SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 19, 2000
CHELL GROUP CORPORATION
...............................................................................
(Exact name of registrant as specified in its charter)
NEW YORK 005-524525 112805051
...............................................................................
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
14 METEOR DRIVE, ONTARIO, CANADA, M9W 1A4
................................................................................
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code................ 416 675-6666
NETWORKS NORTH, INC.
.........................................................................
(Former name or former address, if changed since last report.)
<PAGE>
Item 2. Acquisition or Disposition of Assets
On September 19, 2000 pursuant to an Agreement of Purchase and Sale dated
as of August 4, 2000 ("the Agreement"), Chell Group Corporation f/k/a Networks
North, Inc (the "Registrant") and its wholly owned subsidiary Chell Merchant
Capital Group, Inc f/k/a Networks North Acquisition Corp ("CMCG") acquired,
effective August 31, 2000, certain assets and shares from Cameron Chell and
Chell.com Ltd (collectively the "Vendors" and when referring to each in their
own capacity the "Vendor"). The Agreement was approved by a majority of the
Registrant's shareholders at a Special Meeting of Shareholders held on September
8, 2000. A copy of the Agreement is annexed hereto as Exhibit "10.1" and is
incorporated herein by reference thereto.
Pursuant to the Agreement, the Registrant acquired (a) 480,000 shares of
cDemo, Inc. ("cDemo") which equals 16.39% of its outstanding stock for
$2,510,000; (b) 875,000 shares of Engyro f/k/a R Home Funding CO. Ltd.
("Engyro") which equals 34.1% of its outstanding stock for $16,950,000; (c)
962,500 shares of eSupplies (Alberta) Ltd. ("eSupplies") which equals 27.1% of
its outstanding stock for $5,775,000; and (d) 150,000 shares of C Me Run Corp.
("C Me Run") which equals approximately 1.0% of its outstanding stock on a fully
diluted basis for $1,650,000. Financial Statements for each of Engyro,
eSupplies, C Me Run and cDemo are attached hereto as Exhibit "10.2" through
Exhibit "10.5." The Registrant also acquired assets of Chell.com, valued at
$1,767,503 and assumed a liability in the amount of $1,767,499 to CALP II
Limited Partnership, a creditor of Chell.com. The Registrant has agreed to issue
451,868
<PAGE>
exchangeable shares of CMCG in full settlement of such indebtedness. The
Chell.com assets include:
1. Leased property consisting of Chell.com's executive offices at Unit 11
(east half), Suite 302, 630 8th Avenue SW, Calgary, and Unit 13, Suite
500, 630 8th Avenue SW, Calgary;
2. Office equipment, servers, computers, office supplies (as well as any
leases pertaining thereto) and leasehold improvements;
3. All contracts of insurance covering any of the Chell.com assets to the
extent that such are assignable;
4. All contracts of employment or contracts for services with independent
contractors for the performance of personal services to Chell.com;
5. Service agreements between Chell.com and C Me Run dated November 15, 1999,
Chell.com and eSupplies dated February 8, 2000, Chell.com and R Home
Funding Co. Ltd. (the former name of Engyro) dated January 17, 2000 and
Chell.com and Buyersangel.com (the former name of cDemo) dated March 1,
2000.
The shares of the Registrant that were issued in exchange for shares of C
Me Run are currently held in escrow until such time as (i) C Me Run is current
with its SEC filings pursuant to the Securities Exchange Act of 1934, as
amended; (ii) The average closing price of C Me Run's stock is $11 for five
consecutive trading days and (iii) C Me Run is listed in good standing on either
the NASD Bulletin Board or the NASDAQ Small Cap or National Stock Market. In
addition the shares of the Registrant that were issued in exchange for shares of
eSupplies will be held in escrow until at such time the Board of Directors of
the Registrant has reviewed a new
<PAGE>
business plan and made a determination that the new course taken by eSupplies
fits with the Registrant's business model and provides similar value to the
Registrant.
In a valuation provided by Stanford Keene, it was concluded in its
fairness report (the "Valuation Report") a copy of which is attached hereto as
Exhibit "10.6", that the issuance of 7,325,000 common shares of the Registrant
to the Vendors in exchange for the assets being transferred was fair. The
Registrant paid a total of $28,652,086 for the assets, which was paid by
issuance of the following shares:
(a) Chell.com Ltd. 4,974,904 shares of the Registrant
(b) Chell.com Ltd. 1 shares of CMCG
(c) Cameron Chell 421,829 shares of the Registrant
(d) Cameron Chell 1,476,398 shares of CMCG
----------
6,873,132
(e) CALP II Limited
Partnership 451,868 shares of CMCG
----------
7,325,000 shares of the Registrant or
Shares exchangeable into Shares
of the Registrant.
Cameron Chell is a Director, Chief Executive Officer and President of the
Registrant and is also a director of Engyro, cDemo and C Me Run. He is also the
Chief Executive Officer of Chell.com. Frank Killoran is Chairman of the Board of
Directors of the Registrant and is also a director and shareholder of cDemo.
Gordon Herman one of the Registrant's directors and is also the President and a
shareholder of cDemo, a managing director of Chell Merchant Capital Group and a
consultant to eSupplies. David Bolink is one of the Registrant's directors and
is also a managing director of Chell Merchant Capital Group. Also, Mr. Bolink
owns shares and options in C Me Run and is also a consultant to eSupplies.
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of the businesses in which the Registrant
acquired assets.
(1) Balance sheet and statements of income and cash flows of Engyro
as of August 31, 2000.
(2) Balance sheet and statements of income and cash flows of cDemo
for the period ended August 31, 2000.
(3) Balance sheet and statements of income and cash flows of
eSupplies for the period ended August 31, 2000.
(b) Pro forma information of Engyro, eSupplies, cDemo and the
Registrant for the period ended August 31, 2000.
(c) Set forth below is a list of the Exhibits applicable to this Current
Report on Form 8-K/A, numbered in accordance with Item 601 of Regulation S-K.
10.1 Agreement of Purchase and Sale dated August 4, 2000 by and among Networks
North Inc., Networks North Acquisition Corp., Chell.com Ltd. and Cameron Chell.+
10.2 Valuation of Chell.com Ltd. as of May 31, 2000 by Stanford Keene+
10.3 Financial Statements for Engyro for period from Inception to period ended
May 31, 2000.+
10.4 Financial Statements for eSupplies for period ended May 31, 2000.+
10.5 Financial Statements for C Me Run for period ended March 31, 2000. These
financial statements were filed with the SEC on a Form 10-QSB. C Me Run has
announced that it intends to file an amended Form 10-QSB containing a
restatement of such financial statements.+
10.6 Financial Statements for cDemo for period ended May 31, 2000.+
<PAGE>
+ Incorporated by reference. See Exhibit Index
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Chell Group Corporation f/k/a
Networks North Inc.
a New York Corporation
Date: December 4, 2000 By: /s/ Don Pagnutti
----------------------------------
Don Pagnutti, Vice President,
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit Location
10.1 Agreement of Purchase and Sale dated August 4,
2000 by and among Network North Inc., Networks
North Acquisition Corp., Chell.com Ltd. and
Cameron Chell. Exh. A.
10.2 Valuation of Chell.com Ltd. as of May 31, 2000 by
Stanford Keene. Exh. B
10.3 Financial Statements for Engyro for period from
Inception to period ended May 31, 2000. Exh. D
10.4 Financial Statements for eSupplies for period
ended May 31, 2000. Exh. E
10.5 Financial Statements for C Me Run for period ended
March 31, 2000. Exh. F
10.6 Financial Statements for cDemo for period ended
May 31, 2000. Exh. G
All of the above Exhibits are incorporated by reference to the exhibit number
listed above in the Definitive Proxy Statement on Form 14A of the Registrant
(File No. 000-18066), filed with the Securities and Exchange Commission on
August 8, 2000.
<PAGE>
Item 7.(a)(1) Balance Sheet and statement of income and cash flows of Engyro as
of August 31, 2000
<PAGE>
ENGYRO, INC.
(A Company in the Development Stage)
BALANCE SHEET
August 31, 2000
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,293,146
Certificate of deposit 255,000
Other current assets 258,942
----------
Total current assets 1,807,088
PROPERTY AND EQUIPMENT, net 532,423
----------
$2,339,511
==========
<PAGE>
LIABILITIES AND DEFICIENCY IN ASSETS
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 352,462
-----------
Total current liabilities 352,462
-----------
CONVERTIBLE PREFERRED STOCK, SERIES A 3,419,944
-----------
DEFICIENCY IN ASSETS
Common stock, $.001 par value per share: authorized
20,000,000 shares; issued and outstanding 1,585,000 shares 1,585
Paid-in capital 100
Deficit accumulated during development stage (1,434,580)
-----------
(1,432,895)
-----------
$ 2,339,511
===========
See notes to financial statements and
review report of independent accountants. 2
<PAGE>
ENGYRO, INC.
(A Company in the Development Stage)
STATEMENT OF CHANGES IN OPERATIONS
Period from May 19, 2000 (date of inception)
through August 31, 2000
REVENUES $ --
COST 0F SALES --
-----------
GROSS MARGIN ON SALES --
-----------
OPERATING EXPENSES
Product development 587,748
Marketing and selling 70,996
General and administrative 747,242
-----------
Total operating expenses 1,405,986
-----------
LOSS FROM OPERATIONS (1,405,986)
OTHER INCOME (EXPENSE)
Interest income 4,220
Interest expense (32,814)
-----------
Net other income (expense) (28,594)
-----------
NET LOSS $(1,434,580)
===========
See notes to financial statements and
review report of independent accountants. 3
<PAGE>
ENGYRO, INC.
(A Company in the Development Stage)
STATEMENT OF CHANGES IN DEFICIENCY IN ASSETS
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
------------------------- During
Amount Paid-In Development
Shares at Par Capital Stage Total
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 2000 -- $ -- $ -- $ -- $ --
Issuance of common stock, to individual
investors during August 2000 1,585,000 1,585 100 -- 1,685
Net loss -- -- -- (1,434,580) (1,434,580)
--------- ----------- ----------- ----------- -----------
Balance, August 31,2000 1,585,000 $ 1,585 $ 100 $(1,434,580) $(1,432,895)
========= =========== =========== =========== ===========
</TABLE>
See notes to financial statements and
review report of independent accountants. 4
<PAGE>
ENGYRO, INC.
(A Company in the Development Stage)
STATEMENT OF CASH FLOWS
Period from May 19, 2000 (date of inception)
through August 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,434,580)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and accretion 9,030
Changes in assets and liabilities:
Other current assets (258,942)
Accounts payable and accrued expenses 352,462
Dividends payable 22,917
-----------
Net cash used in operating activities (1,309,113)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (534,219)
-----------
Net cash used in investing activities (534,219)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of capital stock and receipt of paid-in capital 1,685
Proceeds from issuance of preferred stock, Series A 3,389,793
-----------
Net cash provided by financing activities 3,391,478
-----------
NET INCREASE IN CASH 1,548,146
CASH AND CASH EQUIVALENTS, Beginning --
-----------
CASH AND CASH EQUIVALENTS, Ending $ 1,548,146
===========
Set notes to financial statements and
review report of independent accountants. 5
<PAGE>
ENGYRO, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
On May 19, 2000, Engyro, Inc. (Engyro or the Company) was incorporated. Engyro
provides payment and transaction settlement solutions focused on the Application
Service Provider (ASP) industry. Engyro provides data consolidation,
reconciliation, transaction settlement, and payment processing and revenue
assurance services for the new economy sector, currently serving the Application
Service Provider industry, the software industry and evolving m-commerce
applications. Engyro's management believes that the Company has developed
leading edge technologies based on an open architecture Java software and ultra
sophisticated Online Analytical Processing (OLAP) software. Engyro partners with
metering, billing and ASP infrastructure providers to complement its services.
On July 31, 2000, R Home Funding Co. Ltd., was merged into Engyro, Inc. This
transaction was treated as a pooling of interest, with Engyro as the surviving
entity. R Home Funding Co. Ltd., was incorporated on November 4, 1999 as a
Nevada Corporation. On November 26, 1999, R Home Funding entered into a
consulting agreement with Chell.com whereby R Home Funding would receive
certain corporate strategic services and advice. As a result of the merger,
Engyro assumed this consulting agreement, which expires during January 2001.
Significant Accounting Policies
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
Company's actual results in subsequent periods may differ from the estimates and
assumptions used in the preparation of the accompanying consolidated financial
statements.
Cask and Cash Equivalents -- Cash is invested in overnight sweep accounts
invested in Money Market on a nightly basis. Deposits in banks may exceed the
amount of insurance provided on such deposits. The Company performs reviews of
the credit worthiness of its depository banks. The Company has not experiences
any losses on its deposits of cash.
Certificate of Deposit -- The Company was required to deliver a security deposit
to the We Progress Drive, L.L.C. (Landlord) representing one year's lease
payment. In lieu of cash, the Company issued a Letter of Credit to the
Landlord. The Letter of Credit is secured by a $255,000 Certificate of Deposit
with First Union National Bank. The amount of this deposit decreases monthly
during the second year of the lease until the obligation is eliminated at the
end of the second year.
6
<PAGE>
ENGYRO, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
Other Current Assets -- Other current assets consist of advances to shareholders
of $258,067 and other receivables of $875. The shareholder advance is for
contractual consulting services through January 15, 2001. Consulting costs are
expensed as incurred.
Property and Equipment -- Property and equipment are recorded at cost. The
Company provides for depreciation using the straight-line method over the
estimated useful lives for equipment and the shorter of the useful lives or the
related lease term for leasehold improvements.
Stock-Based Compensation -- The Company recognizes expense for options granted
to its employees and board members in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. Since all stock
options granted have an exercise price equal to or greater than the fair market
value on the date of the grant, no compensation expense has been recognized.
Deferred Income Taxes -- Deferred income taxes are provided on the differences
between the financial statement and tax bases of assets and liabilities and
operating loss carryovers using enacted tax rates in which the differences are
expected to reverse.
NOTE 2--CONCENTRATION OF CREDIT RISK
The Company has cash in various financial institutions that insure deposits up
to $100.000 per depositor through the Federal Deposit Insurance Corporation
(FDIC). Deposits in excess of FDIC coverage are not insured and thereby
represent a credit risk to the Company. At August 31, 2000, there was $1,535,803
of uninsured deposit amounts.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment at August 31,2000 consisted of the following:
Furniture and fixtures $ 6,025
Computer equipment 39,715
Software 488,479
---------
534,219
Less accumulated depreciation 1,796
---------
Property and equipment, net $ 532,423
=========
7
<PAGE>
ENGYRO, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
NOTE 4--PREFERRED STOCK
In August 2000, Engyro issued 975,000 shares of Class A preferred stock at $3.84
(preference value) per share. Proceeds from the sale were used to finance the
development of its financial transaction technology and to fund daily
operations.
The following is a summary of convertible redeemable preferred stock at August
31, 2000:
Series A cumulative convertible preferred
stock, par value $0.01; 20,000,000
shares authorized: 975,000 shares
issued and outstanding $3,749,900
Other increase in fair value 22,917
Less financing costs 352,873
----------
Net preferred stock $3,419,944
==========
Holders of the preferred stock are entitled to a cumulative annual dividend at
the rate of 10 percent of the lower of (a) the preference value ($3.84 per
share); and (b) once the common stock of the Company is publicly traded on a
national securities exchange or an established over the counter trading market
in the United States (publicly traded), 80 percent of the average closing bid
price, for 15 consecutive trading days prior to December 31 of the preceding
year provided such price shall not be less than $1.92 per share, payable
quarterly in cash or shares of common stock, at the election of the Company,
commencing September 30, 2000.
If, on or after August 8, 2003 (redemption date), the Series A convertible
preferred stock has not been converted to common stock, the Company shall redeem
all shares of Series A convertible preferred stock outstanding on that date out
of funds legally available for such payment at a per share redemption price
equal to the redemption price. Any holder of the Series A convertible preferred
stock shall have the right to convert his shares to shares of common stock until
August 8, 2003 (redemption date), The redemption price of the convertible
preferred stock shall be the sum of 120 percent of the preference value ($3.84)
plus 100 percent of all accumulated and unpaid dividends accrued as of the
redemption date.
If the Company fails to discharge all or any part of its preferred stock
redemption obligations because sufficient funds are not available, the holders
of the preferred stock shall share ratably in any distribution of cash legally
available.
8
<PAGE>
ENGYRO, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
NOTE 5--STOCK OPTIONS AND WARRANTS
The Company has a fixed stock option p1an under which officers and key employees
may be granted options to purchase shares of the Company's authorized but
unissued common stock. From May 19, 2000 (date of inception) through August 31,
2000, the Company issued 675,000 options to officers and key employees. These
options vest at 25 percent each anniversary date (August 8) over the next 4
years at an exercise price of $5.00 per share. From inception (May 19, 2000)
through August 31, 2000, no options were vested or exercised. The option price
for all options granted equaled or exceeded the fair value of the Company's
stock at the time of issue. The Company has elected to account for its employee
stock option plans in accordance with Accounting Principles Board Statement No.
25. Accordingly, the Company did not recognize any compensation expense in
relation to options granted to employees during the period from inception (May
19, 2000) through August 31, 2000.
The following is a summary of the status of the stock option plan for the period
from inception (May 19, 2000) through August 31, 2000:
Shares Exercise Price
-------------- --------------
Outstanding at beginning of year -- $ --
Granted 675,000 5.00
Exercised -- --
Forfeited -- --
-------------- --------------
Outstanding at end of year 675,000 $ 5.00
============== ==============
During the period from inception (May 19, 2000) to August 31. 2000, Engyro
issued warrants for the purchase of 292,500 shares of common stock at $5.00 per
share, in connection with the issuance of the convertible redeemable preferred
stock. The warrants become exercisable commencing August 9, 2000 and ending
August 9, 2003. As of August 31, 2000,292,500 shares of common stock were
reserved for that purpose.
NOTE 6--PROVISION FOR INCOME TAXES
At August 31, 2000, the Company has available net operating losses for federal
and state corporation income tax purposes of approximately $1,424,000, which
can be carried forward for up to 15 years (federal) and 5 years (state).
Anticipated corporate tax benefits related to these loss carryforwards amounting
to $576,000 are fully reserved by the Company because as a development stage
company, it is not more likely than not that the asset will be realizable.
9
<PAGE>
ENGYRO, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
NOTE 7--LEASE COMMITMENT
At August 31, 2000, the Company is leasing temporary office space in Shelton,
Connecticut through December 31, 2000. Rent expense for the period from May 19,
2000 (date of inception) through August 31, 2000 amounted to $3,310.
In August 2000, the Company entered into an agreement to lease its office space
at another location in Shelton, Connecticut at an annual rental of $257,907,
subject to escalating rates expiring June 30, 2005. The lease allows the Company
to occupy the space starting in January 2001.
At August 31, 2000, future minimum payments under the noncancellable operating
leases were as follows:
2000 $ 31,492
2001 259,171
2002 274,342
2003 289,513
2004 303,420
Thereafter 278,135
-------------
Total minimum lease payments $ 1,436,073
=============
NOTE 8--UNCERTAINTIES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has sustained substantial
operating losses in recent months.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations. Management
believes that actions presently being taken to revise the Company's operating
and financial requirements provide the opportunity for the Company to continue
as a going concern.
10
<PAGE>
Item 7.(a)(2) Balance sheet and statements of income and cash flows of cDemo for
the period ended August 31, 2000
<PAGE>
cDemo Inc.
Interim Financial Statements
For the initial interim 230 day period ended
August 31, 2000
(Unaudited)
Contents
================================================================================
Review Engagement Report 2
Comments by Accountant for US Readers
On Canada - US Reporting Differences 3
Interim Financial Statements
Interim Balance Sheet 4
Interim Statement of Operations and Deficit 5
Interim Statement of Cash Flows 6
Notes to Interim Financial Statements 7 - 12
[LOGO]
<PAGE>
[Letterhead of IBDO]
================================================================================
Review Engagement Report
================================================================================
To the Directors of
cDemo Inc.
We have reviewed the balance sheet of cDemo Inc. as at August 31, 2000 and the
statements of operations and deficit and cash flows for the initial interim 230
day period then ended. Our review was made in accordance with Canadian generally
accepted accounting standards for review engagements and accordingly consisted
primarily of enquiry, analytical procedures and discussion related to
information supplied to us by the Company.
A review does not constitute an audit and consequently we do not express an
audit opinion on these financial statements.
Based on our review, nothing has come to our attention that causes us to believe
that these financial statements are not, in all material respects, in accordance
with generally accepted accounting principles as applied in the United States.
/s/ BDO Dunwoody LLP
Chartered Accountants
Calgary, Alberta
November 14, 2000
2
<PAGE>
[Letterhead of IBDO]
================================================================================
Comments by Accountant for US Readers
On Canada - US Reporting Differences
--------------------------------------------------------------------------------
In the United States, reporting standards for accountants require the addition
of an explanatory paragraph when the financial statements are affected by
conditions and events that cast substantial doubt on the Company's ability to
continue as a going concern, such as those described in Note 1 to the financial
statements. Our report to the shareholders dated November 14, 2000 is expressed
in accordance with Canadian reporting standards which do not permit a reference
to such events and conditions in the auditors' report when these are adequately
disclosed in the financial statements.
/s/ BDO Dunwoody LLP
Chartered Accountants
Calgary, Alberta
November 14, 2000
3
<PAGE>
================================================================================
cDemo Inc.
Interim Balance Sheet
(Unaudited)
As at August 31 2000
--------------------------------------------------------------------------------
Assets
Current
Cash $ 1,779,226
GST receivable 21,120
Prepaid expenses (Note 7(d)) 718,219
-----------
2,518,565
Capital assets (Note 3) 106,969
Deferred financing (Note 2(a)) 443,868
-----------
$ 3,069,402
================================================================================
Liabilities and Shareholders' Deficiency
Current
Accounts payable and accrued liabilities $ 90,300
Convertible debentures (Note 4) 4,277,000
-----------
4,367,300
-----------
Equity instruments (Note 5) 212,195
Deficit (1,510,093)
-----------
(1,297,898)
-----------
$ 3,069,402
================================================================================
------------------------------
Director
------------------------------
Director
The accompanying notes are an integral part of these interim financial [LOGO]
statements.
4
<PAGE>
================================================================================
cDemo Inc.
Interim Statement of Operations and Deficit
(Unaudited)
For the initial interim 230 day period ended August 31 2000
--------------------------------------------------------------------------------
Expenses
General and administrative $ 1,422,680
Development 52,219
Amortization 24,543
Foreign exchange 10,651
-----------
Net loss for the period, representing deficit, end of period $(1,510,093)
================================================================================
Net loss per share $ (1.09)
================================================================================
The accompanying notes are an integral part of these interim financial [LOGO]
statements.
5
<PAGE>
================================================================================
cDemo Inc.
Interim Statement of Cash Flows
(Unaudited)
For the initial interim 230 day period ended August 31 2000
--------------------------------------------------------------------------------
Cash flows from operating activities
Net loss from operations $(1,510,093)
Adjustments for:
Amortization 24,543
Consulting fees 64,000
-----------
(1,421,550)
Net change in non-cash working capital balances (649,039)
-----------
(2,070,589)
-----------
Cash flows from financing activities
Deferred financing costs (456,549)
Issue of convertible debentures 4,425,000
Issue of share capital, net of share issue costs 195
-----------
3,968,646
-----------
Cash flows from investing activity
Purchase of capital assets (118,831)
-----------
Increase in cash, representing cash, end of period $ 1,779,226
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these interim financial [LOGO]
statements.
6
<PAGE>
================================================================================
cDemo Inc.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
1. Organization and Nature of Operations
--------------------------------------------------------------------------------
cDemo Inc. (the "Company"), was incorporated under the laws of the State
of Delaware by Articles of Incorporation dated January 14, 2000. The
Company filed to have its name changed from the original name of
buyersangel.com to consumersangel.com. A subsequent filing was done to
change the Company's name to C Me Buy Inc. A final name change was filed
for and received on May 4, 2000 changing the Company's name to cDemo Inc.
The Company's business purpose is to develop an infrastructure that
empowers and aids consumers for transacting in the automotive industry.
The financial statements have been prepared using United States generally
accepted accounting principles that are applicable to a going concern.
Ultimate recovery of the Company's assets is dependent on the Company,
after an expected period of initial losses, achieving and maintaining
profitability which is dependant on market conditions, successful rollout
of the Company's business plan and the ability to obtain adequate
financing to meet capital and operational requirements. It is management's
opinion that the Company will be able to obtain the necessary financing to
continue development activities over the next fiscal period.
Since the most significant portion of the Company's operations are located
in the Canada and its normal transaction currency is Canadian dollars,
these financial statements are stated in Canadian dollars.
--------------------------------------------------------------------------------
2. Significant Accounting Policies
--------------------------------------------------------------------------------
The financial statements of the Company have been prepared by management
in accordance with generally accepted accounting principles in the United
States. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates. The financial statements have, in management's
opinion, been properly prepared using careful judgement with reasonable
limits of materiality and within the framework of the significant
accounting policies summarized below.
(a) Deferred financing
Deferred financing charges represent costs paid by the Company
relating to the convertible debenture financing. Financing fees and
expenses relating to the debt financing will be amortized over the
term of the related debt. During the period, $12,682 of these costs
has been amortized.
(b) Capital assets
Capital assets are carried at cost less accumulated amortization.
Amortization is provided for using the following methods and annual:
Furniture and fixtures - 5 year straight-line
Computer hardware - 3 year straight-line
Computer software - 3 year straight-line
Leasehold improvements - 4 years; shorter of lease term or
estimated economic life
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7
<PAGE>
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cDemo Inc.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
2. Significant Accounting Policies - continued
--------------------------------------------------------------------------------
(c) Foreign currency
Assets and liabilities transacted in a foreign currency are
translated at the period end exchange rate while revenues and
expenses are translated at average exchange rates for the period.
Any gains or losses resulting from the translation of these assets
and liabilities are recorded on the statement of operations and
deficit.
(d) Financial instruments
The Company's assets and liabilities include various financial
instruments. Unless otherwise indicated, it is management's opinion
that the Company is not exposed to significant interest, currency or
credit risks arising from these financial instruments. The fair
market values of these financial instruments approximate their
carrying values, unless otherwise noted.
(e) Measurement uncertainty
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates.
(f) New accounting pronouncements
(i) In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the
hedge risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income
in the period of change. SFAS No. 133 as amended by SFAS No.
137 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Based on its current and
planned future activities relative to derivative instruments,
the Company believes that the adoption of SFAS No. 133 does
not have any current effect or expected future effect on its
financial statements.
--------------------------------------------------------------------------------
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8
<PAGE>
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cDemo Inc.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
2. Significant Accounting Policies - continued
--------------------------------------------------------------------------------
(ii) On December 3, 1999, the SEC issued Staff Accounting Bulletin
101 ("SAB 101"), Revenue Recognition in Financial Statements.
SAB 101 summarizes some of the SEC's interpretations of the
application of generally accepted accounting principles to
revenue recognition. Revenue recognition under SAB 101 was
initially effective for the Company's first quarter 2000
financial statements. However, SAB 101B, which was released
June 26, 2000, delayed adoption of SAB 101 until no later than
the fourth fiscal quarter 2000. Changes resulting from SAB 101
require that a cumulative effect of such changes for 1999 and
prior years be recorded as an adjustment to net income on
January 1, 2000.
The Company is still in the process of reviewing SAB 101 and
although they do not have any revenues as of yet, it believes
that its revenue recognition practices are in substantial
compliance with SAB 101 and that adoption of its provisions
would not be material to its results of operations.
--------------------------------------------------------------------------------
3. Capital Assets
--------------------------------------------------------------------------------
2000
---------------------------
Accumulated
Cost Amortization
---------------------------
Furniture and fixtures $ 7,876 $ 522
Computer hardware 59,327 7,012
Computer software 10,570 1,281
Leasehold improvements 41,058 3,047
---------------------------
$118,831 $ 11,862
---------------------------
Net book value $106,969
--------------------------------------------------------------------------------
4. Convertible Debenture
--------------------------------------------------------------------------------
During the period, the Company issued US$3,000,000 in convertible
debentures bearing interest at 8% per annum, due on July 31, 2003 and
secured by a general security agreement on the assets of the Company.
These debentures are convertible into 1 common share of the Company for
every US$5 of debt. When the Company is publicly traded, the debentures
are convertible into 1 common share at the lower of US$5 or 80% of the
average closing price for 15 consecutive trading days prior to the
conversion, subject to a floor price of US$2.50. The convertible debenture
was subscribed for by two related parties, VC Advantage Limited
Partnership and the VC Advantage (Bermuda) Fund Ltd., of which a director
of the Company is an investor and beneficiary, respectively.
--------------------------------------------------------------------------------
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<PAGE>
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cDemo Inc.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
5. Equity Instruments
--------------------------------------------------------------------------------
(a) Authorized
20,000,000 common shares
(b) Issued Number
Common shares (Note 5(d)) of Shares Amount
---------------------
Issued for cash 174,000 $ 195
To effect 12 for 1 stock split 1,914,000 --
--------- ----------
2,088,000 195
=========
Warrants 660,000 212,000
========= ----------
Equity instruments $ 212,195
=========
Weighted average number of shares outstanding 1,390,536
=========
(c) Warrants
During the period, the Company issued 660,000 warrants, allowing the
holder to purchase 1 common share for every warrant at $5 per share,
until dates varying from March 3, 2003 to August 21, 2003.
No expense has been recorded for 480,000 warrants issued to a trust
fund on behalf of a director. The value attributable to these
warrants, based on the Black-Scholes method, with an expected
volatility of 0% and risk free rate of return of 6% would
approximate $593,000. The value attributable to the options is
approximately $1.24 per share. The expected life of the warrants is
the date of expiration. It is expected that no dividends will be
paid on the common shares after conversion of any warrants.
Had cost for these warrants issued to the fund been recorded, the
pro-forma income statement would have been as follows:
2000
-------------
Reported net loss $ (1,510,093)
Cost of warrants (593,000)
------------
Pro forma net loss $ (2,103,093)
============
Pro-forma loss per share $ (1.51)
============
The Company also issued 60,000 warrants to a consultant for services
provided and 120,000 warrants issued in conjunction with the
convertible debenture financing. An expense of $64,000 has been
recorded for warrants issued to the consultant. The $148,000 of
value attributed to the convertible debentures financing has been
netted against the debentures on the financials. It will be
amortized over the life of the convertible debt.
(d) Escrow agreement
Pursuant to an escrow agreement dated August 21, 2000 with the
shareholders of the Company, all 2,088,000 common shares of the
Company may not be traded, released, transferred or dealt with in
any manner and in total will be released from escrow 1/3 each on the
dates of July 31, 2001, July 31, 2002 and July 31, 2003.
--------------------------------------------------------------------------------
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cDemo Inc.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
6. Contingency and Commitment
--------------------------------------------------------------------------------
Prior to May 31, 2001, the Company is required to file a registration
statement with the US Securities and Exchange Commission to register
common stock to be issued by the Company as well as 200% of the shares
that would be issued upon debt conversions and 100% of the shares to be
issued upon exercise of the Lender and Agent warrants. Any delay in
obtaining such registration will result in the Company paying the Lender
an amount equal to 1% per month of the original advance. The Lender has
the option of converting this penalty into common shares at the same
conversion as the original principal loan.
--------------------------------------------------------------------------------
7. Related Party Transactions
--------------------------------------------------------------------------------
(a) The Company has paid consulting fees to parties related by virtue of
being shareholders or on the management team in the amount of
$400,423.
(b) The Company has committed to paying $2,900 per month for rent to a
related party by virtue of common shareholders and directors.
(c) The Company has entered into an agreement with a party related by
virtue of common shareholders and directors for provision of
supplying certain strategic services and advice. The contract called
for a lump sum payment of $1,065,600 (US$720,000). As at August 31,
2000, four months of services have been performed therefore,
$710,400 (US$480,000) has been classed as prepaid and $355,200
($240,000) has been expensed. 60,000 warrants have also been issued
pursuant to this contract (Note 5(c)).
(d) The Company issued US$3,000,000 in convertible debentures to two
related parties (Note 4).
--------------------------------------------------------------------------------
8. Statement of Cash Flows
--------------------------------------------------------------------------------
During the period, the Company issued warrants to consultants for which an
expense was recorded. An amount of $64,000 relating to consulting fees has
been expensed and $148,000 in conjunction with the convertible debenture
financing is being amortized over the life of the debenture (Note 5(c)).
[LOGO]
11
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cDemo Inc.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
9. Financial Instruments
--------------------------------------------------------------------------------
As disclosed in Note 2(d), the Company holds various forms of financial
instruments. The nature of these instruments and the Company's operations
expose the Company to foreign currency risk and industry credit risk. The
Company manages its exposure to these risks by operating in a manner that
minimizes its exposure to the extent practical.
(a) Foreign currency rate risk management
The Company manages its exposure to foreign currency fluctuations by
maintaining foreign currency bank accounts and receivables to offset
foreign currency payables and planned expenditures. At August 31,
2000, approximately US$1.1 million was being held at one
institution.
(b) Credit risk
Substantially all of the Company's cash is being held at one
financial institution.
--------------------------------------------------------------------------------
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12
<PAGE>
Item 7.(a)(3) Balance sheets and statements of income and cash flows of
eSupplies for the period ended August 31, 2000
<PAGE>
eSupplies (Alberta) Ltd.
Interim Financial Statements For the
period from date of incorporation on
October 29, 1999 to August 31, 2000
(Unaudited)
Contents
================================================================================
Review Engagement Report 2
Comments by Accountant for US Readers
On Canada - US Reporting Differences 3
Interim Financial Statements
Interim Balance Sheet 4
Interim Statement of Operations and Deficit 5
Interim Statement of Cash Flows 6
Notes to Interim Financial Statements 7 - 16
[LOGO]
<PAGE>
[LETTERHEAD OF BDO DUNWOODY LLP]
--------------------------------------------------------------------------------
Review Engagement Report
--------------------------------------------------------------------------------
To the Director of
eSupplies (Alberta) Ltd.
We have reviewed the balance sheet of eSupplies (Alberta) Ltd. as at August 31,
2000 and the statements of operations and deficit and cash flows for the period
from the date of incorporation on October 29, 1999 to August 31, 2000. Our
review was made in accordance with Canadian generally accepted accounting
standards for review engagements and accordingly consisted primarily of enquiry,
analytical procedures and discussion related to information supplied to us by
the Company.
A review does not constitute an audit and consequently we do not express an
audit opinion on these financial statements.
Based on our review, nothing has come to our attention that causes us to believe
that these financial statements are not, in all material respects, in accordance
with generally accepted accounting principles as applied in the United States.
/s/ BDO Dunwoody LLP
Chartered Accountants
Calgary, Alberta
November 18, 2000
2
<PAGE>
[LETTERHEAD OF BDO DUNWOODY LLP]
--------------------------------------------------------------------------------
Comments by Accountant for US Readers
On Canada - US Reporting Differences
--------------------------------------------------------------------------------
In the United States, reporting standards for accountants require the addition
of an explanatory paragraph when the financial statements are affected by
conditions and events that cast substantial doubt on the Company's ability to
continue as a going concern, such as those described in Note 1 to the financial
statements. Our report to the director dated November 18, 2000 is expressed in
accordance with Canadian reporting standards which do not permit a reference to
such events and conditions in the review engagement report when these are
adequately disclosed in the financial statements.
/s/ BDO Dunwoody LLP
Chartered Accountants
Calgary, Alberta
November 18, 2000
3
<PAGE>
================================================================================
eSupplies (Alberta) Ltd.
Interim Balance Sheet
(Unaudited)
As at August 31 2000
--------------------------------------------------------------------------------
Assets
Current
Cash $ 239,602
Short-term deposits 543,070
Restricted cash (Note 10) 940,407
Accounts receivable 624,196
Inventory 11,941
Prepaid expenses (Note 7(c)) 651,450
-----------
3,010,666
Capital assets (Note 3) 784,882
Deferred financing (Note 2(a)) 415,773
-----------
$ 4,211,321
--------------------------------------------------------------------------------
Liabilities and Shareholders' Deficiency
Current
Accounts payable and accrued liabilities $ 566,158
-----------
Convertible debt (Note 5) 3,717,352
-----------
Equity instruments (Note 6) 5,554,802
Deficit (5,626,991)
-----------
(72,189)
-----------
$ 4,211,321
--------------------------------------------------------------------------------
-----------------------------------
Director
The accompanying notes are an integral part of these interim financial [LOGO]
statements.
4
<PAGE>
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eSupplies (Alberta) Ltd.
Interim Statement of Operations and Deficit
(Unaudited)
For the period from date of incorporation on October 29, 1999 to 2000
August 31
--------------------------------------------------------------------------------
Sales $ 1,076,123
Cost of sales 763,626
Direct costs (including amortization of $15,157) 279,596
-----------
Gross margin 32,901
-----------
Expenses
Amortization and write-downs 1,033,901
Development 757,302
General and administrative 3,576,038
Financing 75,809
Interest 216,842
-----------
5,659,892
-----------
Net loss for the period, representing deficit, end of period $(5,626,991)
================================================================================
Net loss per share $ (1.92)
================================================================================
The accompanying notes are an integral part of these interim financial [LOGO]
statements.
5
<PAGE>
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eSupplies (Alberta) Ltd.
Interim Statement of Cash Flows
(Unaudited)
For the period from date of incorporation on October 29, 1999
to August 31 2000
-------------------------------------------------------------------------------
Cash flows from operating activities
Net loss for the period $(5,626,991)
Adjustments for:
Amortization and write-down of capital assets 1,049,058
Interest 50,948
-----------
(4,526,985)
Net change in non-cash working capital balances
Accounts receivable 255,867
Inventory 275,654
Prepaid expenses (651,450)
Accounts payable and accrued liabilities 566,158
-----------
(4,080,756)
-----------
Cash flows from financing activities
Issue of convertible debenture 3,774,050
Deferred financing (302,378)
Issue of share capital 3,696,137
-----------
7,167,809
-----------
Cash flows from investing activities
Acquisition of assets (Note 4) 369,966
Purchase of capital assets (1,733,940)
Restricted cash (940,407)
-----------
(2,304,381)
-----------
Increase in cash, representing cash and cash
equivalents, end of period (Note 9(c)) $ 782,672
================================================================================
The accompanying notes are an integral part of these interim financial [LOGO]
statements.
6
<PAGE>
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eSupplies (Alberta) Ltd.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
1. Organization and Nature of Operations
--------------------------------------------------------------------------------
eSupplies (Alberta) Ltd. (the "Company"), was incorporated under the
Alberta Business Corporations Act on October 29, 1999. The Company filed
to have its name changed from the original name of 851970 Alberta Ltd. to
eSupplies (Alberta) Ltd.
The financial statements have been prepared using United States generally
accepted accounting principles that are applicable to a going concern.
Ultimate recovery of the Company's assets is dependent on the Company,
after an expected period of initial losses, achieving and maintaining
profitability which is dependant on market conditions, successful rollout
of the Company's business plan and the ability to obtain adequate
financing to meet capital and operational requirements. It is management's
opinion that the Company will be able to obtain the necessary financing to
continue development activities over the next fiscal period.
Since the most significant portion of the Company's operations are located
in the Canada and its normal transaction currency is Canadian dollars,
these financial statements are stated in Canadian dollars.
--------------------------------------------------------------------------------
2. Significant Accounting Policies
--------------------------------------------------------------------------------
The financial statements of the Company have been prepared by management
in accordance with generally accepted accounting principles in the United
States. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates. The financial statements have, in management's
opinion, been properly prepared using careful judgement with reasonable
limits of materiality and within the framework of the significant
accounting policies summarized below.
(a) Deferred financing
Deferred financing charges represent costs paid by the Company
relating to the convertible debenture financing. Financing fees and
expenses relating to the debt financing will be amortized over the
term of the related debt. During the period, $75,809 has been
amortized.
(b) Revenue recognition
Revenue is generally recorded on shipment, with a provision for
estimated returns recorded at that time.
(c) Inventory
Inventory is recorded at the lower of actual cost and net realizable
value.
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7
<PAGE>
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eSupplies (Alberta) Ltd.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
2. Significant Accounting Policies - continued
--------------------------------------------------------------------------------
(d) Capital assets
Capital assets are carried at cost less accumulated amortization.
Amortization is provided for using the following methods and rates:
Computer hardware - 3 year straight-line
Software - 2 year straight-line
Furniture and equipment - 5 year straight-line
Vehicles - 5 year straight-line
Leasehold improvements - 5 years; shorter of lease term or
estimated economic life
(e) Foreign currency
Assets and liabilities transacted in a foreign currency are
translated at the period end exchange rate while revenues and
expenses are translated at average exchange rates for the period.
Any gains or losses resulting from the translation of these assets
and liabilities are recorded on the statement of operations and
deficit.
(f) Financial instruments
The Company's assets and liabilities include various financial
instruments. Unless otherwise indicated, it is management's opinion
that the Company is not exposed to significant interest, currency or
credit risks arising from these financial instruments. The fair
market values of these financial instruments approximate their
carrying values, unless otherwise noted.
(g) Measurement uncertainty
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates.
(h) Stock-based compensation plan
The Company applies Accounting Principles ("APB") Opinion 25,
"Accounting for Stock Issued to Employees," and related
Interpretations in accounting for the stock option plan. Under APB
Opinion 25, compensation cost would be recognized for stock options
granted to employees and directors for their services as directors
if the option price is less than the market price of the underlying
common stock on the date of the grant.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires
the Company to provide pro-forma information regarding net income as
if the compensation costs for the Company's stock option plan had
been determined in accordance with the fair value based method
prescribed in SFAS No. 123. To provide the required pro-forma
information, the Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing
model.
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eSupplies (Alberta) Ltd.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
2. Significant Accounting Policies - continued
--------------------------------------------------------------------------------
(i) Valuation of long-lived assets
The Company periodically evaluates the carrying value of its
long-lived assets. The carrying value of the long-lived assets is
considered impaired when the undiscounted net cash flow from such
assets is estimated to be less than its carrying value. Management
has recorded an impairment adjustment of $777,385 in the initial
period ended August 31, 2000.
(j) New accounting pronouncements
(i) In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the
hedge risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income
in the period of change. SFAS No. 133 as amended by SFAS No.
137 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Based on its current and
planned future activities relative to derivative instruments,
the Company believes that the adoption of SFAS No. 133 will
not have a significant effect on its financial statements.
(ii) On December 3, 1999, the SEC issued Staff Accounting Bulletin
101 ("SAB 101"), Revenue Recognition in Financial Statements.
SAB 101 summarizes some of the SEC's interpretations of the
application of generally accepted accounting principles to
revenue recognition. Revenue recognition under SAB 101 was
initially effective for the Company's first quarter 2000
financial statements. However, SAB 101B, which was released
June 26, 2000, delayed adoption of SAB 101 until no later than
the fourth fiscal quarter 2000.
Although the Company is still in the process of reviewing SAB
101, it believes that its revenue recognition practices are in
substantial compliance with SAB 101 and that adoption of its
provisions would not be material to its results of operations.
--------------------------------------------------------------------------------
3. Capital Assets
--------------------------------------------------------------------------------
------------------------------------------
Accumulated Net
amortization book
Cost and write-downs value
------------------------------------------
Computer hardware and
software $ 824,195 $ 535,638 $ 288,557
Furniture and equipment 480,892 205,979 274,913
Vehicles 129,920 15,157 114,763
Leasehold improvements 398,933 292,284 106,649
------------------------------------------
$1,833,940 $1,049,058 $ 784,882
--------------------------------------------------------------------------------
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eSupplies (Alberta) Ltd.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
4. Business Combination
--------------------------------------------------------------------------------
Effective February 7, 2000, the Company purchased the assets of Willson
Stationers Ltd. ("Willsons"), an office stationary business in Western
Canada. This acquisition has been accounted for using the purchase method
with results from operations being included since the effective date. The
acquisition has been accounted for as a non-monetary transaction and as
such, the fair value of assets acquired has been used to determine the
value of the debt acquired. Net assets acquired are as follows:
Cash $ 369,966
Accounts receivable 880,063
Inventory 287,595
Capital assets 100,000
----------
Net book value of assets purchased $1,637,624
==========
Purchase price paid via the assumption of debt (1) $1,637,624
==========
(1) This debt was converted to common shares on May 23, 2000 (Note 6(b))
The transaction was negotiated with the court appointed receiver / manager
of Willsons as Willsons was in receivership at the time of this
transaction. Certain shareholders of the Company were shareholders of
Willsons as well.
--------------------------------------------------------------------------------
5. Convertible Debt
--------------------------------------------------------------------------------
Effective May 24, 2000, the Company entered into a US$6 million,
non-revolving term loan agreement with VC Advantage Limited Partnership
("VCALP"). Under the terms of this agreement, VCALP would have a general
security interest over the assets of the Company for any advances. All
advances carry an 8% fee on the date of each draw and a 10% per annum
interest on gross amounts advanced. The principle amount including
interest must be repaid by June 18, 2001 (the "Maturity Date") unless such
a date is mutually extended. On May 26, 2000, a gross amount of $3,680,500
(US$2,500,000) was advanced to the Company under this agreement.
Advances are convertible prior to the Maturity Date or as extended, at
VCALP's option, to Class A common shares at the lower of 1) US$7 for
conversions up to and including May 24, 2002, US$8 for conversions between
and including May 25, 2002 and May 24, 2004 and US$9 after May 24, 2004;
or 2) maximum of a) 80% of the weighted average of the closing bid price
on a stock exchange or quotation system during a period of 10 consecutive
trading days ending not more than 3 trading days before written notice
from VCALP of such intentions; b) US$2 per share.
--------------------------------------------------------------------------------
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<PAGE>
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eSupplies (Alberta) Ltd.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
5. Convertible Debt - continued
--------------------------------------------------------------------------------
As additional consideration, the Company agreed to grant warrants
convertible to a maximum of 255,000 Class A common shares based on a
conversion rate of 14.1667 shares for each US$1,000 advanced. These
warrants are exercisable at US$7 per share up to May 24, 2003. The Company
has a right to cause mandatory conversion of these warrants after May 24,
2001 if the average share price of each common share exceeds US$9 on any
public exchange for 30 consecutive trading days. As at August 31, 2000,
US$2,500,000 has been advance therefore, 35,500 warrants have been issued.
Provided that the advances are not repaid by the Maturity Date the Company
will issue, on the first date of each month after the Maturity Date,
warrants to VCALP to purchase 2,500 Class A common shares for each
US$500,000 of indebtedness outstanding. These warrants expire 3 years from
the Maturity Date and are exercisable at US$7 per share up to and
including the second anniversary of the Maturity Date and at US$8 per
share after the second anniversary up to the expiry date. The Company has
a right to cause mandatory conversion of these warrants after June 18,
2002 if the average share price of each common share exceeds US$9 on any
public exchange for 30 consecutive trading days.
--------------------------------------------------------------------------------
6. Equity Instruments
--------------------------------------------------------------------------------
(a) Authorized
Unlimited number of Class A and B voting shares Unlimited number of
Class C and D non-voting shares
(b) Issued
Number
Common shares of Shares Amount
------------------------
Issued for cash 2,500,000 $ 1
Issued upon conversion of VCALP debt (1) 416,667 3,408,655
Issued upon conversion of Willsons debt (2) 633,333 1,470,566
--------- ---------
3,550,000 4,879,222
========= ---------
Weighted average number of shares outstanding 2,930,328
=========
Warrants 423,000 675,580
========= ----------
Equity instruments $5,554,802
==========
(1) The Company issued convertible debt in the amount of $3,589,450
(US$2,500,000) to VCALP. As security for the amounts outstanding,
these creditors held a general security interest over all the assets
of the Company. On May 23, 2000, the Company and VCALP agreed to
convert debt in the amount of into Class A common shares at a
conversion rate of one share for each US$6 of debt. As a result
416,667 Class A common shares were issued to satisfy that debt. The
value attributed to the common shares issued was $3,408,655
(original loan of $3,589,450, net of accrued interest of $106,686
and discount of $287,481).
--------------------------------------------------------------------------------
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<PAGE>
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eSupplies (Alberta) Ltd.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
6. Equity Instruments - continued
--------------------------------------------------------------------------------
(2) As part of the acquisition of Willsons, the Company assumed its debt
owing to secured creditors. On May 23, 2000, the Company and the
secured creditors agreed to convert debt in the amount of $5,451,860
into Class A common shares at a conversion rate of one share for
each US$6 of debt. As a result 633,333 Class A common shares were
issued to satisfy that debt. As the underlying acquisition
transaction is a non-monetary transaction, the value of the debt
assumed was valued at the fair value of the assets acquired. The
value attributed to the common shares issued was $1,470,566 (fair
value of assets of $1,637,624 (Note 4), net of accrued interest of
$50,948 and discount of $218,006).
(c) Warrants
During the period, the Company issued 316,500 and 106,500 warrants,
allowing the holder to purchase 1 common share for every warrant at
US$7 per share until May 23, 2003 and May 24, 2003, respectively.
The Company has a right to cause a mandatory call on the 316,500 and
106,500 warrants on May 23, 2001 and May 24, 2001, respectively, if
the Company is listed on an exchange and their average stock price
exceeds US$9 per share for 30 consecutive trading days.
The value attributable to these warrants was calculated based on the
Black-Scholes method, with an expected volatility of 0% and risk
free rate of return of 6%. The expected life of the warrants is the
date of expiration. It is expected that no dividends will be paid on
any shares, resulting from the exercise of warrants.
(d) Options
In May 2000, the Company adopted a stock option plan, through which
options may be granted to directors, officers, employees,
consultants and affiliates for the purchase of 1,970,000 Class A
common shares. As at August 31, 2000 there were 380,000 stock
options outstanding. These options are exercisable at US$7 per share
and expire in April 2010. Pro-forma information has not been
provided for these options as these options have yet to vest. 1/3 of
the options vest on each of November 1, 2000, November 1, 2001 and
November 1, 2002.
The Company has granted stock options to the officers and employees
of the Company as follows:
Weighted
Option Average
Number of Price per Exercise
Shares Share Price
----------------------------------------
Options - granted 380,000 US$7 US$7
-------------
Options outstanding, August 31,
2000 380,000 US$7 US$7
=============
The following table summarized information about the stock options
outstanding at August 31, 2000:
Average
Weighted Exercise
Weighted Average Number of Price of
Average Remaining Options Options
Options Exercise Contractual Currently Currently
outstanding Option price Price Life Exercisable Exercisable
--------------------------------------------------------------------------
380,000 US$7 US$7 2.75 years -- --
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eSupplies (Alberta) Ltd.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
7. Related Party Transactions
--------------------------------------------------------------------------------
(a) The Company has issued 423,000 warrants to a parties related by
virtue of common shareholders (Note 6(c)).
(b) The Company has entered into an agreement with a party related by
virtue of common shareholders for provision of supplying certain
strategic services and advice. The contract called for a lump sum
payment of $1,034,856 (US$720,000). As at August 31, 2000, $455,829
remains in prepaid expenses. Amortized amount of $579,026 has been
included in general and administrative expense.
(c) The Company issued US$2,500,000 in convertible debt to a party
related by virtue of being a shareholder (Note 5).
(d) The Company paid $413,227 ($US 279,000) to a related consultant for
financing costs related to the convertible debenture which will be
deferred and amortized over the life of the debenture.
(e) The Company entered into an agreement to lease premises from Bankton
Development Corp., a party related by virtue of common shareholders,
commencing on February 7, 2000 to January 31, 2005. Under the terms
of this agreement, the Company is committed to paying basic rent and
condo fees of $96,000 and $30,636 per annum, respectively. For the
period ended August 31, 2000, $69,027 has been included as general
and administrative expense.
(f) General and administrative expenses includes $553,682 in fees
associated with computer services provided by Futurelink Corp., a
party related by virtue of common shareholders.
(g) On March 15, 2000, the Company entered into an agreement with a
party related by virtue of being a shareholder and officer of an
entity which is a shareholder of the Company. Under the terms of
this agreement, the individual is not to carry on business in
competition with the Company for a period of 3 years. As
consideration, the Company has paid US$100,000. For the period ended
August 31, 2000, $24,685 has been included as general and
administrative expense.
(h) In the normal course of business, the Company had purchases from
parties related by virtue of common shareholders and directors in
the amount of $108,657.
(i) Included in accounts receivable are amounts owed to parties related
by virtue of common shareholders and officers of $57,287.
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eSupplies (Alberta) Ltd.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
8. Financial Instruments
--------------------------------------------------------------------------------
As disclosed in Note 2(f), the Company holds various forms of financial
instruments. The nature of these instruments and the Company's operations
expose the Company industry credit risk. The Company manages its exposure
to these risks by operating in a manner that minimizes its exposure to the
extent practical.
A substantial portion of the Company's current assets is comprised of
accounts receivable, which are subject to normal trade credit risks. The
credit risk associated with the accounts receivable is reduced by the
Company's policies of establishing acceptable credit levels for each
customer coupled with an ongoing follow-up of the outstanding accounts
receivable.
--------------------------------------------------------------------------------
9. Statement of Cash Flows
--------------------------------------------------------------------------------
(a) During the period, the Company issued certain warrants for which a
value was recorded. $113,395 has been recorded as deferred financing
charges, while $56,698 attributed to the convertible debenture
financing has been netted against the debenture and is being
amortized over the life of the debenture (Note 5) and warrants that
were attached to the conversion of the original convertible
debentures (Note 5) in the amount of $505,487 have been recorded as
a reduction of capital. Therefore, a total of $675,580 has been
recorded in equity instruments for the value of warrants (Note
5(b)).
(b) Acquisition of assets
During the period, the Company purchased the assets of Willsons
(Note 4).
(c) Cash and cash equivalents
Cash and cash equivalents included in the statement of cash flows
comprise the following balance sheet amounts:
2000
------------
Cash $ 239,502
Short-term deposits 543,070
------------
$ 782,572
============
--------------------------------------------------------------------------------
10. Restricted Cash
--------------------------------------------------------------------------------
Restricted cash includes $382,772 that is held in trust for any remaining
liabilities that may arise from the convertible debt financing raised
during the period, $300,000 for costs relating to the negotiation of a
contract for development of their e-commerce, and cash to support a pledge
to secure accounts payables relating to the purchase of certain inventory,
which at period end, the amount, including interest earned, amounted to
$257,635. Subsequent to the period end, all restricted cash has been
released and related liabilities paid, except for the cash to support the
pledge of accounts payable (Notes 11(b) and 12(c)).
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eSupplies (Alberta) Ltd.
Notes to Interim Financial Statements
(Unaudited)
As at August 31, 2000
--------------------------------------------------------------------------------
11. Commitment and Contingency
--------------------------------------------------------------------------------
(a) The Company rents business premises under a five-year lease from a
related party (Note 7(g)). The approximate annual rents and condo
fees for the next five years are as follows:
2000 $ 52,765
2001 126,636
2002 126,636
2003 126,636
2004 126,636
2005 10,553
(b) During June 2000, the Company issued a letter of credit for
US$170,000 to secure accounts payables relating to the purchase of
inventory.
--------------------------------------------------------------------------------
12. Subsequent Events
--------------------------------------------------------------------------------
(a) In September 2000, the Company's management decided to re-focus the
Company's business so as to realign itself and to reduce costs. As a
part of this reorganization, the Company is currently in
negotiations to dispose of certain assets to a party related by
virtue of having common shareholders and directors. These assets
will be sold at their approximate net book value of $360,000. As a
part of this plan, the Company has reduced its workforce by about 30
employees, which represented approximately 70% of the Company's
employee base. The Company incurred $200,000 in severance costs and
approximately $30,000 in moving and relocation expenses in relation
to this reorganization. As a result of the reduced employee base,
the Company has written off $100,000 of leasehold improvements and
capitalized software expenditures in September 2000.
(b) During October 2000, the Company entered into an agreement with a
company related by virtue of common shareholders. Under the terms of
the agreement, the Company has loaned US$450,000 to this company.
The loan is non-interest bearing, due on demand, and is secured by a
general security agreement.
(c) During October 2000, the letter of credit (Note 11(b)) was reduced
from US$170,000 to US$70,000.
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<PAGE>
Item 7. (b) Proformat information of Engyro, eSupplies, cDemo and the Registrant
for the period ended August 31, 2000
<PAGE>
CHELL GROUP CORPORATION
(Formerly Networks North Inc.)
INTRODUCTION TO CONDENSED CONSOLIDATED PROFORMA FINANCIAL STATEMENTS
(Unaudited)
The following unaudited proforma statement of operations has been prepared based
upon certain proforma adjustments to the historical financial statements of
Chell Group Corporation (the Company). This proforma statement of operations
should be read in conjunction with the notes thereto and with the Company's
historical financial statements included with its annual report on Form 10-K.
The accompanying financial statement has been prepared as if the transactions
below had been consummated as of the beginning of the earliest period presented
(September 1, 1999). Unless stated differently, all amounts are reflected in
Canadian dollars.
On September 19, 2000, pursuant to an Agreement of Purchase and Sale dated as of
August 4, 2000, the Company and its' subsidiary NNAC acquired, effective August
31, 2000, certain shares and net assets from Cameron Chell and Chell.com Ltd.
("Chell.com"). Pursuant to the Agreement, the Company acquired (a) 480,000
common shares of cDemo, Inc. (23%); (b) 875,000 common shares of Engyro, Inc.
(34%); (c) 150,000 common shares of C Me Run Corp. (1%) and (d) 60,000 common
shares of Chell.com USA (100%). In addition, NNAC acquired 962,500 common shares
of eSupplies Ltd. (27%) as well as certain net assets from Chell.com.
In consideration for this acquisition, the Company issued 5,396,733 shares of
its common stock and NNAC issued 1,928,267 special convertible shares to Cameron
Chell, Chell.com and others. Each share issued by NNAC is convertible into one
share of common stock of the Company. Pursuant to a Voting and Exchange Trust
Agreement entered into with a trustee, whereby voting privileges have been
granted, such shares issued by NNAC can be voted by the trustee immediately. The
amount of shares issued was determined based upon an appraisal valuation of the
investments and assets acquired which aggregated US$28,652,086.
As a result of this acquisition, the Company (the legal acquirer), is now
predominantly owned (70%) by Cameron Chell and Chell.com, ("Chell shareholders")
an entity in which Cameron Chell is the sole shareholder. Since the Chell
shareholders (the legal acquiree) became the majority shareholders of the
post-acquisition consolidated enterprise, this acquisition was reflected as a
reverse acquisition.
In accordance with reverse acquisition accounting, the investment in these
entities and the net assets acquired are being recorded in a manner similar to a
pooling of interests whereby investments, assets and liabilities are carried
forward at their book values, which aggregated $2,804,600.
The shares of the Company (421,829) that were issued in exchange for shares of C
Me Run were placed in escrow until such time as certain conditions are met.
Accordingly, the purchase of the shares of this entity will be recorded upon
satisfaction of such conditions, and is therefore not reflected in the
accompanying proforma financial statement.
The purchase price of the investments and net assets acquired from the Chell
shareholders has been allocated as follows:
Investment in unconsolidated subsidiaries $ 920
Fixed assets 2,079,339
Other net assets 724,341
----------
$2,804,600
==========
The investments acquired pursuant to the agreement mentioned in the third
paragraph, except for Chell.com USA which is consolidated, are being reflected
under the equity method of accounting.
Since the acquisition is already reflected in the Company's historical balance
sheet as of August 31, 2000, in Form 10-K, the proforma financial information
includes a proforma statement of operations only.
<PAGE>
CHELL GROUP CORPORATION
(Formerly Networks North Inc.)
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 2000
(Unaudited)
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
Historical Transactions and adjustments Proforma
---------- ---------------------------- --------
Debit Credit
----- ------
$ $ $ $
<S> <C> <C> <C> <C>
REVENUES 19,693,946 19,693,946
---------- -----------
COSTS AND EXPENSES:
Costs of sales 7,657,960 7,657,960
Selling, general and administrative 11,266,339 11,266,339
Bad debts 140,090 140,090
Interest and bank charges 297,654 297,654
Depreciation and amortization 2,347,321 481,800 (a) 2,829,121
Loss from equity investments -- 920 (b) 920
---------- -----------
21,709,364 22,192,084
---------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,015,418) (2,498,138)
Provision for income taxes -- --
---------- -----------
LOSS BEFORE MINORITY INTEREST (2,015,418) (2,498,138)
Minority interest in net loss of subsidiary 29,476 29,476
---------- -----------
NET LOSS (1,985,942) (2,468,662)
========== ===========
LOSS PER COMMON SHARE $ (.25)
===========
WEIGHTED AVERAGE SHARES OUTSTANDING 9,776,213
===========
</TABLE>
<PAGE>
CHELL GROUP CORPORATION
(Formerly Networks North Inc.)
NOTES TO CONDENSED CONSOLIDATED PROFORMA FINANCIAL STATEMENTS
(Unaudited)
a) The Company has recorded depreciation expense on the assets acquired from
Chell.com. Fixed assets acquired include computer and other equipment and
leasehold improvements which are being depreciated on a straight line
basis over 3-7 years.
b) Reflects the Company's share of the losses (not to exceed the carrying
amounts of its investment) of the entities it acquired from the Chell
shareholders using the equity method of accounting.
The Company's equity in the losses of $2,655,628 is limited to the amount
of its investment aggregating $920. If the entities subsequently report
net income, the Company will record its equity in those earnings only
after its share of that net income equals the share of net losses not
recognized.
