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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: AUGUST 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-18066
CHELL GROUP CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 11-2805051
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 3RD AVE., 21ST FLOOR, NY, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (416) 675-0874
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE US$0.0467
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value (i.e., last price) of voting stock held by
non-affiliates of the Registrant, as of April 7, 2004 US$275,000 based on the
closing sale price of US$0.02 on April 7, 2004.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of April 7, 2004 13,795,907 shares of common stock,
par value US$0.0467 per share
DOCUMENTS INCORPORATED BY REFERENCE: NONE
FORWARD LOOKING STATEMENTS
--------------------------
THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN
CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE
THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY
RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. WHEN USED
IN THIS ANNUAL REPORT, STATEMENTS THAT ARE NOT STATEMENTS OF CURRENT OR
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING
THE FOREGOING, THE WORDS "PLAN", "INTEND", "MAY," "WILL," "EXPECT," "BELIEVE",
"COULD," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR SIMILAR EXPRESSIONS OR OTHER
VARIATIONS OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. EXCEPT
AS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
ANY REFERENCE TO "CHELL", THE COMPANY OR THE REGISTRANT, WE, OUR OR US MEANS
CHELL GROUP CORPORATION, INC. AND ITS SUBSIDIARIES.
TABLE OF CONTENTS
FORM 10-K INDEX
PAGE
PART I
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 9
Item 3. Legal Proceedings................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................... 12
Item 6. Selected Financial Data........................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 25
Item 8. Financial Statements and Supplementary Data....................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................... 26
Item 9A. Controls and Procedures........................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant................ 28
Item 11. Executive Compensation............................................ 30
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters................................... 33
Item 13. Certain Relationships and Related Transactions.................... 34
Item 14. Principal Accountant Fees and Services............................ 35
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 36
PART I
EXCHANGE RATES
The currency amounts in this Annual Report on Form 10-K, including the
financial statements, are, unless otherwise indicated, expressed in Canadian
dollars ("Cdn$"). This Form 10-K contains translations of certain amounts in
Canadian dollars into United States dollars ("US$") based upon the exchange rate
in effect at the end of the period to which the amount relates, or the exchange
rate on the date specified. For such purposes, the exchange rate means the noon
buying rate in New York City for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate"). These translations should not be construed as
representations that the Canadian dollar amounts actually represent such U.S.
dollar amounts or that Canadian dollars could be converted into U.S. dollars at
the rate indicated or at any other rate. The Noon Buying Rate at the end of each
of the five years ended August 31, the average of the Noon Buying Rates on the
last day of each month during each of such fiscal years and the high and low
Noon Buying Rate for each of such fiscal years were as follows:
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended August 31,
2004(1) 2003 2002 2001 2000 1999 1998
At end of period Cdn$1.3113 Cdn$1.3857 Cdn$1.5588 Cdn$1.5508 Cdn$1.4715 Cdn$1.4965 Cdn$1.5722
Average for period 1.3245 1.4822 1.5724 1.5284 1.4714 1.4949 1.4390
High for period 1.3632 1.5778 1.6003 1.5825 1.4955 1.5135 1.5770
Low for period 1.2960 1.3523 1.5317 1.4685 1.4489 1.4760 1.4100
(1) Through April 6, 2004.
On April 6, 2004 the Noon Buying Rate was Cdn $1.3093.
ITEM 1. BUSINESS.
OVERVIEW
GENERAL
At August 31, 2002, we were engaged in the business of providing systems
integration and interactive entertainment. Our business is conducted in our
wholly-owned operating subsidiaries. At such date, we provided systems
integration services through our Logicorp Data Systems Ltd. and Logicorp
Services Group Ltd. subsidiaries (collectively referred to as "Logicorp") and
eTelligent Solutions Inc. ("eTelligent"); and interactive entertainment services
through our NTN Interactive Network Inc. ("NTN") and GalaVu Entertainment
Network Inc. ("GalaVu") subsidiaries.
We sold GalaVu on April 25, 2003 and effective December 15, 2003 we sold
certain assets and liabilities of NTN. We discontinued the operations in our
merchant capital services subsidiaries comprised of Chell Merchant Capital Group
("CMCG") and Chell.com USA, during February 2001; CMCG was then used to acquire
Logicorp in January 2002.
We were incorporated on May 12, 1986 pursuant to the laws of the State
of New York as TrioSearch, Inc. In June 1988, we changed our name to NTN Canada,
Inc. In March 1998 we changed our name to Networks North Inc. and in September
2000, changed our name to Chell Group Corporation. Our head office and principal
place of business is located at 14 Meteor Drive, Toronto, Ontario, M9W 1A4. Our
registered office is located at c/o Reitler Brown LLC, 800 Third Avenue, 21st
Floor, New York, New York, 10022.
1
Through August 31, 2001, our management employed an aggressive
acquisition and disposition strategy. During the year ended August 31, 2002, our
management employed a strategy of building and maintaining our current
operations.
In October 1996, we acquired all of the outstanding stock of Magic
Lantern Communications Ltd., an Ontario corporation, and its subsidiaries. In
August 1997, we acquired through Magic Lantern certain business assets of Image
Media Ltd. and 802117 Ontario Inc., operating as Pilot Software. Effective March
18, 2002, we sold all of the outstanding stock of Magic Lantern Communications
Ltd. for Cdn$1.85 million in cash.
As of June 1999, we acquired all of the outstanding stock of Interlynx
Multimedia Inc., an Ontario corporation. Effective June 2001, we sold our
interest in Interlynx for $50,000 cash and a $45,000 note.
In September 1999, we acquired substantially all of the property and
assets (excluding accounts receivable) of GalaVu Entertainment Inc., an Ontario
corporation. In April 2003, we sold GalaVu for $170,000 and a note for $325,000.
In September 2000, we acquired certain assets and the following shares
from Chell.com, a corporation the sole stockholder and director of which is
Cameron Chell, our former Chairman of the Board of Directors, President, and
Chief Executive Officer, for an aggregate purchase price of US$27,002,086: (a)
480,000 shares of cDemo which then represented approximately 14.3% of cDemo's
issued and outstanding stock; (b) 875,000 shares of Engyro Inc. which then
represented approximately 34% of Engyro's issued and outstanding stock; and (c)
100% of the issued and outstanding stock of Chell.com (USA) Inc., a Nevada
corporation. See "Certain Relationships and Related Party Transactions."
Effective January 1, 2002, we acquired through CMCG all of the issued
and outstanding shares of 123557 Alberta Ltd. and 591360 Alberta Ltd. which own
1/3 of the shares of Logicorp Data Systems Ltd., and Logicorp Service Group Ltd.
respectively. The remaining 2/3 of the shares of Logicorp Data Systems and
Logicorp Service Group were acquired directly by CMCG.
On March 18, 2002, we sold our educational video and media resources
business, which was conducted through our Magic Lantern subsidiary and its
subsidiaries.
Effective December 15, 2003 we sold certain assets and liabilities of
NTN to NTN Communications, Inc. ("NTN Communications"), an unaffiliated third
party from which NTN licenses portions of its technology. The purchase price
consisted of US$250,000 in cash, US$650,000 in stock of NTN Communications, and
additional cash based on working capital at closing. The purchase price was
offset by approximately US$700,000 owed by NTN to NTN Communications under this
license agreement. We believe that the interactive entertainment industry does
not represent the growth markets that we wish to develop.
Until April 30, 2001, Chell.com USA was an operating company in the
merchant services. Since then and thru August 31, 2002, we have not had any
operations in merchant services.
Engyro and cDemo were investment companies that were invested in under
our merchant services segment. We have no further plans to develop these
companies. We held shares in these companies as investments which were written
down during the fiscal year ended August 31, 2001 to zero.
BUSINESS SEGMENTS
Systems Integration is an area of business in which our subsidiaries
offer systems solutions to companies of various sizes. These solutions can be
through the delivery and installation of computer hardware solutions; through
offering services to companies to aid in their business processes or
infrastructures or through personalized solutions aided for growing technology
with their organization.
Interactive Entertainment is an area of business that we have decided to
divest ourselves of in order to focus our attention on the systems integration
as is seen with the subsequent sales of GalaVu and NTN. This segment was viewed
as an area of business in which we could use our technology to provide
entertainment to the end user. In addition to being a benefit the end users,
this entertainment would allow for the interaction with other users or just for
their own benefit.
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Merchant Services was viewed as an area in which we could provide
financing and operational expertise to growing companies in order to aid them
with their development and growth. This segment has been discontinued by the
closing down of our CMCG subsidiary's operations.
ORGANIZATIONAL STRUCTURE
During the year ended August 31, 2002, we conducted our business through
five material operating subsidiaries or subsidiary groups and three other
companies in which we held investments. The following is a list of these
subsidiaries or groups and investments, a designation of the business segments
in which each then operated, and the percentage of our revenue attributable to
such subsidiary or group of subsidiaries or investment:
- ----------------------------------------------------------------------------------------------------
PERCENTAGE OF REVENUE
FOR THE YEAR ENDED
WHOLLY-OWNED SUBSIDIARIES BUSINESS SEGMENT AUGUST 31, 2002
====================================================================================================
SUBSIDIARIES OR SUBSIDIARY GROUPS ACTUAL PROFORMA(1)
- --------------------------------- ------ ----------
Logicorp Systems Integration 94.9 70.6
eTelligent Systems Integration 5.1 3.7
NTN (sold December 2003) Interactive Entertainment 0.0 13.6
GalaVu (sold April 2003) Interactive Entertainment 0.0 12.1
CMCG Merchant Services 0.0 0.0
INVESTMENT COMPANIES
Engyro, Inc. Other 0.0 0.0
cDemo Inc. Other 0.0 0.0
======================================================================================================
(1) The operations of NTN were sold on December 15, 2003. We sold GalaVu on
April 25, 2003. We discontinued the operations of CMCG in February 2001.
CMCG was then used to acquire Logicorp in January 2002.
We believe that we currently beneficially own less than 5.0% of the
outstanding securities of Engyro and cDemo. As a result of our minority
investment in such entities, future revenues, when and if realized, will not be
included in our total revenues. We have no obligation to provide additional
funding or support to such corporations and believe that such corporations are
immaterial to our business.
LOGICORP
Logicorp is a Western Canadian information technology solution provider,
specializing in network infrastructure, security, Microsoft Business Solutions
and managed services. Our strategy is for our clients to consider us their one
source for product and services, to meet their entire network infrastructure,
security and managed services needs, whether it is at a single or multiple
locations. We believe our strong relationship with manufacturers and suppliers
and our commitment to development and education can be a huge advantage for our
clients. We provide the strategies, solutions, services and products to help our
clients manage the business and technology complexities of the digital economy,
bringing together the world's best technologies and processes to address our
clients' critical business imperatives. Our goal is to help clients solve
complex business issues and achieve results with technology.
IT INFRASTRUCTURE. We offer comprehensive, expert development of clients' IT
environments. Through our supply channels and our team of experts, we can assist
a client in creating an IT infrastructure that will enable them to concentrate
on managing their business and not the technology. Whether through remote
monitoring and management, request management, or on-site systems support we can
help a company maintain smooth operation of its network, regardless of the size
of the network, by assisting in the management of the desktop environment for
end-user communities, implementation and maintenance of desktop infrastructure,
help-desk services, managing local area networks and shared systems and
technology lifecycle management. We also offer a continuum of fully managed,
scalable, hosting services, including assisting clients with the implementation
and hosting of their enterprise packaged applications, storage related
consulting, mainframe management, security and privacy services and web hosting
services.
- ----------
(1) - See Note 13 of consolidated financial statements for disclosures on
business acquisitions.
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o END USER SERVICES. Our services are customized to manage the desktop
environment for end-user communities with distinct user profiles,
devices, applications, work locations or collaboration needs. Offered
through a Web portal with flexible pricing options. End user services
include messaging, digital learning, mobility and mail services.
o FIELD SERVICES. We offer on-site implementation and maintenance of
desktop infrastructure, including hardware and software support,
install/move/add/change services and warranty management.
o HELPDESK SERVICES. We provide users with a single point of contact for
problem and service requests. These services enable direct interaction
between the desktop user and EDS' technical support organizations, which
leverage both human and technical resources.
o INFRASTRUCTURE SERVICES. We manage local area networks and shared
systems to defined levels of performance, including server management,
network management, security management and backup/restore services.
o TECHNOLOGY LIFECYCLE MANAGEMENT. EDS provides a suite of services that
augment, support and increase the value and productivity of end-user
hardware and software. These services include planning and architecture,
procurement, global reporting, model office services (to test designs
before implementation), security management and business
continuity/disaster recovery services.
o SECURITY AND PRIVACY. We deliver consulting, technology, training and
managed solutions to ensure the privacy, integrity and continued
availability of critical information and processes. Our services and
solutions include smart cards and biometrics, perimeter protection of
logical systems, best practices in business continuity, security and
privacy training and outsourced managed security and privacy.
TRANSFORMATION SERVICES. Our transformation services consist of Business Process
Innovation Services and Business Acceleration Services. Our Business Process
Innovation Services help clients achieve their business objectives by
redesigning and transforming their process and performance measurement systems
to effectively support their business strategies. Our Business Acceleration
Services optimize business processes and deliver solutions that enable clients
to quickly realize business value, generate savings and minimize implementation
risk.
APPLICATIONS MANAGEMENT AND DEVELOPMENT SERVICES. Our services help
organizations plan, develop, integrate and manage custom applications, packaged
software and industry-specific solutions. We offer applications management and
development services on an outsourced or out-tasked basis. Services range from
outsourcing of all application development and management to implementation and
management of Logicorp-owned or third-party industry applications. Our services
are supplemented by our industry-specific applications for the communications,
financial, health care and transportation industries, as well as for government
clients.
SERVICES CONSULTING
Services Consulting consist of a variety of innovative and scalable
solutions from enterprise strategy through application design, development and
deployment. Our services encompass the management and deployment of disciplines,
competencies and capabilities within the following areas: Applications Services,
Applied Value Chain Services, Business Process Innovation Services and Business
Acceleration Services.
o APPLICATION DEVELOPMENT AND SUPPORT. We create new applications,
providing full lifecycle support through delivery. We define the
application requirements, analyze application characteristics, implement
to a production environment and monitor performance for a warranted
time.
o APPLICATION SELECTIVE OUTSOURCING. We offer full support for either
specific applications or an entire application portfolio. An expert
Logicorp team assesses the specified applications, plans the transition
and provides ongoing management to improve the client's productivity and
operating efficiency.
o CUSTOMER RELATIONSHIP MANAGEMENT SERVICES. Our services help clients
create collaborative, client-centric organizations. We provide
assessments, design and architecture, and implementation of CRM
solutions to manage the customer experience.
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o ENTERPRISE RESOURCE MANAGEMENT SERVICES. Our services help clients
assess and optimize their core enterprise business processes and
applications globally in both shared and dedicated environments.
Services include solutions engineering, enterprise modeling, real-time
automation, business intelligence and enterprise-software expertise.
o INDUSTRY PRODUCTS. Services include a full range of consulting,
planning, implementation and optimization to support adapting and
deploying industry-specific solutions to meet our clients' needs.
BUSINESS PROCESS INNOVATION SERVICES
Business Process Innovation Services facilitates clients in achieving
their business objectives by redesigning and transforming their people, process
and performance measurement systems to effectively support their business
strategies. We create operational efficiencies and enhancements for our clients
to deliver products and services to their clients as well as throughout our
client's business. Services include the prompt identification of opportunities
for the greatest impact, the development of a business case for change, the
implementation of industry-specific best practices and the development of a
phased change implementation plan. Our competencies are organized into the
following practice areas:
o INTEGRATION SERVICES. By integrating disparate systems, we offer clients
greater access to information, systems and tools within their enterprise
or among other members of their trading community. Our capabilities
include integration assessment, application-to-application and
business-to-business integration, building of portals and dashboards and
workflow integration.
o PORTALS AND DASHBOARDS. Provides clients with immediate, aggregated
information in a personalized view. We focus on implementing secure,
Web-based solutions that provide a single point of access to
information, applications and services. This practice combines functions
from many IT disciplines, including business intelligence, document
management and Intranet site development.
o COLLABORATION SERVICES. Enables clients to share and coordinate data
with employees, customers, suppliers and partners, build digital
communities and exchange information within applications, among
enterprises and across business relationships. We optimize collaboration
and improve related business processes through the deployment of leading
messaging and collaboration technologies.
o MOBILE APPLICATIONS. Enables clients to extend information sharing to an
increasingly remote work force. Our offerings include Mobile Workplace,
an integrated service platform providing mobile employees real-time
interactive access to workplace applications, and Mobile e-mail and
Collaboration, extending e-mail access to mobile employees.
o WEB CONTENT MANAGEMENT. We design and deploy innovative Web content
management solutions to help clients manage digital contents to deliver
a personalized Web experience, enable collaboration and promote re-use.
o WEB APPLICATION DEVELOPMENT. Allows clients to significantly reduce IT
costs and create more responsive and effective organizations by
seamlessly connecting information, people, systems and devices. We offer
a range of services using Microsoft (R) and Java (R) 2 Enterprise
Edition (J2EE) platforms as well as the advantages of certified
developers, proven architectural frameworks and best practice software
development methodologies.
o MICROSOFT ENTERPRISE SERVICES. We build and deliver innovative solutions
that leverage Microsoft platforms, products and tools, with emphasis on
developer tools, server software, client software and end user
applications.
eTELLIGENT SOLUTIONS INC.
eTelligent is a western Canadian team of business system consultants
specializing the in implementation and integration e-business, CRM (customer
relationship management) and financial services solutions from Microsoft Great
Plains. It is comprised of professional accountants, information technology
specialists and support staff, who provide implementation, training and support
services. eTelligent Solutions has offices in Edmonton and
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Calgary, Alberta. It has offered successful business solutions to a variety of
business organizations for over ten years, and it currently represents and
supports over 70 Microsoft Great Plains customers throughout Alberta. All of its
employees are certified through the Microsoft Great Plains University.
NTN
NTN Interactive Network. Our NTN Interactive Network subsidiary is
engaged in the marketing and distribution of the NTN Entertainment Network
services throughout Canada. These activities are being conducted through an
exclusive license covering Canada granted to NTN Sports Inc., (predecessor to
our NTN Interactive Network subsidiary) by NTN Communications, Inc. of Carlsbad,
California, an unaffiliated corporation from which NTN licenses a portion of its
technology ("NTN-US"). The license grants our NTN Interactive Network subsidiary
the right to market the products and programs of NTN Communications, Inc.
throughout Canada for a 25-year term ending December 31, 2015. NTN-US does not
have an equity position in us or in our NTN Interactive Network subsidiary.
Effective on December 15, 2003, we sold certain assets and liabilities
of NTN to NTN-US. In exchange for this business and assets, NTN-US has agreed to
pay US$1.5 million (Cdn$2.03 million), consisting of (i) US$650,000
(approximately Cdn$853,000) of unregistered common stock (approximately 238,000
shares) of NTN-US (NTN:AMEX) valued on the closing market price on the date of
sale and (ii) US$250,000 (approximately Cdn$328,000) in cash at closing, less
certain fees due from NTN to NTN-US, such amounts payable in three equal monthly
payments.
THE NTN ENTERTAINMENT NETWORK
The NTN Entertainment Network is owned and operated by NTN-US and uses
existing technology to broadcast two-way interactive live events to subscriber
locations. The network provides digital data transmissions, which enable
equipment and software at subscriber locations to display text and graphics
programming and to interpret responses from network viewers. All programming is
produced at and transmitted from the NTN-US broadcast center in Carlsbad,
California. More than 3,600 restaurants, lounges, hotels, and other hospitality
sites across North America have subscribed to these services and installed
systems capable of receiving network broadcasts. These subscriber systems
receive satellite transmissions containing updates to the network interactive
programs, such that thousands of patrons at subscriber locations can interact
with the same programs simultaneously. Our NTN subsidiary markets the network
throughout Canada to the hospitality industry, installs the systems, and
provides technical and marketing support to network sites. Over 400 group
subscribers are located in Canada. Designed to be hardware independent, the
network may be transmitted through a variety of techniques including, direct
satellite, cable, gateway service, FM sideband, Internet, TV vertical blanking
interval, and telephone. We currently use direct satellite as the method of
transmission.
NETWORK PROGRAMMING.
The two-way interactive programming currently featured over the network
includes a variety of interactive sports and trivia games permitting viewer
interaction and participation for 16 hours each day. All present network
programming is structured to provide time for national, regional and local
advertisements, as well as for local inserts, which permit each subscriber to
display announcements of promotional prices or other events at its business
location.
NTN PLAY-ALONG GAMES.
NTN Play-Along Games are played in conjunction with live, televised
events. The primary NTN Play-Along Game is QB1, a game of football strategy.
NTN PREMIUM TRIVIA GAMES.
NTN Premium Trivia Games are promotion-oriented weekly game shows that
usually require an hour of participation. Prizes are awarded to the top
finishers. Games among all participating subscriber locations include the
following: Showdown, a general knowledge game; Sports Trivia Challenge, a game
focused on sports, and Spotlight, a game that quizzes players about the world of
show business and celebrities; Playback, a music news, trivia, song title and
musical topics game; and Sports IQ, a weekly sports trivia game. Half-hour
interactive trivia
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games comprise the majority of the Network's programming. Countdown and Wipeout
are trivia games designed for fast competitive play among participants at each
subscriber location.
INTERACTIVE EVENTS. Interactive Events is a customizable, hosted
interactive trivia, polling or question event brought to the customer. An event
can be created with a customer's logos, graphics and content and will be hosted
by a real host to aid in increasing the enjoyment of the event.
NTN INTERACTIVE NETWORK MARKET. Our NTN subsidiary positions the network
to prospects and clients as a means of attracting patrons (to play the games),
retaining their patronage (as they return to play again), and increasing the
length of time patrons stay in their establishment. As the number of repeat
customers and their length of stay increases, the hospitality establishment has
an increased opportunity to sell additional food and beverage.
Our NTN subsidiary's sales force targets the strongest hospitality
outlets in Canada, including a number of chain accounts. Attractive rental
packages are in place to support our NTN subsidiary's sales efforts. Our NTN
subsidiary promotes the network as one of the best and technically advanced
forms of on-premises advertising to this market, offering long-term repetitive
exposure to a captive, attentive, and enthusiastic audience.
Each end user receives the subscriber system, including the equipment
and the proprietary software, from our NTN subsidiary. In most instances, the
customer rents the equipment from our NTN subsidiary. Our NTN subsidiary, in
turn, purchases equipment from several suppliers. Following installation, each
end user pays a monthly fee to our NTN subsidiary for the network services.
GALAVU ENTERTAINMENT NETWORK INC.
Our GalaVu subsidiary (sold April 2003) is a technology-based
entertainment provider of interactive in-room entertainment systems to hotels.
At August 31, 2002, our GalaVu subsidiary was installed in over 200 Canadian
hotels, primarily small and mid sized. GalaVu's interactive system is based on
proprietary technology and provides a wide range of affordable, in-room
entertainment packages. Marketed to guests under the "Round-the-Clock
Entertainment" brand, GalaVu's suite of products include Hollywood movies on
demand, premium television programming, and other information and entertainment
services designed to enhance the stay of hotel guests while generating revenue
for our GalaVu subsidiary and its hotel partners.
Pursuant to a Share Purchase Agreement dated April 25, 2003, we sold to
DVOD Networks Inc., an Ontario corporation ("DVOD"), all of the issued and
outstanding shares of capital stock of GalaVu for $1.00. Concurrently, we
assigned to DVOD or caused our subsidiaries to assign to DVOD, for $2.00
promissory notes and other receivables of GalaVu in the aggregate amount of
$1,672,608. In addition, 488605 Ontario Limited, a non-affiliated Canadian
corporation ("488605") and an individual assigned a $375,000 note payable by
GalaVu in return for $170,000. This amount was paid by DVOD to us and a new
$325,000 note was issued to one of our subsidiaries.
CHELL MERCHANT CAPITAL GROUP
CMCG was set up as a separate subsidiary to be in the business of
researching, identifying and acquiring technology companies. CMCG's focus was to
identify upcoming technology trends and create the effective infrastructure
required to build out and support these trends.
ENGYRO
Engyro is the surviving legal entity resulting from the merger of R Home
Funding Co. Ltd., a Nevada corporation and its wholly owned Delaware subsidiary,
Engyro, Inc. Its headquarters are located in Shelton, Connecticut. Engyro was a
financial transaction engine designed to support the high demands created by
rapid growth in the application service Provider industry. We own less than 5.0%
of the stock of Engyro and the remaining equity of the company is owned by
private venture capitalists and Engyro's management. The direction and purpose
of the company may now be very different from its original intent. We have
written down our investment to zero as our ownership is less than 5%.
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cDEMO
cDemo is a start up company that was incorporated in the State of
Delaware in February 2000. We own less than 5.0% of the stock of cDemo and the
remainder of the company's stock is distributed as follows: private venture
capitalists; cDemo's management and employees, none of whom are affiliated with
us. Allan Chell, the brother of Cameron Chell, our former Chairman of the Board
of Directors, President and Chief Executive Officer, is a Director and principal
shareholder of cDemo and it's Vice-President of Strategic Development.
cDemo plans to position itself as a trusted and unbiased electronic
assessment tool and service. To perform a standardized electronic assessment and
listing, cDemo has researched and developed an assessment methodology that is
capable of "commoditizing" products, and displaying them in a format that is
easy to both read and view. cDemo's unique consortium of technology partners are
producing a technological system that we believe will be capable of tailoring
the cDemo electronic assessment to industry and partner requirements. The
assessment software will be loaded into a rugged, handheld tablet. cDemo plans
to use this tablet device to collect and transmit an electronic demonstration
based on an Internet connection to the cDemo backend database.
GROWTH STRATEGY
Our growth strategy primarily focuses on increasing the profitability of
our operating companies through process development and technological advances
to aid an organization in operating efficiencies, as well as acquiring assets of
or interests in new companies such that we can increase our market share and our
profitability or acquire unique technologies that our companies can sell and
promote to our existing and potential new clients.
COMPETITION
The market for each of our business segments at August 31, 2002 is
rapidly evolving and highly competitive. Although we believe that each of our
business segments is comprised of a large number of actual and potential
competitors and that, other than our interactive entertainment business segment,
the business segments in which we operate diverse segments of the interactive
entertainment and venture capital services markets will provide opportunities
for more than one supplier of products and services similar to ours, it is
possible that a single supplier may dominate one or more market segments.
Competitors include a wide variety of companies and organizations, including
venture capitalists, interactive entertainment providers, Internet software,
content, service and technology companies, telecommunication companies, cable
companies and equipment/technology suppliers.
Our NTN Interactive Network subsidiary operates in the interactive
entertainment services industry. In 1996, we became aware of a new entertainment
system, Sports Active, attempting to enter the hospitality market. Sports Active
offers only two programs, a football game and a trivia game. While it is
visually entertaining, it requires audio and we believe this is a significant
drawback in the restaurant environment in which it is being marketed. We have
not found this to be a significant competitive entry.
With the entrance of motion picture, cable and TV companies, competition
in the interactive entertainment and multimedia industries will likely intensify
in the future.
GalaVu's competition includes other interactive in-room entertainment
providers. With the development of new satellite technologies, and the
increasing speed of network connections, GalaVu expects the competition to
develop new services. These new services may include digital programming on
demand, enhanced hotel concierge services, billing presentment and settlement,
and others. GalaVu expects that new technologies will lead to intensifying
competition in the future.
INTELLECTUAL PROPERTY
Our success is dependent upon software and other intellectual property
from third parties. Notwithstanding the foregoing, no one license is material to
our business prospects, financial condition or results of operations. We must
conduct our operations without infringing on the proprietary rights of third
parties. We also rely upon non-patented trade secrets and the know-how and
expertise of our employees. To protect our licensed technology and other
intellectual property, we rely primarily on a combination of the protections
provided by applicable contract, copyright, trademark, and trade secret laws as
well as on confidentiality procedures and licensing arrangements. Although we
believe that we have taken appropriate steps to protect our non-patented
proprietary rights, including requiring that our employees and third parties who
are granted access to our licensed technology enter into
8
confidentiality agreements with us, there can be no assurance that these
measures will be sufficient to protect our rights against third parties. Others
may independently develop or otherwise acquire non-patented technologies or
products similar or superior to ours.
We license from third parties certain software and Internet tools that
we include in our services and products. If any of these licenses were
terminated, we could be required to seek licenses for similar software and
Internet tools from other third parties or develop these tools internally. We
may not be able to obtain such licenses or develop such tools in a timely
fashion, on acceptable terms, or at all. Companies participating in the software
and Internet technology industries are frequently involved in disputes relating
to intellectual property. We may in the future be required to defend our
intellectual property rights against infringement, duplication, discovery, and
misappropriation by third parties or to defend against third-party claims of
infringement. Likewise, disputes may arise in the future with respect to
ownership of technology developed by employees who were previously employed by
other companies. Any such litigation or disputes could result in substantial
costs to, and a diversion of effort by, us. An adverse determination could
subject us to significant liabilities to third parties, require us to seek
licenses from, or pay royalties to, third parties, or require us to develop
appropriate alternative technology. Some or all of these licenses may not be
available to us on acceptable terms or at all, and we may be unable to develop
alternate technology at an acceptable price or at all. Any of these events could
have a material adverse effect on our business, prospects, financial condition,
and results of operations.
EMPLOYEES
As of March 31, 2004, we employed 65 employees in the four operating
subsidiaries, consisting of 3 executives, 3 general managers, 29 salespersons,
and 3 in marketing, 5 individuals involved in administration, 5 individuals
involved in finance and accounting, 17 individuals involved in information
services. We believe that our staff is adequate for our anticipated needs.
EMPLOYEE COMPENSATION
For the years ended August 31, 2002, 2001, and 2000, among our current
and former executive officers and directors, Don Pagnutti, our then President
had annual compensation exceeding $100,000. No long-term compensation was
awarded or paid to these individuals in such years.
As of August 31, 2002, we did not have any formal written employment
agreements with any of our directors, executives or other employees and we had
not issued any stock options or stock appreciation rights to any executive
officers (or any other persons).] We may grant stock options or stock
appreciation rights to these or other executive officers or other persons in the
future at the discretion of our Board of Directors.
ITEM 2. PROPERTIES.
On October 12, 2002, we sold an office building owned by 3484751 Canada
Ltd. located at 775 Pacific Road, Oakville Ontario to an unrelated 3rd party for
approximately $560,000. The sale of the building resulted in a loss of
approximately $250,000.
During the fiscal year ended August 31, 2002, we owned an approximately
25,000 square foot parcel of land, located at 14 Meteor Drive in Toronto,
Ontario, on which stands a 12,500 square foot, one story building. On December
19, 2003, we sold this land and building to an unrelated third party for
approximately $730,000 and recorded a gain on the sale of approximately
$100,000.
During the fiscal year ended August 31, 2002, we owned an approximately
29,000 square foot parcel of land, located at 10 Meteor Drive, Toronto, Ontario,
on which stands a 14,000 square foot, two story building. We sold this land and
building to an unrelated party on March 7, 2004 for approximately $710,000. The
sale resulted in an approximate gain of $70,000.
The properties located at 10 & 14 Meteor Drive in Toronto, Ontario and
775 Pacific Road in Oakville had been financed through a mortgage, with the Bank
of Montreal, dated April 24, 2002. The principal balance outstanding regarding
these two properties, as at August 31, 2002 was Cdn$1,166,667. The property at
14 Meteor was sold December 19, 2003 and our former subsidiary NTN and ourselves
are occupying the property at 10 Meteor. NTN has signed a 2-month lease for the
premises.
9
During the fiscal year ended August 31, 2002, GalaVu leased 8,619 square
feet of office space in a building located at 3790 - 3820 Victoria Park Avenue,
North York, Ontario, which lease expires on October 31, 2002 (CND$77,729
annually).
During the fiscal year ended August 31, 2002, Chell Merchant Capital
Group leased 12,043 square feet of office space in Suites 301, 500 and 700 in a
building located at 630 - 8th Avenue S.W. Calgary, Alberta, T2P 1G6. The
combined annual rent of the three suites was Cdn$202,087. We subleased this
space to unaffiliated third parties upon the discontinuation of the operations
of this subsidiary for Cdn$150,000 per annum.
Commencing on December 15, 2002, we started utilizing interim space in
Toronto, Ontario at nominal cost.
Logicorp leases approximately 17,502 square feet in Edmonton, 11,800
square feet in Calgary and approximately 4,500 square feet in Vancouver for
approximately annual rent of $220,350, $115,640 and $62,300 respectively. The
leases expire as follows: Edmonton - December 2006, Calgary - July 31, 2012, and
Vancouver - March 31, 2007.
We believe that our facilities and those of our subsidiaries are
adequate for their present requirements.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business we may be subject to litigation from
time to time. Set forth below is a description of material pending litigation to
which we are a party.
NTN LITIGATION
On June 18, 1992, Interactive Network Inc. (Interactive) commenced a
lawsuit against us, NTN Communications and our NTN subsidiary in the Federal
Court of Canada, Trial Division, Montreal, Quebec, under the titled INTERACTIVE
NETWORK, INC. v. NTN COMMUNICATIONS, INC., NTN SPORTS, INC. AND NTN CANADA, INC.
This action alleges that Interactive granted NTN Communications the right to use
the Interactive Patent, which right Communications then improperly licensed to
our NTN subsidiary and us. Interactive alleges that the license agreement
between NTN Communications and our NTN subsidiary and us infringes upon the
Interactive Patent. The action seeks a declaration of the validity of the
Interactive Patent, an injunction restraining us from further infringement, and
either damages (in an unspecified amount) or an accounting of profits derived
from certain games used in Canada. Except for the aforementioned pleadings, no
proceedings or discovery have been undertaken in this action.
We believe that the licenses granted to us by NTN Communications are
valid and that the patent infringement claims underlying this action will
ultimately be proven to be unfounded. We intend to vigorously defend our
position and to prosecute the Interactive position in the action; however, there
can be no assurance that any or all of these actions will be decided in favor of
us. We believe, based in part upon the advice of outside, independent counsel,
that the costs of defending and prosecuting these actions will not have a
material adverse effect upon our financial position.
In its Quarterly Report on Form 10-Q, for the quarter ended September
30, 1996, NTN Communications stated that "[w]ith the courts [SIC] assistance,
[Communications] and [Interactive] have been able to reach a resolution of all
pending disputes in the United States and have agreed to private arbitration
regarding any future licensing, copyright or infringement issues which may arise
between the parties." The disputes referred to in the NTN Communications Form
10-Q involved litigation in the United States involving allegations similar to
the allegations underlying the actions between Interactive and us. In the NTN
Communication Form 10-Q, NTN Communications also noted that "no substantive
action has been taken in the furtherance of" the Company Action or Interactive
Action.
CANADA CUSTOMS AND REVENUE AGENCY LITIGATION
Canada Customs and Revenue Agency is currently in discussions with us
regarding a potential liability with respect to withholding tax on certain
amounts paid to Communications. An assessment in the amount of approximately
$550,000 has been made to date by Canada Customs and Revenue Agency and we have
filed a notice of objection. We believe that we have valid defenses with respect
to these matters and accordingly, no amount has
10
been recorded in the Company's financial statements. In the event that such
matters are settled in favor of Canada Customs and Revenue Agency, the amounts
could be material and would be recorded in the period in which they become
determinable.
LOGICORP DATA SYSTEMS LITIGATION
On January 27, 2003, a former President of Logicorp Data Systems filed a
wrongful dismissal claim against Logicorp Data Systems and us. A round of
examinations for discovery has been held and preparation of the affidavit of
records is underway. Further discoveries were held during the week of September
8, 2003. Our counsel has determined that it is too early in the process to
evaluate the merits of the case. We have not accrued any liabilities related to
this claim as of August 31, 2002. We have filed a counter-suit stating that the
former President was fraudulent in his representation to the Company.
In June 2001, a former employee filed a wrongful dismissal claim against
LDS. Subsequently the employee offered to settle for which LDS rejected. No
further action has taken place since October 2001 and accordingly, LDS believes
it will prevail and has not accrued liabilities on the accompanying financial
statements related to this claim.
8% CONVERTIBLE NOTES
On December 1, 2001, the Company offered to certain investors 8%
convertible notes up to a maximum amount of US$ 8,000,000 in a private
placement. The Company received approximately Cnd$6,587,622 through this
offering. Under the terms of this offering, the notes are convertible into
shares of common stock at a price of the greater of (1) 50% of the average
closing bid prices for the ten trading days prior to conversion or (2) US$0.50.
These notes were due August 9, 2002. On April 9, 2002 all of the holders of the
notes signed commitments to voluntarily convert the notes based on the
conversion price per the terms of the agreement, which was determined to be
US$0.95 per share. This conversion was subject to shareholder approval. The
conversion of these notes would have resulted in the issuance of approximately
4,389,000 shares representing approximately 20% of the total common shares
outstanding after the issuance, and diluting the current common stockholders. As
of August 31, 2002, none of these shares has been issued and the outstanding
amount of the convertible notes was classified as liabilities. As of December 2,
2002, the Company, Joseph Gunnar & Co., LLC ("JGUN"), the placement agent in
this offering, and the holders of these notes entered into a settlement
agreement providing that the conversion price for these notes shall equal 85% of
the two day weighted average trading price of the common stock for the five
trading days preceding effective date of the registration statement under the
Securities Act of 1933, as amended, relating to the resale of the shares of
common stock issuable upon such conversion, provided, that such conversion price
cannot be greater than $0.75 or less than $0.40. Effective January 7, 2003, the
Company, JGUN, Cameron Chell and the holders of the notes agreed that if this
registration statement is not declared effective on or prior to September 1,
2003, the noteholders could "put" their shares of common stock to Mr. Chell at a
price of $0.475 per share during the period of December 1 - 14, 2003. At April
30, 2004, such registration statement has not been filed. By letter dated
December 4, 2003, the noteholders agreed to permit the Company until February
28, 2004 to file all required filing and periodic reports under the Securities
Exchange Act of 1934, as amended, and to amend the period during which they may
"put" their shares issuable upon such conversion to Mr. Chell from December
1--14, 2003, to March 1 - 14, 2004, in exchange for the extension of the "put"
period and the reduction of the conversion price to $0.25 per share, provided,
that, if such deadline was not satisfied by the Company such agreement and
reduction of the conversion price would be null and void. By letter, dated
February 26, 2004, this deadline and the "put" period were amended to be April
30, 2004 and May 1 - 14, 2004, respectively. By letter, dated April 29, 2004,
the Company requested that such deadline and "put" period be further amended to
be May 30, 2004 and June 1 - 14, 2004, respectively. In the event that the notes
should be converted into shares of common stock at the conversion price of $0.25
per share, the aggregate number of shares of common stock issued upon such
conversion would be approximately 16,640,000, representing approximately 54% of
the common stock outstanding giving effect to such conversion. One noteholder
has indicated to the Company that it believes that it has a cause of action
against the Company with respect to the foregoing and its rights under such
notes, and has threatened to bring such action against the Company. In the event
that the Company should be found to be in default of the notes or the related
agreements, the Company may be required to repay the notes in the event that a
settlement is not reached with the noteholders. In such event, the Company does
not believe that it currently has the necessary capital available to repay the
notes and would be required to seek additional sources of capital or seek
protection from creditors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".
11
Neither our property nor ourselves are a party or subject to any other
material pending legal proceedings, other than ordinary routine litigation
incidental to our business.
To our knowledge no other proceedings of a material nature have been or
are contemplated against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET PRICE FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Our common stock, par value $.0467 per share (the "Common Stock"), was
delisted from the over-the-counter market and was quoted on the NASDAQ Small Cap
Market ("NASDAQ"), under the symbol "CHEL". It is now traded on the NASDAQ pink
sheets under the symbol "CHEL.PK". Set forth below is the range of high and low
bid prices (US$) for shares of Common Stock for each full quarterly period
within our three most recent fiscal years and our quarter of the current year.
The information reflects inter-dealer prices, without retail mark-ups, markdowns
or commissions and may not necessarily represent actual transactions.
-----------------------------------------------------------------
HIGH LOW
------- ------
(US$) (US$)
=================================================================
2000 FISCAL YEAR
First Quarter 2.500 1.500
Second Quarter 3.625 1.375
Third Quarter 7.875 2.250
Fourth Quarter 11.438 3.000
2001 FISCAL YEAR
First Quarter 7.219 3.000
Second Quarter 4.813 1.813
Third Quarter 2.313 0.938
Fourth Quarter 1.600 0.870
2002 FISCAL YEAR
First Quarter 1.310 0.510
Second Quarter 1.990 0.520
Third Quarter 2.250 1.190
Fourth Quarter 1.40 0.109
2003 FISCAL YEAR
First Quarter 0.909 0.109
Second Quarter 0.209 0.019
Third Quarter 0.409 0.109
Fourth Quarter 0.499 0.001
2004 FISCAL YEAR
First Quarter 0.259 0.001
Second Quarter 0.109 0.01
-----------------------------------------------------------------
On April 7, 2004, the closing price of the Common Shares on NASDAQ pink
sheets was US$0.02.
As of April 7, 2004, we had 13,795,907 shares of common stock
outstanding.
As of the close of business on April 7, 2004, there were approximately
228 holders of record of our Common Stock. We believe that there are
approximately 1,100 beneficial holders of Common Stock. We are
12
informed and believe that as of December 10, 2003, Cede & Co. held 3,406,326
shares of our common stock as nominee for Depository Trust Company, 55 Water
Street, New York, New York 10004. It is our understanding that Cede & Co. and
Depository Trust Company both disclaim any beneficial ownership therein and that
such shares are held for the account of numerous other persons.
Since its inception in 1986, we have not paid any cash dividends on our
Common Stock. However, we have, in the past, declared certain stock dividends
and stock splits. We intend to retain earnings, if any, to finance operations
and, therefore, do not expect to declare or pay any cash dividends on the Common
Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth a summary of selected financial
information regarding the Company and its subsidiaries, consolidated, for each
of the five fiscal years ended August 31, 2002.
STATEMENT OF OPERATIONS DATA (CANADIAN DOLLARS):
--------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
2002 2001 2000 1999 1998
----------- --------- --------- ---------- -----------
Cdn$ Cdn$ Cdn$ Cdn$ Cdn$
Restated(1)
====================================================================================================================
Operating revenues 34,207,924 16,595 13,703 61,804 117,561
Cost of sales 31,319,987 -- -- -- --
Gross profit 2,887,937 16,595 13,703 61,804 117,561
Net income (loss) (30,751,537) (11,747,639) (2,323,621) (971,497) 618,065
Net income (loss) per share,
basic and diluted (3.11) (1.40) (0.81) (0.36) 0.24
Weighted average number of
shares outstanding, basic
and diluted 9,879,836 8,393,589 2,873,042 2,635,050 2,550,805
====================================================================================================================
BALANCE SHEET DATA (CANADIAN DOLLARS):
--------------------------------------------------------------------------------------------------------------------
AUGUST 31,
2002 2001 2000 1999 1998
----------- --------- --------- ---------- -----------
RESTATED(1)
====================================================================================================================
Total assets 9,246,755 9,537,219 10,631,974 12,072,282 12,952,836
Long-term obligations 2,914,656 2,417,388 1,206,479 1,243,151 1,857,245
Shareholders' (deficit) equity (16,988,536) 3,408,066 9,383,419 10,792,767 11,033,178
====================================================================================================================
(1) - See Note 17 to consolidated financial statements
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND OTHER PORTIONS OF THIS REPORT CONTAIN FORWARD-LOOKING
INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING
INFORMATION. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, AVAILABILITY AND COST OF FINANCIAL RESOURCES, PRODUCT DEMAND, MARKET
ACCEPTANCE AND OTHER FACTORS. THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH
THE COMPANY'S FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN
THIS REPORT.
INTRODUCTION
CORPORATE BACKGROUND
We are engaged in the business of providing interactive entertainment
services, electronic/on-line products and services, systems integration
services, corporate services and merchant capital services. Our core businesses
are interactive entertainment services provided by our NTN Interactive Network
and GalaVu Entertainment Network Inc. subsidiaries and the systems integration
services provided by our Logicorp Data Systems Ltd. subsidiary.
As of August 31, 2002, we had a working capital deficit of $17,960,854
and an accumulated deficit of $43,909,481. We generated revenues of $34,207,924
for the 2002 Fiscal Year and incurred a net loss of $30,751,537. In addition,
during the 2002 Fiscal Year, net cash used in operating activities was
$9,019,544.
We are in a transitional stage of operations and, as a result, the
relationships between revenue, cost of revenue, and operating expenses reflected
in the financial information included in this annual file do not represent
future expected financial relationships. Much of the cost of revenue and
operating expenses reflected in our consolidated financial statements are costs
based on costs associated with raising funds, retirement of debt and a
write-down of goodwill. Accordingly, we believe that, at our current stage of
operations period-to-period comparisons of results of operations are not
meaningful.
PLAN OF OPERATIONS
Our business strategy is to focus on our core operating companies in order
to make the profitable, to divest ourselves of non-core operating and to wind up
all other non-operating companies, as well as to find new opportunities in order
to increase our value and profitability. Our core operations are the systems
integration segment companies. Additionally, we intend to become current with
all of our filings and we will begin to petition for market status.
We expect our general and administrative costs to increase in future
periods due to our operating as a public company whereby we will incur added
costs for filing fees, increased professional services and insurance costs.
The following is our selected statement of operations data by business
segment for the years ended August 31, 2002, 2001, and 2000.
14
================================================================================
2002 2001 2000
$ $ $
Restated Restated
================================================================================
REVENUE
Systems Integration 34,205,614 -- --
Corporate 2,310 16,595 13,703
- --------------------------------------------------------------------------------
34,207,924 16,595 13,703
- --------------------------------------------------------------------------------
OPERATING PROFIT (LOSS)
Systems Integration (1,162,568) -- --
Merchant Service -- (5,076,619) --
Corporate (15,089,159) (3,115,758) (1,321,542)
- --------------------------------------------------------------------------------
(16,251,727) (8,192,377) (1,321,542)
- --------------------------------------------------------------------------------
NET LOSS
Systems Integration (12,173,848) -- --
Merchant Service -- (6,524,427) --
Corporate (16,561,949) (3,115,758) (1,367,902)
Discontinued Operations (2,015,740) (2,107,454) (955,719)
- --------------------------------------------------------------------------------
(30,751,537) (11,747,639) (2,323,621)
- --------------------------------------------------------------------------------
TOTAL ASSETS
Systems Integration 6,435,982 -- --
Merchant Service -- 1,589,465 --
Education -- 128,986 1,088,157
Corporate 2,810,773 3,170,689 1,818,027
Discontinued Operations -- 4,648,078 7,725,789
- --------------------------------------------------------------------------------
9,246,755 9,537,218 10,631,973
- --------------------------------------------------------------------------------
CAPITAL EXPENDITURES
Systems Integration 127,737 -- --
Corporate 7,355 46,978 --
- --------------------------------------------------------------------------------
135,092 46,978 --
- --------------------------------------------------------------------------------
DEPRECIATION & AMORTIZATION
Systems Integration 425,692 -- --
Merchant Service -- 431,967 --
Corporate 601,550 162,836 47,055
- --------------------------------------------------------------------------------
1,027,242 594,803 47,055
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Systems Integration 182,209 -- --
Corporate 10,077,990 1,146,708 46,360
- --------------------------------------------------------------------------------
10,260,199 1,146,708 46,360
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
YEAR ENDED AUGUST 31, 2002 COMPARED TO YEAR ENDED AUGUST 31, 2001
REVENUES. Revenues from product sales for the 2002 Fiscal Year were
$32,468,400. As Logicorp was purchased in the 2002 Fiscal Year there is no
comparison for our fiscal year ended August 31, 2001 (the "2001 Fiscal Year").
Revenues from service sales for the 2002 Fiscal Year were $1,739,524. As
Logicorp was purchased in the 2002 Fiscal Year there is no comparison.
Other revenues were nil, compared to $16,595 for the 2001 Fiscal Year.
Other revenue composed of income derived from securities held. Since there are
no longer such investments, there was a decrease.
As a result of the foregoing, our total revenues in the aggregate were
$34,207,924, compared to $16,595 for the 2001 Fiscal Year, an increase of
$34,191,329. The increase is due to the purchase of the Logicorp entities.
COST OF REVENUES. Cost of revenues from product sales for the 2002
Fiscal Year was $30,725,499. As Logicorp was purchased in the 2002 Fiscal Year
there is no comparison for our 2001 Fiscal Year.
Cost of revenues from service sales for the 2002 Fiscal Year were
$594,488. As Logicorp was purchased in the 2002 Fiscal Year there is no
comparison.
As a result of the foregoing, our total cost of revenues for continuing
operations was $31,319,987, compared to $nil for the 2001 Fiscal Year, an
increase of $31,319,987 or 100%.
GROSS PROFIT. Gross profit was $2,887,937 for the 2002 Fiscal Year
compared to $16,595 for the 2001 Fiscal Year. As Logicorp was purchased in the
2002 Fiscal Year there is no comparison for our 2001 Fiscal Year.
15
EXPENSES. Selling, general and administrative expenses for the 2002
Fiscal Year were $7,622,873, compared to $7,258,609 for the 2001 Fiscal Year, an
increase of $364,264 or 5.0%. Of this, there was increased legal and accounting
fees of $1,324,433 offset by decreasing operating costs of CMCG. These increased
due to the acquisition and the financing raises.
Depreciation and amortization for the 2002 Fiscal Year were $1,027,242,
compared to $594,803 for the 2001 Fiscal Year, an increase of $432,439 or 72.7%.
This increase is the result of $425,692 of additional depreciation resulting
from the addition of Logicorp and eTelligent. As a percentage of our total
revenues, such costs decreased to 3.0% for the 2002 Fiscal Year.
Loss from the impairment of goodwill for the 2002 Fiscal Year was
$10,489,549 compared to nil for the 2001 Fiscal Year. The costs arose from the
revaluation of our subsidiaries in the Logicorp Group of Companies. As a
percentage of the Company's total revenues, such costs were 30.7% for the 2002
Fiscal Year.
Loss from operations for the 2002 Fiscal Year was $16,251,727 compared
to $8,192,377 for the 2001 Fiscal Year, an increase of $8,059,350 or 98.4%. This
increase was caused primarily by the impairment of goodwill of $10,489,549.
Loss on extinguishment of debt was $521,120 for the 2002 Fiscal Year
with no comparison for the 2001 Fiscal Year. A beneficial conversion and
interest expense was calculated as of the date of the agreement to convert the
notes to common shares, as the difference between the conversion price and the
fair value of the common stock into which the notes are convertible. The Company
recognized a loss on extinguishment of debt and corresponding additional paid in
capital and the balance of this debt has been retired.
Interest expense for the 2002 Fiscal Year were $10,123,183, compared to
$1,146,708 for the 2001 Fiscal Year, an increase of $8,976,475 or 782.6%. The
increase was the result of the interest costs of beneficial conversion features
($6,283,881), interest costs associated with the financing raises ($1,909,011),
the amortization of the discount on debt ($589,981), increased debt levels and
the addition of Logicorp ($193,602). As a percentage of our total revenues, such
costs increased to 29.5% for the 2002 Fiscal Year.
Loss on write-down of investments for the 2002 Fiscal Year were
$1,838,140 compared to nil for the 2001 Fiscal Year. The costs arose from
writing off the investment in Wareforce and the deposit on
Applicationstation.com. As a percentage of the Company's total revenues, such
costs were 5.4% for the 2002 Fiscal Year.
The financing costs, write-down on investments and the loss on sale of
subsidiaries are one-time in nature and we don't view them as occurring until
similar transactions happen.
NET INCOME/LOSS. As a result of all of the above, the Company's net loss
for the 2002 Fiscal Year was $30,751,537 (which includes 2,015,740 of losses
from discontinued operations) compared to net loss of $11,747,639 (which
includes 2,107,454 of losses from discontinued operations) for the 2001 Fiscal
Year, a change of $19,003,898.
DISCONTINUED OPERATIONS. The Company sold Galavu and Interactive
subsequent to August 31, 2002 (See Note 4 of financial statements for further
discussion). Accordingly, the Company is following the guidance in APB 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring
Events and Transactions," and EITF 95-18 "Accounting and Reporting for a
Discontinued Business Segment When the Measurement Date Occurs After the Balance
Sheet Date but Before the Issuance of Financial Statements". The operations of
Galavu and Interactive, along with Magic, are presented as discontinued
operations for all periods presented.
YEAR ENDED AUGUST 31, 2001 COMPARED TO YEAR ENDED AUGUST 31, 2000
REVENUES.
Other revenues were $16,595, compared to $13,703 for the 2000 Fiscal
Year, an increase of $2,892 or 21.1%.
16
As a result of the foregoing, our total revenues in the aggregate were
$16,595, compared to $13,703 for the 2000 Fiscal Year, an increase of $2,892 or
21.1%.
COST OF REVENUES. Cost of revenues were nil for network services for the
2001 and 2000 Fiscal Years.
GROSS PROFITS. Gross profits were $16,595 for the 2001 Fiscal Year
compared to $13,703 for the 2000 Fiscal Year, an increase of $2,892 or 21.1%.
EXPENSES. Selling, general and administrative expenses for the 2001
Fiscal Year were $7,258,609, compared to $1,288,190 for the 2000 Fiscal Year, an
increase of $5,970,419 or 463.5%. The increase was caused by the addition of the
Chell Merchant Capital Group and Chell.com (USA). Chell Merchant Capital Group's
and Chell.com (USA)'s selling, general and administration expenses for the 2001
Fiscal Year were $5,452,378 and $121,715 respectively (There are no comparative
figures for the 2000 Fiscal Year). There were increased consulting, legal and
accounting fees of $298,556, $819,215 and $302,739 respectively. These increased
due to the acquisition and the increased reporting requirements for the
Quarterly reviews. There were also increased operating costs due to the addition
of the two new companies, such as: communications ($202,531), rent and utilities
($117,649), travel ($992,595), office supplies ($100,023). Also there was
increased advertising and promotion ($418,557) and investor and public relations
($492,846) associated with the two new companies. In addition there was an
increase in salaries and benefits of $1,762,128. These staffing levels have been
reduced and these costs should not be incurred in the next fiscal year. As a
whole, Chell Merchant Capital Group and Chell.com (USA) attributed for the
increase in selling, general and administrative expenses, however these costs
have been dramatically decreased and should not occur with our current company
structure in the next fiscal year.
Write-off of leaseholds was $355,560 for the 2001 Fiscal Year. Chell
Merchant Capital Group experienced the one-time write-offs.
Interest and bank charges for the 2001 Fiscal Year were $1,146,708,
compared to $46,360 for the 2000 Fiscal Year, an increase of $1,100,348 or
2,373.5%. The increase was the result of the increased debt levels associated
with the promissory note and convertible debenture. As a percentage of our total
revenues, such costs increased to 6910.0% for the 2001 Fiscal Year from 338.3%
for the 2000 Fiscal Year.
Depreciation and amortization for the 2001 Fiscal Year were $594,803,
compared to $47,055 for the 2000 Fiscal Year, an increase of $547,748 or
1,164.1%. This increase is the result of depreciation on the capital asset
additions in 2001, and the addition of our Chell Merchant Capital Group
subsidiary ($431,697). As a percentage of our total revenues, such costs
increased to 3,584.2% for the 2001 Fiscal Year from 343.4% for the 2000 Fiscal
Year.
NET INCOME/LOSS. As a result of all of the above, the Company's net loss
for the 2001 Fiscal Year was $11,747,639 (which includes 2,107,454 of losses
from discontinued operations) compared to net loss of $2,323,621 (which includes
955,719 of losses from discontinued operations) for the 2000 Fiscal Year, a
change of $9,424,018.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity have been cash provided by
operations, sale of subsidiaries, capital raises, issuance of short-term notes
payable and credit terms from suppliers and subcontractors. Our principal uses
of cash have been for operations and working capital. We anticipate these uses
will continue to be our principal uses of cash in the future.
At the 2002 Fiscal Year end, we had the requisite working capital to
fund our ongoing business operations based upon the losses that had been
incurred during the previous two fiscal years. In addition, our business plan
for 2003 contemplates obtaining additional working capital through refinancings
or restructurings of our existing loan agreements, and the possible sale of some
of our existing subsidiaries. Our management is of the opinion that they will be
able to obtain enough working capital and that together with funds provided by
operations, there will be sufficient working capital for the Company's
requirements.
We may require additional financing in order to implement our business
plan. We currently anticipate capital expenditures of at least $250,000 during
the next 12 months for the replacement of older capital assets. If the
anticipated cash generated by our operations are insufficient to fund
requirements and losses, we will need to obtain additional funds through third
party financing in the form of equity, debt or bank financing. There can be no
17
assurance that we will be able to obtain the necessary additional capital on a
timely basis or on acceptable terms, if at all. If additional capital is not
raised, our business, prospects, financial condition, and results of operations
would be materially and adversely affected. As a result of a financing involving
equity, the holders of our common stock may experience substantial dilution. In
addition, as our results may be negatively impacted and thus delayed as a result
of political and economic factors beyond our control, our capital requirements
may increase.
The following factors, among others, could cause actual results to
differ from those indicated in the above forward-looking statements: pricing
pressures in the industry; the loss of any of our major customers; a continued
downturn in the economy in general or in the interactive entertainment sector; a
further decrease in demand for our products or continued weak demand for these
products; our ability to attract new customers; our ability to reduce costs; an
increase in competition in the market for interactive entertainment; and the
ability of some of our new customers to obtain financing. These factors or
additional risks and uncertainties not known to us or that we currently deem
immaterial may impair business operations and may cause our actual results to
differ materially from any forward-looking statement.
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this report to conform them to
actual results or to make changes in our expectations.
We have listed below the details of all the debt and borrowings the
Company has.
In March 2001, LDS replaced the entered into a line of credit agreement
with HSBC Bank of Canada. Bank advances are payable on demand. The loan
agreement covers (i) a demand revolving operating loan up to $3,000,000; (ii)
equipment loan up to $300,000; (iii) demand Evergreen capital loan/lease
facility up to $300,000; (iv) loan on forward exchange contracts up to $500,000.
The operating loan carries an interest rate of 0.82% over the prime rate while
the equipment and Evergreen Capital loans carry an interest rate equal to, at
the option of the Company, (a) 1.05% over the prime rate at the end of each
month; or (b) a fixed rate agreed by both the Bank and the Company. Under the
terms of the agreement, the Company can borrow, under the operating loan and 31%
of the forward exchange contracts outstanding, up to an aggregate of (i) 70% of
acceptable accounts receivable (ii) 50% of the lesser of cost or current market
value of its inventory not to exceed $750,000. Borrowings under the line are
subject to certain financial covenants and restrictions on additional
indebtedness and other related items. As of August 31, 2002, the Company is in
violation of maximum debt to net worth and minimum working capital covenants.
The loans are secured by the assets of the Company under a general security
agreement, and are guaranteed by the Logicorp Service Group Ltd., through a
security agreement and are also personally guaranteed by the former shareholders
of LDS.
LDS aggress to pay $212,290 payable to HP with respect to the settlement
of claims. The loan is payable in monthly installments of $4,423 due on the
first day of every month, commencing on May 1, 2003 through April 2007 carrying
an interest rate of 0%. Amortization of imputed interest is immaterial to the
accompanying consolidated financial statements.
In November 2001, the Bank of Montreal made available to the Company, a
Demand loan, non-revolving and/or Fixed Rate Term Loan in the amount of
$1,250,000. The loan was for payment of the Matched Fund Term Loan held in the
prior year by The Royal Bank of Canada for properties at 10 Meteor Drive and 775
Pacific Road. Borrowings are repayable by blended monthly principal payments of
$10,417 and interest based on 10-year term which matures in December 2011.
Interest is currently calculated at Prime Rate plus 1.25%. The Company may
convert the Demand loan, non-revolving advances in part or in total to a Fixed
Rate Term Loan advances, and may be converted back to Demand loan, non-revolving
at maturity of terms. Fixed Rate Term Loan rates are to be determined based on
applicable rates at time of draw and the available terms are from 1 to 5 years.
On December 1, 2001, the Company offered to certain investors 8%
convertible notes up to a maximum amount of US$ 8,000,000 in a private
placement. The Company received approximately Cnd$6,587,622 through this
offering. Under the terms of this offering, the notes are convertible into
shares of common stock at a price of the greater of (1) 50% of the average
closing bid prices for the ten trading days prior to conversion or (2) US$0.50.
These notes were due August 9, 2002. On April 9, 2002 all of the holders of the
notes signed commitments to voluntarily convert the notes based on the
conversion price per the terms of the agreement, which was determined to be
US$0.95 per share. This conversion was subject to shareholder approval. The
conversion of these notes would
18
have resulted in the issuance of approximately 4,389,000 shares representing
approximately 20% of the total common shares outstanding after the issuance, and
diluting the current common stockholders. As of August 31, 2002, none of these
shares has been issued and the outstanding amount of the convertible notes was
classified as liabilities. As of December 2, 2002, the Company, Joseph Gunnar &
Co., LLC ("JGUN"), the placement agent in this offering, and the holders of
these notes entered into a settlement agreement providing that the conversion
price for these notes shall equal 85% of the two day weighted average trading
price of the common stock for the five trading days preceding effective date of
the registration statement under the Securities Act of 1933, as amended,
relating to the resale of the shares of common stock issuable upon such
conversion, provided, that such conversion price cannot be greater than $0.75 or
less than $0.40. Effective January 7, 2003, the Company, JGUN, Cameron Chell and
the holders of the notes agreed that if this registration statement is not
declared effective on or prior to September 1, 2003, the noteholders could "put"
their shares of common stock to Mr. Chell at a price of $0.475 per share during
the period of December 1 - 14, 2003. At April 30, 2004, such registration
statement has not been filed. By letter dated December 4, 2003, the noteholders
agreed to permit the Company until February 28, 2004 to file all required filing
and periodic reports under the Securities Exchange Act of 1934, as amended, and
to amend the period during which they may "put" their shares issuable upon such
conversion to Mr. Chell from December 1--14, 2003, to March 1 - 14, 2004, in
exchange for the extension of the "put" period and the reduction of the
conversion price to $0.25 per share, provided, that, if such deadline was not
satisfied by the Company such agreement and reduction of the conversion price
would be null and void. By letter, dated February 26, 2004, this deadline and
the "put" period were amended to be April 30, 2004 and May 1 - 14, 2004,
respectively. By letter, dated April 29, 2004, the Company requested that such
deadline and "put" period be further amended to be May 30, 2004 and June 1 - 14,
2004, respectively. The Company believes that, as these notes have been held by
the noteholders for an excess of two years, and none of such noteholders are or
have been affiliates of the Company during the preceding 90 days, the notes may
be converted tat any time and the shares of common stock issuable upon such
conversion could be resold pursuant to Rule 144(k), and, provided that the
Company files all filings and periodic reports under the Securities Exchange Act
prior to May 31, 2004, these notes shall be mandatorily converted into shares of
common stock. In the event that the notes should be converted into shares of
common stock at the conversion price of $0.25 per share, the aggregate number of
shares of common stock issued upon such conversion would be approximately
16,640,000, representing approximately 54% of the common stock outstanding
giving effect to such conversion. One noteholder has indicated to the Company
that it believes that it has a cause of action against the Company with respect
to the foregoing and its rights under such notes, and has threatened to bring
such action against the Company. In the event that the Company should be found
to be in default of the notes or the related agreements, the Company may be
required to repay the notes in the event that a settlement is not reached with
the noteholders. In such event the Company does not believe that it currently
has the necessary capital available to repay the notes and would be required to
seek additional sources of capital or seek protection from creditors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
In addition, since this debt is convertible into equity at the option of
the note holder at beneficial conversion rates, an embedded beneficial
conversion feature was recorded as a debt discount and will be amortized using
the effective interest rate method over the life of the debt in accordance with
EITF 00-27. Total cost of beneficial conversion feature of Cnd$6,177,647 is
recorded as a discount of the convertible debt which is fully amortized during
the year ended August 31, 2002.
During the year ended August 31, 2003, B.O.T.B., a company controlled by
Cameron Chell, advanced Logicorp Data Systems $820,000, and during the period of
September 1, 2003 through April 30, 2004, advanced Logicorp Data Systems
$567,399. The advances are due on demand and do not carry a stated interest
rate. Due to their long-term nature, the Company has imputed interest on the
advances at a rate of 9% per annum. As of April 30, 2004, the aggregate amount
of such advances was $1,387,399.
On January 15, 2001, the Company received US$1,500,000 (approximately
Cnd$2,280,000) in return for a promissory note payable to Naveen Channana. The
note bears interest at 2% per month and US$1,000,000 of the principal and
accrued interest was due and payable on December 5, 2001. Effective May 6, 2002,
the remaining principal and interest expense was converted to 725,952 common
shares. A beneficial conversion and interested expense was calculated as of the
date of the agreement to convert the notes to common shares, as the difference
between the conversion price and the fair value of the common stock into which
the notes are convertible. The Company recognized a loss on extinguishment of
debt and corresponding additional paid in capital in the amount of approximately
$521,000. During the year ended August 31, 2002, the Company recorded interest
of $522,564, made cash payments of $1,520,000 and settled the remaining balance
of $1,282,564 with 725,952 shares of the Company's common stock.
19
On October 3, 2000, the Company closed the sale of a US$3,000,000
(approximately Cnd$4,740,000) Convertible 10% Debenture to the VC Advantage
Limited Partnership ("VCALP"). As at August 31, 2001, US$1,700,000
(approximately Cnd$2,635,000) has been advanced. This unsecured convertible
debenture is due three years from issue. The Convertible Debenture bears
interest at 10% per annum, payable upon conversion, redemption or maturity. The
unpaid principal of the debenture bears interest from the date that it is
actually advanced until paid. Interest is payable in cash or stock at our
option. The Convertible Debenture is convertible into common stock, at US$3.00
per share, in amounts specified by the VCALP. The maximum number of common
shares VCALP will receive is one million. On the close date, the Company also
issued 50,000 warrants to purchase 50,000 common shares at US$3.00 per share to
VCALP. The warrants have a term of four years. The fair value of these warrants
totaling approximately $220,000 was computed using the Black-Scholes model under
the following assumptions: (1) expected life of 1 1/2 years; (2) volatility of
80%, (3) risk free interest of 5.87% and (4) dividend of 0%. This convertible
debt matured in 2003. The Company can elect to pay the outstanding loan balance
in shares of common stock at a fixed conversion price of US$3. In addition,
since this debt is convertible into equity at the option of the note holder at
beneficial conversion rates, an embedded beneficial conversion feature was
recorded as a debt discount and will be amortized using the effective interest
rate method over the life of the debt in accordance with EITF 00-27. Total cost
of beneficial conversion feature of $1,728,134 and the relative fair value of
the warrants of $220,000 are recorded as a discount of the lines of credit. For
the quarter ended November 30, 2003, the amortization of the discount is
immaterial to the accompanying financial statements. During the year ended
August 31, 2001, the Company amortized $563,367 as interest expense. As of
August 31, 2001, the outstanding balance of this debt net of unamortized
discount totaled $1,250,233.
On November 30, 2000 the convertible debenture was assigned by VCALP to
CALP II Limited Partnership.
During the 2002 Third Fiscal Quarter, the convertible debenture held by
CALP II Limited Partnership ("CALP II") on behalf of Canadian Advantage Limited
Partnership ("CALP") and Advantage (Bermuda) Fund Ltd. ("ABFL") was exchanged
for a note payable to CALP in the amount of US$1,365,100 and a note payable to
ABFL in the amount of US$504,900. These notes provide for payment of principal
and interest at the rate of 10% per annum on August 31, 2006. The notes are
secured by a general security agreement against the assets of the Company in
priority to all other claims subject to the existing security of the Bank of
Montreal and the CIBC. The terms of the debt were changed and thus resulted in a
decrease in the discount by the amount of $408,155.
Effective April 15, 2002, the Company entered into an agreement with
CALP to convert the principal amount of the note plus accrued interest into
Common Stock at the rate of US$0.80 pursuant to which CALP received 1,314,000
shares of the Company. CALP will receive an additional 442,145 shares upon the
approval of the Company's shareholders.
Effective April 15, 2002, the Company also entered into an agreement
with ABFL to convert the principal amount of the note plus accrued interest into
Common Stock at the rate of US$0.80 pursuant to which ABFL received 486,000
shares of the Company. ABFL will receive an additional 163,533 shares upon the
approval of the Company's shareholders.
Certain terms of the convertible debt has been changed including the
fixed conversion price reduced from $3 to $0.80. The Company recorded additional
discount of $677,216 and amortized $787,294. As of August 31, 2002, outstanding
balance of this debt net of unamortized discount totaled $1,360,311.
The conversion of the debt has been approved and the debt will be
converted from debt to equity upon the filling of the registration statement and
issuance of the shares.
The retirement compensation trusts were set up pursuant to section
248(1) of the Income Tax Act of Canada to provide retirement income to the three
individuals who owned Logicorp. Pursuant to the original and amended purchase
agreements of Logicorp, the Company will make monthly payments including
interest in various amounts. The loan carries an interest rate of prime plus
4.75%.
The Term loans are comprised of the following:
20
[a] Loan bearing interest at Prime plus 1.25% per annum, repayable
in monthly principal installments of $6,643 together with interest. Loan is due
July 31, 2005. Outstanding balance of this loan totaled $38,050 as of August 31,
2002.
[b] Small Business Equipment Loans bearing interest at Prime plus
2.25% per annum. Outstanding balance of this loan totaled $11,227 as of August
31, 2002.
Approximate future annual principal payments for long-term debt, exclusive of
the above bank indebtedness, are as follows:
---------------------------------------------------
Years ended August 31,
2003 $ 450,739
2004 2,378,634
2005 656,266
2006 254,755
2007 125,000
Thereafter 583,335
---------------------------------------------------
4,448,729
===================================================
In May 2002, the Company did a private financing raise in the amount of
US$290,000 ($443,189). Since the shares have not been issued the raise has been
placed as a note payable. Upon the issuance of the Company's shares, the note
will be converted from debt to equity.
At August 31, 2002, the Company had a working capital deficit of
$17,960,854, an increase of $14,672,711 from working capital of $3,288,143 at
August 31, 2001.
A comparison of balance sheet accounts does not provide any relevant
information since all prior operating companies are not listed as discontinued
operations. In addition, there is no historical comparison for our current
operating companies as they were acquired within the 2002 Fiscal Year.
For the 2002 Fiscal Year, we had a net cash outflow of $25,902, a cash
outflow of $978,153 for the 2001 Fiscal Year and $906,809 cash outflow for the
2000 Fiscal Year. The decrease in net cash flow for the 2002 Fiscal Year was
primarily due to cash used in operating activities.
Cash used in operating activities for the 2002 Fiscal Year was
$6,031,515. The major factor contributing to the cash used in operations for the
2002 Fiscal Year is the net loss with non-cash expenses added back of
$10,684,237 and a decrease in accounts payable and accrued liabilities of
$2,619,458; cash provided by operations were: decrease in accounts receivable,
trade of $3,002,443, and a decrease in assets from discontinued operations of
$2,794,223. The major factors contributing to the cash used in operations for
the 2001 Fiscal Year include: net loss with non-cash expenses added back of
$9,006,617; cash provided by operations, a decrease in assets from discontinued
operations of $3,254,147, and an increase in accounts payable and other
liabilities of $1,361,950. Cash used in operating activities for the 2000 Fiscal
Year was $1,153,743. The major factor contributing to the cash used in
operations during the 2000 Fiscal Year was net loss with non-cash expenses added
back of $2,708,476; cash provided by operations was a decrease in discontinued
operations of $771,835.
Cash provided by investing activities in the 2002 Fiscal Year was
$207,690. This amount resulted from the purchase of property and equipment of
$135,092, the acquisition of the Logicorp group of companies and eTelligent
Solutions of $1,500,000 and $240,000 respectively, offset by the proceeds from
disposal of property and equipment of $232,782 and the proceeds from the sale of
Magic Lantern of $1,850,000. Cash used in investing activities in the 2001
Fiscal Year was $1,686,688. This amount resulted from the purchase of capital
assets totaling $46,978 and the deposit on purchase of Applicationstation.com of
$1,689,710. Cash used in investing activities in the 2000 Fiscal Year was nil.
Cash provided by financing in the 2002 Fiscal Year were $5,797,923, the
increase in primarily made up of the $6,587,622 convertible promissory note
offset by payments of debt of $1,577,839. Cash provided by financing in the 2001
Fiscal Year were $4,880,321. The increase is primarily due to the sale of the
convertible debenture and
21
the bridge financing. Cash provided by financing in the 2001 Fiscal Year was
$246,934 resulting primarily from the $281,134 proceeds of exercised employee
stock options.
We purchased the Logicorp group of companies and eTelligent Solutions in
Fiscal 2002, both of which are in the Systems Integration segment. We have no
obligation to fund these operations, as they are self-sufficient operations.
INFLATION
The rate of inflation has had little impact on our operations or
financial position during the years ended August 31, 2002, August 31, 2001 and
August 31, 2000 and inflation is not expected to have a significant impact on
our operations or financial position during the 2003 Fiscal Year.
We pay a number of our suppliers, including our licensor and principal
supplier, NTN Communications, Inc., in US dollars. Therefore, fluctuations in
the value of the Canadian dollar against the US dollar will have an impact on
our gross profit as well as our net income. If the value of the Canadian dollar
falls against the US dollar, our cost of revenues will increase thereby reducing
our gross profit and net income. Conversely, if the value of the Canadian dollar
rises against the US dollar, our gross profit and net income will increase.
CRITICAL ACCOUNTING POLICIES
As discussed in our financial statements, the preparation of financial
statements in conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions about future events
that affect the amounts reported in the financial statements and accompanying
notes. Since future events and their effects cannot be determined with absolute
certainty, the determination of estimates requires the exercise of judgment.
Actual results could differ from those estimates, and such differences may be
material to the financial statements. The most significant accounting estimates
inherent in the preparation of our financial statements include estimates as to
the appropriate carrying value of certain assets and liabilities which are not
readily apparent from other sources, primarily accounts receivable, inventory,
property and equipment, intangible assets, deferred revenue, rebates and coop
fund and warranty costs. Management bases its estimates on historical experience
and on various assumptions which are believed to be reasonable under the
circumstances. We reevaluate these significant factors as facts and
circumstances change. Historically, actual results have not differed
significantly from our estimates.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "BUSINESS COMBINATIONS." SFAS No. 141 supersedes Accounting
Principles Board ("APB") No. 16 and requires that any business combinations
initiated after June 30, 2001, be accounted for as a purchase, therefore,
eliminating the pooling-of-interest method defined in APB No. 16. The statement
was effective for any business combination initiated after June 30, 2001, and
must have been applied to all business combinations accounted for by the
purchase method for which the date of acquisition was July 1, 2001, or later.
The adoption of this statement did not have a material impact to our financial
position or results of operations.
In July 2001, the FASB issued SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS", which requires the use of a non-amortization approach to
account for purchased goodwill and certain intangibles. This statement is
effective for fiscal years beginning after December 15, 2001. We adopted this
statement on September 1, 2001. Under the non-amortization approach, goodwill
and certain intangibles will not be amortized into results of operations, but
instead will be reviewed for impairment, written down and charged to results of
operations only in periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. The adoption of this statement did not
have a material impact to our financial position or results of operations.
In October 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS", which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the
22
respective asset while the liability is accreted to its present value. Upon
settlement of the liability, the obligation is settled at its recorded amount or
the company incurs a gain or loss. The statement is effective for fiscal years
beginning after June 30, 2002. We do not expect the adoption of this statement
to have a material impact on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF".
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable and is measured by a comparison
of the carrying amount of an asset to undiscounted future net cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future undiscounted cash flows, an impairment charge is
recognized for the amount by which the carrying amount of the asset exceeds the
fair value of the asset. SFAS No. 144 requires companies to separately report
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sales, abandonment or in a distribution to
owners) or is classified as held for sale. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell. We adopted
SFAS No. 144 on September 1, 2002. The effects of the adoption will be reflected
in the consolidated financial statements for the year ended August 31, 2003. For
the year ended August 31, 2002, the Company has followed the disclosure
requirements of APB 30 and EITF 95-18.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS-145 eliminates the current requirement that gains and losses
on extinguishments of debt must be classified as extraordinary items in the
income statement. Instead, SFAS-145 requires that gains and losses on
extinguishments of debt be evaluated against the criteria in Accounting
Principles Board (APB) Opinion 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," to determine
whether or not it should be classified as an extraordinary item. If
classification as an extraordinary item is not appropriate, the gain or loss
would be included as part of income from operations. The Company adopted SFAS
No. 145 on September 1, 2001 and reported the loss of extinguishment of debt of
$521,120 as loss from operations.
In June 2002, the FASB issued Statement No. 146, "ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES". This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "LIABILITY
RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN
ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING)". The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. We do not
expect the adoption to have a material impact on our financial position or
results of operations.
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS) No. 148, "ACCOUNTING
FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE". SFAS 148 amends FASB
Statement No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION", providing
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS 148 also amends
the disclosure provisions of SFAS 123 and Accounting Principles Board (APB)
Opinion No. 28, "INTERIM FINANCIAL REPORTING", to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. Amendments to SFAS 123 related to the transition and annual
disclosures are effective for fiscal year's ending after December 15, 2002.
Amendments to disclosure requirements of APB Opinion 28 are effective for
interim periods beginning after December 15, 2002. We do not expect the adoption
of SFAS 148 will have a material impact on our financial position, results of
operations or cash flows.
In November 2002, FASB issued FASB Interpretation (FIN) No. 45,
"GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS". FIN 45 requires that the
guarantor recognize, at the inception of certain guarantees, a liability for the
fair value of the obligation undertaken in issuing such guarantee. FIN 45 also
requires additional disclosure requirements about the guarantor's obligations
under certain guarantees that it has issued. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002 and the
disclosure requirements are effective for financial statement periods ending
after
23
December 15, 2002. The Company adopted FIN No. 45 on September 1, 2002 and did
not expect the adoption of FIN 45 to have a material impact on the Company's
financial position, results of operations or cash flows.
In January 2003, FASB issued Interpretation No. 46, "CONSOLIDATION OF
VARIABLE INTEREST ENTITIES". FIN 46 changed the criteria by which one company
includes another entity in its consolidated financial statements. Previously,
the criteria were based on control through voting interest. FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. A company that consolidates a variable interest entity is called the
primary beneficiary of that entity. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. During October
2003, the FASB deferred the effective date for applying the provisions of FIN 46
until the end of the first interim or annual period ending after December 31,
2003, if the variable interest was created prior to February 1, 2003 and the
public entity has not issued financial statements reporting such variable
interest entity in accordance with FIN 46. On December 24, 2003, the FASB issued
FASB Interpretation No. 46 (Revised December 2003), CONSOLIDATION OF VARIABLE
INTEREST ENTITIES, (FIN-46R), primarily to clarify the required accounting for
interests in variable interest entities. FIN-46R replaces FIN-46 that was issued
in January 2003. FIN-46R exempts certain entities from its requirements and
provides for special effective dates for entities that have fully or partially
applied FIN-46 as of December 24, 2003. In certain situations, entities have the
option of applying or continuing to apply FIN-46 for a short period of time
before applying FIN-46R. While FIN-46R modifies or clarifies various provisions
of FIN-46, it also incorporates many FASB Staff Positions previously issued by
the FASB. Management is currently assessing the impact, if any, FIN 46 may have
on us; however, our management does not anticipate the adoption to have a
material impact to the Company's financial position or results of operations.
In April 2003, FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGIN