5) 850,619 726,345
Acquired publishing content, net (note 6) 335,681 353,349
Software development costs, net (note 7) 113,835 124,184
- -----------------------------------------------------------------------------------------
$ 1,883,377 $ 1,749,181
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness $ - $ 145,000
Accounts payable 165,229 282,753
Accrued liabilities 41,000 30,450
Customer deposits - 50,250
Current portion of long-term debt (note 8) 411,096 50,700
- -----------------------------------------------------------------------------------------
617,325 559,153
Long-term debt (note 8) 54,480 47,250
Shareholders' equity:
Capital stock (note 10) 2,720,891 2,607,391
Deficit (1,509,319) (1,464,613)
- -----------------------------------------------------------------------------------------
1,211,572 1,142,778
Future operations (note 1)
Commitments (note 17)
Subsequent events (note 18)
- -----------------------------------------------------------------------------------------
$ 1,883,377 $ 1,749,181
See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/ Michael P. Kraft Director
--------------------------
Michael P. Kraft
/s/ Richard J.G. Boxer Director
--------------------------
Richard J.G. Boxer
LINGO MEDIA INC.
Consolidated Statements of Operations and Deficit
(In Canadian dollars)
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Revenue $ 333,691 $ 527,051 $ 732,127
Cost of sales 42,138 371,668 475,957
- -------------------------------------------------------------------------------------------------------
291,553 155,383 256,170
Expenses:
General and administrative (note 12) 406,961 661,170 505,313
Interest on long-term debt 48,952 12,509 44,688
Other interest and bank charges 4,698 44,589 36,805
Amortization 84,774 87,112 89,785
- -------------------------------------------------------------------------------------------------------
545,385 805,380 676,591
- -------------------------------------------------------------------------------------------------------
Loss before the undernoted (253,832) (649,997) (420,421)
Gain on sale of subsidiary (note 15) 197,719 - -
Gain on issue of shares by subsidiary (note 16) 48,750 - 143,962
- -------------------------------------------------------------------------------------------------------
Loss before income taxes (7,363) (649,997) (276,459)
Income taxes (note 11) 37,343 125,000 -
- -------------------------------------------------------------------------------------------------------
Loss for the year (44,706) (774,997) (276,459)
Deficit, beginning of year (1,464,613) (689,616) (413,157)
- -------------------------------------------------------------------------------------------------------
Deficit, end of year $(1,509,319) $(1,464,613) $ (689,616)
- -------------------------------------------------------------------------------------------------------
Loss per share - basic and diluted $ (0.00) $ (0.05) $ (0.03)
- -------------------------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 16,095,471 14,567,994 10,783,827
See accompanying notes to consolidated financial statements.
LINGO MEDIA INC.
Consolidated Statements of Cash Flows
(In Canadian dollars)
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
- -------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Loss for the year $ (44,706) $ (774,997) $(276,459)
Items not affecting cash:
Gain on sale of subsidiary (197,719) - -
Gain on issue of shares by subsidiary (48,750) - (143,962)
Future income taxes - 125,000 -
Amortization of capital assets 12,847 12,612 6,869
Amortization of development costs 43,910 74,500 82,916
Amortization of acquired
publishing content 17,668 - -
Amortization of software
development costs 10,349 - -
Change in non-cash operating
working capital:
Short-term investments 67,099 (67,099) -
Grants receivable - - 69,387
Accounts receivable (193,173) (110,396) 110,296
Loan receivable 28,018 (62,401) -
Prepaid expenses 34,697 (68,735) 14,600
Work in progress (50,329) 129 18,041
Accounts payable and accrued liabilities (33,087) 4,750 141,337
Customer deposits (50,250) - (96,916)
- -------------------------------------------------------------------------------------------------
(403,426) (866,637) (73,891)
Financing:
Bank indebtedness - - 108,716
Repayment of bank indebtedness (145,000) (105,000) -
Increase in long-term debt 566,713 - 137,762
Repayment of long-term debt (199,087) (420,362) (50,700)
Issuance of capital stock, net 113,500 1,841,872 -
Issuance of capital stock by subsidiary 48,750 - 145,000
- -------------------------------------------------------------------------------------------------
384,876 1,316,510 340,778
Investments:
Purchase of capital assets - (46,305) (8,501)
Development costs (168,184) (348,689) (144,874)
Software development costs - (30,957) (93,227)
Proceeds on sale of subsidiary 150,000 - -
- -------------------------------------------------------------------------------------------------
(18,184) (425,951) (246,602)
- -------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (36,734) 23,922 20,285
Cash and cash equivalents, beginning of year 44,207 20,285 -
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 7,473 $ 44,207 $ 20,285
- -------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 38,730 $ 57,098 $ 67,286
See accompanying notes to consolidated financial statements.
Lingo Media Inc. (the "Company") develops, publishes, licenses and distributes
books, audiocassettes, multimedia and ancillary products for English language
learning for the school and retail markets in China and Canada.
1. FUTURE OPERATIONS:
These consolidated financial statements have been prepared on a going concern
basis, which assumes the realization of assets and liquidation of liabilities in
the normal course of business. The application of the going concern concept is
dependent on the Company's ability to generate future profitable operations
and/or obtain additional financing to fund future operations.
The Company plans to finance its operations with a combination of private
placements of equity and revenue from future product sales. There are no
assurances that the Company will be successful in obtaining an adequate level of
financing. In the short term, the Company believes that sales from existing
sales agreements should be adequate to fund its operations.
2. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated.
(b) Revenue recognition:
Revenue from the sale of publishing and ancillary products is recognized upon
delivery and as long as all vendor obligations, which consist primarily of
obtaining customer acceptance, have been satisfied. Amounts received in advance
of revenue recognition are recorded as customer deposits.
(c) Cash and cash equivalents:
Cash and cash equivalents consist of cash in the bank and highly liquid
investments with maturities of three months or less at the time of purchase.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(d) Short-term investments:
Short-term investments consist of highly liquid investments with original
maturities greater than three months but less than one year when purchased and
are carried at cost plus accrued interest.
(e) Work in progress:
Work in progress is recorded at the lower of cost and net realizable value.
(f) Capital assets:
Capital assets are recorded at cost and are amortized over their estimated
useful lives on a declining-balance basis at the following annual rate:
Office equipment 20%
The Company regularly reviews the carrying values of its capital assets by
comparing the carrying amount of the asset to the expected future cash flows to
be generated by the asset. If the carrying value exceeds the amount
recoverable, a write-down of the asset to estimated fair value is charged to the
consolidated statements of operations and deficit.
(g) Development costs:
Development costs associated with pre-operating expenses of Alpha Media(TM),
Alpha Publishing(TM) and Alpha Brand Name Books(TM) have been capitalized. In
addition, the Company has capitalized pre-operating costs relating to
establishing a business base in the United States and the development of
business in China. Pre-operating costs are capitalized until the commencement
of commercial operations and then amortized on a straight-line basis, over a
maximum of five years. The carrying value is assessed on a periodic basis to
determine if a write-down is required.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(h) Acquired publishing content:
The costs of obtaining the English as a Foreign Language ("EFL") program
entitled "Communications: An Interactive EFL Program" and an international
folktale series entitled "Stories Lost and Found: The Universe of Folktale" have
been capitalized and are being amortized over a five-year period.
The Company regularly reviews the carrying values of its acquired publishing
content. The Company supports the carrying value of these assets based on the
undiscounted value of expected future cash flows. If the carrying value exceeds
the amount recoverable, a write-down of the asset to estimated fair value is
charged to the consolidated statements of operations and deficit.
(i) Software development costs:
The Company has deferred software development costs incurred in connection with
a computer software program to be used by children in reading and writing that
promote and facilitate the development of communication skills in the English
language. Software development costs are deferred once technological
feasibility for a product is established. Software development costs are
amortized on a straight-line basis over a maximum of three years.
Technological feasibility is established when the Company has completed all
planning, designing, coding and testing activities that are necessary to
establish that the product can be produced to meet its design specifications,
including functions, features and technical performance requirements.
The Company regularly reviews the carrying values of its software development
costs. The Company supports the carrying value of these assets based on the
undiscounted value of expected future cash flows. If the carrying value exceeds
the amount recoverable, a write-down of the asset to estimated fair value is
charged to the consolidated statements of operations and deficit.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(j) Future income taxes:
The Company follows the asset and liability method of accounting for income
taxes. Under this method, future income tax assets and liabilities are
determined based on temporary differences between the financial reporting and
tax bases of assets and liabilities, as well as for the benefit of losses
available to be carried forward to future years for income tax purposes. Future
income tax assets and liabilities are measured using substantively enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Future income tax assets are recorded in the financial statements if
realization is considered more likely than not.
(k) Foreign currency translation:
Monetary assets and liabilities denominated in foreign currencies are translated
into Canadian dollars at the exchange rates prevailing at the consolidated
balance sheet dates. Non-monetary assets and liabilities are translated at
historical rates. Transactions in foreign currencies are translated into
Canadian dollars at the approximate rates prevailing at the dates of the
transactions. Foreign exchange gains and losses are included in loss for the
year.
The Company's integrated foreign operations are translated into Canadian dollars
at exchange rates prevailing at the consolidated balance sheets date for
monetary items and at exchange rates prevailing at the transaction dates for
non-monetary items. Revenue and expenses are translated at exchange rates
prevailing during the year. Exchange gains and losses are included in loss for
the year.
(l) Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the year. Actual results
could differ from those estimates. Significant areas requiring the use of
management estimates related to the useful lives and impairment of capital
assets, development costs, acquired publishing content and software development
costs.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(m) Loss per share:
In fiscal 2001, the Company adopted the new provisions of The Canadian Institute
of Chartered Accountants ("CICA") Handbook Section 3500, "Earnings per Share".
Basic earnings per share is computed using the weighted average number of common
shares that are outstanding during the year. Diluted earnings per share is
computed using the weighted average number of common and potential common shares
outstanding during the year. Potential common shares consist of the incremental
common shares issuable upon the exercise of stock options using the treasury
stock method.
Previously, the Company calculated diluted earnings per share using the imputed
earnings method. The change in accounting policy has been applied retroactively
and had no impact on previously reported amounts.
(n) Stock-based compensation plan:
The Company has adopted a stock option plan for employees, officers, directors
and consultants of the Company. To date, all stock options issued under this
plan have an exercise price equal to the fair value of the underlying common
shares on the date of grant. The stock option plan is described in note 10(b).
If stock or stock options are repurchased, the excess of the consideration paid
over the carrying amount of the stock or stock option cancelled is charged to
deficit.
3. LOAN RECEIVABLE:
The loan receivable, which is due from a non-related party, is due on demand,
bears interest at 8.5% per annum, and is secured by a personal guarantee.
4. CAPITAL ASSETS:
Capital assets consist of the following:
2001 2000
- -----------------------------------------------
Office equipment:
Cost $96,438 $96,438
Less accumulated amortization 45,050 32,203
- -----------------------------------------------
$51,388 $64,235
5. DEVELOPMENT COSTS:
Development costs consist of the following:
2001 2000
- ---------------------------------------------------
Cost $1,135,099 $966,915
Less accumulated amortization 284,480 240,570
- ---------------------------------------------------
$ 850,619 $726,345
6. ACQUIRED PUBLISHING CONTENT:
Acquired publishing content consists of the following:
2001 2000
- -------------------------------------------------
Cost $353,349 $353,349
Less accumulated amortization 17,668 -
- -------------------------------------------------
$335,681 $353,349
7. SOFTWARE DEVELOPMENT COSTS:
Software development costs consist of the following:
2001 2000
- -------------------------------------------------
Cost $124,184 $124,184
Less accumulated amortization 10,349 -
- -------------------------------------------------
$113,835 $124,184
8. LONG-TERM DEBT:
2001 2000
- --------------------------------------------------------------------------
Bank loan, bearing interest at prime rate plus 8% per
annum, secured by a general security agreement
and due in full on April 1, 2002 $364,621 $ -
Bank loan, repayable in monthly installments of $4,225
plus interest, bearing interest at 4.75% per annum,
secured by a general security agreement, maturing
November 23, 2002. During the year, the bank
offered to extend the terms of repayment by an
additional four months thereby the loan will mature
on March 23, 2003 59,150 97,950
Shareholder loan, bearing interest at 12% per annum and
due on January 31, 2003 36,805 -
Shareholder loan, bearing interest at 12% per annum and
due on January 31, 2003 5,000 -
- --------------------------------------------------------------------------
465,576 97,950
Less current portion 411,096 50,700
- --------------------------------------------------------------------------
$ 54,480 $47,250
9. RELATED PARTY BALANCES AND TRANSACTIONS:
During the year, the Company had the following transactions with related parties
that have not been disclosed elsewhere in the financial statements:
Consulting fees of $100,000 (2000 - $73,000; 1999 - $36,000) were paid to a
company controlled by a director of the Company. At December 31, 2001, $10,700
(2000 - nil) is included in accounts payable. A success fee of $5,000 (2000 -
$50,000; 1999 - nil) was paid to a company controlled by a director of the
Company.
9. RELATED PARTY BALANCES AND TRANSACTIONS (CONTINUED):
The shareholder loans bear interest at 12% (2000 - 10%; 1999 - 10%) per annum.
Interest expense for the year was $8,963 (2000 - $7,374; 1999 - $3,112).
10. CAPITAL STOCK, WARRANTS AND STOCK OPTIONS:
(a) Authorized:
Unlimited preference shares, no par value
Unlimited common shares, no par value
The following details the changes in issued and outstanding shares and warrants
for the three years ended December 31, 2001:
Purchase warrants Common shares
Number Amount Number Amount
Balance, December 31,
1998 and 1999 - $ - 10,783,827 $ 765,519
Issued:
Private placement (i) 5,000,000 - 5,000,000 1,811,872
Purchase warrants expired (2,500,000) - - -
Options exercised - - 150,000 30,000
- ----------------------------------------------------------------------------------------
Balance, December 31, 2000 2,500,000 - 15,933,827 2,607,391
Issued:
Private placement (ii) 500,000 - 1,000,000 93,500
Purchase warrants expired (2,500,000) - - -
Options exercised - - 100,000 20,000
- ----------------------------------------------------------------------------------------
Balance, December 31, 2001 500,000 $ - 17,033,827 $2,720,891
<FN>
(i) During March and April 2000, the Company completed a private placement of
5,000,000 common shares, 2,500,000 Class A Purchase Warrants and 2,500,000 Class B
Purchase Warrants for cash proceeds, net of issue costs, of $1,811,872. The Class A
Purchase Warrants entitled the holder to acquire one common share for a price of $0.50
per share for each warrant. The Class B Purchase Warrants entitled the holder to
acquire one common share for a price of $1.00 per share for each warrant. The Class A
Purchase Warrants expired without being exercised on December 15, 2000 and the Class B
Purchase Warrants expired on September 30, 2001 without being exercised.
10. CAPITAL STOCK, WARRANTS AND STOCK OPTIONS (CONTINUED):
(ii) On November 23, 2001, the Company completed a private placement of
1,000,000 common shares and 500,000 Class C Purchase Warrants for cash proceeds,
net of issue costs, of $93,500. The Class C Purchase Warrants entitle the
holder to acquire one common share for a price of $0.15 per share for each
warrant. The Class C Purchase Warrants expire on November 23, 2002. As at
December 31, 2001, all the Class C Purchase Warrants remain outstanding.
(b) Stock option plan:
During May 2000, the Company adopted a new stock option plan (the "New Plan") to
replace the previous plan. The New Plan was established for the benefit of the
directors, senior officers, employees and consultants who provide services to
the Company. The maximum number of common shares which may be set aside for
issuance under the New Plan is 10% of the issued and outstanding common shares,
provided that the Board of Directors has the right, from time to time, to
increase such number subject to the approval of the shareholders of the Company
when required by law or regulatory authority. Under the New Plan, the exercise
price of each option cannot be less than the market price of the shares at time
of grant, except for a permitted discount as specified by the TSX Venture
Exchange. Under the TSX Venture Exchange's policy the maximum permitted
discount, under certain conditions, is 25% subject to a minimum price of $0.10.
The exercise period of the options granted cannot exceed five years. The
vesting conditions are specified by the TSX Venture Exchange whereby all options
under the New Plan vest over an 18-month period with no greater than 16.67% of
any options granted to an optionee vesting in any three-month period or such
longer period as the Board may determine. The expiry dates for the options
outstanding as at December 31, 2001 ranges from January 28, 2003 to November 1,
2006.
10. CAPITAL STOCK, WARRANTS AND STOCK OPTIONS (CONTINUED):
Changes for the stock option plans during the years ended December 31, 2001,
2000 and 1999 were as follows:
2001 2000 1999
----------------------- ---------------------- -------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
shares price shares price shares price
- -------------------------------------------------------------------------------------------
Options outstanding,
beginning of year 1,210,000 $ 0.34 965,000 $ 0.20 725,000 $0.20
Options granted 925,000 0.14 700,000 0.50 370,000 0.20
Options exercised (100,000) 0.20 (150,000) 0.20 - -
Options cancelled (60,000) 0.20 (305,000) 0.20 (130,000) 0.20
Options expired (80,000) 0.20 - - - -
- -------------------------------------------------------------------------------------------
Options outstanding,
end of year 1,895,000 0.43 1,210,000 0.34 965,000 0.20
- -------------------------------------------------------------------------------------------
Options exercisable,
end of year 1,017,536 $ 0.26 916,664 $ 0.24 965,000 $0.20
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options outstanding Options exercisable
----------------------------------------- -------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
price outstanding life price outstanding price
- ------------------------------------------------------------------------------------------
0.10 - $0.12 725,000 4.55 $ 0.03 87,516 $ 0.12
0.20 - $0.22 790,000 2.52 0.21 690,020 0.20
0.45 - $0.50 380,000 3.65 0.49 240,000 0.49
- ------------------------------------------------------------------------------------------
1,895,000 3.53 0.43 1,017,536 0.26
11. INCOME TAXES:
The provision for income taxes reflects an effective income tax rate which
differs from the Canadian corporate income tax rate as follows:
2001 2000 1999
- ----------------------------------------------------------------------
Combined basic Canadian federal
and provincial income tax rate 42.1% 43.6% 44.6%
Effective income tax charge on
loss before income taxes $ (3,000) $(283,000) $(123,000)
Increase (decrease) resulting form:
Change in the valuation allowance
for future tax assets allocated to
income tax expense (54,000) 318,000 -
Adjustment to future tax assets and
liabilities for enacted changes in
tax laws and rates 230,000 - -
Effect of losses, the tax effect of
which has not been recorded - - 123,000
Non-taxable portion of gain on
sale of subsidiary (55,000) - -
Non-taxable portion of gain on
issue of shares of subsidiary (21,000) - -
Withholding tax on sales to China 37,343 - -
Other (97,000) 90,000 -
- ----------------------------------------------------------------------
$ 37,343 $ 125,000 $ -
The tax effect of temporary differences representing future tax assets is as
follows:
2001 2000 1999
- ----------------------------------------------------------------------
Future tax assets:
Operating loss carryforwards $ 650,000 $ 660,000 $ 517,000
Share issue costs 90,000 134,000 72,000
Capital assets - - 12,000
- ----------------------------------------------------------------------
740,000 794,000 601,000
Valuation allowance (740,000) (794,000) (476,000)
- ----------------------------------------------------------------------
Net future tax assets $ - $ - $ 125,000
11. INCOME TAXES (CONTINUED):
During 2001, the gross value of the future tax asset relating to operating loss
carry forwards was reduced as a result of a reduction in income tax rates.
Future tax assets and liabilities will be impacted by changes in tax laws and
rates. The future effect of these changes is not currently determinable.
In assessing the realizability of future tax assets, management considers
whether it is more likely than not that some portion or all of the future tax
assets will not be realized. The ultimate realization of future tax assets is
dependent upon the generation of future taxable income during the years in which
those temporary differences become deductible. Management considers projected
future taxable income, uncertainties related to the industry in which the
Company operates and tax planning strategies in making this assessment.
At December 31, 2001, the Company has non-capital losses available for
carryforward for Canadian income tax purposes amounting to $2,088,000. These
losses expire in the following fiscal years:
2002 $ 121,000
2003 271,000
2005 501,000
2006 303,000
2007 505,000
2008 387,000
- --------------------------------
$ 2,088,000
The Company also has non-capital losses available for carryforward for United
States income tax purposes amounting to U.S $30,000 and U.S. $28,000, expiring
in 2019 and 2021, respectively.
12. GOVERNMENT GRANTS:
The Company received government grants of nil (2000 - $141,958; 1999 -
$129,967), which were used to reduce general and administrative expenses
relating to the Company's publishing projects in China.
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
(a) Currency risk:
The Company is subject to currency risk through its activities outside of
Canada. Unfavourable changes in the exchange rate may affect the operating
results of the Company. The Company is also exposed to foreign exchange risk as
a substantial amount of its revenue is denominated in U.S. dollars and Chinese
Reminibi ("RMB").
The Company does not actively use derivative instruments to reduce its exposure
to foreign currency risk. There were no derivative instruments outstanding at
December 31, 2001 and 2000.
(b) Fair market values:
The carrying values of cash and cash equivalents, short-term investments,
accounts receivable, loan receivable, bank indebtedness, accounts payable and
accrued liabilities approximate their fair values due to the relatively short
periods to maturity. The fair value of long-term debt is not significantly
different from its carrying value based on rates for similar instruments
currently available to the Company and its maturity terms. The fair value of
the shareholder loans is not determinable due to their related party nature and
terms.
(c) Concentration of credit risk:
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, short-term
investments, accounts receivable and loan receivable. Cash and short-term
investments consist of deposits with major financial institutions. With respect
to accounts receivable, the Company performs periodic credit evaluations of the
financial condition of its customers and typically does not require collateral
from them. Management assesses the need for allowances for potential credit
losses by considering the credit risk of specific customers, historical trends
and other information. The loan receivable is secured by a personal guarantee.
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED):
A summary of sales to major customers that exceeded 10% of total sales during
the year and the approximate amount due from the customer, as of December 31,
2001, are as follows:
Accounts
Sales receivable
- ---------------------------------------------------
2001 2000 1999 2001
- ---------------------------------------------------
Customer 1 74% - - $210,786
Customer 2 19% 8% - 109,500
Customer 3 - 54% - -
Customer 4 - 38% - -
Customer 5 - - 52% -
Customer 6 - - 19% -
Customer 7 - - 11% -
Customer 8 - - 10% -
14. SEGMENTED INFORMATION:
The Company operates as an international business and has no distinct reportable
business segments.
The Company is developing books, audiocassettes, multimedia and ancillary
products for English language learning to be sold or licensed to the school
market, primarily in China and Canada. This service is called Educational
Publishing. The Company also develops original publishing properties on a
contract basis for corporate clients. This service is called Trade Publishing.
The Company's revenue by geographic region based on the region in which the
customer is located is as follows:
2001 2000 1999
- ------------------------------------------------------------------
Canada $ 21,068 $482,991 $649,067
China 312,623 44,060 -
Other - - 83,060
- ------------------------------------------------------------------
$333,691 $527,051 $732,127
14. SEGMENTED INFORMATION (CONTINUED):
The Company's revenue by type of service is as follows:
2001 2000 1999
- ------------------------------------------------------------------
Educational Publishing $333,691 $ 43,500 $ -
Trade Publishing - 483,551 732,127
- ------------------------------------------------------------------
$333,691 $ 527,051 $ 732,127
Substantially all of the Company's identifiable assets as at December 31, 2001
and 2000 are located in Canada.
15. SALE OF SUBSIDIARY:
On May 28, 2001, the Company sold its majority-owned subsidiary, AlphaCom
Corporation, for cash proceeds of $150,000. A gain of $197,719 was realized.
The gain was higher than the proceeds as the carrying value of the subsidiary
was a negative amount.
16. ISSUE OF SHARES BY SUBSIDIARY:
When a subsidiary issues shares to an external party, the Company records a
dilution gain or loss equal to the difference between the proceeds received and
the Company's proportionate book value interest given up.
On December 27, 2001, EnglishLingo, Inc., a subsidiary of the Company, issued
1,300,000 common shares at $0.0375 per share for total cash proceeds of $48,750
to "accredited investors" in Ontario pursuant to the distribution exemption as a
"closely-held issuer" within the meaning of Rule 45-501 of the Ontario
Securities Commission. As a result of this offering, the Company recorded a
dilution gain of $48,750. Prior to the transaction the Company owned 100% of
EnglishLingo, Inc.'s common shares. Subsequently, the Company's ownership
interest was 93.9%. Due to the Company's loss position, no income taxes were
provided on the dilution gain.
16. ISSUE OF SHARES BY SUBSIDIARY (CONTINUED):
On April 13, 1999, AlphaCom Corporation, a subsidiary of the Company, issued
100,000 common shares at $1.45 per share for total cash proceeds of $145,000 to
qualified investors pursuant to the offering exemptions from registration with
the Securities and Exchange Commission in the United States provided by
Regulation D, Rule 504 of the 1993 Securities Act. As a result of this
offering, the Company recorded a dilution gain of $143,962. Prior to the
transaction the Company owned 100% of AlphaCom Corporation's common shares.
Subsequently, the Company's ownership interest was 90.1%. Due to the Company's
loss position, no income taxes were provided on the dilution gain.
17. COMMITMENTS:
Future minimum lease payments under operating leases for premises and equipment
are as follows:
2002 $ 20,127
2003 20,127
2004 20,127
2005 4,631
- -------------------------------
$ 65,012
18. SUBSEQUENT EVENTS:
(a) Private placement:
During March 2002, the Company completed a private placement of 3,700,000 common
shares and 2,775,000 Class D Purchase Warrants for cash proceeds, net of issue
costs of $349,000. The Class D Purchase Warrants entitle the holder to acquire
one common share for a price of $0.10 per share for each warrant. The Class D
Purchase Warrants expire March 2003.
18. SUBSEQUENT EVENTS (CONTINUED):
(b) Issue of shares by subsidiary:
During January 2002, EnglishLingo, Inc., a subsidiary of the Company, issued
1,800,000 common shares at $0.0375 per share for total cash proceeds of $67,500
to "accredited investors" in Ontario pursuant to the distribution exemption as a
"closely-held issuer" within the meaning of Rule 45-501 of the Ontario
Securities Commission. As a result of this offering, the Company recorded a
diluted gain of $67,500. Prior to the transaction, the Company owned 93.9% of
EnglishLingo, Inc.'s common shares. Subsequently, the Company's ownership
interest was 86.6%.
19. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP"):
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") as applied in Canada. In the following
respects, GAAP as applied in the United States differs from that applied in
Canada:
2001 2000 1999
- -----------------------------------------------------------------------------
Loss for the year - Canadian GAAP $ (44,706) $ (774,997) $(276,459)
Impact of United States GAAP and
adjustments:
Development costs (a) (168,184) (348,689) (144,874)
Amortization of development costs 43,910 74,500 82,916
Software development costs (b) - (30,957) (93,227)
Amortization of software
development costs 10,349 - -
Compensation expense (c) (59,983) (22,500) (35,500)
- -----------------------------------------------------------------------------
Loss for the year - United States GAAP $(218,614) $(1,102,643) $(467,144)
19. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED):
The cumulative effect of these adjustments on the consolidated shareholders'
equity of the Company is as follows:
2001 2000 1999
- ---------------------------------------------------------------------------
Shareholders' equity based on
Canadian GAAP $1,211,572 $1,142,778 $ 75,903
Development costs (a) (850,619) (726,345) (452,156)
Software development costs (b) (113,835) (124,184) (93,227)
Compensation expense (c) (124,033) (64,050) (41,550)
- ---------------------------------------------------------------------------
Shareholders' equity - United States
GAAP $ 123,085 $ 228,199 $(511,030)
<FN>
Under United States GAAP, the amounts shown on the consolidated balance sheets
for development costs and software development costs would both be nil.
(a) Development costs:
Under Canadian GAAP, the Company defers the incremental costs relating to the
development and pre-operating phases of new businesses and amortizes these costs
on a straight-line basis over periods up to five years. Under United States
GAAP, these costs are expensed as incurred.
(b) Software development costs:
Under United States GAAP, the software development costs would be expensed as
incurred.
(c) Options to consultants:
Under Canadian GAAP, the Company does not recognize compensation expense when
stock or stock options are issued to consultants. Any consideration paid on
exercise of stock options or purchase of stock is credited to share capital.
Under United States GAAP, the Company records compensation expense based on the
fair value for stock or stock options granted in exchange for services from
consultants.
19. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED):
(d) Statement of comprehensive income:
Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), establishes
standards for the reporting and disclosure of comprehensive income and its
components in financial statements. Components of comprehensive income or loss
include net income or loss and all other changes in other non-owner changes in
equity, such as the change in the cumulative translation adjustment and the
unrealized gain or loss for the year on "available-for-sale" securities. For
all periods presented, comprehensive loss is the same as loss for the year.
(e) Stock-based compensation disclosure:
The Company measures compensation expense relating to employee stock option
plans for United States GAAP purposes using the intrinsic value method specified
by APB Opinion No. 25, which in the Company's circumstances would not be
materially different from compensation expense as determined under Canadian
GAAP.
Had the Company determined compensation expense based on the fair values at the
grant dates of the stock options consistent with the method prescribed under
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), the Company's loss would have been reported as
the pro forma amounts indicated below:
2001 2000 1999
- ----------------------------------------------------------------
Loss in accordance with
United States GAAP $(218,614) $(1,102,643) $(467,144)
Pro forma loss (271,881) (1,127,018) (499,894)
- ----------------------------------------------------------------
Pro forma loss per share -
basic and diluted $ (0.02) $ (0.08) $ (0.05)
The effects on pro forma disclosure of applying SFAS 123 are not likely to be
representative of the effects on pro forma disclosure in future years.
19. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED):
The weighted average estimated fair value at the date of grant, as defined by
SFAS 123, for options granted in fiscal 2001 was $0.13 (2000 - $0.45; 1999 -
$0.18).
The fair value of each option granted was estimated on the date of grant using
the Black-Scholes fair value option pricing model with the following
assumptions:
2001 2000 1999
- ----------------------------------------------------------
Risk-free interest rate 3.65% 6.09% 5.67%
Dividend yield - - -
Expected volatility 129% 519% 576%
Expected life of the options in years 5 5 5
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period on a
straight-line basis.
(f) Recent accounting pronouncements:
(i) In July 2001, the CICA and FASB issued new similar standards for
Business Combinations, Goodwill and Other Intangible Assets. These standards
provide new guidance on the accounting for a business combination at the date a
business combination is completed. Specifically, they require use of the
purchase method of accounting for all business combinations initiated after June
30, 2001, thereby eliminating use of the pooling-of-interests method. These
standards also require that goodwill and certain other intangible assets will no
longer be amortized and will be tested for impairment at least annually and
written down only when impaired. The Company does not believe that the adoption
of these standards will have a material impact on its financial statements.
(ii) In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and for the associated asset retirement costs. SFAS No. 143 is effective
for the Company's fiscal year beginning January 1, 2002. The Company does not
believe that the adoption of SFAS No. 143 will have a material impact on its
financial statements.
19. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED):
(iii) In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and related
literature and establishes a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale.
The Company is required to adopt SFAS No. 144 for its fiscal year beginning
January 1, 2002. The Company does not believe that the adoption of SFAS No. 144
will have a material impact on its financial statements.
(iv) In November 2001, the CICA amended Handbook Section 1650, Foreign
Currency Translation and issued Accounting Guideline 13, Hedging Relationships
("AcG 13"). The revision to Section 1650 will eliminate the deferral and
amortization of foreign currency translation differences resulting from the
translation of long-term monetary assets and liabilities denominated in foreign
currencies. All such translation differences will be charged directly to
income, Section 1650 will be in effect as of January 1, 2002. AcG 13
establishes new criteria for hedge accounting and will apply to all hedging
relationships in effect on or after January 1, 2003. On January 1, 2003, the
Company will reassess all hedging relationships to determine whether the
criteria are met or not and will apply the new guidance on a prospective basis.
To qualify for hedge accounting, the hedging relationship must be appropriately
documented at the inception of the hedge and there must be reasonable assurance,
both at the inception and throughout the term of the hedge, that the hedging
relationship will be effective. Effectiveness requires a high correlation of
changes in fair values or cash flows between the hedged item and the hedge. The
Company does not believe that the adoption of revised Section 1650 and AcG 13
will have a material impact on its financial statements.
(v) Effective January 1, 2002, the Company will adopt the new Canadian
accounting standard for stock-based compensation and other stock-based payments.
The new standards will require additional disclosures for options granted to
employees and that compensation cost be recorded for the fair value of options
granted to non-employees. The new standards for non-employees will be similar
in many respects to SFAS No. 123. The Company has not determined the impact on
its financial statements of adopting these standards.
20. COMPARATIVE FIGURES:
Certain comparative figures have been reclassified to conform with the financial
statement presentation adopted in the current year.
LINGO MEDIA INC.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
SEPTEMBER 30, 2002
LINGO MEDIA INC.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
SEPTEMBER 30, 2002
INDEX
Page
----
Consolidated Interim Financial Statements:
Balance Sheet I
Statement of Retained Earnings (Deficit) II
Statement of Operations III
Statement of Changes in Cash Flows IV
Notes to Financial Statements V
LINGO MEDIA INC.
CONSOLIDATED INTERIM BALANCE SHEETS
(Expressed in Canadian dollars)
(Unaudited)
ASSETS
SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------------- -------------------
CURRENT:
Cash and cash equivalents $ 35,062 $ 7,473
Accounts receivable, net (Note 3) 685,436 336,840
Loan receivable 18,815 34,383
Prepaid expenses and other 36,830 52,778
Inventory on hand 23,328 -
Work in process - 100,380
799,471 531,854
--------------------
Capital assets, net 45,338 51,388
Development costs, net 760,976 850,619
Acquired publishing content, net 282,679 335,681
Software development costs, net 82,788 113,835
1,971,253 1,883,377
LIABILITIES
CURRENT:
Accounts payable $ 218,380 $ 165,229
Accrued liabilities 39,750 41,000
Current portion of long-term debt (Note 4) 131,903 411,096
390,034 617,326
Long-term debt - 54,480
390,034 671,806
SHAREHOLDERS' EQUITY
Authorized
Unlimited common shares and preferred shares with no par value.
Issued
20,733,827 common shares (December 31, 2001: 17,033,827) 3,077,391 2,720,891
Deferred stock-based compensation (3,958) -
Deficit (1,492,213) (1,509,319)
1,581,220 1,211,572
$ 1,971,253 $ 1,883,377
See accompanying notes to the consolidated financial statements.
LINGO MEDIA INC.
CONSOLIDATED INTERIM STATEMENT OF DEFICIT
(Expressed in Canadian dollars)
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
FOR THE NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------
2002 2001
---- ----
Deficit, beginning of period (1,509,319) (1,464,613)
Net income (loss) for the period 17,106 (146,757)
----------- ----------
Deficit, end of period (1,492,213) (1,611,370)
=========== ==========
See accompanying notes to the consolidated financial statements.
LINGO MEDIA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in Canadian dollars)
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
FOR THE NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------
2002 2001
---- ----
Revenue $ 1,032,322 $ 84,051
Cost of sales 386,523 -
645,799 84,051
EXPENSES
General and administrative 418,439 356,139
Interest on long term debt 20,104 20,954
Other interest and bank charges 2,237 2,449
Amortization of capital assets and deferred assets 191,712 48,985
Amortization of deferred stock-based compensation 3,542 -
---------- --------
PROFIT (LOSS) BEFORE THE UNDERNOTED 9,766 (344,476)
Gain on Issue of shares of subsidiary 101,438 -
Gain on sale of subsidiary 197,719
---------- --------
111,203 (146,757)
EARNINGS (LOSS) BEFORE INCOME TAXES
Income taxes 94,097 -
EARNINGS (LOSS) FOR THE PERIOD $ 17,106 $ (146,757)
========== ========
---------- --------
Earnings (Loss) Per Share - Basic and Diluted $ 0.00 $ (0.01)
---------- --------
Weighted average number of common shares outstanding 17,281,401 15,966,978
See accompanying notes to the consolidated financial statements.
LINGO MEDIA INC.
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(Expressed in Canadian dollars)
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
FOR THE NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------
2002 2001
---- ----
OPERATING ACTIVITIES
Net income (loss) for the period $ 17,106 $ (146,757)
Items not affecting Cash:
Gain on Issue of shares of subsidiary (101,438) -
Amortization of capital assets and deferred assets 191,712 48,985
Amortization of deferred stock-based compensation 3,542 -
Gain on sale of subsidiary (197,719)
Change in non-cash working capital items:
Accounts receivables (348,596) 28,363
Short-term investments 22,662
Loan receivable 15,568 1,118
Prepaid expenses and other 15,947 -
Inventory on hand (23,328) -
Work in process 100,380 (17,837)
Accounts payable 53,151 (55,265)
Accrued liabilities (1,250) 19,748
---------- ------
(77,205) (296,702)
---------- ------
FINANCING ACTIVITIES
Issuance of capital stock, net 349,000 20,000
Repayment of bank indebtedness - (145,000)
Increase in long-term debt 180,621 532,497
Repayment of long-term debt (514,293) (95,460)
---------- ------
15,327 312,037
---------- ------
INVESTING ACTIVITIES
Development costs (10,313) (94,626)
Realization of net assets of discontinued operations
Purchase of capital assets (1,658)
Proceeds of sale of subsidiary 150,000
Proceeds of sale of shares of subsidiary 101,438
---------- ------
89,467 55,374
---------- ------
Increase in cash and cash equivalents 27,589 70,709
Cash and cash equivalents - Beginning of period 7,473 44,207
---------- ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 35,062 $ 114,916
========== ======
See accompanying notes to the consolidated financial statements.
LINGO MEDIA INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
For the nine months ended September 30, 2002
Lingo Media Inc. (the "Company") develops, publishes, licenses and distributes
books, audiocassettes, multimedia and ancillary products for English language
learning for the school and retail markets in China and Canada.
1. FUTURE OPERATIONS
These financial statements have been prepared on a going concern basis, which
assumes the realization of assets and liquidation of liabilities in the normal
course of business. The application of the going concern concept is dependent on
the Company's ability to generate future profitable operations and/or obtain
additional financing to fund future operations.
2. SIGNIFICANT ACCOUNTING POLICIES:
The disclosures contained in these unaudited interim consolidated financial
statements do not include all requirements of generally accepted accounting
principles (GAAP) for annual financial statements. The unaudited interim
consolidated financial statements should be read in conjunction with the annual
consolidated financial statements for the year ended December 31, 2001.
The unaudited interim consolidated financial statements reflect all adjustments,
consisting only of normal recurring accruals, which are, in the opinion of
management, necessary to present fairly the financial position of the Company as
of September 30, 2002 and the results of operations and cash flows for the nine
months ended September 30, 2001 and 2002.
The Company experiences seasonal variation in revenue.
The unaudited interim consolidated financial statements are based upon
accounting principles consistent with those used and described in the annual
consolidated financial statements, except the following:
(a) Business Combinations, goodwill and other intangible assets:
In September 2001, the Canadian Institute of Chartered Accountants (CICA) issued
Handbook Sections 1581 "Business combinations" and 3062 "Goodwill and other
intangible assets". The new standards mandate the purchase method of accounting
for business combinations and require that goodwill no longer be amortized but
instead be tested for impairment at least annually. The standards also specify
criteria that intangible assets must meet to be recognized and reported apart
from goodwill. The standards require that the value of the shares issued in a
business combination be measured using the average share price for a reasonable
period before and after the date the terms of the acquisition are agreed to and
announced. Previously, the consummation date was used to value the shares
issued in a business combination. The new standards are substantially
consistent with U.S. GAAP. Adoption of the new standards has not impacted the
consolidated financial statements, as the Company does not have intangible
assets with an indefinite life or goodwill.
(b) Stock-based compensation and other stock-based payments:
Effective January 1, 2002, the Company adopted the new CICA Handbook Section
3870, which requires that a fair value based method of accounting be applied to
all stock-based payments to non-employees and to direct awards of stock to
employees. However, the new standard permits the Company to continue its
existing policy of recording no compensation cost on the grant of stock options
to employees with the addition of pro forma information. The Company has
applied the pro forma disclosure provisions of the new standard to awards
granted on or after January 1, 2002. The pro forma effect of awards granted
prior to January 1, 2002 has not been included.
The standard requires the disclosure of pro forma net earnings and earnings per
share information as if the Company had accounted for employee stock options
under the fair value method. The fair value of the options issued in the
quarter is determined using the Black-Scholes option pricing model. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to income over the vesting period. For the nine months ended
September 30, 2002, the Company's pro forma net earnings is identical to
reported earnings as there were no options issued to employees.
3. ACCOUNTS RECEIVABLE
The components of accounts receivables at the following dates are as follows:
September 2002 December 2001
- ---------------------------------------------------------
Trade Receivables $ 647,936 $ 336,840
Grant Receivable 37,500 -
- ---------------------------------------------------------
Total 685,436 336,840
Grant receivable was used to reduce general and administrative expenses relating
to the Company's publishing projects.
4. LONG-TERM DEBT:
September 2002 December 2001
Bank Loan, repayable in monthly installments of $4,225
plus interest, bearing interest at 4.75% per annum,
secured by a general security agreement, maturing
November 23, 2002. During the period, BDC extended
the terms of repayment by an additional four months
thereby the loan will mature on March 23, 2003. $ 25,350 $ 59,150
Shareholder loan payable due to a company controlled by a
director of the Company, is interest bearing at 12%
per annum and is due in full on January 31, 2003 5,000
Shareholder loan payable, interest bearing at 12% per annum and
is due on January 31, 2003 106,553 36,805
Bank Loan payable, interest bearing at prime rate plus 8%
per annum and was due in full on April 1, 2002 364,621
- ------------------------------------------------------------------------------------------------
131,903 465,576
Less current portion 131,903 411,096
- ------------------------------------------------------------------------------------------------
$ - $ 54,480
5. CAPITAL STOCK, WARRANTS AND STOCK OPTIONS:
(a) Authorized:
Unlimited preference shares, no par value
Unlimited common shares, no par value
The following details the changes in issued and outstanding shares
for nine months ended September 30,2002.
Common Shares
Number Amount
- ------------------------------------------------------------------------------------------------
Balance, December 31, 2001 17,033,827 2,720,891
Issued:
Private placement (i) 3,700,000 349,000
Stock Based Compensation 7,500
- ------------------------------------------------------------------------------------------------
Balance, September 30, 2002 17,033,827 3,077,391
<FN>
(1) During March 2002, the Company completed a private placement of
3,700,000 common shares and 2,775,000 Class D Purchase Warrants for cash
proceeds, net of issue costs, of $349,000. The Class D Purchase Warrants
entitle the holder to acquire one common share for a price of $0.10 per share
for each warrant. The Class D Purchase Warrants expire in March 2003. The
closing stock price for the Company's stock on TSX Venture Exchange was $0.10.
(b) Changes for the stock option plans during the nine months ended September
30,2002:
Weighted
average
Number of exercise Price
shares
- ------------------------------------------------------------------------------------------------
Options outstanding, beginning of the year 1,895,000 $ 0.43
Options granted 170,000 0.11
Options exercised - -
Options cancelled (91,660) 0.19
Options expired - -
- ------------------------------------------------------------------------------------------------
Options outstanding at the end of the year 1,973,340 0.22
- ------------------------------------------------------------------------------------------------
Options exercisable,
end of period 1, 715,007 0.24
- ------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
September 30,2002:
Options outstanding Options vested
------------------------------------- ---------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
price outstanding life price outstanding price
- ------------------------------------------------------------------------------------------------
0.10 - $0.12 850,000 3.89 $ 0.11 591,667 $ 0.11
0.20 - $0.22 743,340 1.59 0.20 743,340 0.20
0.45 - $0.50 380,000 2.91 0.49 380,000 0.49
- ------------------------------------------------------------------------------------------------
1,973,340 2.84 0.22 1,715,007 0.24
The following table summarizes information about warrants outstanding at
September 30,2002:
Class C Warrants outstanding 500,000
(each warrant exercisable into one common share at
$0.15 per share, expiring November 23, 2002 (the expiry
date of the warrants has been extended to November 23,
2003 at the exercise price of $0.15))
Class D Warrants outstanding 2,775,000
(each warrant exercisable into one common share at
$0.10 per share, expiring March 30, 2003(the expiry
date of the warrants has been extended to December 31,
2003 at the revised exercise price of $0.12))
- --------------------------------------------------------------------------------
Total warrants Outstanding 3,275,000
6. SEGMENT INFORMATION:
The Company operates as an international business and has no distinct reportable
business segments.
The Company is developing books, audiocassettes, multimedia and ancillary
products for English language learning to be sold or licensed to the school
market, primarily in China and Canada. This service is called Educational
Publishing. The Company also develops original publishing properties on a
contract basis for corporate clients. This service is called Trade Publishing.
The Company's revenue by geographic region based on the region in which the
customer is located is as follows:
September 2002 September 2001
- --------------------------------------------------------------------------------
Canada $ 383,377 $ 19,551
China 648,945 64,500
- --------------------------------------------------------------------------------
$ 1,032,322 $ 84,051
Substantially all of the Company's identifiable assets as at September 30, 2002
and December 31, 2001 are located in Canada.
The Company's revenue by type of service is as follows:
September 2002 September 2001
- --------------------------------------------------------------------------------
Educational Publishing $ 1,024,822 $ 69,051
Trade Publishing 7,500 15,000
- --------------------------------------------------------------------------------
$ 1,032,322 $ 84,051
7. GAIN ON ISSUE OF SHARES BY SUBSIDIARY:
During the first nine months of year 2002, EnglishLingo, Inc., a subsidiary of
the Company, issued common share for proceeds of U.S. $67,625 (CDN $101,438). As
a result of this offering, the Company recorded a dilution gain of CDN$101,438.
8. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP")
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") as applied in Canada. In the following
respects, GAAP as applied in the United States differs from that applied in
Canada:
September 30, 2002 September 30, 2001
- ----------------------------------------------------------------------------------------------------------
Net income (loss) for the period - Canadian GAAP $ 17,106 $ (146,757)
Impact of U.S. GAAP and adjustments:
Development costs (a) (10,313) (94,626)
Amortization of development costs 89,607 39,728
Software development costs (b) - -
Amortization of software development costs 41,395 -
Compensation expense (c) (58,767) (41,804)
- ----------------------------------------------------------------------------------------------------------
Gain (Loss) for the year - U.S. GAAP $ 79,029 $ (243,459)
The cumulative effect of these adjustments on the consolidated shareholders'
equity of the company is as follows:
September 30, 2002 December 31, 2001
- ----------------------------------------------------------------------------------------------------------
Shareholders' equity based on Canadian GAAP $ 1,581,220 $ 1,211,572
Development costs (a) (760,976) (850,619)
Software development costs (b) (82,788) (113,835)
Compensation expense (c) (182,800) (124,033)
- -----------------------------------------------------------------------------------------------------------
Shareholders' equity - U.S. GAAP $ 554,656 $ 123,085
Under United States GAAP, the amounts shown on the consolidated balance sheet
for development costs and software development costs would both be nil.
(a) Development costs:
Under Canadian GAAP, the Company defers the incremental costs relating to the
development and pre-operating phases of new businesses and amortizes these costs
on a straight-line basis over periods up to five years. Under United States
GAAP, these costs are expensed as incurred.
(b) Software development costs:
Under United States GAAP, the software development costs would be expensed as
incurred.
8. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP")
(c) Options to consultants:
Prior to January 1, 2002, the Company did not recognize compensation expense
under Canadian GAAP when stock or stock options were issued to consultants.
Under U.S. GAAP, the Company has always recorded compensation expense based on
the fair value for stock or stock options granted in exchange for services from
consultants.
(d) Statement of comprehensive income:
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes
standards for the reporting and disclosure of comprehensive income and its
components in financial statements. Components of comprehensive income or loss
include net income or loss and all other changes in other non-owner changes in
equity, such as the change in the cumulative translation adjustment and the
unrealized gain or loss for the year on "available-for-sale" securities. For
all periods presented, comprehensive income is the same as net income.
9. SUBSEQUENT EVENTS
(a) The Company amended the terms of its Series C Warrant by extending the term
for exercise of the Warrants for one additional year, expiring November 23,
2003. The Company issued 500,000 Series C Warrants pursuant to a Private
Placement. Each warrant entitles the holder to purchase one common share of the
Company at $0.15 per share.
(b) The Company amended the terms of its Class D Warrant by extending the term
for exercise of the Warrants for nine additional months, expiring December 31,
2003. 2,775,000 Class D Warrants were issued pursuant to the provisions of a
Private Placement. Each Class D Warrant entitles the holder to purchase one
common share of the Company at $0.10 per share.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Bylaws contain provisions to (i) eliminate the personal liability of our
directors and officers for monetary damages resulting from breaches of their
fiduciary duty (other than breaches from their own willful neglect or default)
provided that nothing shall relieve our directors and officers from the duty to
act in accordance with the Business Corporations Act of Ontario and the
regulations thereunder or from liability for any breach thereof and (ii)
indemnify our directors and officers if he acted honestly and in good faith with
a view to the best interests of the Company, and in the case of a criminal or
administrative proceeding that is enforced by a monetary penalty, he had
reasonable grounds for believing that his conduct was lawful. We believe that
these provisions are necessary to attract and retain qualified persons as
directors and officers. As a result of these provisions, the ability of the
Company or a stockholder thereof to successfully prosecute an action against a
director for a breach of his duty of care has been limited. However, the
provision does not affect the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of his duty of care.
The Securities and Exchange Commission has taken the position that the
provisions will have no effect on claims arising under the federal securities
laws.
ITEM 7. RECENT SALES OF UNREGISTERED SECURITIES.
Financings
- ----------
The Company has financed its operations through borrowings and/or private
issuance of common shares:
During May 1996, Lingo Media Ltd., formerly Alpha Corporation, a wholly-owned
subsidiary of the Company issued 957,022 shares of common stock in consideration
for forgiveness of debt in the amount of $95,702 owed to two individuals and one
entity. The Company believes that these transactions were exempt from
registration pursuant to Section 4(2) of the Securities Act as transactions by
an Issuer not involving a public offering.
During August 1996, Lingo Media Ltd., formerly Alpha Corporation, a wholly-owned
subsidiary of the Company, issued 700,000 shares for $120,000 to eight
individuals and two corporations. The Company believes that the transaction was
exempt from registration pursuant to Section 4(2) of the Securities Act as a
transaction by an Issuer not involving a public offering.
During April 1996, the Company issued 1,200,000 shares to six individuals in
consideration for $120,000, which included Michael P. Kraft, our chief executive
officer, president and director, and Richard J.G. Boxer, a Company director.
The Company believes that the transaction was exempt from registration pursuant
to Section 4(2) of the Securities Act as a transaction by an Issuer not
involving a public offering.
During May 1997, a stock option was exercised by a former director for 70,000
shares resulting in proceeds to the Company of $14,000. The Company believes
that the transaction was exempt from registration pursuant to Section 4(2) of
the Securities Act as a transaction by an Issuer not involving a public
offering.
From March 2000 through April 2000 the Company issued 5,000,000 shares in
consideration for net proceeds of $1,811,872 to various investors outside of the
United States. The Company believes that the transaction was exempt from
registration pursuant to Regulation S.
From February through March 2000, stock options were exercised by three
individuals for 150,000 shares resulting in proceeds of $30,000. The Company
believes that the transactions were exempt from registration pursuant to Section
4(2) of the Securities Act as transactions by an Issuer not involving a public
offering.
During April 2001, a stock option was exercised by Michael P. Kraft, our chief
executive officer, president and director, for 100,000 shares resulting in
proceeds of $20,000. The Company believes that the transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as a transaction by
an Issuer not involving a public offering.
During November 2001, 1,000,000 units were issued in consideration for $100,000
to one entity. Each unit priced at $0.10 and consisting of one common share and
one-half common share purchase Class C warrant. Each whole warrant is
exercisable into one common share at a price of $0.15 per share for a period of
12 months. These Class C Warrants expiring November 23, 2002 exercisable at
$0.15 were extended until November 23, 2003 at $0.15 per share. The Company
believes that the transaction was exempt from registration pursuant to Section
4(2) of the Securities Act as a transaction by an Issuer not involving a public
offering.
During March 2002, 3,700,000 units were sold in consideration for net proceeds
of $349,000 to seven individual investors. Each Unit is comprised of one common
share and three quarters of one Class D Warrant. Each whole Class D Warrant
entitles the holder to purchase one common share at an exercise price of $0.10
per share for a period of 12 months from the date of closing. Class D warrants
are exercisable at $0.10 per share until March 30, 2003, the original expiry
date. The expiry date of the Class D warrants was extended by the Company
pursuant to the approval of the TSX Venture Exchange for an additional 9 months
from March 31, 2003 to December 31, 2003 at $0.12 per share. According to the
TSX Venture Exchange policy, the exercise price of the Class D warrants at the
time of the application for approval of the extension has to be higher than the
market price of the shares. On March 19, 2003 the closing market price for our
shares was $0.11. Accordingly, the exercise price for the Class D warrants
during the 9 month extension period is $0.12 per share. The company believes
that the transaction was exempt from registration pursuant to Section 4(2) of
the Securities Act as a transaction by an Issuer not involving a public
offering..
ITEM 8. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. The following is a list of exhibits to this registration
statement:
Exhibit No.
2.1(1) Acquisition Agreements with Alpha Corporation,
dated May 7, 1997
2.2(1) Acquisition Agreements for CSVL, dated March 5, 1998
2.3(1) Stock Purchase Agreement of AlphaCom Corporation
2.4(1) Amendment to Stock Purchase Agreement of AlphaCom Corporation
3.1* Certificate of Incorporation
3.2(2) Bylaws
3.3(2) Amendment to Certificate of Incorporation4.1(2)
Form of share certificate
4.2* Class C warrant Certificate expiring on November 23, 2002
4.3* Class D warrant Certificate expiring on March 30,2003
4.4* Amended Class C warrant Certificate expiring on November 23, 2003
4.5* Amended Class D warrant Certificate expiring on December 31,2003
5.1* Opinion of David M. Loev, Attorney at Law - as to certain matters
10.1(1) Management Agreement with MPK Inc.
10.2(1) Amendment to Agreement with Michael P. Kraft
10.3(1) Amendment #2 to Agreement with Michael P. Kraft
PEOPLE'S EDUCATION PRESS:
10.4(1) Master Agreement to Develop, Publish and Sell Product
10.5(1) Product Agreement #1 - Communications: An Interactive EFL Program
(Grade 1-6)
10.6(1) Product Agreement #2 - Junior Reading Training Series
10.7(1) Product Agreement #3 - Beginning English for Young Learners
CRAZY ENGLISH (RENZHEN GROUP):
10.8(1) Master Agreement to Develop, Publish and Sell Product
10.9(1) Product Agreement #1 - English In Business Communications
10.10(1) Product Agreement #2 - The Out Loud Program
Escrow Agreements
10.11(1) Performance Escrow Agreement (Form C Escrow Agreement) between
Alpha Ventures Inc. (now Lingo Media Inc.), Montreal Trust Company
of Canada (Transfer Agent) and Kraft and Sherman Holding Companies
(1077431 Ontario Limited and Kraft Investments Corp.) & Kraft and
Sherman RRSP's
10.12(1) Performance Escrow Agreement between Sherman Holding Company
(1077431 Ontario Limited), Montreal Trust Company of Canada
(Transfer Agent) and Richard Sherman
10.13(1) Performance Escrow Agreement between Kraft Holding Company (Kraft
Investments Corp.), Montreal Trust Company of Canada
(Transfer Agent), and Michael P. Kraft & Associates Inc.
23.1* Consent of KPMG, LLP
23.2* Consent of David M. Loev, Attorney at Law, See Exhibit 5.1
* Filed Herein
(1) Filed as an exhibit to the F-1/A amended registration statement
filed on December 20, 2002.
(2) Filed as an exhibit to the F-1/A amended registration statement
filed on February 24, 2003.
(b) Financial Statements
FINANCIAL STATEMENTS
--------------------
Index to Financial Statements
- --------------------------------
Audited Financial Statements
- ------------------------------
A. Auditor's Report, dated May 3, 2002
Consolidated Balance Sheets at December 31, 2001 and December 31,
2000
Consolidated Statements of Operations and Deficit
for the years ended December 31, 2001, December 31, 2000 and December 31,
1999
Consolidated Statements of Cash Flows
for the years ended December 31, 2001, December 31, 2000, and December 31,
1999
Notes to Financial Statements
Unaudited Financial Statements
- --------------------------------
B. Consolidated Balance Sheet at September 30, 2002
Consolidated Statements of Operations and Deficit for the Nine Months Ended
September 30, 2002 and September 30, 2001 and the Nine Months Ended
September 30, 2002 and September 30, 2001
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2002 and September 30, 2001, and the Nine Months Ended September 30,
2002 and September 30, 2001
Notes to Financial Statements
ITEM 9. UNDERTAKINGS.
The registrant hereby undertakes that it will:
1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement
a) Include any prospectus required by Section 10(a)3) of the
Securities Act;
b) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered if the total dollar value of
securities offered would not exceed that which was registered and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Securities and Exchange Commission pursuant to Rule 424(b)if, in the
aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
c) Include any additional or changed material information on the plan
of distribution.
2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
4) If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Item 8.A. of Form 20-F (17 CFR 249.220f) at the start of any
delayed offering or throughout a continuous offering. Financial statements
and information otherwise required by Section 10(a)(3) of the Act need not
be furnished, provided that the registrant includes in the prospectus, by
means of a post-effective amendment, financial statements required pursuant
to this paragraph (a)(4) and other information necessary to ensure that all
other information in the prospectus is at least as current as the date of
those financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3 (Sec.239.33 of this chapter), a
post-effective amendment need not be filed to include financial statements
and information required by Section 10(a)(3) of the Act or Sec.210.3-19 of
this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Form F-3.
5) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
6) In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
Part II-2
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933, certifies that
it has reasonable grounds to believe that it meets all of the requirements for
filing on Form F-1 and has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Toronto, Canada,
on March 26, 2003.
By /s/ Michael P. Kraft
-----------------------------
Name: Michael P. Kraft
Title: Chief Executive Officer
and Director
By /s/ Khurram R. Qureshi
-----------------------------
Name: Khurram R. Qureshi
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Michael P. Kraft President, Chief Executive March 26, 2003
- -------------------- Officer and Board Member
Michael P. Kraft
/s/ Khurram R. Qureshi Chief Financial Officer March 26, 2003
- ----------------------
Khurram R. Qureshi
/s/ Richard J. G. Boxer Board Member March 26, 2003
- -----------------------
Richard J. G. Boxer
/s/ Richard H. Epstein Board Member March 26, 2003
- ----------------------
Richard H. Epstein
/s/ Chen Geng Board Member March 26, 2003
- -------------
Chen Geng
/s/ Scott Remborg Board Member March 26, 2003
- -----------------
Scott Remborg
/s/ Imran Atique Secretary / Treasurer March 26, 2003
- ----------------
Imran Atique