Filed On 8/2/01 4:29pm ET ˇ SEC File 0-31110 ˇ Accession Number 950144-1-505072
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
8/02/01 Commercial Consolidators Corp 20FR12G/A 2:172 Bowne of Atlanta Inc/FA
Amendment to Registration of Securities of a Foreign Private Issuer ˇ Form 20-F
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 20FR12G/A Commercial Consolidators Corp. 168 1,001K
2: EX-4.36 Amending Agreement Dated June 18, 2001 4 18K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 2001.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM 20-F
---------------------
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[X] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED ---------------
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 0-31110
COMMERCIAL CONSOLIDATORS CORP.
formerly known as BALMORAL CAPITAL CORP.
(Exact Name of Registrant as Specified in its Charter)
NOT APPLICABLE
(Translation of Registrant's Name into English)
ALBERTA, CANADA
(Jurisdiction of Incorporation or Organization)
SUITE 1010, 5255 YONGE STREET, TORONTO, ONTARIO M2N 6P4, CANADA
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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NONE NONE
(Title of Each Class) (Name of Each Exchange on Which
Registered)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
COMMON SHARES WITHOUT PAR VALUE ("COMMON SHARES")
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the Company's classes
of capital or common stock as of the close of the period covered by the annual
report: NOT APPLICABLE.
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 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 which financial statement item the registrant has
elected to follow. ITEM 17 [ ] ITEM 18 [X]
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. YES [ ] NO [ ]
Unless otherwise indicated, all references herein are expressed in Canadian
dollars and United States currency is stated as "U.S. $ ."
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TABLE OF CONTENTS
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PAGE
----
PART I.................................................................. 1
Item 1. Identity of Directors, Senior Management and Advisers....... 1
Item 2. Offer Statistics and Expected Timetable..................... 2
Item 3. Key Information............................................. 2
Item 4. Information on the Company.................................. 13
Item 5. Operating and Financial Review and Prospects................ 31
Item 6. Directors, Senior Management and Employees.................. 44
Item 7. Major Shareholders and Related Party Transactions........... 51
Item 8. Financial Information....................................... 53
Item 9. The Offer and Listing....................................... 54
Item 10. Additional Information...................................... 56
Item 11. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 72
Item 12. Description of Securities Other Than Equity Securities...... 72
PART II................................................................. 73
Item 13. Defaults, Dividend Arrearages and Delinquencies............. 73
Item 14. Material Modifications to the Rights of Security Holders and
Use of Proceeds............................................. 73
Item 15. (Reserved).................................................. 73
Item 16. (Reserved).................................................. 73
PART III................................................................ 73
Item 17. Financial Statements........................................ 73
Item 18. Financial Statements........................................ 74
Item 19. Exhibits.................................................... 74
i
INTRODUCTION
Unless otherwise indicated, all references herein to (i) "we," "our," "our
company" or "the Company" are references to Commercial Consolidators Corp. and
its subsidiaries; (ii) "Common Shares" refer to our authorized and outstanding
common stock without par value; and (iii) "fiscal year," "financial year" or
"year" refers to our fiscal year ended February 28th/29th. Except as otherwise
noted, all financial information contained herein has been presented in Canadian
dollars, the official currency of Canada. Where applicable, financial
information expressed in United States dollars has been adjusted to reflect U.S.
generally accepted accounting principles, or U.S. GAAP. All references to "U.S.
dollars," or "U.S. $," are to United States dollars. On April 30, 2001, the
commercial exchange rate (buy) was Canadian dollar $1.5420 per U.S. $1.00.
We are an international distributor of business technologies and consumer
electronics.
Our Business Technologies Group sells, markets and distributes cellular
telephones and accessories, computer systems and components, and a proprietary,
integrated hardware and software system for the hospitality industry and other
business applications. We also distribute business supplies in support of
certain of our business technologies products. We currently distribute our
business technologies throughout North America, certain Latin and South American
countries and Israel.
Our Consumer Electronics Group sells, markets and distributes well-known
third party and private label brands of televisions and other household
appliances. We currently distribute our consumer electronics in certain Latin
American countries. We intend to expand and further develop these lines of
business.
Since our inception in 1998, we have grown internally and through
acquisitions. During the nine months ended November 30, 2000, we earned
approximately $5.4 million (U.S. $3.5 million) after taxes on revenues of
approximately $70.5 million (U.S. $45.7 million), compared to net income of
approximately $1.8 million (U.S. $1.2 million) on revenues of approximately
$30.5 million (U.S. $19.8 million) for the nine months ended November 30, 1999.
We intend to continue to grow both internally through cross-selling our products
within our various operating divisions, and externally by seeking opportunities
for appropriate strategic acquisitions.
Our world wide website is http://www.commercialconsolidators.com. The
information in our website is not incorporated by reference into this
registration statement.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
A. DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth the names, business addresses and functions
of our current directors and senior management.
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NAME AND OFFICE HELD BUSINESS ADDRESS
FUNCTION
-------------------- ----------------
--------
Michael S. Weingarten 5255 Yonge Street, Suite 1010 Direct
and supervise our overall
Director, Chairman of the Board Toronto, Ontario, Canada M2N 6P4
business operations; develop and
formulate our business plan.
Guy P. Jarvis 5255 Yonge Street, Suite 1010 Direct
and supervise our overall
Director and Toronto, Ontario, Canada M2N 6P4
business operations; execute and
Chief Executive Officer
implement our business plan.
Leonard S. Black 39 Rivalda Road Direct
and supervise our overall
Director and President Toronto, Ontario, Canada M9M 2M4
business operations.
Tomas Carlos Gonzales-Anleo Suite 1010 -- 5255 Yonge Street Manage
our day to day operations.
Chief Operating Officer Toronto, ON M2N 6P4, Canada
Ricardo Jose Alvarez San Pedro Suite 1010 -- 5255 Yonge Street Manage
our financial resources and
Chief Financial Officer Toronto, ON M2N 6P4, Canada
accounts.
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NAME AND OFFICE HELD BUSINESS ADDRESS
FUNCTION
-------------------- ----------------
--------
Gregory C. Burnett 604 -- 750 West Pender Street Direct
and supervise our overall
Director and Secretary Vancouver, BC V6C 2T7, Canada
business operations; maintain all
records and effect all necessary
filings.
Frederick McLean 2626 Charlotte Court Direct
and supervise our overall
Director Mississauga, Ontario, Canada L5M 5E6
business operations.
Donald Lyons 106 Willingdon Blvd. Direct
and supervise our overall
Director Toronto, Ontario, Canada M8X 2H7
business operations.
Terry Amisano c/o Amisano Hanson Direct
and supervise our overall
Director 750 West Pender Street, Suite 604
business operations.
Vancouver, B.C., V6C 2T7
B. ADVISERS
Not Applicable
C. AUDITORS
Our current auditors are Mintz & Partners LLP, Chartered Accountants, whose
business address is at 1446 Don Mills, North York, Ontario M3B 3N6. From May 4,
1998 to May 10, 1999, our auditors were Davidson & Company, Chartered
Accountants, whose business address is at Suite 1200, Stock Exchange Tower, 609
Granville Street, P.O. Box 10372, Vancouver, British Columbia V7Y 1G6. The
change of our auditors was made in connection with our reverse acquisition of
100% of the issued and outstanding securities of 1058199 Ontario Inc. There have
been no qualified opinions or denials of opinions by Davidson & Company for any
of our fiscal years or for any period subsequent to the most recently completed
fiscal period for which Davidson & Company issued an auditors' report.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The selected financial data presented below is for the interim period ended
November 30, 2000 and the three-year period ended February 28, 2001.
The selected financial data for the financial years ended February 28,
1999, February 29, 2000 and February 28, 2001 is derived from our consolidated
financial statements that were examined by our independent auditor. The selected
financial data for the interim period ended November 30, 2000 is derived from
our interim financial statements, which have not been examined by our
independent auditor. The selected financial data for the financial year ended
February 28, 1998 is derived from our predecessor's financial statements,
Business Supplies Are Us Inc., or BSRU. Our independent auditor examined these
financial statements. The information set forth below should be read in
conjunction with our consolidated financial statements, and the related notes,
in "Item 18 -- Financial Statements" and "Item 5 -- Operating and Financial
Review and Prospects." The data is presented in Canadian dollars.
In connection with our reverse acquisition of BSRU, the British Columbia
Securities Commission did not require the presentation of predecessor financial
data for the years ended February 28, 1996 and 1997. Thus,
2
we have not provided predecessor financial data herein, as such data could not
now be provided without unreasonable effort and expense.
SELECTED CONSOLIDATED FINANCIAL DATA
(STATED IN CANADIAN DOLLARS)
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NINE MONTHS ENDED
NOVEMBER 30,
(UNAUDITED) FISCAL YEAR ENDED
FEBRUARY 28(29)(1)
-------------------------
------------------------------------------------------
2000 1999 2001 2000
1999 1998
----------- ----------- ------------ -----------
----------- -----------
Sales................ $70,485,866 $30,482,378 $103,506,513 $45,127,064
$29,013,528 $19,073,043
Cost of goods sold... 56,036,132 24,982,878 83,114,778 37,337,755
24,394,735 16,874,994
Amortization......... 826,558 62,123 1,789,481 210,554
65,341 23,955
Other Operating
Expenses........... 5,601,412 2,464,956 7,653,299 3,469,693
2,170,586 1,749,374
Interest............. 1,969,939 1,165,136 3,961,937 1,558,808
1,064,310 314,244
Income -- before
foreign exchange
and income taxes... 6,517,825 1,807,285 7,949,978 2,550,254
1,318,556 110,476
Foreign exchange
(loss) gain........ 343,496 34,002 331,865 (89,732)
38,819 (12,376)
Income -- before
income taxes....... 6,395,321 1,841,287 7,318,883 2,460,522
1,357,375 98,100
Net Income under
Canadian GAAP...... 5,416,494 1,775,458 7,111,947 2,356,522
1,192,445 64,028
Net Income under U.S.
GAAP............... 2,051,837 59,999 2,293,162 895,236
1,007,555 n/a(1)
Total Assets under
Canadian GAAP...... 55,855,100 17,397,838 65,110,947 17,039,434
8,729,068 4,902,789
Total Assets under
U.S. GAAP.......... 50,599,186 14,859,686 58,800,124 14,631,721
8,582,997 n/a(1)
Net Assets under
Canadian GAAP...... 29,311,690 6,622,314 30,967,724 7,094,526
1,432,332 239,887
Net Assets under U.S.
GAAP............... 24,399,611 4,084,162 24,927,105 4,686,813
1,286,261 n/a(1)
Capital Stock
(excluding long
term debt and
redeemable
preferred stock)... 20,215,494 3,414,824 20,176,075 3,414,824
300 300
Number of Common
Shares (adjusted to
reflect changes in
capital)........... 17,183,034 12,601,666 17,263,034 12,601,666
7,000,000(2) 7,000,000(2)
Basic earnings per
share under CDN
GAAP............... 0.35 0.20 0.43 0.26
0.17 0.01
Basic earnings per
share under U.S.
GAAP............... 0.13 0.01 0.14 0.10
0.14 n/a(1)
3
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NINE MONTHS ENDED
NOVEMBER 30,
(UNAUDITED) FISCAL YEAR ENDED
FEBRUARY 28(29)(1)
-------------------------
------------------------------------------------------
2000 1999 2001 2000
1999 1998
----------- ----------- ------------ -----------
----------- -----------
Fully diluted
earnings per
share -- CDN
GAAP............... 0.31 0.20 0.39 0.23
0.16 0.01
Fully diluted
earnings per
share -- U.S.
GAAP............... 0.12 0.01 0.12 0.09
0.14 n/a(1)
Dividends per Common
Share.............. -- -- -- --
-- --
Dividends per Common
Share in U.S.$..... -- -- -- --
-- --
---------------
(1) As disclosed in note 22(t) to our consolidated financial statements,
reconciliation to U.S. GAAP for our 1998 fiscal year has not been provided
as it is not required.
(2) Reflects the share split on May 17, 1999, pursuant to which the 300 shares
were reclassified into 7,000,000 shares.
Reconciliation to United States Generally Accepted Accounting Principles
Except as noted, the selected financial data above was prepared in
accordance with accounting principles generally accepted in Canada, or Canadian
GAAP. The following adjustments have been utilized to present certain of the
selected financial data in accordance with generally accepted accounting
principles generally accepted in the United States, or U.S. GAAP, as shown
above. Specific details of the adjustments are included in note 22 to our
consolidated financial statements.
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NOVEMBER 30, (UNAUDITED)
FEBRUARY 28,
-------------------------
--------------------------------------
2000 1999 2001
2000 1999
----------- ----------- -----------
----------- ----------
Total Assets Under Canadian
GAAP........................... $55,855,100 $17,397,838 $65,110,947
$17,039,434 $8,729,068
Adjustments.................... (5,255,914) (2,538,152) (6,310,823)
(2,407,713) (146,071)
----------- ----------- -----------
----------- ----------
Total Assets Under U.S. GAAP..... $50,599,186 $14,859,686 $58,800,124
$14,631,721 $8,582,997
=========== =========== ===========
=========== ==========
Shareholders' Equity Under U.S.
GAAP........................... $24,399,611 $ 4,086,162 $24,927,105 $
4,686,813 $1,286,261
=========== =========== ===========
=========== ==========
Net Income Under Canadian GAAP... $ 5,416,494 $ 1,775,458 $ 7,111,947 $
2,356,522 $1,192,445
Adjustments.................... (3,364,657) (1,715,659) (4,818,285)
(1,461,286) (184,890)
----------- ----------- -----------
----------- ----------
Net Income Under U.S. GAAP....... $ 2,051,837 $ 59,999 $ 2,293,162 $
895,236 $1,007,555
=========== =========== ===========
=========== ==========
4
Since June 1, 1970, the Canadian government has permitted a floating
exchange rate to determine the value of the Canadian dollar as compared to the
U.S. dollar. On April 30, 2001, the exchange rate in effect for Canadian dollars
exchanged for U.S. dollars, expressed in terms of Canadian dollars, was $1.5420
per U.S. $1.00. For the past five fiscal years ended February 28(29), 1997-2001,
and each of the last six months, the following exchange rates were in effect for
Canadian dollars exchanged for U.S. dollars, expressed in terms of Canadian
dollars:
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YEAR END/
YEAR/MONTH END AVERAGE LOW-HIGH
PERIOD END
-------------- ------- --------------------------
----------
(BASED ON THE NOON BUYING RATES IN NEW YORK CITY, FOR CABLE TRANSFERS IN
CANADIAN DOLLARS,
AS CERTIFIED FOR CUSTOMS PURPOSES BY THE FEDERAL RESERVE BANK OF NEW
YORK)
02/28/1997......................... $1.3617 Low $1.3310 - High $1.3775
$1.3670
02/28/1998......................... $1.4032 Low $1.3649 - High $1.4637
$1.4236
02/28/1999......................... $1.5010 Low $1.4075 - High $1.5770
$1.5090
02/29/2000......................... $1.4767 Low $1.4350 - High $1.5286
$1.4504
02/28/2001......................... $1.4955 Low $1.4432 - High $1.5625
$1.5299
November 30, 2000.................. $1.5426 Low $1.5263 - High $1.5600
$1.5355
December 31, 2000.................. $1.5219 Low $1.4995 - High $1.5458
$1.4995
January 31, 2001................... $1.5029 Low $1.4966 - High $1.5040
$1.5039
February 28, 2001.................. $1.5289 Low $1.5244 - High $1.5312
$1.5299
March 31, 2001..................... $1.5757 Low $1.5698 - High $1.5791
$1.5767
April 30, 2001..................... $1.5410 Low $1.5404 - High $1.5425
$1.5420
B. CAPITALIZATION AND INDEBTEDNESS
The following table shows our capitalization as of April 30, 2001. You
should read this table in conjunction with our consolidated financial
statements, and related notes, provided in "Item 18 -- Financial Statements."
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AS OF
APRIL 30, 2001
--------------
Secured debt................................................ $23,051,998
Unsecured debt.............................................. 1,649,966
Total debt........................................ 24,701,964
Shareholders' equity (capital deficit):
Preferred Stock: no par value, unlimited shares
authorized; none issued(1)............................. 0
Common Stock: no par value; unlimited shares authorized;
17,273,034 shares issued and outstanding(2)............ 20,196,075
Accumulated earnings...................................... 12,099,438
-----------
Total shareholders' equity........................ $32,295,513
Total capitalization.............................. $56,997,477
===========
---------------
(1) We currently have an unlimited number of authorized non-cumulative,
non-voting, redeemable, retractable and non-participating Class A preference
shares. As of April 30, 2001, none have been issued.
(2) Does not include, as of April 30, 2001, approximately 2.0 million shares of
common stock issuable upon the exercise of outstanding warrants and
approximately 3.5 million shares issuable upon the exercise of outstanding
stock options.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable.
5
D. RISK FACTORS
Much of the information included in this registration statement includes or
is based upon estimates, projections or other "forward looking statements." Such
forward-looking statements include any projections or estimates made by us and
our management in connection with our business operations. While these forward-
looking statements, and any assumptions upon which they are based, are made in
good faith and reflect our current judgment regarding the direction of our
business, actual results will almost always vary, sometimes materially, from any
estimates, predictions, projections, assumptions or other future performance
suggested herein.
Such estimates, projections or other "forward looking statements" involve
various risks and uncertainties, as outlined below. We caution the reader that,
in some cases, important factors have affected, and in the future could
materially affect, actual results and may cause actual results to differ
materially from the results expressed in any such estimates, projections or
other "forward looking statements." Factors that may affect our future
performance are set forth in this section and in the discussion in Item 5
"Operating and Financial Review and Prospects" beginning on page 31 of this
registration statement. See also our discussion of "forward-looking statements"
set forth on page 43 of this registration statement.
Our Common Shares may be considered speculative and prospective investors
should consider carefully the risk factors set out below.
General Risk Factors
Risks Inherent in Multinational Business Operations. Our multinational
operations expose us to certain financial and operational risks. Our revenues
are dependent upon our operations in a number of countries throughout the world
and we receive a material amount of revenue and incur expenses in Canadian
dollars, U.S. dollars and other foreign currencies. Operations in several
different countries expose us to a number of risks, such as:
- Currency fluctuations;
- Unexpected changes in regulatory requirements;
- Longer payment cycles;
- Ability to secure and maintain the necessary physical and
telecommunications infrastructure;
- Export and import restrictions, tariffs and other trade barriers;
- Potentially adverse tax consequences;
- Challenges in staffing and managing foreign operations;
- Employment laws and practices in foreign countries; and
- Political and economic instability.
Any of these factors could have a material adverse effect on our business,
financial condition and results of operations.
Uncertain Ability to Manage Growth. Our business has experienced
significant growth recently and we anticipate future growth. Our ability to
achieve our planned growth is dependent upon a number of factors including, but
not limited to, our ability to hire, train and assimilate management and other
employees and the adequacy of our financial resources. The future growth may
strain our existing management resources and operational, financial, human and
management information systems and controls, which may not be adequate to
support our operations. There can be no assurance that such controls or
procedures will be developed effectively on a timely basis, and the failure to
do so may have a material adverse effect on our business, operating results and
financial condition. In short, there can be no assurance that we will be able to
achieve our planned expansion or that we will be able to successfully manage
such expanded operations. Failure to manage anticipated growth effectively and
efficiently could materially adversely affect us.
6
Risk of Enforceability of Civil Liabilities Against Foreign Persons. Our
company and our officers, directors and auditors are residents of Canada and
substantially all of our assets are or may be located outside the United States.
As a result, it may be difficult for investors to effect service of process
within the United States upon non-resident officers and directors, or to enforce
against them judgments obtained in the United States courts predicated upon the
civil liability provisions of the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, or state securities laws. We
believe that a judgment of a United States court predicated solely upon civil
liability under the Securities Act and/or Exchange Act would probably be
enforceable in Canada if the United States court in which the judgment was
obtained had a basis for jurisdiction in the matter that was recognized by a
Canadian court for such purposes. We cannot assure you that this will be the
case. There is substantial doubt, however, whether an action could be brought in
Canada in the first instance on the basis of liability predicated solely upon
such laws.
Adverse Effect of Goodwill on Future Earnings. We recorded goodwill
charges of approximately $963,000 (U.S. $624,514) and $466,000 (U.S. $302,000)
for the fiscal year ended February 28, 2001 and the nine months ended November
30, 2000, respectively. Current U.S. GAAP accounting regulations require us to
write off this goodwill against our earnings over a period of up to 20 years. We
expect this to adversely impact the amount of our reportable earnings during the
20-year period by approximately $1.2 million per year (U.S. $778,210),
representing our annual goodwill deduction. To the extent we acquire other
companies in the future, the duration and magnitude of our annual goodwill
deduction from earnings may be increased.
Potential Inability to Integrate New Businesses. The integration of our
newly acquired businesses, YAM International Communications Inc., La Societe
Desig Inc., MAX Systems Group Inc. and Tri-Vu Interactive Corporation, into our
operations will be critical to our ongoing success. Our integration strategy
includes marketing of the products sold by our Business Technologies Group in
Cuba and other Latin and South American countries serviced by our Consumer
Electronics Group; building the Commercial Consolidator's brand; cross-selling
products among the various distribution channels within our Business
Technologies Group; and eliminating certain duplicative accounting and
administrative functions. We will not export goods of our U.S. subsidiaries to
Cuba. We cannot assure you that we will be able to successfully integrate YAM,
Desig, MAX and Tri-Vu into our operations or achieve our strategic objectives,
cost savings and other benefits. Prior to our acquisition of YAM, Desig, MAX and
Tri-Vu, we were not involved in the cellular/wireless communication industry,
hospitality technology solutions industry, or the systems solution provider
industry. In view of the limited experience of our executive management in these
diverse industries, we are relying heavily upon the expertise of the former
owners and executive management of YAM, Desig, MAX and Tri-Vu. However, we may
find it necessary to employ additional experienced professionals in order to
implement our integration plans. We cannot assure you that we will be able to
find suitable professionals to help us achieve these objectives.
Dependence Upon Key Personnel. We consider that any member of our
management team and other key personnel, including Gregory Burnett, Michael
Weingarten, Leonard Black, Frederick McLean, Donald Lyons, Terry Amisano, Guy
Jarvis, Tomas Carlos Gonzales-Anleo, Ricardo Jose Alvarez San Pedro, Victor
Noce, Robert Marcoux, Bertrand Bolduc, Joe Franklin, Yossi Vanon, Shani Sasson,
Ron Bothwell, Bryn Meredith and William Krahule, are vital to our continued
operations. The loss of the services of any of them or other key employees, for
any reason, may materially adversely affect our prospects. To the extent that
the services of our key personnel become unavailable, we will be required to
retain other qualified persons. We cannot assure you that we will be able to
find a suitable replacement for any such person. Furthermore, due to the intense
competition for qualified executive, technical, marketing and support personnel
in the Latin and South American markets in which we do substantial business,
recruiting and retaining such qualified personnel in the future will be critical
to our success and there can be no assurance that we will be able to do so. We,
or our subsidiaries, have entered into employment agreements with Messrs.
Franklin, Noce, Marcoux, Bolduc, Sasson and Vanon. We maintain $1.0 million of
"key-man" life insurance on each such executive, with the exception of Mr.
Franklin who has a "key-man" life insurance policy of U.S. $750,000 and Messrs.
Vanon, Bothwell, Meredith and Krahule for whom we do not have "key-man" policies
in place.
Dependence on Key Suppliers. We do not have any written agreements that
ensure continuity of supply from our suppliers. We currently use a few key
suppliers and depend on them for timely delivery of goods and
7
materials. There can be no guarantee as to the ongoing maintenance of existing
key supplier relationships, including certain exclusive distribution rights for
products in export markets. We believe that the majority of our relationships
with suppliers are non-exclusive. Although we also believe that there are many
other suppliers in the marketplace that could be used for most of the products
that we distribute, we cannot assure you that other suppliers will be willing to
sell us supplies upon terms and conditions acceptable to us, or at all. Although
we believe it is not likely, the inability to obtain supplies from other
suppliers in a sufficient amount when needed, and upon acceptable terms and
conditions, could materially adversely affect us. Inadequate sources of supplies
would likely cause delays in, or disruption to, our business, and could also
impair our ability to compete in the marketplace.
Regulatory Requirements. Current or future operations may require permits
from various federal, state and local governmental authorities. Such operations
are and will be governed by laws and regulations relating to export, taxes,
labour standards, occupational health, waste disposal, toxic substances, land
use, environmental protection and other matters. To our knowledge, we are in
substantial compliance with all material laws and regulations which currently
apply to our activities and have all the required permits for our current
operations. We cannot assure you that all permits required for the operation of
our business will be obtainable on reasonable terms and that such laws and
regulations would not have an adverse effect on any activity we might undertake.
Failure to comply with applicable laws, regulations and permit requirements
may result in enforcement actions, including orders issued by regulatory or
judicial authorities causing operations to cease or be curtailed, and may
include corrective measures requiring capital expenditures, installation of
equipment or remedial actions.
Amendments to current laws, regulations and permits governing our
operations and activities, or more stringent implementation thereof, could have
a material adverse impact on us and cause increases in capital expenditures or
sales costs, or reduction in levels of sales.
Need for Additional Financing. Although we intend to expand our business
primarily through acquisitions, we also intend to exploit the cross selling
opportunities between our different business units. These endeavours will
require additional capital. Our plans for the fiscal year 2002 anticipate that
we will be required to secure additional debt and equity-type financing of
approximately U.S. $20 million from various sources, including one or more
private placements of our Common Shares. This additional financing will also
allow us to continue to expand our business operations in North, Central and
South America.
We cannot assure you that any such financing will be available upon terms
and conditions acceptable to us, if at all. The inability to obtain additional
financing in a sufficient amount when needed and upon acceptable terms and
conditions could materially adversely affect us. Although we believe that we can
raise financing sufficient to meet our immediate needs, we will likely require
funds to finance our development and marketing activities in the future. If
additional funds are raised by issuing equity securities, further dilution to
existing or future shareholders is likely to result. If adequate funds are not
available on acceptable terms when needed, we may be required to delay, scale
back or eliminate our promotional and marketing campaign or our development
programs. Inadequate funding could also impair our ability to compete in the
marketplace, which may result in our dissolution.
Insider Control of Common Stock. As of February 28, 2001, our directors
and senior management beneficially owned approximately 43% of our outstanding
Common Shares. Therefore, these persons may have the power to influence our
business policies and affairs and determine the outcome of any matter submitted
to a vote of our shareholders, including the election of members of our board of
directors, mergers, sales of substantially all of our assets and changes in
control.
Future Dilution. Our articles of incorporation, or charter documents,
authorize the issuance of an unlimited number of Common Shares and an unlimited
number of Preferred Shares. In the event that we are required to issue
additional Common Shares or enter into private placements to raise financing
through the sale of equity securities, investors' interests will be diluted and
they may suffer dilution in their net book value per share depending on the
price at which such securities are sold. If we do issue any such additional
shares,
8
such issuances also will cause a reduction in the proportionate ownership and
voting power of all other shareholders. Further, any such issuance may result in
a change of control.
Blue Sky Considerations. Because the securities registered under this
registration statement have not been registered for resale under the blue sky
laws of any state, holders of these shares and persons who desire to purchase
them in any trading market that might develop in the future should be aware that
there may be significant state blue sky restrictions upon the ability of new
investors to purchase the securities. These restrictions could reduce the size
of any potential market. As a result of recent changes in federal law, non-
issuer trading or resale of our securities is exempt from state registration or
qualification requirements in most states. Nevertheless, investors should
consider any potential secondary market for our securities to be a limited one.
"Penny Stock" Rules May Restrict the Market for our Common Shares. Our
Common Shares are subject to rules promulgated by the Securities and Exchange
Commission relating to "penny stocks" which apply to companies whose shares are
not traded on a national stock exchange or on the NASDAQ system, trade at less
than U.S. $5.00 per share, or who do not meet certain other financial
requirements specified by the Securities and Exchange Commission. These rules
require brokers who sell "penny stocks" to persons other than established
customers and "accredited investors" to complete certain documentation, make
suitability inquiries of investors, and provide investors with certain
information concerning the risks of trading in such penny stocks. These rules
may discourage or restrict the ability of brokers to sell our Common Shares and
may affect the secondary market for our Common Shares. These rules could also
hamper our ability to raise funds in the primary market for our Common Shares.
Possible Volatility of Share Prices. The trading price of our Common
Shares has been and may continue to be subject to wide fluctuations. The stock
market has generally experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of the
companies. We cannot assure you that trading prices and price earnings ratios
previously experienced by our Common Shares will be matched or maintained. These
broad market and industry factors may adversely affect the market price of our
Common Shares, regardless of our operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted. Such litigation, if
instituted, could result in substantial costs and a diversion of management's
attention and resources.
Anti-Takeover Provisions. At the present time, our board of directors has
not adopted any shareholder rights plan or any anti-takeover provisions in our
articles of incorporation. Without any anti-takeover provisions, there is no
deterrent for a take-over of our company, which may result in a change of
management and directors.
No Foreseeable Dividends. We do not anticipate paying further dividends on
our securities in the near future. The payment of any future dividends will be
at the sole discretion of our board of directors. We currently intend to retain
earnings to finance the expansion of our business and do not anticipate paying
additional dividends in the foreseeable future.
Risk Factors Related to our Business Technologies Group
We May Not Be Able to Respond Effectively to the Significant Competition in
the Cellular/Wireless Communication Industry. Approximately 38% and 41% of our
sales during the nine months ended November 30, 2000 and the year ended February
28, 2001, respectively, were derived from our wireless products division.
Competition in the cellular/wireless communication industry is intense. We
anticipate that competition will cause the market prices for two-way wireless
products and services to remain competitive in the future. Our ability to
compete will depend, in part, on our ability to anticipate and respond to
various competitive factors affecting the telecommunications industry. One
example of these competitive factors is the changes in consumer preferences,
demographic trends or economic conditions. Some of our competitors have
substantially greater financial, technological, marketing and sales and
distribution resources than us. Accordingly, such competitors have the ability
to take advantage of economies of scale that we cannot, such as the negotiation
and procurement of volume discounts we are not able to negotiate and access due
to our relatively
9
smaller size and capabilities. Further, when these competitors buy in larger
volumes, they establish stronger relationships with suppliers and can further
leverage their strong supplier relationships to achieve more competitive pricing
terms. Moreover, these larger competitors are also able to negotiate more
favorable trade credit terms. Therefore, we may be unable to compete
successfully with larger competitors who have substantially greater resources
than we do.
Use of Cellular/Wireless Handsets May Pose Health Risks. Media reports
have suggested that radio frequency emissions from wireless handsets may:
- be linked to various health problems, including cancer;
- interfere with various electronic medical devices, including hearing aids
and pacemakers; and
- cause explosions if used while fuelling an automobile.
Concerns over radio frequency emissions may discourage use of wireless
handsets or expose us to potential litigation.
Political Uncertainties in Israel. We have, through our wireless products
division, a significant presence in the State of Israel. Approximately 10% and
13% of our total sales during the nine months ended November 30, 2000 and the
year ended February 28, 2001, respectively, were derived from our sales in
Israel. Such sales accounted for approximately 25% and 32% of our wireless
products division's revenues for the nine months ended November 30, 2000 and
fiscal 2001, respectively. As a result, operation of our wireless products
division may be affected in varying degrees by political instability in that
region. Any unexpected eruption of terrorist activities or military
confrontations between Palestinians and Israelis are beyond our control and may
adversely affect our business. Our operations in Israel may be affected in
varying degrees by political demonstrations, civil unrest or terrorist attacks.
We cannot assure you that further political or economic instability will not
occur in Israel in the future.
Uncertainties Inherent in Expansion in Latin/South America. Approximately
54% and 48% of our sales were derived from our operations in Latin/South America
during the nine months ended November 30, 2000 and the year ended February 28,
2001, respectively. We are currently expanding our activities and operations in
Latin/South America. To the extent that some Latin/South American countries may
have commercial and contractual regimes that are not as contemplated and as
experienced in North America, we will have to take steps to ensure that we do
not suffer losses from our ability to conduct business activities, such as
collections for sales, in those countries. While we are confident that, based on
our experience in other divisions, we will take the appropriate steps to
appropriately protect us, we cannot assure you that such losses will not occur.
Lack of Uniform Technical Standard. An important element of our business
is the fact our wireless products division has the ability to sell cellular
phones and related products that are compatible with the various cellular
operating systems used throughout the world. North, Latin and South America do
not presently have a standard phone system, such as GSM in Europe. Should any of
these major markets move to adopt one standard phone system, overall demand for
our cellular products could weaken. While there is no evidence at this time to
indicate that this may occur, we cannot assure you that such standardization
will not occur.
Significant Competition. During the nine months ended November 30, 2000
and the year ended February 28, 2001, our revenues from our integrated
applications division accounted for approximately 4% and 3%, respectively, of
our sales and were an insignificant factor in this industry. Many of our
integrated applications division's competitors, which are either part of or have
alliances with large software makers, systems integrators or telecom suppliers,
can, if they desire, devote substantially more resources to developing a market
than our integrated applications division can. Accordingly, it is possible that
a large competitor could attack a market aggressively. While there are no
indications of this at the present time, we cannot assure you that one or more
large competitors will not choose to attack our market niche.
10
Research and Development Requirements. At present, our integrated
applications division spends somewhat less than $1.0 million (U.S. $648,508) per
year, before recovery of tax credits and other governmental assistance, on
research and development for products and applications. For the fiscal year
ended October 31, 1999, gross research and development expenses were $735,290,
and investment tax credits were $544,212, for a net expense of $191,078. For the
fiscal year ended October 31, 1998, gross research and development expenses were
$609,864, and investment tax credits were $383,288, for a net expense of
$216,576. We feel that this is an appropriate and affordable level to remain
competitive and to produce products that are attractive and saleable in our
market niches. Accordingly, our integrated applications division will have the
continuous need for free working capital of approximately $1.0 million (U.S.
$648,508) per year to continue to fund research and development. While we are
committed to continue to fund research and development, we cannot assure you
that the necessary amount of working capital will be available.
Dependence on Certain Staff. As with all technology companies, our
integrated applications division is dependent on the intellectual capabilities
of its development staff, in particular the work of Victor Noce, Robert Marcoux,
Bertrand Bolduc, Ron Bothwell and Bryn Meredith. These individuals have executed
employment agreements with Desig and Tri-Vu, which operate our integrated
applications division. We carry $1.0 million (U.S. $648,508) of key-man life
insurance on Messrs. Noce, Marcoux and Bolduc. A mass defection of development
staff could cause delays or diminution in the quality of our development
efforts. While we believe that this is unlikely, we cannot assure you that key
development personnel will choose to remain with us for a significant period of
time.
Hospitality Industry. At present, our hospitality sales efforts are
supported by very strong performance and expansion in the hospitality industry.
If there is any sort of worldwide economic slow down and/or recession, the
hospitality industry could slow down or even stop its expansion. To the extent
that the property management solutions segment of our integrated applications
division develops a major niche in activities in this area, it could face a slow
down in sales and be forced to more aggressively target other markets such as
residential facilities and apartment/condominium managers. Accordingly, we
cannot assure you that a major slow down in economic activities will not
significantly impact our business.
Our Intellectual Property Rights. Our ability to compete effectively will
depend on our ability to maintain the proprietary nature of certain of our
technologies, including our proprietary property management system software and
our proprietary interactive television software. We hold no patents and have no
patent applications pending in Canada, the United States or elsewhere. We rely
on a combination of trade secrets and copyright laws, nondisclosure and other
contractual agreements and technical measures to protect our rights in our
technological know-how and proprietary services. We depend upon confidentiality
agreements with our officers, directors, employees, consultants and
subcontractors to maintain the proprietary nature of our technology. These
measures may not afford us sufficient or complete protection, and others may
independently develop know-how and services similar to ours, otherwise avoid our
confidentiality agreements, or produce patents and copyrights that would
materially and adversely affect our business, prospects, financial condition and
results of operations.
We believe that our software systems are not subject to any infringement
actions based upon the patents or copyrights of any third parties; however, our
know-how and technology may in the future be found to infringe upon the rights
of others. Others may assert infringement claims against us, and if we should be
found to infringe upon their patents or copyrights or otherwise impermissibly
utilize their intellectual property, our ability to continue to use our
technology could be materially restricted or prohibited. If this event occurs,
we may be required to obtain licenses from the holders of this intellectual
property, enter into royalty agreements, or redesign our products and services
so as not to utilize this intellectual property, each of which may prove to be
uneconomical or otherwise impossible. Licenses or royalty agreements required in
order for us to use this technology may not be available on terms acceptable to
us, or at all. These claims could result in litigation, which could materially
adversely affect our business, prospects, financial condition and results of
operations.
Dependence on Certain Key Contracts. Our ability to compete effectively
and grow depends on our ability to negotiate and implement supply contracts.
Currently, our computer products division holds licenses from Compaq, Hewlett
Packard, IBM and Microsoft to serve as a value-added reseller and distributor of
their
11
computers, software and related products and applications. These agreements do
not have a specific duration, are generally renewed annually and may be
cancelled upon 30 days notice. Our ability to sell these hardware and software
products is dependent on the continuation of our OEM licenses. Our other
operating divisions are not dependent on contracts to compete effectively in
their respective markets.
Dependence of Certain Large Customers. Our computer products division is
dependent on a relatively small number of large customers. Overall, the top five
customers account for approximately 25% of our computer products division's
annual sales. We cannot assure you that we can retain these customers going
forward. The loss of any one of these customers could be materially adverse to
our computer products division's operational results.
Risk Factors Related to our Consumer Electronics Group
Proprietary Products. Our Consumer Electronics Group and the business
supplies division of our Business Technologies Group do not offer proprietary
products, except for our General Vision and LEC product lines that only
comprised approximately 15% of our consumer product sales during both the nine
months ended November 30, 2000 and the year ended February 28, 2001. Most
products in our Consumer Electronics Group and business supplies division are
supplied to us on a non-exclusive basis and we occasionally may be subject to
supply restrictions and price fluctuations that we cannot directly control.
Competition. The markets for the products that we distribute are, for the
most part, highly competitive. We face competition from a number of sources,
including several international trading companies that offer competitive
products in our export and domestic markets. Such competitors may also have
greater financial, marketing, technological and manufacturing resources than us.
We expect that we will face additional competition from new entrants into the
Latin American marketplace as the economic and political climate evolves in the
coming years. New competition could have a negative impact on future sales
performance and cause a reduction in margins should pricing become increasingly
competitive. We cannot assure you that existing or future competitors will not
develop or offer new products and services that have advantages over our
products and services.
Dependence on Key Customers. Approximately 90% of our sales in our
Consumer Electronics Group during both the nine months ended November 30, 2000
and the year ended February 28, 2001 were derived from approximately four
customers. The loss of these significant customers would materially adversely
affect our business, financial condition and operating results. In addition, we
cannot assure you that we will be successful in marketing our products to
potential customers. There is a limited number of companies in Latin America
that are involved in the retail distribution of our product line and that are
capable of purchasing products from us. Our sales growth in the short term will
depend significantly on maintaining existing relationships with key customers
and increasing sales to our existing customer base. The loss of any key customer
would have a material negative impact on sales.
Political and Economic Uncertainties in Cuba. Approximately 99% of the
total sales of our Consumer Electronics Group during the nine months ended
November 30, 2000 and the year ended February 28, 2001, respectively, resulted
from our sales to customers in Cuba. Such sales to customers in Cuba accounted
for approximately 54% and 48% of our total revenues for the nine months ended
November 30, 2000 and fiscal 2001, respectively. In addition, all transactions
completed in Cuba are concluded in U.S. dollars. These operations may be
affected in varying degrees by political instability and government regulations
relating to industry and foreign investors. Any changes in regulations or shifts
in political conditions are beyond our control and may adversely affect our
business. Operations may be affected in varying degrees by government
regulations with respect to restrictions on, for example, production,
repatriation of profits, price controls, export controls, income taxes and
expropriations of property.
The international financial community has viewed the economic performance
and political uncertainty of Cuba over the past number of years unfavourably. As
a result, project financing is more difficult and thus more costly to achieve in
view of the fact that the perceived risk of financing would demand greater
returns to satisfy higher risk expectations. Such a situation could render
projects less competitive compared to those located within more favourable
economic and political environments. Such instability could affect the
investors'
12
perception of risk and cause further equity financing to be more difficult. Our
operations could also be affected, which could reduce or interrupt cash flow.
The United States' Trade Embargo Against Cuba. Our operations may be
affected by the United States' continual trade embargo against Cuba. The trade
embargo applies to most transactions involving Cuba and Cuban enterprises. From
its inception in 1962 to 1996, the embargo only restricted the activities of
U.S. citizens, U.S. residents, businesses organized under U.S. law, and
businesses owned or controlled by U.S. citizens or residents. This changed with
the enactment of the Cuban Liberty and Democratic Solidarity Act, or
Helms-Burton Act, in March of 1996, which extended the reach of the U.S. embargo
by creating a private cause of action and authorizing U.S. nationals with claims
to property confiscated by the Cuban Government to file suit in U.S. courts
against persons that may be "trafficking" in that property. However, a 1992
Order issued by the Canadian government blocks the application of the U.S.
embargo to Canadian corporations. Further, the embargo does allow for U.S.
citizens and businesses to make secondary investments in a Canadian or other
foreign country corporation or other entity only if such company does not
subsequently receive a majority of its revenues directly from activity within
Cuba, and only if the investment is not a controlling interest.
Our activities in Cuba currently consist of furnishing components for
televisions to a government-controlled factory near Havana, and serving as an
authorized distributor of brand name televisions and other consumer electronics
in that country. Approximately 45%, 96% and 96% of our total revenues were
derived from our operations in Cuba for fiscal 2001, 2000 and 1999,
respectively. As we own little or no property in Cuba, and to our knowledge no
property confiscated by the Government of Cuba and no property subject to a
claim certified by the Foreign Claims Settlement Commission under the
International Claims Settlement Act of 1949, we believe the Helms-Burton Act
would not apply to us. Currently, our ownership of assets in Cuba is limited to
furniture and fixtures, computers and leasehold improvements in our Cuban
locations.
In the very unlikely event that it were determined that we were
"trafficking" in confiscated property, we could be subject to monetary damages
up to three times the amount of any claim by a United States national certified
by the Foreign Claims Settlement Commission plus interest, or three times the
fair market value of the property plus interest, which ever is greater, plus
court costs and reasonable attorney fees. Given the fact that the value of such
property, if any, owned by us would be minimal, the impact of such a suit on our
business or our shareholders would also be minimal.
In addition, as a result of recent acquisitions and other acquisitions we
are presently contemplating, we expect that the percentage of our assets,
revenues and profits located in and derived from our business operations in Cuba
will decrease significantly as a percentage of our consolidated assets, revenues
and profits. However, we cannot assure you that our existing or future United
States business operations, efforts to achieve financing in the United States or
the listing of our securities on United States securities exchanges will not be
adversely affected by political considerations, including the U.S. trade embargo
on Cuba.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Original Incorporation and Reverse Acquisition
We were incorporated on May 4, 1998 in Alberta, Canada under the name
Balmoral Capital Corp. pursuant to the Business Corporation Act of Alberta.
Balmoral was extra-provincially registered in the Province of British Columbia,
Canada on May 7, 2000. Our principal office is located at Suite 1010, 5255 Yonge
Street, Toronto, Ontario Canada M2N 6P4, telephone number (416) 512-8299, and
our registered office is located at 1600, 407-2nd Street, S.W., Calgary,
Alberta, T2P 2Y3.
In September 1998, Balmoral completed an initial public offering of our
Common Shares with the Alberta Securities Commission. Balmoral did not carry on
any business other than identifying and evaluating opportunities for the
acquisition of an interest in assets or businesses.
13
On October 15, 1999, Balmoral completed its acquisition of 100% of the
issued and outstanding securities of 1058199 Ontario Inc. and changed its name
from Balmoral Capital Corp. to Commercial Consolidators Corp. In the reverse
acquisition, we issued 10,335,000 Common Shares at a deemed price of $1.00 per
share for 100% of the issued and outstanding shares of 1058199 Ontario Inc., and
335,000 Common Share Purchase Warrants entitling the holder to acquire one
Common Share for every two warrants at an exercise price of $2.00 per share
until the expiry of the warrants on October 8, 2001.
On October 15, 1999, we commenced trading on the Vancouver Stock Exchange,
which subsequently became the Canadian Venture Exchange (CDNX).
RECENT ACQUISITIONS
Effective April 1, 2000, we acquired a 100% interest in YAM Wireless Inc.,
formerly YAM International Communications Inc., or YAM. Located in Miami,
Florida, YAM is an international distributor of cellular telephones and
accessories. We issued 1.247 million Common Shares, at a fair value of $3.75 per
share, and U.S. $3.3 million in cash as consideration for 100% of the issued and
outstanding shares of YAM to its two owners Yossi Vanon and Shani Sasson.
Effective May 1, 2000, we acquired 100% of La Societe Desig Inc., or Desig.
Based in Montreal, Canada, Desig develops and markets proprietary property
management solutions software for the hospitality industry. We issued a total of
3.1 million Common Shares in consideration for 100% of the issued and
outstanding shares of Desig to its owners Victor Noce, Robert Marcoux, Bertrand
Bolduc and certain members of their families.
Effective December 1, 2000, we acquired 100% of MAX Systems Group Inc., or
MAX. Based in Calgary, Canada, MAX is a provider of notebook computers, computer
components and MIS solutions throughout Canada and the United States. We
acquired MAX for a purchase price equal to 2.5 times MAX's audited pre-tax
profit for the 12 months ending February 28, 2002. The minimum purchase price is
$750,000. We agreed to pay the purchase price to complete the acquisition in
cash and Common Shares. Specifically, we will pay a minimum of $750,000 in cash,
with the balance to be paid in Common Shares at $4.25 per share. Accordingly, we
escrowed 1.6 million Common Shares in order to provide for the stock component
of the purchase price and issued a promissory note to the MAX stockholders
evidencing our obligation to pay the $750,000 for the cash component of the
purchase price. The cash portion of the purchase price is payable following the
completion of the MAX audit for the 12 month period ending February 28, 2002.
Payment of the $750,000 cash portion of the purchase price will retire the
outstanding note payable.
However, if MAX does not have a minimum pre-tax profit of CDN $1 million
for the 12 month period ending February 28, 2002, then the acquisition agreement
will automatically terminate unless the parties mutually agree to continue the
transaction. During the three months ended May 31, 2001, which is the first
three months of the 12-month measurement period referenced above, MAX had
pre-tax operating income of approximately $85,000 before inter-corporate expense
allocations. Despite these results, and in light of positive discussions and
meetings with MAX's major suppliers, major customers, banker and senior
management, we believe that the $1.0 million targeted pre-tax amount will be
achieved.
Effective July 1, 2001, we acquired a 100% interest in Mississauga,
Ontario-based Tri-Vu Interactive Corporation, or Tri-Vu. Tri-Vu develops,
implements and services customized interactive entertainment and information
television-based content and Internet services to the global four/five star
hospitality industry. We agreed to purchase Tri-Vu for a purchase price equal to
4.5 times Tri-Vu's net income for the 12 months ending May 31, 2002. The entire
purchase price shall be paid in our Common Shares, at $3.74 per share, on or
before August 31, 2002.
However, if Tri-Vu does not have a minimum pre-tax profit of CDN $458,500
for the period ending May 31, 2002, then we may terminate the acquisition
agreement and unwind the transaction. If Tri-Vu's pre-tax profit for the twelve
month period ending May 31, 2002 is less than the minimum pre-tax requirement,
Tri-Vu is afforded a three month extension in which to achieve the forecast and,
if the minimum threshold is
14
not met during the entire 15 month period, then we may elect to put the Tri-Vu
shares back to the sellers, in which case all the Common Shares held in escrow
shall be surrendered to us for cancellation. If we elect to consummate the
transaction notwithstanding the fact that the minimum pre-tax profit forecast
target had not been met, we would multiply the actual pre-tax profit by 4.5 and
settle the transaction.
The following is a summary description, including the amounts invested, of
our principal acquisitions since the reverse merger that created our company on
October 15, 1999.
[Download Table]
DATE OF TRANSACTION DESCRIPTION OF TRANSACTION
AMOUNT OF TRANSACTION
------------------- --------------------------
---------------------
April 1, 2000............................ Acquisition of YAM $
11,124,737(1)
May 1, 2000.............................. Acquisition of Desig $
12,247,153(2)
December 1, 2000......................... Acquisition of MAX $
1,100,325(3)
July 1, 2001............................. Acquisition of Tri-Vu To
be determined
---------------
(1)Includes approximately $1,522,397 in transaction costs.
(2)Includes approximately $622,153 in transaction costs.
(3)Comprised of the $750,000 cash portion of the purchase price, plus
approximately $350,325 in transaction costs.
Capital assets are added in the normal course of business and consist
primarily of furniture, vehicles, computers and leasehold improvements. In the
fiscal year ended February 28, 2001, we developed a proprietary television
"chassis," which is the electronic circuitry inside the television. Our capital
expenditures in connection with our development of this technology were
approximately $2.4 million (U.S. $1.6 million), and were incurred during the
fiscal year ended February 28, 2001. Our total capital asset investment for the
nine months ended November 30, 2000 and the year ended February 28, 2001 was
approximately $2.4 million (U.S. $1.6 million) and $3.2 million (U.S. $2.1
million), respectively, compared with approximately $574,000 (U.S. $372,000) and
$656,000 (U.S. $425,000) for the nine months ended November 30, 1999 and the
year ended February 29, 2000, respectively.
Integration of Acquired Businesses
With respect to our recent acquisitions described above, we do not
anticipate any material difficulties in integrating the businesses of the
acquired companies into our business operations. We have accomplished what we
believe to be a successful transition and retention of key management personnel
from the acquired businesses, which we believe to be most beneficial to the
integration process. Most of the key personnel from the acquired businesses have
elected to retain their positions and each person has entered into a three-year
employment agreement with us which provides them with incentive stock options in
addition to their salaries. In addition, in order to help integrate the general
employee population of the acquired companies, we appointed our transfer agent
as agent for our employee stock purchase plan. We intend to implement the plan
in November 2001.
We had intended to introduce a new online service to our customers on or
about June 30, 2001, that would provide our customers access to all of the
additional products and services we now offer as a result of our acquisition of
these new businesses. The online service will provide links to the acquired
businesses, which are operated through separate divisions of our company,
through which customers can order products and obtain up-to-date information
regarding inventory, order status and account information. Although the online
service is ready for launch, we have decided to temporarily delay its
introduction due to the current downturn in demand for electronic commerce
services within the industries we service. We reassess these economic conditions
on a monthly basis, and are poised to launch our online service as soon as we
determine there is adequate demand.
From a financial accounting perspective, we expect our consolidated
financial reporting systems to be completely in place by the end of August 2001.
Common general ledger accounts have already been created in this regard.
15
Our primary strategic objective is to expand the markets in which our
business groups and divisions operate in South and Central America in order to
increase our sales by leveraging existing distribution channels and selling more
products/services to our existing customers. In this regard, we are not
experiencing the higher costs normally associated with a growing company
acquiring new business lines. Rather, our acquired businesses, operating through
our divisions, are able to enter these new markets through our established
relationships with existing customers and distributors thereby resulting in
lower integration costs. With the exception of MAX, each acquired business was a
profitable enterprise in its respective industry when we acquired it. These
lower costs associated with entering new markets have allowed the acquired
businesses to maintain, and in some cases increase, net profit levels.
Certain synergies currently in place consist of the following:
- We have utilized our corporate purchasing power to secure operating lines
for our computer products and wireless products divisions, which reduced
their costs with their major suppliers.
- We have co-located the Toronto operations of our business supplies and
computer products divisions, thereby reducing their combined costs of
maintaining premises by approximately 20%.
- We have cross-introduced our business supplies and computer products
divisions' suppliers.
B. BUSINESS OVERVIEW
We are an international distributor of business technologies and consumer
electronics. Our business consists of:
- A Business Technologies Group, comprised of:
- A wireless products division;
- A computer products division;
- An integrated applications division; and
- A business supplies division.
- A Consumer Electronics Group, that distributes:
- recognized third party brands and our private label brand of
televisions;
- refrigerators, stoves, washer-driers, toaster, blender, freezers and
other household appliances; and
- video cassette recorders, and audiovisual and entertainment
equipment.
We intend to grow our business through a combination of an expansion of our
existing business operations and through strategic acquisitions.
The following table sets forth our total revenues, by business group, for
the past three fiscal years:
[Download Table]
FYE FYE
FYE
BUSINESS GROUPS 2/28/99 2/29/00
2/28/01
--------------- ------- -------
-------
(IN THOUSANDS OF
DOLLARS)
Consumer Electronics Group................................ $18,208 $28,833
$31,273
Business Technologies Group............................... $10,896 $16,294
$72,234
16
The following table sets forth the revenues of our Business Technologies
Group, by division, for the past three fiscal years:
[Download Table]
FYE FYE
FYE
DIVISION OF BUSINESS TECHNOLOGIES GROUP 2/28/99 2/29/00
2/28/01
--------------------------------------- ------- -------
-------
(IN THOUSANDS OF
DOLLARS)
Wireless products division................................ $ -- $ --
$42,227
Computer products division................................ -- --
6,841
Integrated applications division.......................... -- --
2,984
Business supplies division................................ 10,896 16,294
20,182
------- -------
-------
Total........................................... $10,896 $16,294
$72,234
======= =======
=======
The following table sets forth our total revenues, by geographic market,
for the past three fiscal years:
[Download Table]
FYE FYE
FYE
GEOGRAPHIC MARKET 2/28/99 2/29/00
2/28/01
----------------- ------- -------
-------
(IN THOUSANDS OF
DOLLARS)
Domestic (Canada and U.S.A.)................................ $1,270 $1,711
$40,848
Latin America............................................... 27,834 43,416
49,287
Israel...................................................... -- --
13,371
We do not believe that the performance of our main business operations is
subject to any seasonal cycles or disruptions.
Some of our business operations are dependent on certain licenses,
contracts and intellectual property rights, the most significant of which
include:
- Our Consumer Electronics Group has entered into a five-year agreement
with Tecnotex, a Cuban corporation, to supply and advise an assembly
plant located near Havana, Cuba. The plant produces televisions and other
consumer electronics. Under our agreement that expires October 2006, we
are the exclusive supplier of television components to the plant, which
completes final assembly and shipment of such products to department
stores and other retailers within Cuba. We provided economic and
technical assistance in connection with the construction of the facility
and, in addition to payments for components supplied, we receive a
monthly royalty of 0.7% of sales until we recoup our original investment
of approximately $1.5 million (U.S. $972,763). Repayment of the original
investment will begin in October 2001.
- Our computer products division holds licenses from Compaq, Hewlett
Packard, IBM and Microsoft to serve as a value-added reseller and
distributor of their computers, software and related products and
applications. These agreements do not have a specific duration, are
generally renewed annually and may be cancelled upon 30 days notice. Our
ability to sell these hardware and software products is dependent on the
continuation of our OEM licenses.
Business Technologies Group
Our Business Technologies Group sells, markets and distributes products
such as cellular telephones and accessories, computer systems and components and
a proprietary, integrated hardware and software system for the hospitality
industry and other business applications. We also distribute business supplies
in support of certain of our products and services. We currently distribute our
products and services throughout North America, certain Latin and South American
countries and Israel. Overall, our Business Technologies Group represented
approximately 62% and 70% of our total revenues during the nine months ended
November 30, 2000 and the year ended February 28, 2001, respectively.
Wireless Products Division
Our wireless products division is currently comprised of a Miami, Florida
based wholesale distributor of new, used and refurbished cellular telephones,
including recognized brand names such as Nokia, Ericsson,
17
Motorola and Samsung. Our customers include leading international carriers
(network operators) and wireless telecommunications equipment wholesalers and
retailers. We service the U.S. and Israeli markets where the demand for new,
used and refurbished cellular products has been, and we believe will continue to
remain, strong. In April 2001, we signed an agreement with Samsung Electronics
Latin America to provide distribution and fulfillment services of wireless
phones for Samsung for the northern region of Latin America and the Caribbean.
For the nine months ended November 30, 2000 and the year ended February 28,
2001, our wireless products division recorded revenues of approximately $27.0
million (U.S. $17.5 million) and $42.2 million (U.S. $27.4 million),
respectively, representing approximately 38% and 41%, respectively, of our
overall total revenues and 62% and 58%, respectively, of the total revenues of
our Business Technologies Group for such periods. Approximately 77% and 78% of
our wireless products division's sales during the nine months ended November 30,
2000 and the year ended February 28, 2001, respectively, were in the U.S. and
23% and 22%, respectively, were in Israel. Many of our U.S. customers resell the
cellular telephones and accessories they purchase from us into the Latin and
South American markets.
Industry Overview
The market for cellular telephones within developing countries is one that
is characterized by a demand that is defined and segmented by the different
types of wireless systems used, customer price sensitivity and brand penetration
in the various markets.
The U.S. market for distribution of cellular phones and accessories to
retailers is characterized by significant competition for digital cellular
technologies. This competition exists from both large national carriers as well
as regional and local distributors, all of whom have access to multiple product
types and recognized brand names, either through distribution agreements with
the manufacturers directly or through the purchase of wholesale cellular
products through third-party distributors.
The Israeli market for cellular phones, parts and accessories is highly
developed with a significant portion of the Israeli population using cellular
phones. The Israeli market is also highly advanced in its demand for new
products and is considered to be at the forefront of using new technologies such
as digital capabilities and phones with Internet-ready access. As a result, we
believe that the market in Israel has high penetration rates for cellular phone
use, and experiences significant turnover of new phones with consumers looking
to upgrade their phones less than every 18 months.
Unlike North America, Europe and Israel, which are currently witnessing a
gradual convergence toward digital cellular technologies, developing markets
such as Latin and South America do not show any signs of convergence, as
multiple wireless technologies are widely used, although none is dominant. This
is primarily a result of the broad range of consumer demand profiles among the
various developing countries, topographical suitability constraints and the
open-market nature of competition for wireless licenses.
Overlaying the diversity of network systems in Latin and South America is
the varying levels of penetration by competing brands. Certain phones are more
in demand in certain countries. Moreover, not every manufacturer makes cellular
phones for every kind of wireless system. For example, up until its recent
association with Qualcomm, Ericsson did not make a Code Division Multiple
Access, or CDMA, cellular telephone. Similarly, Samsung does not offer a Time
Division Multiple Access, or TDMA, cellular telephone. These distinct systems
operate on different technology platforms with different frequencies that are
allocated to specific carriers by government regulators.
Growth in wireless communication in developing markets such as Latin and
South America is driven by two key factors: the lack of teledensity, or number
of landline phone lines per capita, and the relative economics of the
development of landline versus cellular networks. Teledensity rates are
substantially lower in emerging markets than in the U.S. with five to ten phone
lines per 100 people as opposed to 85 to 90 in the U.S. In the past, demand has
not been sufficient to justify laying extensive landline systems. Industry
studies have shown that deployment costs for wireless systems are cheaper than
landline systems in many developing
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countries. Cellular networks can also be cheaper to maintain. As such, wireless
is quickly becoming the dominant form of communication in these areas.
Products and Services
The operations of our wireless products division can be divided into three
main functions: procurement of product, delivery and shipping, and distribution
to customers.
In addition to the straight purchase of new cellular phones and auxiliary
products from a variety of international and domestic suppliers, we source used
products in those markets experiencing shifts in demand patterns. As customers
upgrade their cellular telephones for newer more-advanced products, the majority
return their used phones to the dealers, which are, in turn, returned to the
actual carriers. Given that the carriers have no functional use for these used
and outdated phones, they look to sell these products quickly and often at
deeply discounted prices. Information about the availability of such products is
usually obtained either directly from the carriers or through cellular products
brokers. These phones are subsequently refurbished and repackaged at our
warehouse facility located in Miami, Florida and then sold and distributed to
our customers.
During the past two years, we have positioned ourselves as an informal
market maker in diverse markets. We act as an intermediary between carriers in
developed countries and customers in developing countries that would not
otherwise transact business. This is especially true with our Latin and South
American customers who buy in the U.S. and then distribute the products into
Latin and South America. Frequently, these customers can obtain better or newer
products at better prices in more plentiful quantities from us than they can in
their home countries.
Our wireless products division has well-established relationships with
carriers and local distribution channels in its major markets. Our wireless
products division's top five customers, Cellcom Israel, Ltd. (Israel),
Brightpoint, Inc. (United States), DIN Dynamic (Israel), PH Cellular, Inc.
(United States) and Must Com Communications, Inc. (Israel), purchased
approximately 44% and 42% of our wireless products division's products through
the nine months ended November 30, 2000 and the year ended February 28, 2001,
respectively.
We have developed relationships with many leading manufacturers, carriers
and dealers in our focus markets. The strength of these relationships is
instrumental in facilitating the timely and cost-effective procurement of
products. Our top supplier, RMG Enterprises, Inc., accounted for approximately
13% and 15% of our total purchases for the nine months ended November 30, 2000
and the year ended February 28, 2001, respectively.
Unlike the Latin American cellular phone market which continues to be in
its development stage, both the U.S. and Israeli markets for cellular phones is
categorized as advanced. As a result, we generally distribute new cellular
phones into both the U.S. and Israel. These phones are primarily recognized
brand names, including Nokia, Samsung and Ericsson. In addition to the cellular
phones, we also distribute certain accessories, such as batteries,
carrying-cases and re-chargers, into these two markets.
Given the relative infancy in the trade of used and refurbished cellular
phones to Latin and South America, we experienced little competition relative to
the fiercely competitive U.S. cellular telephone market. There are, however,
companies that market and sell new phones into the Latin and South American
markets such as Brightpoint Inc., a provider of outsourced services in the
global wireless telecommunications and data industry. In the Latin and South
American markets, companies like Brightpoint Inc. are both a customer and a
competitor. Their status is dependent, at any time, upon the needs of their own
customers and their own inventory and supply channels.
Within the U.S. cellular market, we face significant competition from a
variety of national, international and regional cellular distributors, many of
which are substantially larger and better capitalized than us. Similar to the
U.S. cellular market, we face strong competition in Israel. As a developed
market, there are a number of well-established distributors in Israel. We have,
however, developed strong relationships and networks over the past five years
which allow us to be one of the leading distributors of cellular phones and
accessories into the Israeli market.
19
Computer Products Division
Our computer products division is as a value-added reseller of computer
equipment, components and peripheries. Located in the Canadian cities of
Calgary, Edmonton and Toronto and Birmingham, Alabama, this division has broad
access to the North American market, serving over 200 customers in approximately
1,000 different locations. Our computer products division provides North
American clients, including companies such as Fairmont Resorts and Lucent
Technologies, with the latest packages of computer hardware and software
solutions designed to facilitate easy deployment and use for its clients' MIS
departments and ultimately their employees. During the three months ended
February 28, 2001, we generated revenues of approximately $1.3 million (U.S.
$843,000) and $75,000 (U.S. $49,000) from Fairmont Resorts and Lucent
Technologies, respectively.
Our computer products division is authorized to sell and service its
products in both the United States and Canada from manufacturers such as Compaq,
Hewlett Packard and IBM. We believe this provides us with a significant
advantage over many of our competitors.
Our computer products division was acquired December 1, 2000. As a result,
it did not contribute any revenues during the nine months ended November 30,
2000 and contributed only approximately 7% of our total revenues for the year
ended February 28, 2001, or approximately $6.8 million (U.S. $4.4 million).
Overall, it represented approximately 10% of our Business Technologies Group's
total revenues for the year ended February 28, 2001.
Industry Overview
The North American market for the resale of value-added computers is highly
fragmented and competitive. Generally, manufacturers such as IBM, Compaq and
Toshiba sell their products to major wholesale distributors, such as Tech-Data
Corp. and Merisel, Inc., which in turn distribute computer hardware and
components to companies such as value-added resellers. These value-added
resellers then provide customers with customized computer packages. Given the
highly service oriented nature of value-added resellers, they tend to be
regional in focus, concentrating on specific markets and relationship. As a
result, the market is fragmented, with hundreds of local resellers providing
services to clients in the local areas in which they compete.
Products and Services
Our computer products division sells and services computer equipment,
components and peripheries to our customers. We target large and medium sized
customer accounts that require assistance in determining their technology
requirements and need access to those products/services at competitive prices.
We subsequently source the computer components and software and provide the
customer with the full package of computer hardware and software solutions
designed to facilitate easy installation. Our customers are spread across
several different industries including financial, hospitality, insurance and
transportation and the energy sector. Our customer base varies from end-user
customers to systems integrators and re-marketers of new and used products
around the world.
In addition, we provide clients with comprehensive after-sales service.
Services provided to our customers include a 24 hour-a-day, seven days-a-week
telephone helpdesk, and an Internet-based set of electronic tools that allows
customers access to buy online, and provides information about a customer's
complete financial and service history. A component of our after-sales service
is manufacturer authorized warranty repairs. With a product under a
manufacturers' warranty, customers can call our help-desk and we will either
solve the problem over the phone or send a representative to deal with the
problem on-site. The costs incurred with these services are billed back to the
original equipment manufacturer and a manufacturer warranty repair credit is
then issued to us.
We differentiate ourselves from the competition by virtue of our
authorization to sell and service products and systems in both Canada and the
United States. In contrast to many of our competitors, we believe we are one of
a few value-added resellers authorized for sales and service in both the United
States and Canada from
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manufacturers such as Compaq, Toshiba, Hewlett Packard and IBM. The most common
types of equipment we sell from these manufacturers are notebook (laptop)
computers, desktop computers and servers, as well as a variety of software
systems such as Microsoft Office(R), CorelDraw(R) and Adobe Photoshop(R). In
addition, for certain large clients, we provide full-time, on-site technical and
maintenance support.
Typically, we receive the following types of orders for these
manufacturers' products:
- Five Toshiba notebooks, for an aggregate cost of approximately $12,000
(U.S. $7,800).
- One Compaq Proliante server, for a cost of approximately $5,000 (U.S.
$3,200).
- Ten IBM desktops and screens, with Microsoft Office(R), for an aggregate
cost of approximately $22,000 (U.S. $14,300).
We believe our ability to work with customers in both the United States and
Canada without a product ever having to cross the border provides us with a
competitive advantage. Our ability to sell in both countries allows us to
service an account in both countries in either currency, which provides us with
an advantage over most of our competitors in this industry, particularly for our
Canadian customers with U.S. offices. While we acknowledge that this
cross-border competitive advantage is more valuable to our Canadian operations
than to our U.S. operations, we believe the advantages it provides to our
company as a whole are important. Our Canadian competitors still have access to
all of the products sold and serviced by our computer products division, but may
not be able to service their clients with Canadian and U.S. operations. Our
cross-border capabilities provide the following distinct competitive advantages:
- Timing Benefits: Since we can provide the products to customers without
having to go through customs officials at the border, we believe we can
get certain products to customers more quickly than our competitors.
- Warranty: Since the products we sell do not have to cross the border, we
are not affected by the fact that products transferring between countries
sometimes may not maintain their warranties from the originating country.
- Duty Charges: We are also not affected by duties that may be imposed on
products crossing the border.
Our computer products division's top five customers for fiscal year 2001
were Calgary Regional Health Authority (an administrative agency of the Alberta
provincial government), Fairmont Hotels & Resorts (a global hospitality
company), Canada Life Assurance Company (a Canadian insurance company), Agra
Monenco (environmental engineering firm) and Grant Thorton (accounting
firm -- Canada only). These customers purchased approximately 25% of such
products for the year ended February 28, 2001, which individual purchases were
of the type described above.
We have developed relationships with many leading manufacturers including
3COM, Cisco, Compaq, Hewlett Packard, IBM, Microsoft and Toshiba, as well as
their distributors. Our top three suppliers for fiscal year 2001 were Tech Data
Canada, Ingram Micro and Merisel Canada. For the year ended February 28, 2001,
these suppliers sold to us approximately $15.9 million (U.S. $10.3 million) or
90% of our computer product division's total purchases for such period.
Our computer products division competes with a variety of different
value-added resellers across Canada and the United States. The majority of its
competitors are small to medium sized enterprises with geographically regional
focuses. Based on our experience, these regional value-added resellers typically
use only one or two suppliers on a consistent basis. We believe our successful
efforts to broaden our supplier base to seven or eight at any given time gives
us a competitive advantage in this regard due to the fact that a broader base of
suppliers allows us to obtain more competitive pricing from our suppliers which,
in turn, allows us to quote lower prices to our customers. Given the importance
of customer service in the value-added reseller industry and the relatively
local and regional focus of the majority of its customers, this division tends
to compete with different companies in each of its four major markets, Calgary,
Edmonton, Toronto and Birmingham, Alabama.
21
Integrated Applications Division
During the nine months ended November 30, 2000 and fiscal year 2001, we
acquired a comprehensive and technologically advanced property management
solutions (PMS) software system for small and mid-size hotels and large resorts.
Our PMS systems are software tools used by the hospitality industry to manage
their room availability and inventory, and to assist in administrative tasks
such as managing reservations, maintaining guest history, interacting with tour
operators, arranging group sales, and other important functions.
In addition, in March 2001 we acquired Tri-Vu Interactive Corporation, a
development stage company that has developed proprietary, interactive
entertainment and information television-based content and Internet services,
such as scheduled and video-on-demand movies, guest billing review and express
checkout, targeted to the global four/five star hospitality industry.
For the nine months ended November 30, 2000 and the year ended February 28,
2001, our integrated applications division recorded revenues of approximately
$2.5 million (U.S. $1.6 million) and $3.0 million (U.S. $1.95 million),
respectively. Overall, it represented approximately 4% of our revenues for each
such period.
Industry Overview
Hospitality
We believe that the hospitality technology solutions industry will
experience continued growth in the coming years, and believe there are several
factors contributing to its growth. First, travel and tourism is one of the
world's largest industries and, outside of large hotel chains, has only recently
realized the benefits that information and Internet technologies can provide.
Many smaller and independent hotels and motels are still working with manual or
non-computerized systems. The hospitality industry is modernizing so that it can
become more customer oriented and, therefore, more competitive. Hotels are
integrating their various guest touch points into fully integrated customer
relationship management tools. This has created a significant opportunity for
PMS systems suppliers.
Interactive Information Services
Historically, providers of software and programming to hotels delivered
content on a fixed time schedule that did not provide the hotel guest
flexibility in choosing when to watch a movie. In addition to greater
flexibility in terms of movie selections, rapid and significant changes in
technology over the past two decades, particularly the 1990's, have resulted in
the ability to provide a number of on-demand interactive services such as guest
billing review, automatic checkout, survey completion, guest messaging, video
games and Internet service. The current North American marketplace for
interactive entertainment and information services is dominated by several
companies, particularly On Command Corp. and Lodgenet Entertainment Corp. These
companies command a majority share of the North American marketplace. However,
these two companies have focused the bulk of their sales and marketing efforts
within North America and, despite a highly competitive industry, we do not
believe that any company has a dominant international market position. We
believe that the competition to provide interactive guest services to the
international markets can be characterized as disparate.
Products and Services
Our integrated applications division's operations consist of two separate
software design and production operations: a property management solutions (PMS)
team, and a customized interactive entertainment and information systems team.
The PMS team develops products for small and mid-size hotels and large
resorts. It not only designs and develops new software programs, but also
upgrades and enhances our existing software products. We also market and sell
our PMS software solutions to North American and global hospitality companies,
and provide on-going support to our clients through the maintenance of a 24
hour-a-day, seven days-a-week helpdesk.
22
We receive revenue from a one-time perpetual license fee, payable upon the
initial sale of the PMS software package. The one-time license fee equates to
approximately $100 per room for software training and installation. Additional
revenue may be generated thereafter from the annual sale of upgrades and service
packages to the originally purchased software. We offer a discretionary
maintenance contract that includes software upgrades, training and maintenance
for which we charge approximately 20% of the base license fee per year.
We have developed a package of software suites to address the needs of
small, medium and large hospitality providers and resorts. These software tools
are used by the hospitality industry to manage room availability and inventory,
and to assist in administrative tasks such as managing reservations, maintaining
guest history, interacting with tour operators, arranging group sales and other
administrative functions. We have also developed an Internet-based PMS system
that we have not yet actively marketed.
Our software products are currently available in English, French, Spanish
and Portuguese, and have been installed in more than 750 locations in over 24
countries. Our customers include hotels with the Delta, Ramada, Best Western and
Radisson chains. Given the fact that the individual hospitality properties can
either be full or limited in their affiliation with the actual brand names, we
provided system solutions designed to address a specific property's needs. These
hotel chains purchased either our GrandVision or InnVision software, described
below, depending upon their particular needs. They pay us a one-time license fee
which is priced both on the basis of the number of users and the number of
hotels rooms each property operates. In addition, there are annual software
upgrade and maintenance fees which are based on 20% of the total software,
interface and modules purchased by the customer.
There are currently more than 20 property management system developers in
the North American hospitality market. There are six vendors that hold a large
portion of the industry share due to their long-time association with
international hotel chains. These vendors are MICROS-Fidelio International,
Pegasus Systems, Inc., GEAC Computer Corp., Hospitality Solutions International,
Hotel Information Systems and Verso Technologies, Inc. The remaining vendors
tend to compete in fragmented and regionalized markets.
Our customers are located primarily in Canada (70%), with the remainder in
the United States (15%) and the Caribbean and other countries (15%). These
customers consist of independently owned and operated single, small to medium
sized hotels within some of the best known chains including Ramada, Best
Western, Delta and Radisson. Approximately 90% of our integrated application
division's Canadian sales are in the Province of Quebec. The majority of hotels
in Quebec are independently owned, as opposed to the rest of Canada which is
chain based. Since American companies own most of the hotel chains, the decision
of what to purchase has rested mainly in the United States. In response, we
opened an office under the name Central Point Technologies in Florida to market
and manage our relationships with these chains.
We differentiate ourselves from our competition through our ability to
provide our customers with custom-tailored solutions. Unlike the majority of our
competitors that provide static, off-the-shelf and non-customizable solutions,
we offer packages that can be easily customized as to hotel name, location and
services offered in order to meet each customer's individual needs.
We recently acquired a group of key technical personnel and the related
technology from Tri-Vu, a start-up company focused on the creation of a
customized interactive entertainment and information system for the hospitality
industry. This customizable and interactive system is delivered by way of a
set-top-box and a television. The interactive television system provides a
variety of services on demand. Every system is tailored to meet the specific
needs of each customer and the property being served. The following services can
be delivered via the interactive television system: Scheduled Movies;
Pay-Per-View, Pay-Per-Day, Pay-Per-Stay and Tiered Channel Sales.
Currently, both of these systems are actively being market to resorts and
hotels in the hospitality industry, while we simultaneously develop alternative
interactive functions such as inventory management. These alternative functions
are in the development stage and are not currently being marketed or sold.
We are still refining the revenue model upon which we will charge customers
for these products and services. We are currently charging customers
approximately $500 for the sale of the in-room hardware and
23
software system. Once installed, we intend to provide in-room movies at cost,
thereby permitting the hotel to generate additional profits from in-room
viewing. This is in contrast to our competitors that charge a percentage of the
fee received for in-room viewing of movies, but no up front fees for the
hardware or software system. Depending upon our success in securing appropriate
financing and our overall capital needs, we are considering switching to the
revenue sharing model of our competitors in order to reduce our customers'
initial capital costs for this product.
The particular products currently marketed and sold, or licensed, through
our integrated applications division are as follows:
- GrandVision/InnVision: This suite of property management systems is
based on a powerful multi-tiered distributed framework which uses all of
the latest IT standards and is accessible from any terminal in a local or
enterprise-wide configuration. Each product in the suite provides its own
unique property management solution to hospitality companies. These
products include:
- GrandVision Property Management System;
- InnVision Property Management System;
- GlobalVision Central Management System;
- OnePoint Central Reservation System;
- SharePoint Condo Management System; and
- CorpRes Housing Management System.
- HotelPMS.com: This product is our front-office solution designed to help
inns, budget hotels, seasonal resorts and limited service properties and
chains benefit from property management system functionality with reduced
up-front costs, system complexity and technical expertise. With this
product, we target small hotels, generally with less than 75 rooms, that
cannot afford the investment in most technology solutions systems.
Although the HotelPMS.com software provides many of the same operations
as the GrandVision/InnVision Suite, Hotel PMS.com differs in that it is
an Internet-based application whereby the client can access the software
by the Internet and does not need the software installed on its computer.
- Integra: This software manages hotel call accounting (local and long
distance phone costs, by room), which is critical for hotel management as
it can typically generate high revenues. This product was developed by
Desig through a verbal partnership with MDR Technologies, Inc., a
Canadian-based communications management solutions provider, and Bell
Canada, for distribution to hotels in Ontario and Quebec. This product is
sold and managed by MDR and Bell Canada, and we are paid a licensing fee
comprised of 50% of the software sale and 50% of the servicing fee.
- BonjourQuebec.com: This product, which is an Internet-based client
reservation system developed for Bonjour Quebec (part of the government
agency Tourism Quebec), was developed by Desig through a partnership with
Bell Canada and others. This online client reservation system offers
individuals web connectivity to hotels in Ontario and Quebec using
Windows or Unix systems. Desig received a one-time license fee of
$100,000 for the creation of this Internet software system.
Our integrated applications division markets its products in two ways.
First, the division's highly professional and well-trained direct sales staff is
responsible for generating leads, making presentations and closing transactions.
This sales force was responsible for approximately and 85% of our integrated
application division's sales for both the nine months ended November 30, 2000
and the year ended February 28, 2001. Second, this division generates sales by
responding to formal bids tendered by hospitality companies. This method of
marketing accounted for approximately 15% our integrated application division's
sales for both the nine months ended November 30, 2000 and the year ended
February 28, 2001.
Business Supplies Division
Our business supplies division, headquartered in Toronto, Canada,
distributes business supplies and computer components to the Canadian and Cuban
markets. We specialize in sourcing and distributing a large variety of business
supplies including computer components, photocopiers, fax machines, printers,
point-of-
24
sales equipment and miscellaneous business supplies such as batteries, office
furniture, hotel supplies and security systems. Approximately 95% of the
business supplies and equipment sold by us during both the nine months ended
November 30, 2000 and the year ended February 28, 2001 were purchased from
Canadian supply sources.
For the nine months ended November 30, 2000 and the year ended February 28,
2001, the business supplies division recorded revenues of approximately $14.3
million (U.S. $9.3 million) and $20.2 million (U.S. $13.0 million). Overall,
this division represented approximately 33% and 28%, respectively, of our
Business Technologies Group's sales for such periods.
Industry Overview
We believe that the market for business supplies within Canada is
competitive and geographically diverse. Originally, the majority of business
supplies were marketed and sold through catalogues that were distributed by
suppliers to small and large businesses throughout urban and rural Canada. The
Canadian market for business supplies has, however, witnessed a shift in the way
it supplies Canadian businesses with the growth and expansion of major retail
office supplies chains. During the 1990's, the Canadian office supplies
marketplace experienced additional competition from "big box" retail chains that
compete directly with the traditional officer suppliers, particularly in urban
centres. The result was the fragmentation of the Canadian marketplace by
geographic location, with retailers focused on urban centres and traditional
distributors concentrating on both urban and rural areas. As a result, despite
the fact that the Canadian marketplace is highly competitive, particularly in
urban centres, a significant market of small to medium sized business in rural
and remote locations still relies on traditional catalogues to satisfy their
office supplies needs.
We believe that demand for business supplies within Cuba is continuing to
grow rapidly. Growth is being driven by the same factors that are stimulating
the expansion of our consumer electronics products in that country. See
"Consumer Electronics Group" below.
Products and Services
In Canada, we focus our sales efforts on businesses that operate Point of
Sale (POS) systems. Our products include paper products, including paper rolls
and ribbons, debit card kits, photocopy and computer paper, toner and ink jet
supplies, plastic bags, pricing labels, facsimile supplies and media supplies.
We save POS system purchasers money on their supplies by volume purchasing
directly from the manufacturers. Our current customer base consists of more than
3,000 businesses across Canada. They range from large chains or franchise
stores, such as Canadian Tire, Burger King and Shoppers Drug Mart, to small
family owned restaurants and grocers. We market office and business products
through outbound telemarketing. The telemarketing approach allows for
cost-effective national sales coverage.
There are no legislative barriers for a Canadian company to enter the Cuban
business supplies market. Canada does not restrict companies from competing in
the Cuban marketplace, nor does the Cuban government require any specific
license or governmental authorization to conduct business in the Cuban business
supplies market. Our exports into Cuba began in 1995 and consisted of the sale
of consumable supplies, including fax paper, roll paper and general business
supplies. In addition to these consumable supplies, we export computer
components into the Cuban marketplace.
The products we sell in Cuba are obtained from a number of different
sources, including major Canadian wholesale distributors of business supplies
and computer components. We currently have one supply contract with Epson Canada
for the purchase of computer components for sale into Cuba.
Our business supplies division's two largest customers for the nine months
ended November 30, 2000 and the year ended February 28, 2001 were Cuban
corporations, namely Copextel S.A. and Cubalse S.A. These customers purchased
approximately $11.0 million (U.S. $7.1 million) and $15.0 million (U.S. $9.7
million), respectively, in business supplies during such periods, or 75% and
77%, respectively, of the products sold by our business supplies division during
such periods. Our three major suppliers during such periods were Samtack
Computers, Tech Data Canada and Tecway Technologies Ltd. Our purchases from
these suppliers
25
accounted for approximately $5.0 million (U.S. $3.2 million) and $6.9 million
(U.S. $4.5 million) in expenses, or 40% and 39%, respectively, of cost of goods
sold for the nine months ended November 30, 2000 and the year ended February 28,
2001, respectively.
Within Canada, competition comes primarily from two sources: "big box"
retailers and point-of-sale vendors. Competition from "big box" retailers, such
as Staples, Grand & Toy, The Office Place and Corporate Express, is most
apparent in major Canadian urban centres where these retailers have set up
outlets from which to sell office supplies at the retail level. We also face
competition throughout Canada from similar direct POS vendors. To compete with
similar POS vendors, we position ourselves by providing competitive pricing,
quality products and attentive service.
Within Cuba, we face competition from similar distributors seeking to sell
a variety of business supplies and computer components. We compete in the market
on the basis of price, product and service.
CONSUMER ELECTRONICS GROUP
Our Consumer Electronics Group, headquartered in Panama, is focused on the
distribution of consumer electronic devices to Cuba and certain other Latin
American markets. We specialize in distributing consumer electronics such as
televisions, CD players, stereos, air conditioners and fans. In addition to
distributing recognized brand names such as Philips, Sanyo, Sony and Samsung, we
have, during the past five years, developed our own brand names, General Vision
and LEC, which we actively market. Our Consumer Electronics Group also sells
refrigerators, stoves, washers, dryers, toasters, blenders, freezers, hair
dryers and audiovisual and entertainment equipment. Approximately 85% and 83% of
the consumer electronic products supplied by us were purchased from Asian
sources during the nine months ended November 30, 2000 and the year ended
February 28, 2001, respectively.
During both the nine months ended November 30, 2000 and the year ended
February 28, 2001, approximately 99% of our Consumer Electronics Group's
revenues were derived from sales in Cuba. We generally offer customer credit
financing that has an effective term of 120-150 days for our sales in Cuba.
Typically, upon a sale in Cuba, we receive a negotiable "bill of exchange" from
the customer/purchaser which can be redeemed at any one of several Cuban
financial institutions. Upon our redemption of the bill of exchange, the
financial institution collects the receivable directly from the
customer/purchaser. To date, we have not yet experienced an uncollectable bill
of exchange in Cuba.
An assembly line operation has been established near Havana, Cuba in an
economic association with Tecnotex, an agency of the Cuban government, whereby
Sanyo, Samsung and Philips brand televisions, and our own General Vision and LEC
brand televisions, are assembled. We do not own or operate the assembly facility
in Cuba. We supply unfinished components and advise on technical and quality
control matters. We are the exclusive supplier to the assembly plant and receive
a royalty on sales from this facility. We buy the products from our suppliers,
thereby taking title to them, and then sell the products to Tecnotex for its use
in assembling the televisions, thereby transferring title to Tecnotex. Our risk
ends upon delivery of the components to the Cuban assembly plant because all of
our sales to the plant are guaranteed by a debit note to the plant's bank
account.
During fiscal 2001, sales of finished products by our Consumer Electronics
Group accounted for approximately 25% of its revenues, while sales of assembly
parts accounted for approximately 75% of its revenues. For the same period,
gross margins for the finished products were approximately 15%, while gross
margins for sales of the assembly components were approximately 25%.
As a result of our focus on the development of our Business Technologies
Group and the integration of our recent acquisitions, our management has
purposely controlled the growth of our Consumer Electronics Group. For the nine
months ended November 30, 2000 and the year ended February 28, 2001, our
Consumer Electronics Group recorded revenues of approximately $26.7 million
(U.S. $17.3 million) and $31.0 million (U.S. $20.1 million), respectively.
Overall, our Consumer Electronics Group represented approximately 38%
26
and 30%, respectively, of our total revenues for such periods. All transactions
in Cuba are completed in U.S. dollars.
During the first half of fiscal 2001, we had plans to construct and operate
a manufacturing and assembly plant in Montevideo, Uruguay. On or about June 15,
2001, we decided not to proceed with the initiative in Uruguay because both our
local business partner and the authorities in Uruguay failed to meet certain
conditions precedent to the initiative. Although we have not formally abandoned
the initiative, we do not anticipate proceeding with it at this time.
Industry Overview
We believe that demand for consumer electronics within Cuba continues to
grow rapidly. This growth is being driven by a number of factors, including:
- the opening of the country to foreign investment and business through a
variety of political initiatives including the creation of free-trade
zones, and the encouragement of joint-ventures;
- the access to U.S. dollars through the growing tourism industry,
permitted U.S. dollar remittances from relatives abroad, and foreign
investment;
- the introduction of limited capitalistic businesses in select free-trade
areas;
- the entry of numerous foreign businesses; and
- the modernizing of retail stores.
We believe that approximately ten major state-owned corporations exist in
Cuba and dominate the business and consumer products marketplace, particularly
Cimex S.A., TRD Caribe, Cubalse S.A. and Copextel S.A. These companies operate
department store chains, retail outlets, and other business enterprises. We
believe that each of these companies currently generates revenues of between
U.S. $100 million and U.S. $750 million annually and are growing rapidly in
concert with the Cuban economy as a whole. All appear to be projecting continued
strong growth in the future.
The wholesale/institutional consumer electronics market in Cuba is
comprised primarily of hotels and government ministries, many of which have
entered into joint ventures with foreign corporations for their supplies of
consumer electronics. All other consumer electronics sold in Cuba are
distributed through retail stores wholly-owned by Cuban corporations. There is,
however, significant competition among the numerous distributors, which must be
Cuban corporations, for the sale of consumer electronics into the retail
locations. Like in Canada and the United States, this competition is driven by
factors such as price, brand name recognition, service and product warranty.
Thus, the market resembles the Canadian and U.S. markets, but is much more
regulated in that, among other things, only Cuban corporations are permitted to
distribute to the retail locations and the government regulates which companies
are allowed to supply the distribution chains.
Products and Services
There are no legislative barriers for a Canadian company to enter the Cuban
consumer electronics market. Canada does not restrict companies from engaging in
business in Cuba, with Cuban businesses or with the Cuban government. The Cuban
government does not require Canadian companies to obtain any specific license or
government approval to conduct business in the domestic Cuban markets in which
we currently do business. We believe this provides us with a competitive
advantage over our U.S. competitors because U.S. businesses, persons and goods
are blocked from Cuba by U.S. law.
We currently export both finished and unfinished products into the Cuban
marketplace. Our exports into Cuba began in 1995 and consisted of the
distribution of consumable supplies, including fax and photocopier paper and
general business supplies. Although we continue to export business supplies and
computer components into the Cuban market, our most significant business
operations in Cuba to date has been the creation of our television distribution
networks.
27
Our four largest customers for the nine months ended November 30, 2000 and
the year ended February 28, 2001 were Tecnotex, TRD Caribe, Cubalse S.A. and
Cimex S.A. These customers purchased approximately $26.0 million (U.S. $16.9
million) and $30.0 million (U.S. $19.5 million), respectively, in business
supplies during these periods, or 97% and 92%, respectively, of the products
sold by our Consumer Electronics Group during such periods. Our four major
suppliers for the nine months ended November 30, 2000 and the year ended
February 28, 2001 were Peikard Zona Libra Colon, Sony Corp, Philips and Samsung
Electronics. Our purchases from these suppliers accounted for approximately
$10.2 million (U.S. $6.6 million) and $11.6 million (U.S. $7.5 million),
respectively, in expenses, or 50% and 48%, respectively, of cost of goods sold
for such periods.
Finished Products
Between 1996 and 2000, we signed distribution agreements with major
consumer electronics companies, such as Philips, Samsung, Sanyo and Sony, to
supply the Cuban market with their products. These agreements do not give us an
exclusive right to sell their products in Cuba. However, we believe that we are
currently the only supplier of these products into Cuba. We distribute these
brand name consumer electronics to a number of different retailers in Cuba. Each
retailer in Cuba is free to decide which products to market to consumers and
consumers, in turn, are free to choose which products they wish to purchase.
In addition to our distribution agreements, we also sell televisions and
assorted household appliances from Asian sources that we have branded with our
two proprietary brand names -- General Vision and LEC. We have actively marketed
products with these brand names in Cuba over the past four years. In an effort
to establish closer relationships with our Asian suppliers, we opened an office
in Hong Kong in April 1999, for which we incurred capital costs of approximately
$220,000. Although this office continues to be fully operational, we do not
expect any further associated capital costs.
Assembled Products
In April 1999, we signed an agreement with Tecnotex, a Cuban corporation
and our customer, to establish a television assembly plant and to supply
operational and quality control advice. Tecnotex provided the land and an empty
facility. We procured the equipment, designed the plant, installed the equipment
and incurred all ancillary costs to establish the facility. In October 1999, the
assembly facility became fully operational and we sold the improvements in the
facility to Tecnotex (operating under the name S.J. Electronica del Caribe) for
approximately $1.5 million (U.S. $1.0 million). During fiscal 2001, Tecnotex
generated approximately $34.4 million (U.S. $22.3 million) in sales from its
operations at the plant. Pursuant to our agreement, no payments were due for 24
months after the sale. Commencing October 2001, we will begin receiving, and
will continue to receive until paid in full, 0.7% of the sales from the assembly
plant, on a monthly basis. Additionally, the agreement provides us with the
exclusive right to supply to the assembly plant all the unfinished product kits
required to assemble the televisions. Our exclusivity rights expire in or about
October 2006. In addition to the construction of the assembly plant, we had
originally intended to roll-out approximately 18 after-sales service centers
across Cuba to better service the television market as a whole. After further
examination and discussions with Cuban authorities, we decided to outsource this
project to Servihogar, a subsidiary of the Cuban Internal Commerce Ministry, who
will be responsible for the creation and administration of a network of
after-sales service centers throughout Cuba.
Until 1999, the majority of televisions distributed in Cuba were imported
from outside sources. Since the creation of the state-owned television assembly
facility, the Cuban Finance & Price Ministry (Ministerio de Finanzas y Precios)
modified the pricing index that sets the minimum mark-up percentages for
retailers selling finished goods to encourage Cuban retailers to purchase
televisions assembled in Cuba. As a result, during the past two years, the
percentage of televisions currently purchased by the Cuban public and assembled
in Cuba has grown significantly and, as of the end of fiscal 2001, was
approximately 90%. Of that amount, our facility produces approximately 70% of
these televisions, while 23% are supplied by another state-owned assembly
facility with which we have no affiliation or association. Of the remaining 7%,
5% is comprised of products exported by us, while the last 2% are made up of
different brands exported by other distributors.
28
Our Consumer Electronics Group does business in Cuba in a relatively
non-competitive environment. Historically, our major competition came from
international trading organizations from Canada, Spain, Japan and Panama who
were shipping various brand names of consumer electronics into Cuba. Since 1999,
however, the Cuban government has implemented and sustained significant price
controls on the export of televisions to Cuba. This policy change occurred
within the same period as our assembly facility began full operations. As a
result of the price controls, exports of televisions to Cuba declined
significantly. We believe that our exclusive rights under the economic
association agreement, our agreements with Philips, Samsung, Sanyo and Sony to
sell their products in Cuba, the sale of our own proprietary brand name products
in Cuba and the price controls on the export of assembled televisions to Cuba
implemented by the Cuban government, are providing us with a significant
competitive advantage in Cuba.
We understand, however, that this advantage is due in part to the
protective measures the Cuban government has implemented to protect its domestic
markets, and that this advantage may, regardless of our actions, disappear at
any time. While we believe that our business operations will be adversely
affected by the expiration of our exclusive rights and the removal of export
price controls to the consumer electronics market in Cuba, we also believe that
the significant head start we have had under the current environment will allow
us to continue to maintain our competitive advantage for some time.
C. ORGANIZATIONAL STRUCTURE
OUR CORPORATE STRUCTURE
Below is a schematic depiction of our company and each of our direct and
indirect subsidiaries, their jurisdictions of incorporation and the corporate
relations among them.
Flow Chart
---------------
(1)Formerly, Yam International Communications Inc.
(2)Operating in Cuba as ACC Corp.
(3)Previously operated as Mirage Impex
(4)Currently inactive
29
OUR OPERATING STRUCTURE
Below is a schematic depiction of our business groups and divisions and of
the subsidiaries that operate within them.
FLOW CHART
---------------
*Mirage International Services Inc. also services the Consumer Electronics Group
and the other three divisions of the Business Technologies Group
D. PROPERTY, PLANTS AND EQUIPMENT
We do not own any real property. However, we lease business premises in the
following locations for the respectively enumerated purposes:
[Download Table]
APPROXIMATE
FLOOR SPACE
LOCATION (SQUARE FEET) PRINCIPAL USE AND PRODUCTS
MANUFACTURED
-------- -------------
---------------------------------------
Toronto, Ontario Canada
(Commercial)..................... 6,700 Executive offices and
general
administration
North York, Ontario Canada
(BSRU/MAX)....................... 19,302 Administrative & Sales
offices and
warehouse
Calgary, Alberta, Canada (MAX)..... 8,000 Administrative & Sales
offices and
warehouse
Edmonton, Alberta, Canada (MAX).... 2,200 Sales offices and warehouse
Birmingham, Alabama (MAX).......... 6,000 Sales offices and warehouse
Wajay Free Zone, Havana Cuba
(Mirage)......................... 8,500 Warehouse space
Havana, Cuba (Mirage).............. 10,000 Administrative offices,
sales showroom
Panama Colon Free Trade Zone,
Panama (Mirage).................. 5,000 Warehouse space for
in-transit shipping
and consolidation shipments
30
[Download Table]
APPROXIMATE
FLOOR SPACE
LOCATION (SQUARE FEET) PRINCIPAL USE AND PRODUCTS
MANUFACTURED
-------- -------------
---------------------------------------
Saint Michael, Barbados (Mirage)... 1,000 Administrative & Sales
offices
Montreal, Quebec, Canada (Desig)... 4,998 Administrative & Sales
offices
Deerfield Beach, Miami (Desig)..... 1,546 Administrative & Sales
offices
Miami, Florida (YAM)............... 8,186 Administrative & Sales
offices and
warehouse
We also have access to production capacity in the assembly plant owned and
operated by S.J. Electronica del Caribe located near Havana, Cuba. S.J.
Electronica del Caribe is an unaffiliated third party that assembles television
sets.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OVERVIEW
We generate revenues by the sale to domestic and export customers of (i)
component products for televisions and home electronics, and (ii) the finished
products of television, home electronics, office supplies such as machinery
computer and photocopy papers, and cellular phones.
All revenues are recognized when the risks and rewards of ownership have
transferred from us to our customers. Such ownership transfer occurs either (i)
at shipment on an "FOB shipping point" basis when our only interest in the
product is as potential security for the receivable, should the receivable not
be paid, or (ii) on delivery to the customer at their point of acceptance.
Our cost of goods sold represent the cost of purchase of these products
either from Canadian or United States suppliers or from sources arranged and
contracted for in the Far East, mainly Mainland China.
All customers and sources of supply are in the commercial sector and we
have no retail sales or purchases.
General and administrative expenses include our normal operating costs,
including office and warehouse salaries, telephone, general office expenses,
management salaries, professional fees, rent on our release premises, and
repairs and maintenance of office equipment.
Selling and marketing expenses include advertising, commissions and sales
expenses, postage, routine sales and marketing, consulting, and travel incurred
to make sales and identify specific sources of product, particularly outside
North America.
The results of operations discussed below are based on our audited
consolidated financial statements and related notes provided in "Item
18 -- Financial Statements" on pages F-1 through F-86 of this registration
statement, which were prepared in accordance with Canadian GAAP. Differences
between Canadian GAAP and U.S. GAAP are listed and quantified in note 22 to our
consolidated financial statements. Significant differences between Canadian GAAP
and U.S. GAAP include:
- Pre-operating expenses and start-up costs are deferrable under Canadian
GAAP and must be expensed under U.S. GAAP.
- Deferred finance charges must be written off over a shorter period under
U.S. GAAP.
- Foreign exchange gains are a component of income under Canadian GAAP but
comprehensive income under U.S. GAAP.
- There are differences in treatment of interest, valuation and accounting
for warrants issued in connection with debt.
31
Nine Months Ended November 30, 2000 Compared With Nine Months Ended November
30, 1999
Sales increased by approximately $40.0 million (U.S. $25.9 million), or
131%, to approximately $70.5 million (U.S. $45.7 million) for the nine months
ended November 30, 2000 from approximately $30.5 million (U.S. $19.8 million)
for the nine months ended November 30, 1999. This increase was driven by
continued strong growth in our Business Technologies and Consumer Electronics
Groups, as well as from the contribution of our three major acquisitions. For
the nine months ended November 30, 2000 compared with the nine months ended
November 30, 1999, sales from our existing Consumer Electronics and Business
Technologies Groups increased by approximately $10.6 million (U.S. $6.8
million), or 35%, from approximately $30.4 million (U.S. $19.7 million) to
approximately $41.0 million (U.S. $26.6 million). The additional growth for the
nine months ended November 30, 2000 was driven by our two major acquisitions,
which contributed approximately $29.5 million (U.S. $19.1 million) in aggregate
sales during the nine month period.
Gross margin increased by approximately $9.0 million (U.S. $5.8 million),
or 163%, from $5.5 million (U.S. $3.6 million) in the nine months ended November
30, 1999 to approximately $14.5 million (U.S. $9.4 million) in the nine months
ended November 30, 2000. The increase reflects our increased sales as well as an
increase in gross profit percentage from 18.0% to 20.5%. The increase in gross
margin was driven by continued strong margin from our integrated applications
division, and from our Consumer Electronics Group which continued to grow its
sales to the Cuban assembly plant.
Total operating expenses increased by approximately $4.7 million (U.S. $3.0
million), or 127.4%, to approximately $8.4 million (U.S. $5.5 million) for the
nine months ended November 30, 2000 from approximately $3.7 million (U.S. $2.4
million) for the nine months ended November 30, 1999. As a percentage of sales,
total operating expenses increased from approximately 11.9% for the nine months
ended November 30, 2000 to approximately 12.1% for the nine months ended
November 30, 1999, reflecting our commitment to more stringent cost management
throughout our operations.
General and administrative expenses increased by approximately $2.6 million
(U.S. $1.7 million), or 150.8%, to approximately $4.3 million (U.S. $2.8
million) for the nine months ended November 30, 2000 from approximately $1.7
million (U.S. $1.1 million) for the nine months ended November 30, 1999. As a
percentage of sales, general and administrative expenses increased from 5.6% for
the nine months ended November 30, 1999 to 6.2% for the nine months ended
November 30, 2000. The increase reflects our increased level of sales activities
and the slightly higher general and administrative expenses related to our two
acquisitions.
Selling and marketing expenses increased by approximately $520,000 (U.S.
$337,000), or 71.7%, to approximately $1.25 million (U.S. $811,000) for the nine
months ended November 30, 2000 from approximately $730,000 (U.S. $473,000) for
the nine months ended November 30, 1999. As a percentage of sales, selling and
marketing expenses decreased from 2.4% for the nine months ended November 30,
1999 to 1.8% for the nine months ended November 30, 2000.
In the nine months ended November 30, 2000 compared to the nine months
ended November 30, 1999, the total amortization of capital assets and deferred
charges increased by approximately $300,000 (U.S. $195,000) from approximately
$60,000 (U.S. $39,000) to approximately $360,000 (U.S. $233,000), reflecting the
fact that our asset base was growing and that the deferred charge write-offs
that commenced previously, increased during fiscal 2001. In addition, in the
nine months ended November 30, 2000, goodwill amortization commenced with
charges of $466,000 (U.S. $218,000), or approximately 0.5% of sales.
Interest and bank charges increased from approximately $1.165 million (U.S.
$756,000) in the nine months ended November 30, 1999 to approximately $1.97
million (U.S. $1.3 million) in the nine months ended November 30, 2000
representing an increase of approximately $800,000 (U.S. $519,000) or 69.1%.
This reflects that, notwithstanding the fact that we were growing, our net bank
indebtedness position had remained constant. In addition, during the same
period, we also arranged substantial new financing at the more favourable rate
of 20% than we previously had been incurring in our operating line of credit.
Income from operations, before foreign exchange and income taxes, increased
by approximately $4.2 million (U.S. $2.8 million), or 235%, to approximately
$6.0 million (U.S. $3.9 million) for the nine months
32
ended November 30, 2000 from approximately $1.8 million (U.S. $1.2 million) for
the nine months ended November 30, 1999. Our foreign exchange gain increased to
$343,496 (U.S. $223,000) reflecting a short term weakening of the Canadian
dollar compared to the U.S. dollar and the fact that we had more net U.S. dollar
denominated assets at November 30, 2000 than at November 30, 1999.
Our provision for income tax approximated 1.3% of sales, a substantial
increase from less than 1% of sales in 1999. This is as a result of the fact
that we have approximately 25% of our net income subject to tax at U.S. rate of
34% in the year 2000, whereas in 1999 we had very little tax that was not
subject to very favourable Canadian private companies tax rates or offshore
jurisdiction tax rates as described in note 17 to our financial statements.
Net income in 2000 of approximately $5.4 million (U.S. $3.5 million) (8.6%
of sales) showed an increase of approximately $3.7 million (U.S. $2.4 million)
(205%) over 1.7 million (U.S. $1.1 million) (5.9% of sales) in 1999. This
reflected the substantial increase in sales without a substantial increase in
expenses relative to sales.
Year Ended February 28, 2001 Compared With Year Ended February 29, 2000
For the year ended February 28, 2001 compared with the year ended February
29, 2000, our sales increased by approximately $58.4 million (U.S. $37.9
million), or 129%, from approximately $45 million (U.S. $29.2 million) to
approximately $103.5 million (U.S. $67.1 million). This increase was driven by
continued strong growth in our Business Technologies and Consumer Electronics
Groups, as well as from the contribution of our three major acquisitions. For
the year ended February 28, 2001 compared with the year ended February 29, 2000,
sales from our existing Consumer Electronics and Business Technologies Groups
increased by approximately $6.5 million (U.S. $4.2 million), or 14%, from
approximately $45 million (U.S. $29.2 million) to approximately $51.5 million
(U.S. $33.4 million). The growth in sales from our existing Consumer Electronics
and Business Technologies Groups is primarily due to growth from our Consumer
Electronics Group, which continues to capitalize on a growing Cuban economy. As
the economy grows and increasingly more individuals have access to disposable
U.S. dollars, television sales continue to rise. It should be noted, however,
that during this period our management purposely slowed the growth of our sales
revenue from the Consumer Electronics Group in order to focus our resources on
the completion and integration of our recent acquisitions. The overall growth
for the fiscal year ended February 28, 2001 was driven by our three major
acquisitions, which contributed approximately $52 million in aggregate sales
during the year.
Gross margin increased by approximately 162% from approximately $7.8
million (U.S. $5.1 million) for the year ended February 29, 2000 to
approximately $20.4 million (U.S. $13.2 million) for the year ended February 28,
2001. Overall, our gross margin percentage increased from approximately 17.3% in
the year ended February 29, 2000 to approximately 19.7% in the year ended
February 28, 2001. The increase reflects the contribution from our recently
acquired integrated applications division, and continued strong gross margins
from our Consumer Electronics Group. Gross margins from our existing Consumer
Electronics and Business Technologies Groups increased by approximately $1.7
million (U.S. $1.1 million), or 22%, from approximately $7.8 million (U.S. $5.1
million) for the year ended February 29, 2000 to approximately $9.5 million
(U.S. $6.2 million) for the year ended February 28, 2001. Despite management's
focus on the completion and integration of the three acquisitions, gross margin
as a percentage of sales for our existing business groups remained strong,
increasing from approximately 17.3% for the year ended February 29, 2000 to
approximately 18.4% for the year ended February 28, 2001.
Total operating expenses, including general and administrative, selling and
marketing, interest and bank charges and amortization of capital assets and
deferred charges, increased by approximately $7.2 million (U.S. $4.7 million),
or 138%, from approximately $5.2 million (U.S. $3.4 million) for the year ended
February 29, 2000 to approximately $12.4 million (U.S. $8.0 million) for the
year ended February 28, 2001. As a percentage of sales, total operating expenses
increased marginally from approximately 11.6% for the year ended February 29,
2000 to approximately 12.0% for the year ended February 28, 2001, reflecting the
relatively smooth integration of our newly acquired operations.
33
General and administrative expenses increased approximately $2.9 million
(U.S. $1.9 million), or 112%, from approximately $2.6 million (U.S. $1.7
million) for the year ended February 29, 2000 to approximately $5.5 million
(U.S. $3.6 million) for the year ended February 28, 2001, which increase is
primarily attributable to the three major acquisitions completed in fiscal 2001.
Despite the increase, general and administrative expenses as a percentage of
sales decreased from approximately 5.7% in the year ended February 29, 2000 to
approximately 5.3% for the year ended February 28, 2001. This decrease is due to
our continued commitment to more stringent cost management. In particular, we
focused on only acquiring companies with historically strong general and
administrative controls in place. As a result, the general and administrative
costs, as a percentage of sales, associated with these acquisitions are similar
to those of our existing business groups.
Selling and marketing expenses increased approximately 175% from
approximately $900,000 (U.S. $585,000) for the year ended February 29, 2000 to
approximately $2.2 million (U.S. $1.4 million) for the year ended February 28,
2001. The significant increase in selling and marketing costs is primarily
attributable to the three major acquisitions we closed during the year. Despite
the increase, sales and marketing costs as a percentage of revenues remained
constant at approximately 2.1% for the year, as compared with approximately 2%
for the previous year.
Amortization, including capital assets, deferred charges and goodwill,
increased from approximately $200,000 (U.S. $130,000) for the year ended
February 29, 2000 to approximately $1.8 million (U.S. $1.2 million) for the year
ended February 28, 2001, reflecting the significant increase in our goodwill due
to the major acquisitions during the year ended February 28, 2001, as well as
our continued write-off of deferred charges related to the development of our
Latin American brands and costs incurred by our attempts to obtain additional
financing.
Interest and bank charges increased approximately $2.4 million (U.S. $1.6
million), or 112%, from approximately $1.6 million (U.S. $1.0 million) for the
year ended February 29, 2000 to approximately $4.0 million (U.S. $2.6 million)
for the ended February 28, 2001, reflecting the working capital requirements to
finance our sales growth in the year ended February 28, 2001.
Income before provision for income taxes increased approximately $4.8
million (U.S. $3.1 million), or 198%, from approximately $2.5 million (U.S. $1.6
million) for the year ended February 29, 2000 to approximately $7.3 million
(U.S. $4.7 million) for the year ended February 28, 2001. This growth reflects
our strong growth in gross margins in conjunction with our focus on managing our
operating expenses.
Our income tax provision increased by approximately $103,000 (U.S.
$67,000), or 100%, from approximately $104,000 (U.S. $68,000) in the year ended
February 29, 2000 to approximately $207,000 (U.S. $134,000) for the year ended
February 28, 2001. Although a significant increase, our relatively low tax
provision reflects the tax advantages obtained by our international business
operations through Mirage Trading Corp., our Barbadian subsidiary, which has
lower tax rates than North America. As an International Business Corporation
formed under Barbadian law, Mirage Trading is subject to a 2 1/2% tax rate on
income. Under Canadian law, foreign subsidiaries of Canadian companies are
permitted to remit income to the Canadian parent through tax-free dividends.
Thus, we are not subject to an additional tax on income generated by Mirage
Trading other than the 2 1/2% tax imposed in Barbados.
Overall, our net income increased approximately $4.7 million (U.S. $3.0
million), or 202%, to approximately $7.1 million (U.S. $4.6 million), for the
year ended February 28, 2001 from approximately $2.5 million (U.S. $1.6
million), for the year ended February 29, 2000. For the year ended February 28,
2001, net income as a percentage of sales was 6.9% as compared with 5.2% for the
fiscal year ended February 29, 2000.
Year Ended February 29, 2000 Compared With Year Ended February 28, 1999
For the year ended February 29, 2000 compared with the year ended February
28, 1999, our sales increased by approximately $16.1 million (U.S. $10.4
million), or 55.5%, from approximately $29 million (U.S. $18.8 million) to
approximately $45.1 million (U.S. $29.2 million). This growth reflects the
continued growth of our Consumer Electronics Group within Cuba. As increasing
amounts of U.S. currency flowed into Cuba, demand for consumer electronics, in
particular televisions, continued to grow rapidly. As a result of our
34
established relationships, we continued to supply increased volumes of goods
into the market. In addition, a significant factor in our growth resulted from
the opening of the Cuban assembly plant in October 1999. As a result of our
investment into the plant, we have the exclusive right to supply the components
to be assembled at the plant. Sales to the new plant began in October 1999.
Our gross margin percentage increased from approximately 15.9% in the year
ended February 28, 1999 to approximately 17.3% in the year ended February 29,
2000, reflecting increased buying leverage as we grew and were able to realize
the benefits of more direct sourcing in Asia. Also, as we sourced more and more
products for sale by way of direct shipment from suppliers, we were able to
achieve economies of scale in buying and direct shipping. The increased gross
margin percentages yielded approximately $900,000 (U.S. $585,000) of additional
gross profit.
Gross margin increased by approximately 70% from approximately $4.6 million
(U.S. $3.0 million) in the year ended February 28, 1999 to approximately $7.8
million (U.S. $5.1 million) in the year ended February 29, 2000, reflecting
buying margin improvements and the fact that we were able to achieve economies
of scale in our sourcing activities.
Total operating expenses increased by approximately $1.9 million (U.S. $1.2
million), or 58%, from approximately $3.3 million (U.S. $2.1 million) in the
year ended February 28, 1999 to approximately $5.2 million (U.S. $3.4 million)
for the year ended February 29, 2000. Notwithstanding the increase in expenses,
income before foreign exchange and income taxes for the same periods increased
by 93.3% from approximately $1.32 million (U.S. $856,000) to approximately $2.55
million (U.S. $1.7 million). This increase reflects the fact that there was a
greater increase in gross margin dollars and percentage, than the increases in
expenses from previous years.
General and administrative expenses increased by 102% from approximately
$1.28 million (U.S. $830,000) for the year ended February 28, 1999 to
approximately $2.59 million (U.S. $4.4 million) for the year ended February 29,
2000, reflecting the fact that we had commenced expansion of our staff and
administrative capacities as we became a fully operational public company and,
accordingly, needed to incur more infrastructure and development expenses. The
increase in general and administrative expenses also reflected the fact that we
were expanding our office network to investigate and to serve new markets. In
addition, during period, we commenced investigating future markets in South
America and Central America.
Selling and marketing costs remained constant, decreasing marginally from
approximately $886,000 (U.S. $577,000) for the year ended February 28, 1999 to
approximately $881,000 (U.S. $571,000) for the year ended February 29, 2000,
reflecting stable selling and marketing costs compared to sales and margin
increases. The slight decrease in selling and marketing costs is attributable to
our being able to take advantage of previously established relationships in our
major markets and with our major customers, thereby decreasing the need for
fresh investment in sales and marketing activities.
Amortization increased by approximately $146,000 (U.S. $95,000), or 224.6%,
to approximately $211,000 (U.S. $140,000) for the year ended February 29, 2000
from approximately $65,000 (U.S. $42,000) for the year ended February 28, 1999,
reflecting our increased capital asset base and the write-offs of deferred
charges that commenced during fiscal 2000.
Interest and bank charges increased by 46.4% from approximately $1.06
million (U.S. $687,000) for the year ended February 28, 1999, representing 2.7%
of sales, to approximately $1.56 million (U.S.$1.0 million) for the year ended
February 29, 2000, representing approximately 3.45% of sales. This increase
reflects the fact that we expanded our financing and sales activities and were
operating with essentially an unchanged line of available credit. Accounts
receivable and inventory increased by approximately $4.0 million (U.S. $2.6
million), or 66.67%, from February 28, 1999 to February 29, 2000. Such increase,
together with a significant increase in sales volume, caused us to incur
significantly higher transaction costs to turn our available credit facilities
faster.
Income before provision for income tax increased by approximately $1.25
million (U.S. $811,000), or 81.4%, from approximately $1.36 million (U.S.
$882,000) in fiscal 1999 to approximately $2.46 million (U.S.
35
$1.6 million) in fiscal 2000. This reflected the leverage gained from improved
buying and gross margins and the fact that we were able to increase our gross
margins at a faster rate than our expense base.
Our income tax provision dropped from approximately $165,000 (U.S.
$107,000) in fiscal 1999 to approximately $104,000 (U.S. $67,000) in fiscal
2000, reflecting the fact that, in the year ended February 29, 2000, a higher
proportion of our business was carried on through our Mirage subsidiary, which
has the benefit of substantially lower tax rate than the BSRU subsidiary in
North America.
Our income increased by 97.7% from approximately $1.3 million (U.S.
$842,000) in fiscal 1999 to approximately $2.36 million (U.S. $1.5 million) in
fiscal 2000, reflecting a significant increase in sales and gross margin in the
year ended February 29, 2000.
Year Ended February 28, 1999 Compared With Year Ended February 28, 1998
Sales increased by approximately $9.1 million (U.S. $5.9 million), or
52.1%, to approximately $29.0 million (U.S. $18.8 million) for the year ended
February 28, 1999 from approximately $19.1 million (U.S. $12.4 million) for the
year ended February 28, 1998. This growth reflects the expansion of our Consumer
Electronics Group in Cuba as well as the realization of the strength of the
established relationships within Cuba. During the fiscal year ended February 28,
1999, the Consumer Electronics Group, due to the strength of its existing and
established relationships within Cuba, began to export larger quantities of
consumer electronics, in particular televisions, into the Cuban marketplace.
Gross profit margin increased by approximately $2.4 million (U.S. $1.6
million), or 109%, to approximately $4.6 million (U.S. $3.0 million) in fiscal
1999 from approximately $2.2 million (U.S. $1.4 million) in fiscal 1998. This
reflected a continuing gross margin percentage of approximately 18.3% and
indicated that, between 1999 and 1998, we maintained our buying strengths and
positions prior to expansion in future years.
Total operating expenses increased by approximately $1.2 million (U.S.
$780,000), or 57%, to approximately $3.3 million (U.S. $2.1 million) in fiscal
1999, representing approximately 11.3% of sales, from approximately $2.1 million
(U.S. $1.4 million) in fiscal 1998, representing approximately 10.9% of sales.
General and administrative expenses increased by approximately $265,000
(U.S.$170,000), or 26%, to approximately $1.285 million (U.S. $833,000) in
fiscal 1999 from $1.2 million (U.S. $778,000) in fiscal 1998. This increase,
which was less than the sales increase, was attributable to general and
administrative expenses decreasing from 5.3% of sales in fiscal 1998 to 4.4% in
fiscal 1999, as we were able to use our existing resources more efficiently.
Selling and marketing expenses increased by approximately $156,000 (U.S.
$101,000), or 21%, to approximately $886,000 (U.S. $574,000) in fiscal 1999 from
approximately $730,000 (U.S. $473,000) in fiscal 1998. As a percentage, sales,
selling and marketing expenses decreased from approximately 3.8% in fiscal 1998
to approximately 3% in fiscal 1999, reflecting the fact that we had commenced
investing in our sales and marketing infrastructure in fiscal 1998.
Interest and bank charges increased significantly as we experienced
substantial growth from the year ended February 28, 1998 to the year ended
February 28, 1999. The approximate $750,000 (U.S. $486,000), or 238.9%, increase
in interest charges reflects the fact that, at February 28, 1999, we had
approximately $2.4 million (U.S. $1.6 million), representing a 60% increase from
fiscal 1998, in accounts receivable and inventory with no corresponding increase
in accounts payable between the years ended February 28, 1998 and 1999. The
interest and bank charges also indicated that we had to finance ourself by lines
of credit which increased substantially from approximately $800,000 (U.S.
$520,000) in fiscal 1998 to approximately $3.4 million (U.S. $2.2 million) in
fiscal 1999.
Provision for income taxes increased by approximately $130,000 (U.S.
$85,000). Notwithstanding the increase in income taxes, the rapid increase in
sales and gross profit led to an increase of approximately $1.16 million (U.S.
$752,000) in profit for the year ended February 28, 1999 compared to the year
ended February 28, 1998.
36
Our approximate $1.3 million (U.S. $843,000) in net profit reflects the
fact that (i) we were obtaining leverage and economies of scale at the then
generated sales level, and (ii) our income before taxes of 5.4% of sales
indicated that we had achieved, in the year ended February 28, 1999, "critical
mass" and were able to start a rapid profit growth pattern.
February 28, 1998
For the year ended February 28, 1998, we became a substantial factor in the
Cuba department store sales marketplace. Notwithstanding the fact that the
profit picture was essentially a break-even situation with limited profits of
approximately $64,000 (U.S. $42,000), we established our presence in Latin
America, invested in substantial office and warehouse facilities and in sales
and marketing activities, all of which enabled us to commence the growth
described in the years ended February 28, 1999, February 29, 2000 and February
28, 2001.
Summary Discussion of Significant Subsidiaries and Segment Information
Wireless Products Division
On April 1, 2000, we acquired YAM Wireless, Inc., formerly, Yam
International Communications, Inc., which is a Florida-based cellular/wireless
communications company that provides new, used and refurbished cellular phones
and original equipment manufacturer accessories, and operates as our wireless
products division.
For the year ended February 28, 2001, our wireless products division
contributed 11 months of revenues totaling approximately $42.2 million (U.S.
$27.4 million), compared with approximately $33.4 million (U.S. $21.7 million)
for the 12-month pre-acquisition period ended December 31, 1999. Our wireless
products division's fiscal 2001 revenues reflect its strategic sales shift to an
increased corporate focus on the used phone market in developing countries. Our
wireless products division has also taken advantage of opportunities to sell
new, high demand cellular phones domestically and in certain core foreign
markets, particularly the Caribbean and Israel.
Our wireless products division accounted for approximately $6.9 million
(U.S. $4.8 million) of gross profit for fiscal 2001 compared with $3.2 million
(U.S. $2.1 million) for the 12-month period ended December 31, 1999. Overall,
our wireless products division had a gross profit margin of approximately 16.4%
for fiscal 2001. The gross margin reflects our wireless products division's
ability to purchase cellular phones and accessories at more advantageous pricing
due to its larger volume purchases.
Our wireless products division financed the majority of its growth and
operations from existing cash flow.
During fiscal 2001, our wireless products division accounted for
approximately $1.7 million (U.S. $1.1 million) in general and administrative
expenses. Overall, general and administrative expenses were 4.0% as a percentage
of sales for such period. The majority of our wireless products division's
general and administrative costs reflect its continued efforts to seek out
opportunities to purchase cellular products at the most competitive prices
available, conclude new distribution arrangements and service its clients'
needs.
Our wireless products division accounted for approximately $560,000 (U.S.
$363,000) in sales and marketing expenses during fiscal 2001. Overall, sales and
marketing expenses were approximately 1.3% as a percentage of sales for such
period. The majority of these sales and marketing expenses are comprised of
commissions for its sales staff.
During fiscal 2001, our wireless products division did not incur
significant costs related to capital expenditures. Its capital assets costs
reflect normal course of business expenditures for vehicles, computers and
office furniture.
Overall, our wireless products division accounted for approximately $4.1
million (U.S. $2.7 million) of the approximately $9.0 million (U.S. $5.8
million) in operating profit for fiscal 2001.
37
Integrated Applications Division
On May 1, 2000, we acquired La Societe Desig Inc., a Montreal-based
software developer of property management systems for small and mid-size hotels
and large resorts, which operates as our integrated applications division.
For fiscal 2001, our integrated applications division recorded a 10-month
revenue contribution of approximately $3.0 million (U.S. $2.0 million) compared
with approximately $2.0 million (U.S. $1.3 million) for the 12-month
pre-acquisition period ended October 31, 1999. Revenues reflect the highly
successful year-2000 launch of our integrated applications division's newest
developed suite of property management software solutions into the North
American and Caribbean hospitality markets.
Our integrated applications division accounted for approximately $2.7
million (U.S. $1.8 million) of overall gross profit and recorded a gross profit
margin of approximately 92%, compared with approximately $1.5 million (U.S.
$973,000) and 77%, respectively, for the 12-month period ended October 31, 1999.
The gross profit reflects the stronger sales established by our integrated
applications division and the relatively low direct costs related to the
implementation of its software systems.
Our integrated applications division financed the majority of its growth
and operations from existing cash flow.
During fiscal 2001, our integrated applications division accounted for
approximately $196,000 (U.S. $127,000) of general and administrative expenses,
representing approximately 6.5% as a percentage of sales. These expenses reflect
the costs associated with the normal course of business operations.
Our integrated applications division accounted for approximately $460,000
(U.S. $298,000) of selling and marketing expenses during fiscal 2001. This
amount represents approximately 15.3% as a percentage of sales and reflects
expenses related to our integrated applications division's aggressive marketing
of its new software suites to its target markets in the hospitality industry.
During fiscal 2001, our integrated applications division did not incur
significant costs related to capital expenditures. Its capital assets costs
reflect normal course of business expenditures for vehicles, computers and
office furniture.
Our integrated applications division accounted for approximately $1.5
million (U.S. $973,000) of operating profit as it successfully launched and
marketed its new and expanded suite of software solutions.
Computer Products Division
On December 1, 2000, we acquired MAX Systems Group, Inc., a Calgary-based
computer hardware value-added reseller and systems solutions provider, which
operates as our computer products division.
Due to the December 1, 2000 acquisition date, our computer products
division contributed only three months of financial results to our overall 2001
fiscal year. During this three-month period, revenues were approximately $6.8
million (U.S. $4.4 million), while gross profit was approximately $1.2 million
(U.S. $778,000), representing a strong gross profit margin for the period of
18.2%, compared with approximately $53.5 million (U.S. $34.7 million),
approximately $5.6 million (U.S. $3.6 million) and 10.5%, respectively, for the
12-month pre-acquisition period ended July 31, 2000. The apparent decrease in
our computer products division's first quarter sales following acquisition
reflects the fact that during this period senior management of our computer
products division diverted its focus from operations to closing the acquisition.
In addition, in the months prior to its acquisition by us and following the end
of its fiscal year ended July 31, 2000, MAX was without a line of credit and had
to rely on its own cash flow. This lack of access to regular working capital
restricted operations. As of the middle of February 2001, our computer products
division had established a $5.0 million (U.S. $3.2 million) line of credit and
management is focused on growing its sales volumes to previous levels.
38
Our computer products division accounted for approximately $254,000 (U.S.
$165,000) of interest during the fourth quarter ended February 28, 2001, as it
concluded a $5.0 million (U.S. $3.2 million) operating-line financing in
February 2001 to take advantage of purchasing opportunities going forward.
During fiscal 2001, our computer products division did not incur
significant costs related to capital expenditures. Its capital assets costs
reflect normal course of business expenditures for vehicles, computers and
office furniture.
Overall, our computer products division recorded an operating loss of
approximately $10,500 (U.S. $6,800) for the three months ended February 28,
2001. This loss reflects the fact that our computer products division did not
have an operating line in place until February 2001 and, consequently, was
unable to pursue available sales growth opportunities.
Business Supplies Division
Our business supplies division, headquartered in Toronto, Canada,
distributes business supplies and computer components to the Canadian and Latin
American markets. It specializes in sourcing and distributing a large variety of
business supplies including computer components, photocopiers, fax machines,
printers, point-of-sale equipment and miscellaneous business supplies such as
batteries, office furniture, hotel supplies and security systems.
Our business supplies division recorded fiscal 2001 revenues of
approximately $20.1 million (U.S. $13.0 million) compared with revenues of
approximately $16.3 (U.S. $10.6 million) for fiscal 2000, representing a growth
of approximately 23%. Revenue growth was driven by growth in sales of computer
hardware and components to Latin America as this division continues to leverage
our existing relationships in the Latin American marketplace.
Our business supplies division recorded fiscal 2001 gross profit of
approximately $2.7 million (U.S. $1.8 million), a gross profit margin of
approximately 13.1%, compared with approximately $3.2 million (U.S. $2.1
million), a gross profit margin of approximately 19.3% for fiscal 2000. The
decline in both gross profit and gross profit margin reflects this division's
transition from a focus on only staple consumable products such as paper and
supplies, to a diversified product mix including capital intensive items such as
computer components and office furniture. Although the shift to this newer
product mix has created additional revenues, competitive pricing has negatively
impacted our business supplies division's newer product lines.
During fiscal 2001, our business supplies division accounted for
approximately $166,000 (U.S. $108,000) of interest, compared with approximately
$511,000 (U.S. $331,000) in fiscal 2000. The decrease in interest costs reflects
the change in product mix. The expansion into a diversified product mix
resulted, in some instances, in better trade terms and the ability to obtain
customer deposits. The net result has been a decrease in the working capital
required to support operations.
Our business supplies division accounted for general and administrative
costs of approximately $2.4 million (U.S. $1.6 million) in fiscal 2001, compared
with approximately $1.2 million (U.S. $778,000) for fiscal 2000. General and
administrative costs as a percentage of sales were approximately 11.9% in fiscal
2001 compared with approximately 7.4% in fiscal 2000. This growth in general and
administrative expenses as a percentage of sales reflects increased costs being
allocated to manage our business supplies division's growth and shifting its
product mix to include a greater focus on computer components.
During fiscal 2001, our business supplies division accounted for selling
and marketing costs of approximately $722,000 (U.S. $468,000), compared with
approximately $580,000 (U.S. $376,000) for fiscal 2000. General and
administrative costs as a percentage of sales were approximately 3.6% in fiscal
2001 compared with approximately 3.6% in fiscal 2000. Despite the shift to a
broader product mix during fiscal 2001, selling and marketing costs as a
percentage of sales remained constant in fiscal 2001.
Our business supplies division did not incur significant costs related to
capital expenditures during fiscal 2001. Its capital assets costs reflect normal
course of business expenditures for vehicles, computers and office furniture.
39
Overall, our business supplies division lost approximately $126,000 (U.S.
$82,000) in fiscal 2001, compared with an operating profit of approximately
$306,000 (U.S. $198,000) in fiscal 2000.
Consumer Electronics Group
Our Consumer Electronics Group is focused on the distribution of consumer
electronic devices to high-growth Latin American markets. It specializes in
distributing consumer electronics, such as televisions, compact disc players,
stereos, air conditions and fans, to the Latin American marketplace. In addition
to distributing recognized brand names such as Philips, Sony and Samsung, it
has, during the past five years, developed its own brand names of General Vision
and LEC, which it actively and successfully markets in Latin America.
During fiscal 2001, our Consumer Electronics Group generated revenues of
approximately $31.2 million (U.S. $20.2 million) compared with revenues of
approximately $28.8 million (U.S. $18.7 million) for fiscal 2000, representing a
growth of approximately 8.3%. This growth reflects our Consumer Electronics
Group's continued strong sales into the Latin American markets.
Our Consumer Electronics Group achieved a fiscal 2001 gross profit of
approximately $6.8 million (U.S. $4.4 million) compared with approximately $5.8
million (U.S. $3.8 million) for fiscal 2000, representing a growth of
approximately 17.2%. Overall, our Consumer Electronics Group recorded a gross
profit margin of approximately 21.8% for fiscal 2001 as compared to 20.5% for
fiscal 2000. This growth in gross profit reflects both our Consumer Electronics
Group's strong and established market presence in Latin America and its ability
to continue to take advantage of attractive purchasing opportunities.
During fiscal 2001, our Consumer Electronics Group accounted for
approximately $2.4 million (U.S. $1.6 million) in interest costs, compared with
approximately $1.0 million (U.S. $649,000) for fiscal 2000, as it continues to
pay above average interest rates for operating lines into the Latin American
marketplace and higher borrowing amounts to finance its continued growth.
Our Consumer Electronics Group accounted for general and administrative
costs of approximately $312,000 (U.S. $202,000) during fiscal 2001 as compared
with approximately $1.3 million (U.S. $843,000) during fiscal 2000. General and
administrative costs as a percentage of sales were approximately 1.0% during
fiscal 2001, as compared with approximately 4.5% for fiscal 2000. The
significant decrease in selling, general and administrative costs reflects the
benefits of our Consumer Electronics Group's significant investment in fiscal
2000 in the installation of a Cuban television assembly plant. As a result of
the assembly plant's successful operations and our exclusive distribution rights
of television components to the plant, our Consumer Electronics Group has
significantly downsized its required ongoing administrative operations within
Cuba.
During fiscal 2001, our Consumer Electronics Group accounted for selling
and marketing costs of approximately $127,000 (U.S. $82,000), as compared with
approximately $1.6 million (U.S. $1.0 million) during fiscal 2000. Selling and
marketing costs as a percentage of sales were approximately 0.4% during fiscal
2001, as compared with approximately 5.6% for fiscal 2000. The significant
decrease in selling and marketing costs reflects the transition from the
establishment and initial support of the new Cuban television assembly plant in
fiscal 2000, which plant assembles televisions for several international
manufacturers such as Philips, Samsung and Sanyo with higher associated selling
and marketing costs and more immediate benefits, to, in fiscal 2001, focusing on
the development of a proprietary brand name with more long-term benefits. As a
result of our Consumer Electronics Group's exclusive distribution rights to the
now fully-operational Cuban assembly plant, our Consumer Electronics Group has
been able to decrease the bulk of its ongoing repeatable selling and marketing
expenses. For fiscal 2001, our Consumer Electronics Group incurred material
expenditures relating to the development of its own brands for use in products
to be sold within Cuba and Latin America, which have been capitalized as
deferred charges in that the long term benefits of the brand recognition will be
realized over the next three years.
Our Consumer Electronics Group accounted for additions to our capital
assets of approximately $2.7 million (U.S. $1.8 million). In addition to the
normal course of business assets included in furniture, fixtures and equipment,
computer equipment, leasehold improvements and vehicles, we invested
approximately $2.4
40
million (U.S. $1.6 million) in the development of proprietary chassis technology
and circuitry for assembly and sale of televisions into the Latin American
markets. This proprietary chassis relates to the configuration of the electronic
circuitry inside each television and we anticipate being the beneficiary of this
technology for approximately three years.
Overall, our Consumer Electronics Group recorded fiscal 2001 operating
profit of approximately $3.5 million (U.S. $2.3 million) compared with
approximately $2.2 million (U.S. $1.4 million) for fiscal 2000, a growth of
approximately 59%. This growth reflects the continued success of our Consumer
Electronics Group's Latin American operations, its continued strong marketing
efforts into the region and the rewards of developing its own brand names within
Latin America
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting and Standard Board issued
pronouncements under FAS No. 141, "Business Combinations," and FAS No. 142,
"Goodwill and Other Intangible Assets," related to the acquisitions and
amortization of acquisition goodwill. We are currently evaluating the effects of
the new standards on the method of recording and amortization of acquisition
goodwill. We will adopt these standards as soon as permitted. On adoption of
these new standards, the amortization of acquisition goodwill will cease. We
will evaluate the goodwill for any impairment on a yearly basis and any
impairment in the acquisition goodwill will be charged to income in the year the
acquisition goodwill is considered impaired.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash generated by operations for the nine months ended November 30, 2000
was approximately $0.25 million (U.S. $0.18 million) compared with cash used in
operations of approximately $3.7 million (U.S. $2.4 million) for the nine months
ended November 30, 1999. In the nine months ended November 30, 2000, net income
with amortization of goodwill, capital assets and deferred charges, and future
income taxes added back provided approximately $6.2 million (U.S. $4.1 million)
of cash flow compared with approximately $1.8 million (U.S. $1.2 million) for
the comparable period in 1999. This increase was a direct result of increased
net income under Canadian GAAP of approximately $5.4 million versus
approximately $1.8 million in 1999. This income increase was offset in fiscal
2000 by approximately $6.0 million (U.S. $4 million) of increase in current
assets and liabilities compared with approximately $5.5 million (U.S. $3.6
million) of net increases in operating assets in 1999.
The most significant of these increases were approximately $2.4 million
(U.S. $1.6 million) in inventory compared with a reduction in inventory of
approximately $0.5 million (U.S. $0.37 million) in 1999. We also increased our
accounts receivable by a lesser amount in 2000 (approximately $4.4 million (U.S.
$2.9 million)) compared with approximately $6.0 million (U.S. $4 million) in
1999. In addition, we increased realized cash by increasing payables by
approximately $1.5 million (U.S. $1.0 million) in 2000 compared with
approximately $2.7 million (U.S. $1.8 million) in 1999. The increase in accounts
receivable and inventory occurred due to our sales increases in the consumer
electronics business where we are subject to extended payment terms. Inventories
also increased as we invested in new and expanded product lines for our
acquisitions, including our wireless products division.
Cash used in operations for the year ended February 28, 2001 was
approximately $2.8 million (U.S. $1.8 million) compared to $2.1 million (U.S.
$1.4 million) for the year ended February 29, 2000. In the year ended February
28, 2001, our operations used $2.8 million (U.S. $1.8 million) of cash,
resulting from our cash flow from net income with amortization of goodwill,
capital assets and deferred charges, and future income taxes added back of $8.9
million (U.S. $5.8 million) being absorbed by increases of $11.6 million (U.S.
$7.5 million) of non-cash assets and liabilities related to operations. This
resulted from increases in accounts receivable ($3.2 million, or U.S. $2.1
million) and inventories ($1.6 million, or U.S. $1.0 million) that occurred
because of our sales increases, a significant portion of which came in our
consumer electronics business where we are subject to extended payment terms.
Inventories increased as we invested in new and expanded product lines for
acquisitions in our wireless products and computer products divisions. Also, we
used the capital raised in our equity and debt financings to substantially
reduce accounts payable by $3.6
41
million (U.S. $2.3 million). Certain legal subsidiaries provided for income
taxes of approximately $1.3 million (U.S. $843,000). We also invested (under
Canadian GAAP) approximately $1.3 million (U.S. $0.9 million) in deferred
charges for product, brand and market development.
During fiscal 2000, we consumed $2.1 million (U.S. $1.4 million) of cash in
operations, which consisted of net income with amortization of goodwill, capital
assets and deferred charges, and future income taxes added back of $2.6 million
(U.S. $1.7 million) being offset by $4.7 million (U.S. $3.1 million) in changes
in non-cash balances. The most significant component in this was increases in
accounts receivable of $4.4 million (U.S. $2.9 million), prepayments to
suppliers of $1.3 million (U.S. $843,000) under Canadian GAAP and the long-term
receivable of $1.1 million (U.S. $713,000 million). Receivables increased as a
direct result of significant sales increases ($15.7 million, or U.S. $10.2
million, or 95% of total sales increase) in our Latin America business where we
are subject to payment terms of up to 150 days. We made prepayments to suppliers
of $1.3 million (U.S. $843,000) to support expanded product lines. We sold,
under specific arrangement, the assembly plant in Cuba on a long-term basis. To
partially offset these demands for cash, our trade accounts payables increased
by approximately to $3.0 million (U.S. $2.0 million). We also invested (under
Canadian GAAP) $1.0 million (U.S. $649,000) in brand, product and market
development.
During fiscal 1999, we used $1.5 million (U.S. $973,000) of cash in
operations, which consisted of net income with amortization of goodwill, capital
assets and deferred charges, and future income taxes added back of $1.3 million
(U.S. $843,000) offset by $2.8 million (U.S. $1.8 million) in changes in
non-cash balances. The changes in non-cash balances consisted primarily of
increases in accounts receivable of $1.6 million (U.S. $1.0 million), $700,000
(U.S. $454,000) in inventory and $300,000 (U.S. $195,000) in brand, product and
market development. Accounts receivable and inventory increases were a direct
result of increased business activity in Cuba where we had a 52.1% sales
increase.
During fiscal 1998, we used $200,000 (U.S. $130,000) in cash from
operations. The main use of cash was $300,000 (U.S. $195,000) increase in
non-cash balances. Accounts receivable increased by $1.0 million (U.S. $649,000)
reflecting increased business activities, particularly in Cuba. We financed this
use of cash by increasing trade payables.
Financing activities during the year ended February 28, 2001 provided
approximately $15.4 million (U.S. $10.0 million) compared with approximately
$1.8 million (U.S. $1.2 million) for the year ended February 29, 2000. The $15.4
million (U.S. $10.0 million) was provided primarily by a cash infusion of
approximately $9.7 million (U.S. $6.3 million) in term loans and notes payable,
and an increase of approximately $6.5 million (U.S. $4.2 million) in borrowings
under a line of credit. These loans were from various different sources and were
used to finance our major acquisitions and supplement working capital. In
addition, we paid out approximately $700,000 (U.S. $454,000) to repay advances
from related parties.
Cash used in investing activities for the year ended February 28, 2001 was
approximately $13.2 million (U.S. $8.6 million), as compared with approximately
$700,000 (U.S. $454,000) in the year ended February 29, 2000. The cash was used
for the following primary purposes: the costs related to our major acquisitions
which amounted to approximately $7.3 million (U.S. $4.7 million), and the
acquisition of approximately $5.6 million (U.S. $3.6 million) of capital assets,
which consisted of the addition of approximately $2.4 million (U.S. $1.6
million) related to the development of a proprietary technology related to
televisions chassis.
As of February 28, 2001, our principal source of liquidity was
approximately $566,000 (U.S. $367,000) in cash and short-term deposits. We have
long-term debt of approximately $7.7 million (U.S. $5.0 million) which is
comprised primarily of the term loans which carry an average interest rate of
20%. Approximately $6.5 million of the outstanding long-term debt was raised in
May 2000 to close the YAM acquisition and to finance our general working capital
needs. In April 2001, these bridge loans were extended for an additional year
until April 30, 2002. In addition, we had approximately $8.8 million (U.S. $5.7
million) in borrowings. These borrowings are comprised of two material lines of
credit and a small line of credit of $300,000 from a Canadian bank. The first
material line of credit, which supports our Cuban operations, is for
approximately $6.1 million (U.S. $4.0 million), bears interest at a rate of 27%
and is secured by a general security agreement. The second material line of
credit is for $5.0 million (U.S. $3.2 million), bears interest at a rate of
prime plus
42
3.25%, and is secured by a general security agreement and assignment of selected
book debts. As of February 28, 2001, $2.4 million of this line of credit was
drawn, with approximately $2.6 million remaining available. We anticipate
spending an aggregate of approximately $150,000 (U.S. $97,000) in cash during
the 2002 fiscal year to cover costs associated with our recent acquisitions and
pay normal operating costs including debt service of approximately $17.0 million
(U.S. $11.0 million).
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements made either by our representatives or us. We may
from time to time make written or oral statements that are "forward-looking,"
including statements contained in this registration statement and other filings
with the Securities and Exchange Commission, the Canadian System for Electronic
Document Analysis and Retrieval, the Canadian Venture Exchange and in reports to
our shareholders or to appropriate Canadian securities regulatory authorities.
These statements include statements regarding our intent, belief and current
expectations about our strategic direction, prospects and future results. We
have described some of the important factors that affect these statements as we
discussed each subject. These matters are inherently difficult to predict. These
statements are made on the basis of our views and assumptions, as of the time
the statements are made, regarding future events and business performance. There
can be no assurance, however, that our expectations will necessarily come to
pass. Actual results may differ materially.
For an enterprise doing business in as many different geographic regions as
ours, with as many different lines of business, a wide range of factors could
materially affect our future developments and performance, including the
following:
- Changes in company-wide or business-group strategies, which may result in
changes in the types, mix or geographic location of businesses in which we
are involved;
- Changes in Canadian, global or regional economic conditions, which may
affect the sales of our products or services, our relationships with our
suppliers and the performance of our employees;
- Changes in global financial and equity markets, including significant
interest rate and currency exchange fluctuations, which may impede our
access to, or increase the cost of, external financing for our operations
and investments;
- Increased competitive pressures, both domestically and internationally,
which may, among other things, affect the performance of business-groups
and lead to increased expenses in such areas as marketing, software
development, sales and costs of goods sold;
- Legal and regulatory developments that may affect particular business
units, such as regulatory actions affecting our operations in Cuba,
consumer products, or the protection of intellectual properties, the
imposition by foreign countries of trade restrictions or quotas, and
changes in international tax laws or currency controls; and
- Changing public and consumer taste, which may affect the sale of our
products and services.
This list of factors that may affect future performance and the accuracy of
forward-looking statements are illustrative, but by no means exhaustive. We have
no obligation to publicly update or revise any of the forward-looking statements
contained in this registration statement. Accordingly, all forward-looking
statements should be evaluated with the understanding of their inherent
uncertainty.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
All our research and development costs are incurred by and through our
subsidiary, Desig. The total amount spent on research and development during
Desig's year ended October 31, 2000, as disclosed in the financial statements of
Desig included on pages F-61 through F-73 of this registration statement, was
approximately $780,000 (U.S. $505,000). Prior to our acquisition, Desig spent
approximately $722,000 (U.S. $470,000) and $587,000 (U.S. $380,000) for the
years ended October 31, 1999 and 1998, respectively.
43
D. TREND INFORMATION
We are not aware of any trends related to purchasing, sales, inventory or
otherwise, or any uncertainties, demands, commitments or events which are
reasonably likely to have a material effect upon our net sales or revenues,
income from continuing operations, liquidity or capital resources, or that would
cause reported financial information not necessarily to be indicative of future
operating financial condition. The risk factors inherent in our business are
disclosed in Item 3.D.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth information concerning our directors and
senior management. Senior management serves at the pleasure of our Board of
Directors.
[Download Table]
FUNCTION AND
NAME AND OFFICE HELD PRINCIPAL BUSINESS ACTIVITIES PERFORMED OUTSIDE
BUSINESS EXPERIENCE
IN THE COMPANY AGE THE COMPANY DURING THE PAST FIVE YEARS
IN THE COMPANY
-------------------- --- -----------------------------------------------
----------------------
Gregory C. Burnett, 39 Since 1989, President of Carob Management Ltd.,
Director since May 4,
Director and a management consulting company in Vancouver,
1998; direct and
Secretary B.C.; since 1996, President of Orko Gold
supervise our overall
Corporation, a junior gold exploration company
business operations;
listed on the CDNX; from 1993 -- April 1997,
maintain all records
officer and director of Pender Capital Corp.,
and effect all
an industrial company listed on the ASE;
necessary filings.
director only of Pender Capital Corp. since
1997.
Michael S. 46 July 1993 -- November 1994 owner and President
Director since October
Weingarten,(1) of Isolceles Telephone Corp.; January 1994 to
15, 1999; direct and
Director and July 1995, Director of Operations of Preferred
supervise our overall
Chairman of the Telemanagement; in March 1994 founding majority
business operations;
Board shareholder of Business Supplies Are Us Inc.;
develop and formulate
from 1997 to Present, founder and President of
our business plan.
Complete Telemanagement Services Inc.
Frederick McLean, 40 Since 1997, Chief Operating Officer for
Director since August
Director Complete Telemanagement Services Inc., from
24, 1999; direct and
1994-1996, Vice-President, Sales for Preferred
supervise our overall
Telemanagement Inc.; from 1990-1994, director
business operations;
of Sales for ACC Long Distance.
develop and formulate
our business plan.
Donald Lyons, 69 Current Positions: Chairman, City of Toronto
Director since October
Director Pension Plan (Firefighters), President, Dorato
15, 1999; direct and
Partners Inc., director and Chief Financial
supervise our overall
Officer, Sagit Investment Management Ltd.,
business operations.
Chairman and director, Cymat Aluminium Inc.,
operations. Parcel and Post Inc., director and
treasurer, St. Lawrence Centre for the
Performing Arts; from 1994 -- December 1995,
President and director of York Fire and
Casualty Co.
44
[Download Table]
FUNCTION AND
NAME AND OFFICE HELD PRINCIPAL BUSINESS ACTIVITIES PERFORMED OUTSIDE
BUSINESS EXPERIENCE
IN THE COMPANY AGE THE COMPANY DURING THE PAST FIVE YEARS
IN THE COMPANY
-------------------- --- -----------------------------------------------
----------------------
Leonard S. Black, 42 Since March 1994, President of Business
Director since October
Director and Supplies Are Us Inc.; December 1984 to March
15, 1999; direct and
President 1994, Sales Manager and eventually General
supervise our overall
Manager of Network Business Supplies Inc. and
business operations.
Majestic Paper Ltd.
Terry Amisano, 45 Since 1991, a partner with Amisano Hanson,
Director since August
Director Chartered Accountants
11, 2000; direct and
supervise our overall
business operations.
Guy P. Jarvis, 39 Mr. Jarvis served as Vice President & Director,
Chief Executive
Director and Chief Private Placement of Deloitte & Touche
Officer since July 19,
Executive Officer Corporate Finance Canada Inc. In his previous
2000; execute and
capacity with the Business Development Bank of
implement our business
Canada, Mr. Jarvis was responsible for the
plan.
Bank's subordinated debt market in the GTA and
assisted clients with minority equity
investments in a consulting role. He has 10
years of extensive transaction experience in
mid-market commercial banking, with experience
in corporate banking, syndication, acquisitions
and divestitures, cross-border credit
facilities, and loan recovery.
Tomas Carlos Gonzales- 37 Mr. Anleo has over eight years of experience in
Chief Operating
Anleo, international product sourcing and strategic
Officer since October
Chief Operating distribution. For five years, he was General
15, 1999; manage our
Officer Manager of the Advanced Business Division of
day to day operations.
Commercial Cimex, S.A. a large organization
specializing in POS technology, and one of the
four largest Cuban commercial entities.
Ricardo Jose Alvarez 64 Mr. San Pedro is a seasoned professional with
Chief Financial
San Pedro, over 30 years of experience in accounting and
Officer since October
Chief Financial engineering. He previously served as CFO for a
15, 1999; manage our
Officer number of companies, including Cubanacan S.A.,
financial resources
the major Cuban Tourism Group with annual
and accounts.
revenues in excess of $1 billion, and
Interholdings Group, where he managed state-
owned insurance company funds on an
international level.
---------------
(1) Mr. Weingarten served as our Chief Executive Officer from October 15, 1999
to July 19, 2000.
In 1994, Mr. Weingarten, though not active in the business, was a minority
shareholder (less than 10%) and served as secretary-treasurer of Network
Business Supplies, Inc. of Toronto, which filed a petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code.
In addition, Mr. Weingarten, though not active in the business, was a
minority shareholder and a Director of Majestic Paper Limited, which filed a
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in
1994. Majestic Paper Limited had shareholders in common with Network
Business Supplies, Inc.
45
There are no family relationships among any of our directors or executive
officers. There are no arrangements or understandings between any of our
directors and/or executive officers and any other person pursuant to which that
director and/or executive officer was selected.
B. COMPENSATION
Directors
Except for Greg Burnett, a director and our secretary who receives a
management fee of $2,500 per month, none of our directors received compensation
or director's fees during the fiscal years ended February 29, 2000 and February
28, 2001, other than in the form of stock options as set forth in the following
table:
[Download Table]
EXERCISE PRICE PER
DATE OF GRANT/
NAME OF DIRECTOR NO. OF SHARES COMMON SHARE
EXPIRY DATE
---------------- ------------- ------------------
-------------------------
Michael S. Weingarten............ 100,000 $2.07 Oct 26,
1999/Oct 26, 2009
Frederick McLean................. 50,000 $1.00 Oct 14,
1999/Oct 14, 2009
Leonard S. Black................. 50,000 $1.00 Oct 14,
1999/Oct 14, 2009
Michael S. Weingarten............ 400,000 $1.00 Oct 14,
1999/Oct 14, 2009
Gregory C. Burnett............... 50,000 $1.00 Oct 14,
1999/Oct 14, 2009
Donald Lyons..................... 50,000 $1.00 Oct 14,
1999/Oct 14, 2009
Executive Officers
Alberta securities legislation requires disclosure of particulars of
compensation paid to our Executive Officers by us or any of our subsidiaries for
services rendered during the most recently completed financial year. For these
purposes, "Executive Officer" means:
- our chairman and any vice-chairman of our board of directors who performs
the functions of that office on a full-time basis;
- our president or any vice-president in charge of a principal business
unit such as sales, finance or production; or
- any officer of our company or any subsidiary who performs a policy making
function in respect of our company, whether or not that officer is also a
director of our company or such subsidiary.
Similarly, British Columbia securities legislation requires disclosure of
particulars of compensation paid to each following "Named Executive Officer" in
each of the three most recently completed fiscal years:
- our chief executive officer or an individual who acted in a similar
capacity at any time during the most recently completed financial year;
- each of our four most highly compensated executive officers who were
serving as executive officers at the end of the most recently completed
financial year, and whose total salary and bonus exceeds $100,000 per
year; or
- any additional individuals for whom disclosure would have been provided
under the previous bullet point but for the fact that the individual was
not serving as an executive officer of our company at the end of the most
recently completed financial year.
Greg C. Burnett, who has been one of our directors since May 4, 1998,
served as our president from May 4, 1998 to October 15, 1999 when he was
replaced by Leonard Black. Mr. Burnett continues to serve as a director and, as
of October 15, 1999, also serves as our secretary.
As of the most recently completed financial year ended on February 28,
2001, Mr. Black, our president, and Mr. Weingarten, our former chief executive
officer and current chairman of the board, are our only current Named Executive
Officers. Mr. Burnett, our past president, is also a Named Executive Officer
since he served during the financial year in question.
46
Other than as set forth in the tables below, no Executive Officer or Named
Executive Officer was paid or earned compensation from us for performing his or
her duties during the fiscal years ended February 28(29), 1999, 2000 and 2001.
SUMMARY COMPENSATION TABLE
[Download Table]
LONG
TERM COMPENSATION AWARDS
ANNUAL COMPENSATION
-----------------------------------
----------------------------
RESTRICTED ALL
NAME AND FISCAL OTHER
SECURITIES SHARES OR OTHER
PRINCIPAL YEAR COMPEN-
UNDER RESTRICTED LTIP COMPEN-
POSITION ENDED(1) SALARY BONUS SATION
OPTIONS/SARS SHARE UNITS PAYOUT SATION
--------- -------- -------- ----- -------
------------ ----------- ------ -------
$
$
-----
------
Michael S. Weingarten,....... 2001 $168,000 Nil Nil(9)
Nil Nil Nil Nil
Former 2000 70,000(8) Nil Nil(9)
500,000 Nil Nil Nil
CEO(2) 1999 N/A N/A N/A
N/A N/A N/A N/A
Guy P. Jarvis,............... 2001 $ 85,000(11) Nil Nil
500,000 Nil Nil Nil
CEO(3)
Leonard S. Black,............ 2001 $168,000 Nil Nil
Nil Nil Nil Nil
President(4) 2000 $ 70,000(8) Nil Nil
50,000 Nil Nil Nil
1999 N/A N/A N/A
N/A N/A N/A N/A
Greg C. Burnett,............. 2001 Nil Nil Nil(7)
Nil Nil Nil Nil
Former 2000 Nil Nil Nil(7)
50,000 Nil Nil Nil
President(5) 1999 Nil Nil Nil
Nil Nil Nil Nil
Tomas Carlos
Gonzales-Anleo,............ 2001 $165,000 Nil Nil
Nil Nil Nil Nil
COO(6) 2000 $ 69,000(10) Nil Nil
100,000 Nil Nil Nil
1999 N/A N/A N/A
N/A N/A N/A N/A
---------------
(1) Fiscal year ended February 28(29), 1999, 2000 and 2001.
(2) Mr. Weingarten served as our chief executive officer from October 15, 1999
to July 19, 2000.
(3) Mr. Jarvis has been chief executive officer since July 19, 2000.
(4) Mr. Black has been president since October 15, 1999.
(5) Mr. Burnett acted as president from May 4, 1998 to October 15, 1999. Mr.
Burnett has been our secretary since October 15, 1999.
(6) Mr. Gonzales was appointed chief financial officer on October 15, 1999.
(7) Mr. Burnett receives a management fee of $2,500 per month.
(8) Salary is from October 1999 to February 29, 2000, which is $14,000 per
month.
(9) Mr. Weingarten receives $950 per month as automobile benefits.
(10) Salary is from October 1999 to February 29, 2000, which is $13,800 per
month.
(11) Salary is from September 2000 to February 29, 2001, which is $14,166.88 per
month.
There were no bonus or profit sharing plans in place for any director,
Executive Officer or Named Executive Officer during the fiscal years ended
February 29, 2000 and February 28, 2001.
47
Stock Option Information
OPTION/SAR GRANTS DURING THE FISCAL YEARS ENDED
FEBRUARY 29, 2000 AND FEBRUARY 28, 2001
[Download Table]
MARKET VALUE OF
SECURITIES
% OF TOTAL EXERCISE
UNDERLYING
SECURITIES OPTIONS/SARS OR
OPTIONS/SARS
UNDER GRANTED TO BASE ON
THE DATE OF
OPTIONS/SARS EMPLOYEES IN PRICE
GRANT EXPIRATION
NAME GRANTED(#) FINANCIAL YEAR ($/SECURITY)
($/SECURITY) DATE
---- ------------ -------------- ------------
--------------- -----------------
Michael Weingarten, 400,000 37.4% $1.00
$2.18 October 14, 2009
Former CEO.............. 100,000 9.3% $2.07
$2.05 October 26, 2009
Guy Jarvis, CEO........... 500,000 20.9% $3.90
$3.90 August 3, 2005
Leonard Black,
President............... 50,000 4.7% $1.00
$2.18 October 14, 2009
Greg Burnett, Former
President............... 50,000 4.7% $1.00
$2.18 October 14, 2009
Tomas Carlos Gonzales-
Anleo, COO.............. 100,000 9.3% $1.00
$2.18 October 14, 2009
During the fiscal years ended February 29, 2000 and February 28, 2001, no
options were exercised by any Executive Officer or Named Executive Officer, no
options held by any Executive Officer or Named Executive Officer were repriced
downward, and no defined accruing pension or retirement benefit plans were in
place for any Executive Officer or Named Executive Officer.
2000 Stock Option Plan
We received approval of our 2000 Stock Option Plan, effective June 16,
2000, from the Canadian Venture Exchange on July 24, 2000 and our shareholders
at the Annual General Meeting held on August 11, 2000. The 2000 Stock Option
Plan provides for the grant of options to key employees, consultants, directors
and officers to purchase up to an aggregate of 3,400,000 Common Shares. The
terms of the 2000 Stock Option Plan are as follows:
- The plan shall be administered by the Executive Committee of directors
appointed from time to time by our board of directors, or, if no
Executive Committee is appointed, by our president; in either case
subject to approval by the board of directors pursuant to rules of
procedure fixed by the board of directors.
- The number of shares reserved for issuance to any one person pursuant to
options shall not exceed the maximum number of shares permitted under the
rules of any stock exchange on which the Common Shares are then listed or
other regulatory body having jurisdiction, which is presently 5% of our
issued and outstanding share capital.
- The administrator of the plan may determine the time during which any
options may vest and the method of vesting or that no vesting restriction
shall exist.
- The exercise price of an option shall not be lower than the price
permitted by any stock exchange on which the Common Shares are then
listed or other regulatory body having jurisdiction.
- The options shall be for such periods as the administrator may determine,
subject to any limits imposed by any stock exchange on which our shares
are listed.
- Unless otherwise determined by the administrator, an option will
terminate 30 days after an optionee ceases to be a director, officer or
full-time employee or consultant.
48
- In the event of the death of an optionee, the option will only be
exercisable within 12 months of such death but in any event no longer
than ten years from the date of grant.
- The options shall be non-transferrable.
Grants of Stock Options Pursuant to 2000 Stock Option Plan
On August 3, 2000, we granted, subject to shareholder approval which was
later obtained, stock options to certain key employees for the right to purchase
an aggregate of 750,000 Common Shares, exercisable for five years at a price of
$3.90 per share.
On August 18, 2000, we granted stock options to one director to purchase
20,000 Common Shares, exercisable for five years at a price of $3.90 per share.
On August 18, 2000, we granted stock options to five key employees,
officers and directors of our subsidiaries to purchase an aggregate of 1,185,000
Common Shares, exercisable for five years at a price of $3.75 per share. On the
same day, we also granted stock options to 21 key employees of a subsidiary to
purchase an aggregate of 72,600 Common Shares, exercisable for five years at a
price of $3.75 per share.
On October 27, 2000, we granted options to certain employees of our
subsidiaries to purchase an aggregate of 90,000 Common Shares, exercisable for
five years at a price of $3.75 per share.
On November 20, 2000, we granted stock options to four key employees,
officers and directors of our subsidiaries to purchase an aggregate of 90,000
Common Shares, exercisable for five years at a price of $3.75 per share.
A total of 3,400,000 Common Shares have been authorized for issuance under
the terms of the 2000 Stock Option Plan. As of the date of this registration
statement, options to purchase an aggregate of 2,207,600 Common Shares have been
granted, and options to purchase an aggregate of 1,192,400 Common Shares remain
ungranted and reserved for issuance under the 2000 Stock Option Plan.
Grants of Stock Options Outside of 2000 Stock Option Plan
On October 14, 1999, we granted options to ten officers and directors to
purchase an aggregate of 900,000 Common Shares, exercisable for ten years at a
price of $1.00 per share.
On October 26, 1999, we granted options to Michael Weingarten, our Chairman
of the Board, to purchase 100,000 Common Shares, exercisable for ten years at a
price of $2.07 per share.
On November 16, 1999, January 12, 2000 and February 28, 2000, we granted
options to various employees and consultants to purchase an aggregate of 260,000
Common Shares, all exercisable for five years at prices ranging from $2.18 per
share to $3.53 per share.
Accordingly, we have granted options to purchase an aggregate of 1,260,000
Common Shares outside of out 2000 Stock Option Plan. Altogether, we have
outstanding options to purchase a total of 3,467,600 Common Shares, 2,207,600 of
which have been granted pursuant to our 2000 Stock Option Plan, and 1,260,000 of
which have been granted outside of our 2000 Stock Option Plan.
C. BOARD PRACTICES
Our directors listed under Item 6.A were elected at the Annual General
Meeting held on August 11, 2000 and will hold office until the next Annual
General Meeting or until their respective successors are appointed. Our chief
executive officer, Guy P. Jarvis, chief operating officer, Tomas Carlos
Gonzales-Anleo, and chief financial officer, Ricardo Jose Alvarez San Pedro, all
serve at the pleasure of our board.
There are no service contracts between us and any of our directors
providing for benefits upon termination of service.
The sole members of our audit committee are Michael Weingarten, Frederick
McLean and Donald Lyons. We do not have a remuneration committee. The function
of the audit committee is to review and
49
approve the scope of the audit procedures employed by our independent auditors,
to review the results of the auditor's examination, the scope of audits, the
auditor's opinion on the adequacy of internal controls and quality of financial
reporting, and our accounting and reporting principles, policies and practices,
as well as our accounting, financial and operating controls. The audit committee
also reports to our board of directors with respect to such matters and
recommends the selection of independent auditors. The audit committee met once
during the year ended February 28, 2001.
D. EMPLOYEES
The following table sets forth the number of employees in our different
business groups/divisions at the end of fiscal years 1999, 2000 and 2001:
[Download Table]
NUMBER OF NUMBER OF NUMBER OF
EMPLOYEES EMPLOYEES IN EMPLOYEES IN
NUMBER OF IN
OUR OUR OUR
TOTAL EMPLOYEES IN OUR NUMBER OF EMPLOYEES
WIRELESS INTEGRATED COMPUTER
YEAR NUMBER OF CONSUMER IN OUR BUSINESS
PRODUCTS APPLICATIONS PRODUCTS
ENDED EMPLOYEES ELECTRONICS GROUP SUPPLIES DIVISION
DIVISION DIVISION DIVISION
----- --------- ----------------- -------------------
--------- ------------ ------------
2001................. 177* 36 32
19 36 54
2000................. 62 43 15
0 0 0
1999................. 53 36 14
0 0 0
---------------
* The significant changes in the number of employees resulted from our
acquisition of YAM, Desig and MAX.
The following table sets forth the number of employees in the different
geographic regions in which we operate at the end of fiscal year 1999, 2000 and
2001:
[Download Table]
TOTAL NUMBER OF EMPLOYEES
NUMBER OF EMPLOYEES IN
NUMBER OF NUMBER OF IN OTHER LATIN
NUMBER OF EMPLOYEES OTHER GEOGRAPHIC
PERIOD EMPLOYEES EMPLOYEES IN CUBA AMERICA COUNTRIES IN
NORTH AMERICA REGIONS
------ --------- ----------------- -------------------
------------------- ----------------------
2001................. 177 26 10
141 0
2000................. 62 26 10
25 1
1999................. 53 20 9
23 1
There is no relationship between our management and any labor unions. We do
not employ a significant number of temporary employees.
E. SHARE OWNERSHIP
The following table sets forth the number of Common Shares held by each
person listed under Item 6.A. as of February 28, 2001:
[Download Table]
APPROXIMATE
NUMBER OF PERCENTAGE OF
COMMON SHARES TOTAL ISSUED OPTION
EXERCISE
HELD DIRECTLY OR AND OUTSTANDING OPTIONS PRICE
OPTION
NAME AND OFFICE HELD INDIRECTLY COMMON SHARES GRANTED
($/SECURITY) EXPIRATION DATE
-------------------- ---------------- --------------- -------
--------------- ---------------
Gregory Burnett...... 170,300 1.00% 50,000 $
1.00/50,000 10/14/2009
Michael Weingarten... 3,740,000 21.70% 500,000
$2.07/100,000 10/26/2009
$1.00/400,000 10/14/2009
Frederick McLean..... 4,500 0.03% 50,000 $
1.00/50,000 10/14/2009
Donald Lyons......... Nil 0.00% 50,000 $
1.00/50,000 10/14/2009
Leonard Black........ 1,540,000 9.00% 50,000 $
1.00/50,000 10/14/2009
Terry Amisano........ 149,850 0.90% 20,000 $
3.90/20,000 08/18/2005
Guy Jarvis........... 5,000 0.03% 500,000
$3.90/500,000 08/03/2005
Tomas Carlos
Gonzales-Anleo..... Nil 0.00% 100,000
$1.00/100,000 10/14/2009
Ricardo Jose Alvarez
San Pedro.......... Nil 0.00% 25,000 $
1.00/25,000 10/14/2009
---------------
* Less than 1%.
50
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth the names of each shareholder who holds
beneficially 5% or more of Common Shares as of February 28, 2001:
[Download Table]
PERCENTAGE OF
OUTSTANDING
NO. OF COMMON
COMMON
NAME OF SHAREHOLDER SHARES OWNED
SHARES
------------------- -------------
-------------
Michael Weingarten......................................... 3,740,000
21.8%
Delia Rico................................................. 2,032,933
11.8%
Leonard S. Black........................................... 1,540,000
9.0%
Victor Noce................................................ 1,500,000
8.7%
Robert Marcoux............................................. 1,500,000
8.7%
Yossi Vanon................................................ 1,061,176
6.2%
There are 15 shareholders of record resident in Canada, including the
Canadian Depository Service acting on behalf of Canadian brokerage firms, who
hold an aggregate of 17,074,282 Common Shares (98.9%).
To the knowledge of our officers or directors, we are not directly or
indirectly owned or controlled by another corporation or corporations, by any
foreign government or by any other natural or legal person or persons, severally
or jointly.
There are no arrangements known to us which may, at a subsequent date,
result in a change in control.
Significant Changes in Shareholding; Voting Rights of Majority Shareholders
A significant change occurred in the percentage ownership held by our major
shareholders as a result of our consolidation of Common Shares on the basis of
one post-consolidation share for each pre-consolidation share and our
acquisition of 100% of issued and outstanding shares of BSRU on October 15,
1999. The following table sets forth the shareholdings of those persons who
beneficially owned or exercised control over more than 10% of the issued and
outstanding Common Shares immediately prior to the reverse acquisition and after
the completion of the reverse acquisition:
[Download Table]
NUMBER AND PERCENTAGE OF NUMBER
AND PERCENTAGE
COMMON SHARES OWNED OF
COMMON SHARES OWNED
PRIOR TO CONSOLIDATION AFTER THE
CONSOLIDATION,
AND THE REVERSE THE
REVERSE ACQUISITION AND
NAME OF SHAREHOLDER ACQUISITION
ESCROW TRANSFER
------------------- ------------------------
---------------------------
Gregory C. Burnett...................... 668,000(16.3%)
150,300(1.2%)
Terry M. Amisano........................ 666,000(16.2%)
149,850(1.2%)
Kevin R. Hanson......................... 666,000(16.2%)
149,850(1.2%)
Alan G. Crawford........................ 2,000,000(50%)
450,000(3.6%)
Michael S. Weingarten................... Nil
3,740,000(29.0%)
Leonard S. Black........................ Nil
1,540,000(12.0%)
Delia Rico.............................. Nil
2,153,333(17.0%)
The voting rights of our major shareholders do not differ from the voting
rights of holders of the Common Shares who are not major shareholders.
51
B. RELATED PARTY TRANSACTIONS
Except as set forth below, none of the following persons had or is to have
any material interest, direct or indirect, in any transaction or loan during our
last three fiscal years, or during the period between March 1, 2001 and the date
of this registration statement, or any presently proposed transaction to which
we, or any of our subsidiaries, was or is to be a party:
- an enterprise that directly or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control
with us;
- associates, an unconsolidated enterprise in which we have a significant
influence or which has a significant influence over us;
- individuals owning, directly or indirectly, an interest in our voting
power that gives them significant influence over us, such as 10%
shareholders, and close members of such individuals' families;
- key management personnel having authority and responsibility for
planning, directing and controlling our activities, including our
directors and senior management and close members of such individuals'
families; and
- an enterprise in which a substantial interest in the voting power is
owned, directly or indirectly, by any person described in the 3rd or 4th
bullet points above or over which such a person is able to exercise
significant influence.
On October 14, 1999, Michael Weingarten acquired 3,640,000 Common Shares
pursuant to the acceptance of the reverse acquisition with BSRU. In conjunction
with the closing of the reverse acquisition, Mr. Weingarten also acquired
100,000 escrowed Common Shares.
On October 14, 1999, Delia Rico acquired 1,820,000 Common Shares pursuant
to the acceptance of the reverse acquisition. In conjunction with the closing of
the reverse acquisition, Ms. Rico also acquired 333,333 escrowed Common Shares.
On October 14, 1999, Leonard Black acquired 1,540,000 Common Shares
pursuant to the acceptance of the reverse acquisition.
During the quarter ended November 30, 1999, we paid Gregory Burnett the sum
of $13,800 in respect of consulting fees and administrative expenses and Leonard
Black the sum of $78,000 in respect of management fees and benefits.
In December of 1999, Michael Weingarten provided a $500,000 non-interest
bearing loan, repayable on demand any time on or after 30 days from advancement
of funds. In consideration for the loan, we agreed to pay Mr. Weingarten a fee
of $10,000 and issue 50,000 Common Share Purchase Warrants having a term of one
year, and entitling the holder to purchase 50,000 Common Shares at $2.21 per
share. The loan was applied to bridge a working capital shortfall related to
advance payments on component orders.
During the period from October 1999 to February 2000, we paid Gregory
Burnett the sum of $15,000 in respect of consulting fees, Leonard Black the sum
of $70,000 in respect of management fees, and Michael Weingarten the sum of
$70,000 in respect of management fees. In addition, subsidiary companies paid
directors of those companies fees totaling $27,500 during October 1999 to
February 2000.
Outstanding advances from Michael Weingarten, a principal shareholder and
director, and a company under common control with Mr. Weingarten totaled
$475,630 at February 28, 2001, compared to $298,951 and $509,341 owed to such
parties at February 29, 2000 and February 28,1999, respectively. Mr. Weingarten
also personally guaranteed $300,000 of our term loan, which was at $159,079 as
of February 28, 2001.
We carried $131,000 in accounts receivable at year end due from private
companies under common control arising from sales made in the normal course of
operations and accounted for at normal trade terms.
During the period from March 2000 to May 2000, we made aggregate
expenditures of $129,260 to parties not at arm's length. We paid Gregory Burnett
$7,500 in consulting fees. We also paid Leonard Black and
52
Michael Weingarten management fees of $42,500 each. In addition, subsidiary
companies paid directors of those companies fees totaling $36,760 during the
three months ended May 31, 2000.
Victor Noce, a significant shareholder, beneficially owns Complexe Pitfield
Inc., the lessor of the property in Montreal, Quebec disclosed in Items 4.D. and
10.C.
In May 2000, we received a bridge loan in the amount of $2.5 million from
Frederick McLean, one of our directors. The loan formed a part of the $6.5
million in bridge loans due April 2002 discussed in "-- Liquidity and Capital
Resources" and carried the same terms as all other investors in the syndicate.
C. INTERESTS OF EXPERTS AND COUNSEL
Not Applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See pages F-1 through F-86.
B. SIGNIFICANT CHANGES
Effective April 1, 2000, we acquired a 100% interest in YAM International
Communications Inc., a Florida based cellular/wireless communication company. We
issued 1.247 million Common Shares from treasury, at a fair value of $3.75 per
share, and U.S. $3.3 million in cash as consideration for 100% of the issued and
outstanding shares of YAM, to its two owners Yossi Vanon and Shani Sasson.
Effective May 1, 2000, we acquired a 100% interest in La Societe Desig
Inc., a Montreal based software developer and information technology company
focused on the hospitality sector. We issued a total of 3.1 million Common
Shares from treasury at a fair value of $3.75 per share in consideration for
100% of the issued and outstanding shares of Desig to its owners Victor Noce,
Robert Marcoux, Bertram Bolduc and certain members of their families.
Effective December 1, 2000, we acquired 100% of MAX Systems Group Inc., or
MAX. Based in Calgary, Canada, MAX is a provider of notebook computers, computer
components and MIS solutions throughout Canada and the United States. We
acquired MAX for a purchase price equal to 2.5 times MAX's audited pre-tax
profit for the 12 months ending February 28, 2002. The minimum purchase price is
$750,000. We agreed to pay the purchase price to complete the acquisition in
cash and Common Shares. Specifically, we will pay a minimum of $750,000 in cash,
with the balance to be paid in Common Shares at $4.25 per share. Accordingly, we
escrowed 1.6 million Common Shares in order to provide for the stock component
of the purchase price and issued a promissory note to the MAX stockholders
evidencing our obligation to pay the $750,000 for the cash component of the
purchase price. The cash portion of the purchase price is payable following the
completion of the MAX audit for the 12 month period ending February 28, 2002.
Payment of the $750,000 cash portion of the purchase price will retire the
outstanding note payable.
However, if MAX does not have a minimum pre-tax profit of CDN $1 million
for the 12 month period ending February 28, 2002, then the acquisition agreement
will automatically terminate unless the parties mutually agree to continue the
transaction. During the three months ended May 31, 2001, which is the first
three months of the 12-month measurement period referenced above, MAX had
pre-tax operating income of approximately $85,000 before inter-corporate expense
allocations. Despite these results, and in light of positive discussions and
meetings with MAX's major suppliers, major customers, banker and senior
management, we believe that the $1.0 million targeted pre-tax amount will be
achieved.
Effective July 1, 2001, we acquired a 100% interest in Mississauga,
Ontario-based Tri-Vu Interactive Corporation, or Tri-Vu. Tri-Vu develops,
implements and services customized interactive entertainment and information
television-based content and Internet services to the global four/five star
hospitality industry. We agreed to purchase Tri-Vu for a purchase price equal to
4.5 times Tri-Vu's net income for the 12 months
53
ending May 31, 2002. The entire purchase price shall be paid in our Common
Shares, at $3.74 per share, on or before August 31, 2002.
However, if Tri-Vu does not have a minimum pre-tax profit of CDN $458,500
for the period ending May 31, 2002, then we may terminate the acquisition
agreement and unwind the transaction. If Tri-Vu's pre-tax profit for the twelve
month period ending May 31, 2002 is less than the minimum pre-tax requirement,
Tri-Vu is afforded a three month extension in which to achieve the forecast and,
if the minimum threshold is not met during the entire 15 month period, then we
may elect to put the Tri-Vu shares back to the sellers, in which case all the
Common Shares held in escrow shall be surrendered to us for cancellation. If we
elect to consummate the transaction notwithstanding the fact that the minimum
pre-tax profit forecast target had not been met, we would multiply the actual
pre-tax profit by 4.5 and settle the transaction.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
Price History
We first filed an initial public offering with the Alberta Securities
Commission in September of 1998 and our Common Shares were listed for trading on
the Alberta Stock Exchange as a junior capital pool company on November 11,
1998, under the symbol "BAL." On June 7, 1999, trading of our Common Shares on
the Alberta Stock Exchange was halted because our reverse acquisition of 100% of
BSRU was determined to be a "foreign transaction" and not a "major transaction."
We subsequently elected to delist our Common Shares from the Alberta Stock
Exchange and applied to the Vancouver Stock Exchange for listing of our Common
Shares. On October 15, 1999, the effective date of our revised acquisition of
BSRU and 3 for 1 share consolidation, our Common Shares commenced trading on the
Vancouver Stock Exchange as an advanced company under the trading symbol of
"CCZ." The last closing price of Common Shares on the Alberta Stock Exchange was
$0.64 per share (or $1.92 per share after the 3:1 share consolidation).
The average daily trading volume and the high and low market prices for our
Common Shares on the Canadian Venture Exchange (formed by the merger of the
Alberta Stock Exchange and the Vancouver Stock Exchange) (the "CDNX") for each
fiscal quarter period from its initial listing on October 15, 1999, were as
follows:
PRICE HISTORY FOR "CCZ" ON CDNX
[Download Table]
AVERAGE
DAILY
FISCAL QUARTER ENDED/PERIOD HIGH LOW TRADING
VOLUME
--------------------------- ----- -----
--------------
October 15, 1999 to November 30, 1999.............. $2.42(1) $1.95
12,233
February 29, 2000.................................. $3.81 $2.03
11,857
May 31, 2000....................................... $6.00 $3.25
17,716
August 31, 2000.................................... $4.88 $3.80
12,321
November 30, 2000.................................. $4.80 $3.85
11,911
February 28, 2001.................................. $4.30 $4.20
6,888
---------------
(1) Prior to the completion of our reverse acquisition to acquire 100% of issued
and outstanding securities of 1058199 Ontario Inc., we effected a
consolidation of our Common Shares on the basis of three pre-consolidated
Common Shares for each post-consolidated Common Share.
54
The average daily trading volume and the high and low market prices for
each of the most recent six months (November 2000 through April 2001) on the
CDNX were as follows:
[Download Table]
AVERAGE
DAILY
MONTH ENDED HIGH LOW TRADING
VOLUME
----------- ----- -----
--------------
November 30, 2000.................................. $4.64 $3.85
10,692
December 31, 2000.................................. $4.40 $3.90
6,685
January 31, 2001................................... $4.14 $4.00
5,850
February 28, 2001.................................. $4.30 $4.20
8,223
March 31, 2001..................................... $4.24 $4.00
7,992
April 30, 2001..................................... $4.15 $3.80
18,366
There is no established trading market in the United States for our Common
Shares.
Type and Class of Securities
Our Common Shares, without par value, are being registered under the
Securities Exchange Act of 1934, as amended, pursuant to this registration
statement. We are authorized to issue an unlimited number of Common Shares and
intend to apply for listing of our Common Shares on the American Stock Exchange
under the symbol "CCCZ."
Transfer and Transferability
There are no restrictions on the transferability of our Common Shares. The
transfer of our Common Shares is managed by our transfer agent, CIBC Mellon
Trust Company, 1066 Hastings Street, Vancouver, British Columbia V6C 3K9
(Telephone: (604) 688-4330; Facsimile: (604) 688-4301).
B. PLAN OF DISTRIBUTION
Not Applicable.
C. MARKETS
Our Common Shares trade on the Canadian Venture Exchange under the symbol
of "CCZ" and the CUSIP number is 20162E 101. Our Common Shares also trade on the
Frankfurt Stock Exchange under the symbol of "CJ9" and the WKN number is 929222.
Trading in our Common Shares was halted on March 29, 2000 in accordance with the
policies of the CDNX pending clarification as to whether our proposed
acquisition of Desig and YAM constituted a "change of business" as defined under
the policies of the CDNX. Trading in our Common Shares resumed March 31, 2000
upon the CDNX's satisfaction that such acquisitions did not constitute a change
of business. Trading in our Common Shares was again halted on June 7, 2000 in
accordance with the policies of the CDNX pending our announcement on the closing
of the acquisition of Desig. Trading resumed later on June 7, 2000 following
dissemination of a news release detailing the closing.
D. SELLING SHAREHOLDERS
Not Applicable.
E. DILUTION
Not Applicable.
F. EXPENSES OF THE ISSUE
Not Applicable.
55
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Our authorized capital consists of:
- an unlimited number of non-cumulative, non-voting, redeemable,
retractable and non-participating Class A preference shares, without par
value, of which no shares have ever been issued or outstanding;
- an unlimited number of Common Shares, without par value, of which
12,601,666 and 17,263,034 shares were issued and outstanding as of March
1, 2000 and February 28, 2001, respectively; and
- and unlimited number of non-voting special shares, without par value, of
which no shares have ever been issued or outstanding.
All of our Common shares are fully paid. At February 28, 2001, the
paid-in-amount of our Common Shares equalled $20,176,075.
Authorized But Unissued Common Shares
As of April 30, 2001, the following securities to acquire Common Shares
were outstanding:
[Download Table]
AMOUNT OF COMMON
SHARES UNDERLYING
TYPE OF SECURITY THE SECURITY EXERCISE PRICE
EXPIRATION DATE
---------------- ----------------- --------------
------------------
Warrants(1).......................... 1,450,250 $2.00
October 8, 2001
Warrants attached to loans(2)(5)..... 50,000 $4.00
April 30, 2002
Warrants attached to loans(2)(5)..... 83,334 $4.00
April 30, 2002
Warrants attached to loans(2)(5)..... 50,000 $4.00
March 19, 2002
Warrants attached to
loans(2)(3)(6)..................... 66,666 $4.00
March 28, 2003
Warrants attached to loans(2)........ 50,000 $4.25
September 30, 2001
Warrants attached to loans(2)........ 50,000 $4.00
December 20, 2001
Warrants attached to loans(2)........ 50,000 $4.00
February 15, 2002
Warrants attached to loans(2)(6)..... 50,000 $4.00
April 14, 2002
Warrants attached to loans(2)........ 33,333 $4.25
September 13, 2002
Warrants attached to loans(2)(6)..... 55,000 $4.00
April 30, 2003
Options(4)........................... 900,000 $1.00
October 14, 2009
Options(4)........................... 40,000 $2.18
November 16, 2004
Options(4)........................... 100,000 $2.07
October 26, 2009
Options(4)........................... 30,000 $2.25
January 12, 2005
Options(4)........................... 150,000 $3.53
February 28, 2005
Options(4)........................... 40,000 $3.53
March 18, 2005
Options(4)........................... 750,000 $3.90
August 3, 2005
Options(4)........................... 20,000 $3.90
August 18, 2005
Options(4)........................... 1,257,600 $3.75
August 18, 2005
Options(4)........................... 90,000 $3.75
October 27, 2005
Options(4)........................... 90,000 $3.75
November 20, 2005
---------------
(1) As the result of a private placement during the year ended February 29,
2000, an aggregate of 3,335,000 Common Share Purchase Warrants were attached
to the Common Shares issued pursuant to the private placement. For every two
warrants held, the owner is entitled to purchase one Common Share at an
exercise price of $2.00 per share. During the year ended February 28, 2000,
434,500 warrants were exercised, resulting in the purchase of 217,250 Common
Shares at $2.00 per share. Accordingly, 2,900,500 warrants, representing
1,450,250 Common Shares, remain outstanding as of April 30, 2001.
(2) For every warrant held, the owner is entitled to purchase one Common Share.
56
(3) Immediately exercisable as to 33,333 Common Shares, and exercisable as to
the remaining 33,333 Common Shares at such time as the holder foregoes its
right to have the loan, pursuant to which the warrants were issued, paid out
as of September 13, 2001.
(4) Options granted to employees generally vest pro-rata over a period of three
years based on our annual performance.
(5)Warrants issued after February 28, 2001, which replaced 216,667 expired
warrants entitling the holders to acquire one Common Share per warrant at
$4.60 per share.
(6)Warrants issued after February 28, 2001.
History of Share Capital
The following table is a history of our share capital for a three year
period commencing March 1, 1998 and ending February 28, 2001:
[Download Table]
NUMBER
OF COMMON
TOTAL NUMBER OF
DATE OF ISSUANCE SHARES ISSUED PRICE OF SECURITIES
SHARES OUTSTANDING
---------------- ------------- -------------------
------------------
Balance February 28, 1998................. 300 --
300
Balance February 28, 1999................. 300 --
300
May 7, 1999 (share split)................. 6,999,700 --
7,000,000
Proceeds from Private Placement........... 3,335,000 $0.88
10,335,000
Issued on Takeover of Balmoral............ 2,033,333 $0.35
12,368,333
Exercise of options (11/30/99)............ 233,333 $0.30
12,601,666
Balance February 29, 2000................. -- --
12,601,666
Acquisition of YAM (April 1, 2000)........ 1,294,118 $3.71
13,895,784
Acquisition of Desig (May 1, 2000)........ 3,100,000 $3.75
16,995,784
Exercise of Warrants...................... 217,250 $2.00
17,213,034
Exercise of Options....................... 50,000 $1.00
17,263,034
Comity Between Judgments of U.S. and Canadian Courts
Generally, a judgment against us which was obtained in a U.S. court can be
directly enforced against us in Canada if the U.S. state in which the U.S. court
is situated is recognized in the Reciprocal Enforcement of Judgments legislation
of the applicable Canadian province. If the state is not so recognized, a
judgment from a U.S. court would be enforced in Canada through a separate
original action for the amount of the judgment.
A U.S. investor may bring an original action, based on U.S. law, against
us, an affiliate or any named expert in the registration statement in the courts
of a Canadian province if there is a reasonable causal connection between the
action and the particular Canadian province.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
On May 4, 1998, our Articles of Incorporation were registered with the
Alberta Registries and we were assigned Corporate Access Number 207810987. The
Articles were subsequently amended and restated effective September 17, 1998,
August 26, 1999 and October 13, 1999. The Articles do not contain any
restriction on our objects and purposes.
As a corporation formed under the laws of Alberta, Canada, we are subject
to the rules and regulations of the Alberta Business Corporation Act (ABCA).
Provisions Relating to Directors and Officers
Duties of Directors and Officers
When exercising powers and discharging duties, Section 117 of the ABCA
requires that such officer or director act honestly, in good faith and in the
best interests of the corporation. Such section of the ABCA also
57
requires that the officer or director exercise the care, diligence and skill
that a reasonable prudent person would exercise in comparable circumstances.
Voting and Related Matters
Section 7 of our Bylaws governs a director's and officer's power to vote on
a proposal, arrangement or contract in which the director is materially
interested. Section 7 of the Bylaws provides as follows:
(1) Disclosure of Interest. A director or officer who (i) is a party
to a material contract or proposed material contract with us; or (ii) is a
director or an officer of, or has a material interest in, any person who is
a party to a material contract with us, must disclose in writing to us, or
request to have entered in the minutes of meetings of our board, the nature
and extent of the director's or officer's interest.
(2) Approval and Voting. A director or officer must disclose in
writing to us, or request to have entered in the minutes of meetings of our
board, the nature and extent of the director's or officer's interest in a
material contract or proposed material contract if the contract is one that
in the ordinary course of our business would not require approval by our
board or shareholders. The disclosure must be made immediately after the
director or officer becomes aware of the contract of proposed contract. A
director who is required to disclose an interest in a material contract or
proposed material contract may not vote on any resolution to approve the
contract unless the contract is:
- an arrangement by way of security for money lent to or obligations
undertaken by the director, or by a body corporate in which the
director has an interest, for the benefit of our company or an
affiliate;
- a contract relating primarily to the director's remuneration as a
director or officer, employee or agent of our company or as a
director, officer, employee or agent of an affiliate;
- a contract for indemnity or insurance under the ABCA; or
- a contract with an affiliate.
(3) Effect of Conflict of Interest. If a material contract is made
between us and a director or officer, or between us and another person of
which a director or officer is a director or officer or in which the
director or officer has a material interest:
- the contract is neither void nor voidable by reason only of that
relationship, or by reason only that a director with an interest in
the contract is present at or is counted to determine that authorized
the contract;
- a director or officer who is a party to such contract may be present
at a meeting of our board or committee of our board for the purpose of
constituting a quorum of directors at such meeting, but may not vote
in connection with any matter relating to the approval of such
contract;
if the director or officer disclosed the director's or officer's interest
in the contract in the manner prescribed by the ABCA and the contract was
approved by our board or shareholders and was reasonable and fair to us at
the time it was approved.
Section 3(1) of our Bylaws generally provides that our board may, without
authorization from the shareholders:
- borrow money on our credit;
- issue, reissue, sell or pledge our debt obligations;
- give a guarantee on our behalf to secure performance of an obligation of
any person; and
- mortgage, hypothecate, pledge or otherwise create a security interest in
all or any of our property to secure any of our obligations.
58
Compensation of Directors
There is no provision in our Articles or Bylaws with respect to the
directors' power, in the absence of an independent quorum, to vote compensation
to themselves or any members of their body. Section 4(12) of our Bylaws
generally provides that the directors are entitled to receive remuneration for
their services in the amount our board determines. It also stipulates that the
directors must disclose to our shareholders the aggregate remuneration paid to
the directors in a written statement to be placed before our shareholders at
every annual meeting of shareholders.
Liability and Indemnification
Under Canadian law, directors and officers may be held liable for monetary
damages if found to be in breach of their fiduciary duties, subject to a right
of indemnification in certain circumstances as provided for in Section 8 of our
Bylaws.
General
There is no provision in our Articles or Bylaws with respect to retirement
or non-retirement of directors under an age limit requirement, nor is there any
provision with respect to number of shares required for directors'
qualification.
With respect to the above noted matters, there are generally no significant
differences between Canadian and U.S. law.
Provisions Relating to Rights, Preference and Restrictions Attached to Each
Class of the Company's Shares
Our Common Shares have the following rights, privileges, restrictions and
conditions:
- Except for meetings at which only holders of another specified class or
series of our shares are entitled to vote separately as a class or
series, each holder of a Common Share is entitled to receive notice of,
to attend and to vote at all meetings of our shareholders.
- Subject to the rights, privileges, restrictions and conditions attached
to any other class of our shares, the holders of the Common Shares are
entitled to receive dividends if, as and when declared by our board.
- Subject to the rights, privileges, restrictions and conditions attached
to any other class of our shares, the holders of the Common Shares are
entitled to share equally in our remaining property upon liquidation,
dissolution or winding-up of our company.
Our Preferred Shares have the following rights, privileges, restrictions
and conditions:
- The Preferred Shares may from time to time be issued in one or more
series and, subject to the following provisions, and subject to the
sending of articles of amendment in prescribed form and the issuance of a
certificate of amendment in respect thereof, the directors may fix from
time to time and before issue of a series of Preferred Shares, the number
of shares which are to comprise that series and the designation, rights,
privileges, restrictions and conditions to be attached to that series of
Preferred Shares including, without limiting the generality of the
foregoing, the rate or amount of dividends or the method of calculating
dividends, the dates of payment of dividends, the redemption, purchase
and/or conversion prices and terms and conditions of redemption, purchase
and/or conversion, and any sinking fund or other provisions.
- The Preferred Shares of each series shall, with respect to the payment of
dividends and the distribution of assets or return of capital in the
event of our liquidation, dissolution or winding-up, whether voluntary or
involuntary, or any other return of capital or distribution of the assets
among our shareholders for the purpose of winding up its affairs, rank on
a parity with the Preferred Shares of every other series and be entitled
to preference over the Common Shares and over any other shares ranking
junior to the Preferred Shares. The Preferred Shares of any series may
also be given other
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preferences, not inconsistent with our Articles, over the Common Shares
and any other shares ranking junior to the Preferred Shares of a series
as may be fixed in accordance with the first bullet point immediately
above.
- If any cumulative dividends or amounts payable on the return of capital
in respect of a series of Preferred Shares are not paid in full, all
series of Preferred Shares shall participate ratably in respect of
accumulated dividends and return of capital.
- Unless the directors otherwise determine in the articles of amendment
designating a series of Preferred Shares, the holder of each share of a
series of Preferred Shares shall not, as such, be entitled to receive
notice of or vote at any meeting of shareholders, except as otherwise
specifically provided in the ABCA.
With respect to the rights, preferences and restrictions attaching to each
class of shares, there are generally no significant differences between Canadian
and U.S. law as the board of directors, or the applicable corporate statute,
will determine the rights, preferences and restrictions attaching to each class
of a company's shares.
Provisions Relating to Changes to the Rights of Shareholders
Provisions as to the modification, amendment or variation of the rights
attaching to our Common Shares are contained in the ABCA. The ABCA requires
adoption by a special resolution approved by at least two-thirds of the votes
cast at a meeting of our shareholders, or consented to in writing by each of our
shareholders, in order to effect any of the following changes:
- change the designation of all or any of our shares, or add, change or
remove any rights, privileges, restrictions and conditions, including
rights to accrued dividends, in respect of all or any of our shares,
whether issued or unissued;
- change the shares of any class or series, whether issued or unissued,
into a different number of shares of the same class or series or into the
same or a different number of shares of other classes or series;
- divide a class of shares, whether issued or unissued, into series and fix
the number of shares in each series and the rights, privileges,
restrictions and conditions of that series;
- authorize our directors to divide any class of unissued shares into
series and fix the number of shares in each series and the rights,
privileges, restrictions and conditions of that series;
- authorize our directors to change the rights, privileges, restrictions
and conditions attached to unissued shares of any series; or
- add, change or remove restrictions on the transfer of shares.
Generally, there are no significant differences between Canadian and U.S.
law with respect to changing the rights of shareholders as most state
corporation statutes require shareholder approval (usually a majority) for any
such changes that affect the rights of shareholders.
Provisions Relating to Annual General Meetings and Extraordinary General
Meetings
An Annual General Meeting, AGM, must be held once every financial year,
within 15 months of the previous AGM. If we fail to hold an AGM, the Court of
Queen's Bench of Alberta may, on the application of one or more of our
shareholders, call or direct an AGM. Under the ABCA, we must give our
shareholders written notice of an AGM not less than 21 days and not more than 50
days before the AGM is to be held.
Our directors may, whenever they deem appropriate, convene an Extraordinary
General Meeting, EGM. An EGM may also be requisitioned by one or more of our
shareholders so long as such shareholders own not less than 5% of the issued and
outstanding shares at the date such shareholders requisition an EGM. After
receiving such requisition, our directors must immediately give notice of the
EGM which must be held within four months after the date of the delivery of the
requisition to us.
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All of our shareholders entitled to attend and vote at an AGM or an EGM
will be admitted to the meeting.
Most state corporation statutes require a public company to hold an AGM for
the election of directors and for the consideration of other appropriate
matters. The state statutes also include general provisions relating to
shareholder votings and meetings. Apart from the timing of when an AGM must be
held and the percentage of shareholders required to call a AGM or EGM, there are
generally no material differences between Canadian and U.S. law respecting AGMs
and EGMs.
Provisions Relating to Rights to Own Securities
There are no limitations imposed by our Articles or Bylaws on the rights of
non-resident or foreign shareholders to hold or exercise voting rights.
Except as provided in the Investment Canada Act, ICA, there are no
limitations under the applicable laws of Canada or by our charter or other
constituent documents on the right of foreigners to hold or vote our Common
Shares or other securities.
The ICA will prohibit implementation, or, if necessary, require divestiture
of an investment deemed "reviewable" under the ICA by an investor that is not a
"Canadian" as defined in the ICA (a "non-Canadian"), unless after review the
Minister responsible for the ICA (the "Minister") is satisfied that the
"reviewable" investment is likely to be of net benefit to Canada. An investment
in our Common Shares by a non-Canadian would be reviewable under the ICA if it
was an investment to acquire control of us and the value of our assets was $5
million or more. A non-Canadian would be deemed to acquire control of us for the
purposes of the ICA if the non-Canadian acquired a majority of our outstanding
Common Shares (or less than a majority but controlled us in fact through the
ownership of one-third or more of our outstanding Common Shares) unless it could
be established that, on the acquisition, we were not controlled in fact by the
acquirer through the ownership of such Common Shares. Certain transactions in
relation to our Common Shares would be exempt from review under the ICA,
including, among others, the following:
- acquisition of Common Shares by a person in the ordinary course of that
person's business as a trader or dealer in securities;
- acquisition of control of us in connection with the realization of
security granted for a loan or other financial assistance and not for any
purpose related to the provisions of the ICA; and
- acquisition of control of us by reason of an amalgamation, merger,
consolidation or corporate reorganization following which the ultimate
direct or indirect control of us, through the ownership of voting
interests, remains unchanged.
The ICA was amended with the World Trade Organization Agreement to provide
for special review thresholds for "WTO Investors" of countries belonging to the
World Trade Organization, among others, nationals and permanent residents,
including "WTO Investor controlled entities" as defined in the ICA. Under the
ICA, as amended, an investment in our Common Shares by WTO Investors would be
reviewable only if it was an investment to acquire control of us and the value
of our assets was equal to or greater than a specified amount (the "Review
Threshold"), which is published by the Minister after its determination for any
particular year. The Review Threshold is currently $209 million for the year
2001.
Change in Control
There are no provisions in our Articles that would have the effect of
delaying, deferring or preventing a change in control of us, and that would
operate only with respect to a merger, acquisition or corporate restructuring
involving us.
Generally, there are no significant differences between Canadian and U.S.
law in this regard, as many state corporation statutes also do not contain such
provisions and only empower our board of directors to adopt such provisions.
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Ownership Threshold
There are no provisions in our Articles or Bylaws or in the ABCA governing
the threshold above which shareholder ownership must be disclosed. The
Securities Act (British Columbia) requires that we disclose, in our AGM proxy
statement, holders who beneficially own more than 10% of our issued and
outstanding shares. Most state corporation statutes do not contain provisions
governing the threshold above which shareholder ownership must be disclosed.
United States federal securities laws require us to disclose, in our Annual
Report on Form 20-F, holders who own more than 5% of our issued and outstanding
shares.
Changes in our Capital
There are no conditions imposed by our Articles which are more stringent
than those required by the ABCA.
C. MATERIAL CONTRACTS
The following are the material contracts which we, or our subsidiaries,
have entered into during the two years preceding the date hereof:
- Memorandum of Agreement, dated July 31, 2000, among MFI Export Finance
Inc., Commercial Consolidators Corp., Business Supplies Are Us Inc., ACC
Corp. and Mirage Trading Corp., for a revolving credit facility of US
$3.3 million to assist with financing of accounts receivable.
- General Security Agreement, dated July 31, 2000, in favor of MFI Export
Finance Inc.
- Agreement between ACC Corp. (i.e. Mirage) and Uimtex/Tecnotex, dated
April, 1999, regarding building and sale of television assembly plant to
be operated by S.J. Electronica.
- Agreement and Plan of Merger between Commercial Consolidators Corp. and
CCC Acquisition Inc., a Florida company, and YAM International
Communications Inc., dated March 28, 2000, to acquire 100% of Yam
International Communications Inc.
- Employment contracts, dated July 31, 2000, with Messrs. Vanon and Sasson
whereby we will pay them a total of U.S. $250,000 per year in fees and
issue an aggregate of 450,000 stock options (with 150,000 vesting per
year) at $3.75 per share, subject to YAM attaining mutually agreed upon
financial performance targets.
- Share Purchase Agreement between Commercial Consolidators Corp., La
Societe Desig Inc., Groupe de Gestion Marcoux Inc., and Gestion Clauvic
Inc. et al, to acquire a 100% interest in La Societe Desig Inc., dated
June 17, 2000.
- Employment contracts, dated July 5, 2000, with Messrs. Noce, Marcoux,
Bolduc and other key employees.
- Bridge Loan With Warrants Agreement between Forum Interamerican Corp., a
Panamanian company, and Mirage Impex Inc. (name was subsequently changed
to Commercial Consolidators Corp., a Panamanian company) and Commercial
Consolidators Corp., dated September 7, 2000, for $2.2 million (U.S. $1.4
million) with term of up to six months, bearing interest at 20% per
annum, with 33,333 warrants attached. This loan was amended on March 13,
2001, which amendment extended the term of the loan for an additional
twelve months, pursuant to which am additional 33,333 warrants were
issued. The loan is secured by a General Security Agreement dated
September 7, 2000.
- Bridge Loan With Warrants Agreement between Trident Plus Inc., a company
incorporated under the laws of Belize, Commercial Consolidators
Corp.(Panama), and Commercial Consolidators Corp., dated December 15,
2000, for $1.5 million (U.S. $975,000) with a term of up to one year
bearing interest at 20% per annum, with 50,000 warrants attached. The
loan is secured by a General Security Agreement dated December 15, 2000.
This loan was retired on May 1, 2001 and the warrants have expired.
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- Bridge Loan With Warrants Agreement between Dr. Abraham Gotman and
Commercial Consolidators Corp., dated May 1, 2000, for $1.54 million
(U.S. $1.0 million), bearing interest at 20% per annum, with 50,000
warrants attached. The loan was retired on January 15, 2001 and the
warrants have expired. The loan was secured by a General Security
Agreement dated October 2, 2000.
- Bridge Loan With Warrants Agreement between Dr. Abraham Gotman and
Commercial Consolidators Corp., dated March 20, 2001, for $1.54 million
(U.S. $1.0 million), bearing interest at 20% per annum, with 50,000
warrants attached. The loan was secured by a General Security Agreement
dated October 2, 2000.
- Bridge Loan With Warrants Agreement between Dr. Abraham Gotman and
Commercial Consolidators Corp., dated April 5, 2001, for $1.54 million
(U.S. $1.0 million), bearing interest at 20% per annum, with 50,000
warrants attached. The loan was secured by a General Security Agreement
dated October 2, 2000.
- Bridge Loan With Warrants Agreement between Grupo Carrera SA, Commercial
Consolidators Corp. (Panama), and Commercial Consolidators Corp., dated
September 20, 2000, for $1.5 million (U.S. $975,000) with a term of up to
one year, bearing interest at 20% per annum, with 50,000 warrants
attached. The loan is secured by a General Security Agreement dated
September 20, 2000. This loan was retired on December 20, 2000.
- Bridge Loan With Warrants Agreement between 1220356 Ontario Limited and
Commercial Consolidators Corp., dated January 15, 2001, for $1.64 million
(U.S. $1.0 million) with a term of up to one year, bearing interest at
20% per annum, with 50,000 warrants attached. The loan is secured by a
General Security Agreement dated January 15, 2001.
- Bridge Loan With Warrants Agreement between Frederick McLean, a Director,
and Commercial Consolidators Corp., dated May 15, 2000, for $2.5 million
(U.S. $1.6 million) with a term of up to one year, bearing interest at
20% per annum, with 83,334 warrants attached. The loan is secured by a
General Security Agreement dated May 15, 2000. This loan was amended on
April 27, 2001, which amendment extended the maturity date to May 15,
2002.
- Bridge Loan With Warrants Agreement between JCI Timely Services Inc., and
Commercial Consolidators Corp., dated May 15, 2000, for $1.54 million
(U.S. $1.0 million) with a term of up to one year, bearing interest at
20% per annum, with 50,000 warrants attached. The loan is secured by a
General Security Agreement dated May 15, 2000. This loan was amended on
April 27, 2001, which amendment extended the maturity date to May 15,
2002.
- Bridge Loan With Warrants Agreement between Dunross Capital Ltd., a Hong
Kong company, and Commercial Consolidators Corp., dated April 20, 2001,
for $1.7 million (U.S. $1.1 million) with a term of up to one year,
bearing interest at 20% per annum, with 55,000 warrants attached. The
loan is secured by a General Security Agreement dated April 20, 2001.
- Lease Agreement with The Great West Life Assurance Company, dated August
1, 1999, for the premises at 5255 Yonge Street, Toronto, Ontario, Canada
for approximately 4477 square feet, for a five year term, for minimum
annual rentals of $55,515 for years one and two and $67,155 for years
three to five, plus taxes, maintenance fees and insurance.
- Lease Agreement between Jolex Holdings Ltd. (landlord) and Business
Supplies Are Us Inc. (tenant) and Commercial Consolidators Corp.
(indemnifier) for the premises at 39 Rivaldi Road, Toronto, Ontario,
Canada, dated January 15, 2001, for approximately 19,306 square feet, for
a five year term, for minimum annual rentals of $106,183 for years one to
three and $115,836 for years four and five, plus taxes, maintenance fees
and insurance.
- Lease Agreement between O&B Properties, Inc. and Yam International
Communications, Inc., dated May 26, 2000, for the premises at 3061 N.W.
107th Avenue, Miami, Florida, for approximately 8186 square feet, for a
three year term with a three year renewal term, for $59,349 in year one,
$61,722 in year two and $64,191 in year three, plus taxes, maintenance
and insurance.
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- Lease Agreement between Complexe Pitfield Inc. and La Societe Desig Inc.,
dated October 1, 1999, for the premises at 9300 Henri Bourassa Ouest,
Suite 280, Ville St-Laurent, Quebec, for approximately 4,998 square feet,
for a five year term, for $37,481 per annum plus $1.38 per square foot
per month for operating expenses including insurance, maintenance and
taxes.
- Lease Agreement between Parkway Properties LP, a Delaware limited
partnership, and Central Point Technologies, Inc., for the premises at
700 West Hillsboro Blvd., Deerfield Beech, Florida, for approximately
1,546 square feet, for a five year term, for annual rent of $17,007 in
year one, $17,686 in year two, $18,397 in year three, $19,124 in year
four, $19,897 in year five, plus taxes, maintenance and insurance.
- Share Purchase Agreement between Commercial Consolidators Corp. and Max
Systems Group Inc., dated November 28, 2000, to purchase all of the
capital of Max Systems Group Inc. and its U.S. subsidiary, Max USA Inc.
The Share Purchase Agreement was amended pursuant to that certain
Amending Agreement dated June 18, 2001.
- Employment Contract, dated December 28, 2000, with Mr. Joe Franklin
whereby we will pay Mr. Franklin $150,000 per year.
- Employment Contract, dated August 1, 2000, with Mr. Guy Jarvis whereby we
will pay Mr. Jarvis $170,000 per year for a term of three years plus
500,000 stock options.
- Employment Contract, dated February 19, 2001, with Mr. Peter Cook whereby
we will pay Mr. Cook $135,000 per year for a term of three years plus
250,000 stock options.
- Loan Agreement between Congress Financial Corporation (Canada) and Max
Systems Group Inc., dated January 31, 2001, for a revolving credit
facility of $5.0 million (U.S. $3.2 million).
- Loan Agreement between the Business Development Bank of Canada and
Commercial Consolidators Corp., dated October 7, 1999, for $600,000 (of
which $300,000 has been received to date), bears interest at 13% per
annum, and is repayable in monthly instalments of $8,350 plus a royalty
of 0.0306% of the gross revenues of Commercial Consolidators Corp. for
each year the loan is outstanding.
- Share Purchase Agreement between Commercial Consolidators Corp. and
Tri-Vu Interactive Corporation, dated February 20, 2001, to purchase all
of the capital of Tri-Vu Interactive Corporation.
D. EXCHANGE CONTROLS
There are no government laws, decrees or regulations in Canada which
restrict the export or import of capital or which affect the remittance of
dividends, interest or other payments to non-resident holders of our Common
Shares. Any remittances of dividends to United States residents and to other
non-residents are, however, subject to withholding tax. See "Taxation" below.
E. TAXATION
Canadian Federal Income Taxation
We consider the following summary to fairly describe the principal Canadian
federal income tax consequences applicable to a holder of our Common Shares who
at all material times deals at arm's length with us, who holds all Common Shares
as capital property, who is resident in the United States, who is not a resident
of Canada and who does not use or hold, and is not deemed to use or hold, his
Common Shares in connection with carrying on a business in Canada (a
"non-resident holder"). It is assumed that the Common Shares will at all
material times be listed on a stock exchange that is prescribed for purposes of
the Income Tax Act (Canada) (the "ITA") and regulations thereunder.
This summary is based upon the current provisions of the ITA, the
regulations thereunder, the Canada-United States Tax Convention as amended by
the Protocols thereto (the "Treaty") as of the date of this registration
statement, and the currently publicly announced administrative and assessing
policies of Revenue Canada. This summary does not take into account Canadian
provincial income tax consequences. This
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description is not exhaustive of all possible Canadian federal income tax
consequences and does not take into account or anticipate any changes in law,
whether by legislative, governmental or judicial action. This summary does,
however, take into account all specific proposals to amend the ITA and
regulations thereunder, publicly announced by the Government of Canada as of the
date hereof.
THIS SUMMARY DOES NOT ADDRESS POTENTIAL TAX EFFECTS RELEVANT TO US OR THOSE
TAX CONSIDERATIONS THAT DEPEND UPON CIRCUMSTANCES SPECIFIC TO EACH INVESTOR.
ACCORDINGLY, HOLDERS AND PROSPECTIVE HOLDERS OF OUR COMMON SHARES SHOULD CONSULT
WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE INCOME TAX CONSEQUENCES TO THEM
OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON SHARES.
Dividends
The ITA provides that dividends and other distributions deemed to be
dividends paid or deemed to be paid by a Canadian resident corporation (such as
our company) to a non-resident of Canada shall be subject to a non-resident
withholding tax equal to 25% of the gross amount of the dividend of deemed
dividend. Provisions in the ITA relating to dividend and deemed dividend
payments to and gains realized by non-residents of Canada, who are residents of
the United States, are subject to the Treaty. The Treaty may reduce the
withholding tax rate on dividends as discussed below.
Article X of the Treaty, as amended by the US-Canada Protocol ratified on
November 9, 1995, provides a 5% withholding tax on gross dividends or deemed
dividends paid to a United States corporation which beneficially owns at least
10% of the voting stock of the company paying the dividend. In cases where
dividends or deemed dividends are paid to a United States resident (other than a
corporation) or a United States corporation which beneficially owns less than
10% of the voting stock of the company, a withholding tax of 15% is imposed on
the gross amount of the dividend or deemed dividend paid. We will be required to
withhold any such tax from the dividend and remit the tax directly to Revenue
Canada for the account of the investor.
The reduction in withholding tax from 25%, pursuant to the Treaty, will not
be available if:
- if the shares in respect of which the dividends are paid formed part of
the business property or were otherwise effectively connected with a
permanent establishment or fixed base that the holder has or had in
Canada within the 12 months preceding the disposition; or
- the holder is a U.S. LLC which is not subject to tax in the U.S.
The Treaty generally exempts from Canadian income tax dividends paid to a
religious, scientific, literary, educational or charitable organization or to an
organization exclusively administering a pension, retirement or employee benefit
fund or plan, if the organization is resident in the U.S. and is exempt from
income tax under the laws of the U.S.
Capital Gains
A non-resident holder is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of a share of a company unless the
share represents "taxable Canadian property" to the holder thereof. Our Common
Shares will be considered taxable Canadian property to a non-resident holder
only if:
- the non-resident holder,
- persons with whom the non-resident holder did not deal at arm's length,
or
- the non-resident holder and persons with whom he did not deal at arm's
length,
owned not less than 25% of the issued shares of any class or series of our
shares at any time during the five-year period preceding the disposition. In the
case of a non-resident holder to whom our shares represent
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taxable Canadian property and who is resident in the United States, no Canadian
taxes will generally be payable on a capital gain realized on such shares by
reason of the Treaty unless:
- the value of such shares is derived principally from real property,
including resource property, situated in Canada,
- they formed part of the business property or were otherwise effectively
connected with a permanent establishment or fixed base that the holder
has or bad in Canada within the 12 months preceding the disposition, or
- the holder is a U.S. limited liability company, which is not subject to
tax in the U.S.
If subject to Canadian tax on such a disposition, the taxpayer's capital gain
(or capital loss) from a disposition is the amount by which the taxpayer's
proceeds of disposition exceed (or are exceeded by) the aggregate of the
taxpayer's adjusted cost base of the shares and reasonable expenses of
disposition. For Canadian income tax purposes, the "taxable capital gain" is
equal to three-quarters of the capital gain.
United States Federal Income Taxation
The following is a discussion of the material United States Federal income
tax consequences, under current law, applicable to a U.S. Holder (as defined
below) of our Common Shares who holds such shares as capital assets. This
discussion does not address all potentially relevant Federal income tax matters
and it does not address consequences peculiar to persons subject to special
provisions of Federal income tax law, such as those described below as excluded
from the definition of a U.S. Holder. In addition, this discussion does not
cover any state, local, or foreign tax consequences. See "Canadian Federal
Income Tax Consequences" above.
The following discussion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations, published Internal Revenue Service
("IRS") rulings, published administrative positions of the IRS and court
decisions that are currently applicable, any or all of which could be materially
and adversely changed, possibly on a retroactive basis, at any time. In
addition, this discussion does not consider the potential effects, both adverse
and beneficial, of any recently proposed legislation which, if enacted, could be
applied, possibly on a retroactive basis, at any time.
THE DISCUSSION BELOW DOES NOT ADDRESS POTENTIAL TAX EFFECTS RELEVANT TO US
OR THOSE TAX CONSIDERATIONS THAT DEPEND UPON CIRCUMSTANCES SPECIFIC TO EACH
INVESTOR. IN ADDITION, THIS DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES
THAT MAY BE RELEVANT TO PARTICULAR INVESTORS SUBJECT TO SPECIAL TREATMENT UNDER
CERTAIN U.S. FEDERAL INCOME TAX LAWS, SUCH AS, DEALERS IN SECURITIES, TAX-EXEMPT
ENTITIES, BANKS, INSURANCE COMPANIES AND NON-U.S. HOLDERS. PURCHASERS OF THE
COMMON SHARES SHOULD THEREFORE SATISFY THEMSELVES AS TO THE OVERALL TAX
CONSEQUENCES OF THEIR OWNERSHIP OF THE COMMON SHARES, INCLUDING THE STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES THEREOF (WHICH ARE NOT REVIEWED HEREIN), AND SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR PARTICULAR CIRCUMSTANCES.
U.S. Holders
As used herein, a "U.S. Holder" includes a beneficial holder of Common
Shares who is a citizen or resident of the United States, a corporation or
partnership created or organized in or under the laws of the United States or of
any political subdivision thereof, any trust if either a U.S. court is able to
exercise primary supervision over the administration of the trust or one or more
U.S. persons have the authority to control all substantial decisions of the
trust, any entity which is taxable as a corporation for U.S. tax purposes and
any other person or entity whose ownership of Common Shares is effectively
connected with the conduct of a trade or business in the United States. A U.S.
Holder does not include persons subject to special provisions of Federal income
tax law, such as tax-exempt organizations, qualified retirement plans, financial
institutions, insurance companies, real estate investment trusts, regulated
investment companies, broker-dealers, non-resident alien individuals or foreign
corporations whose ownership of Common Shares is not effectively connected with
the conduct of a trade or business in the United States and shareholders who
acquired their shares through the exercise of employee stock options or
otherwise as compensation.
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Dividend Distribution on Shares of the Company
U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to our Common Shares are required to include in gross
income for United States Federal income tax purposes the gross amount of such
distributions to the extent that we have current or accumulated earnings and
profits, without reduction for any Canadian income tax withheld from such
distributions. Such Canadian tax withheld may be deducted or may be credited
against actual tax payable, subject to certain limitations and other complex
rules, against the U.S. Holder's United States Federal taxable income. See
"Foreign Tax Credit" below. To the extent that distributions exceed our current
or accumulated earnings and profits, they will be treated first as a return of
capital to the extent of the shareholder's basis in our Common Shares and
thereafter as gain from the sale or exchange of our Common Shares. Preferential
tax rates for net long term capital gains may be applicable to a U.S. Holder
which is an individual, estate or trust.
In general, dividends paid on our Common Shares will not be eligible for
the dividends received deduction provided to corporations receiving dividends
from certain United States corporations.
Foreign Tax Credit
A U.S. Holder who pays, or who has had withheld from distributions,
Canadian income tax with respect to the ownership of our Common Shares may be
entitled, at the election of the U.S. Holder, to either a deduction or a tax
credit for such foreign tax paid or withheld. This election is made on a
year-by-year basis and generally applies to all foreign income taxes paid by, or
withheld from, the U.S. Holder during that year. There are significant and
complex limitations which apply to the credit, among which is the general
limitation that the credit cannot exceed the proportionate share of the U.S.
Holder's United States income tax liability that the U.S. Holder's foreign
source income bears to his or its world-wide taxable income. In determining the
application of this limitation, the various items of income and deduction must
be classified into foreign and domestic sources. Complex rules govern income
such as "passive income," "high withholding tax interest," "financial services
income," "shipping income" and certain other classifications of income. A U.S.
Holder who is treated as a domestic U.S. corporation owning 10% or more of our
voting stock is also entitled to a deemed paid foreign tax credit in certain
circumstances for our underlying foreign tax related to dividends received or
Subpart F income received from us. For further information, see the discussion
of Controlled Foreign Corporations below. The availability of the foreign tax
credit and the application of the limitations on the foreign tax credit are fact
specific and holders and prospective holders of our Common Shares should consult
their own tax advisors regarding their individual circumstances.
Disposition of Common Shares
If a "U.S. Holder" is holding shares as a capital asset, a gain or loss
realized on a sale of the Common Shares will generally be a capital gain or
loss, and will be long-term if the shareholder has a holding period of more than
one year. However, gains realized upon sale of the Common Shares may, under
certain circumstances, be treated as ordinary income, if we were determined to
be a "collapsible corporation" within the meaning of Code Section 341 based on
the facts in existence on the date of the sale. The amount of gain or loss
recognized by a selling U.S. Holder will be measured by the difference between
(i) the amount realized on the sale and (ii) his tax basis in the Common Shares.
U.S. Holders who are individuals may offset up to $3,000 of ordinary income per
year, $1,500 for married individuals filing separately, and may carryover unused
capital losses to offset capital gains realized in subsequent years. For U.S.
Holders which are corporations, other than corporations subject to Subchapter S
of the Code, any unused capital losses may only be carried back three and
forward five years from the year in which such losses are realized.
A "collapsible corporation" is a corporation that is formed or availed
principally to manufacture, construct, produce, or purchase prescribed types or
property that the corporation holds for less than three years and that generally
would produce ordinary income on its disposition, with a view to the
stockholders selling or exchanging their stock and thus realizing gain before
the corporation realizes two thirds of the taxable income to be derived from
prescribed property. Prescribed property includes: stock in trade and inventory;
property held primarily for sale to customers in the ordinary course of
business; unrealized receivables or fees,
67
consisting of rights to payment for noncapital assets delivered or to be
delivered, or services rendered or to be rendered to the extent not previously
included in income, but excluding receivables from selling property that is not
prescribed; and property gain on the sale of which is subject to the capital
gain/ordinary loss rule. Generally, a shareholder who owns directly or
indirectly five percent or less of the outstanding stock of the corporation may
treat gain on the sale of his shares as capital gain.
Other Considerations for U.S. Holders
In the following circumstances, the above sections of this discussion may
not describe the United States Federal income tax consequences resulting from
the holding and disposition of Common Shares. Our management is of the opinion
that there is little, if not, any likelihood of our company being deemed a
"Foreign Personal Holding Company," a "Foreign Investment Company" or a
"Controlled Foreign Corporation" under current and anticipated conditions.
Foreign Personal Holding Company
If at any time during a taxable year more than 50% of the total combined
voting power or the total value of a registrant's outstanding shares is owned,
actually or constructively, by five or fewer individuals who are citizens or
residents of the United States and 60% or more of the registrant's gross income
for such year was derived from certain passive sources such dividends received
from its subsidiaries, the registrant would be treated as a "foreign personal
holding company." In that event, U.S. Holders that hold common shares of the
registrant would be required to include in income for such year their allocable
portion of the registrant's passive income which would have been treated as a
dividend had that passive income actually been distributed.
Foreign Investment Company
If 50% or more of the combined voting power or total value of a
registrant's outstanding shares are held, actually or constructively, by
citizens or residents of the United States, United States domestic partnerships
or corporations, or estates or trusts other than foreign estates or trusts, as
defined by the Code Section 7701(a)(31), and the registrant is found to be
engaged primarily in the business of investing, reinvesting, or trading in
securities, commodities, or any interest therein, it is possible that the
registrant might be treated as a "foreign investment company" as defined in
Section 1246 of the Code, causing all or part of any gain realized by a U.S.
Holder selling or exchanging common shares of the registrant to be treated as
ordinary income rather than capital gains.
Passive Foreign Investment Company
A U.S. Holder who holds stock in a foreign corporation during any year in
which such corporation qualifies as a passive foreign investment company
("PFIC") is subject to U.S. federal income taxation of that foreign corporation
under one of two alternative tax methods at the election of each such U.S.
Holder.
Section 1297 of the Code defines a PFIC as a corporation that is not formed
in the United States and, for any taxable year, either (i) 75% or more of its
gross income is "passive income," which includes interest, dividends and certain
rents and royalties, or (ii) the average percentage, by value (or, if the
company is a controlled foreign corporation or makes an election, adjusted tax
basis), of its assets that produce or are held for the production of "passive
income" is 50% or more. For taxable years of U.S. persons beginning after
December 31, 1997, and for tax years of foreign corporations ending with or
within such tax years, the Taxpayer Relief Act of 1997 provides that publicly
traded corporations must apply this test on a fair market value basis only. We
believe that we are a PFIC.
As a PFIC, each U.S. Holder must determine under which of the alternative
tax methods it wishes to be taxed. Under one method, a U.S. Holder who elects in
a timely manner to treat a registrant as a Qualified Electing Fund ("QEF"), as
defined in the Code, (an "Electing U.S. Holder") will be subject, under Section
1293 of the Code, to current federal income tax for any taxable year in which
the registrant's qualifies as a PFIC on his pro-rata share of the registrant's
(i) "net capital gain" (the excess of net long-term capital
68
gain over net short-term capital loss), which will be taxed as long-term capital
gain to the Electing U.S. Holder and (ii) "ordinary earnings" (the excess of
earnings and profits over net capital gain), which will be taxed as ordinary
income to the Electing U.S. Holder, in each case, for the U.S. Holder's taxable
year in which (or with which) the registrant taxable year ends, regardless of
whether such amounts are actually distributed. Such an election, once made shall
apply to all subsequent years unless revoked with the consent of the IRS.
A QEF election also allows the Electing U.S. Holder to (i) generally treat
any gain realized on the disposition of his common shares (or deemed to be
realized on the pledge of his common shares) as capital gain; (ii) treat his
share of the registrant's net capital gain, if any, as long-term capital gain
instead of ordinary income, and (iii) either avoid interest charges resulting
from PFIC status altogether (see discussion of interest charge below), or make
an annual election, subject to certain limitations, to defer payment of current
taxes on his share of the registrant's annual realized net capital gain and
ordinary earnings subject, however, to an interest charge. If the Electing U.S.
Holder is an individual, such an interest charge would be not deductible.
The procedure a U.S. Holder must comply with in making an timely QEF
election will depend on whether the year of the election is the first year in
the U.S. Holder's holding period in which the registrant is a PFIC. If the U.S.
Holder makes a QEF election in such first year, (sometimes referred to as a
"Pedigreed QEF Election"), then the U.S. Holder may make the QEF election by
simply filing the appropriate documents at the time the U.S. Holder files its
tax return for such first year. If, however, the registrant qualified as a PFIC
in a prior year, then the U.S. Holder may make an "Unpedigreed QEF Election" by
recognizing as an "excess distribution" (i) under the rules of Section 1291
(discussed below), any gain that he would otherwise recognize if the U.S. Holder
sold his stock on the qualification date (Deemed Sale Election) or (ii) if the
registrant is a controlled foreign corporation ("CFC"), the Holder's pro rata
share of the corporation's earnings and profits (Deemed Dividend Election) (But
see "Elimination of Overlap Between Subpart F Rules and PFIC Provisions"). The
effect of either the deemed sale election or the deemed dividend election is to
pay all prior deferred tax, to pay interest on the tax deferral and to be
treated thereafter as a Pedigreed QEF as discussed in the prior paragraph. With
respect to a situation in which a Pedigreed QEF election is made, if the
registrant no longer qualifies as a PFIC in a subsequent year, normal Code rules
and not the PFIC rules will apply.
If a U.S. Holder has not made a QEF Election at any time (a "Non-electing
U.S. Holder"), then special taxation rules under Section 1291 of the Code will
apply to (i) gains realized on the disposition (or deemed to be realized by
reason of a pledge) of his common shares and (ii) certain "excess
distributions," as specially defined, by the registrant. An "excess
distribution" is any current-year distribution in respect of PFIC stock that
represents a rateable portion of the total distributions in respect of the stock
during the year that exceed 125% of the average amount of distributions in
respect of the stock during the three preceding years.
A Non-electing U.S. Holder generally would be required to pro-rate all
gains realized on the disposition of his common shares and all excess
distributions over the entire holding period for the common shares. All gains or
excess distributions allocated to prior years of the U.S. Holder (other than
years prior to the first taxable year of the registrant during such U.S.
Holder's holding period and beginning after January, 1987 for which it was a
PFIC) would be taxed at the highest tax rate for each such prior year applicable
to ordinary income. The Non-electing U.S. Holder also would be liable for
interest on the deferred tax liability for each such prior year calculated as if
such liability had been due with respect to each such prior year. A Non-
electing U.S. Holder that is an individual is not allowed a deduction for
interest on the deferred tax liability. The portions of gains and distributions
that are not characterized as "excess distributions" are subject to tax in the
current year under the normal tax rules of the Code.
If the registrant is a PFIC for any taxable year during which a
Non-electing U.S. Holder holds common shares, then the registrant will continue
to be treated as a PFIC with respect to such common shares, even if it is no
longer by definition a PFIC. A Non-electing U.S. Holder may terminate this
deemed PFIC status by electing to recognize gain (which will be taxed under the
rules discussed above for Non-Electing U.S. Holders) as if such common shares
had been sold on the last day of the last taxable year for which it was a PFIC.
69
Under Section 1291(f) of the Code, the Department of the Treasury has
issued proposed regulations that would treat as taxable certain transfers of
PFIC stock by Non-electing U.S. Holders that are generally not otherwise taxed,
such as gifts, exchanges pursuant to corporate reorganizations, and transfers at
death. If a U.S. Holder makes a QEF Election that is not a Pedigreed Election
(i.e., it is made after the first year during which the registrant is a PFIC and
the U.S. Holder holds shares of the registrant) (a "Unpedigreed Election"), the
QEF rules apply prospectively but do not apply to years prior to the year in
which the QEF first becomes effective. U.S. Holders should consult their tax
advisors regarding the specific consequences of making a Non-Pedigreed QEF
Election.
Certain special, generally adverse, rules will apply with respect to the
common shares while the registrant is a PFIC whether or not it is treated as a
QEF. For example, under Section 1297(b)(6) of the Code (as in effect prior to
the Taxpayer Relief Act of 1997), a U.S. Holder who uses PFIC stock as security
for a loan (including a margin loan) will, except as may be provided in
regulations, be treated as having made a taxable disposition of such stock.
The foregoing discussion is based on currently effective provisions of the
Code, existing and proposed regulations thereunder, and current administrative
rulings and court decisions, all of which are subject to change. Any such change
could affect the validity of this discussion. In addition, the implementation of
certain aspects of the PFIC rules requires the issuance of regulations which in
many instances have not been promulgated and which may have retroactive effect.
There can be no assurance that any of these proposals will be enacted or
promulgated, and if so, the form they will take or the effect that they may have
on this discussion. Accordingly, and due to the complexity of the PFIC rules,
U.S. Holders of our shares are strongly urged to consult their own tax advisors
concerning the impact of these rules on their investment in us. For a discussion
of the impact of the Taxpayer Relief Act of 1997 on a U.S. Holder of a PFIC, see
"Mark-to-Market Election For PFIC Stock Under the Taxpayer Relief Act of 1997"
and "Elimination of Overlap Between Subpart F Rules and PFIC Provisions" below.
Market-to-Market Election for PFIC Stock Under the Taxpayer Relief Act of
1997
The Taxpayer Relief Act of 1997 provides that a U.S. Holder of a PFIC may
make a mark-to-market election with respect to the stock of the PFIC if such
stock is marketable as defined below. This provision is designed to provide a
current inclusion provision for persons that are Non-Electing Holders. Under the
election, any excess of the fair market value of the PFIC stock at the close of
the tax year over the Holder's adjusted basis in the stock is included in the
Holder's income. The Holder may deduct any excess of the adjusted basis of the
PFIC stock over its fair market value at the close of the tax year. However,
deductions are limited to the net mark-to-market gains on the stock that the
Holder included in income in prior tax years, or so called "unreversed
inclusions." For purposes of the election, PFIC stock is marketable if it is
regularly traded on (i) a national securities exchange that is registered with
the Securities and Exchange Commission, (ii) the national market system
established under Section II A of the Securities Exchange Act of 1934, as
amended, or (iii) an exchange or market that the IRS determines has rules
sufficient to ensure that the market price represents legitimate and sound fair
market value.
A Holder's adjusted basis of PFIC stock is increased by the income
recognized under the mark-to-market election and decreased by the deductions
allowed under the election. If a U.S. Holder owns PFIC stock indirectly through
a foreign entity, the basis adjustments apply to the basis of the PFIC stock in
the hands of the foreign entity for the purpose of applying the PFIC rules to
the tax treatment of the U.S. owner. Similar basis adjustments are made to the
basis of the property through which the U.S. persons hold the PFIC stock.
Income recognized under the mark-to-market election and gain on the sale of
PFIC stock with respect to which an election is made is treated as ordinary
income. Deductions allowed under the election and loss on the sale of PFIC with
respect to which an election is made, to the extent that the amount of loss does
not exceed the net mark-to-market gains previously included, are treated as
ordinary losses. The U.S. or foreign source of any income or losses is
determined as if the amount were a gain or loss from the sale of stock in the
PFIC.
If PFIC stock is owned by a Controlled Foreign Corporation (CFC) (discussed
below), the CFC is treated as a U.S. person that may make the mark-to-market
election. Amounts includible in the CFC's
70
income under the election are treated as foreign personal holding company
income, and deductions are allocable to foreign personal holding company income.
The above provisions apply to tax years of U.S. persons beginning after
December 31, 1997, and to tax years of foreign corporations ending with or
within such tax years of U.S. persons.
The rules of Code Section 1291 applicable to nonqualified funds as
discussed above generally do not apply to a U.S. Holder for tax years for which
a mark-to-market election is in effect. If Code Section 1291 is applied and a
mark-to-market election was in effect for any prior tax year, the U.S. Holder's
holding period for the PFIC stock is treated as beginning immediately after the
last tax year of the election. However, if a taxpayer makes a mark-to-market
election for PFIC stock that is a nonqualified fund after the beginning of a
taxpayer's holding period for such stock, a co-ordination rule applies to ensure
that the taxpayer does not avoid the interest charge with respect to amounts
attributable to periods before the election.
Controlled Foreign Corporation Status
If more than 50% of the voting power of all classes of stock or the total
value of the stock of the registrant is owned, directly or indirectly, by U.S.
Holders, each of whom own after applying rules of attribution 10% or more of the
total combined voting power of all classes of stock of a registrant, the
registrant would be treated as a "controlled foreign corporation" or "CFC" under
Subpart F of the Code. This classification would bring into effect many complex
results including the required inclusion by such 10% U.S. Holders in income of
their pro rata shares of "Subpart F income" (as defined by the Code) of the
registrant and the registrant's earnings invested in "U.S. property" (as defined
by Section 956 of the Code). In addition, under Section 1248 of the Code if the
registrant is considered a CFC at any time during the five year period ending
with the sale or exchange of its stock, gain from the sale or exchange of common
shares of the registrant by such a 10% U.S. Holder of registrant at any time
during the five year period ending with the sale or exchange is treated as
ordinary dividend income to the extent of earnings and profits of the registrant
attributable to the stock sold or exchanged. Because of the complexity of
Subpart F, and because the registrant may never be a CFC, a more detailed review
of these rules is beyond of the scope of this discussion.
Elimination of Overlap Between Subpart F Rules and PFIC Provisions
Under the Taxpayer Relief Act of 1997, a PFIC that is also a CFC will not
be treated as a PFIC with respect to certain 10% U.S. Holders. For the exception
to apply, (i) the corporation must be a CFC within the meaning of section 957(a)
of the Code and (ii) the U.S. Holder must be subject to the current inclusion
rules of Subpart F with respect to such corporation (i.e., the U.S. Holder is a
"United States Shareholder," see "Controlled Foreign Corporation," above). The
exception only applies to that portion of a U.S. Holder's holding period
beginning after December 31, 1997. For that portion of a United States Holder
before January 1, 1998, the ordinary PFIC and QEF rules continue to apply.
As a result of this new provision, if the registrant were ever to become a
CFC, U.S. Holders who are currently taxed on their pro rata shares of Subpart F
income of a PFIC which is also a CFC will not be subject to the PFIC provisions
with respect to the same stock if they have previously made a Pedigreed QEF
Election. The PFIC provisions will however continue to apply to U.S. Holders for
any periods in which Subpart F does not apply (for example he is no longer a 10%
Holder or the registrant is no longer a CFC) and to U.S. Holders that did not
make a Pedigreed QEF Election unless the U.S. Holder elects to recognize gain on
the PFIC shares held in the registrant as if those shares had been sold.
ALL PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF PURCHASING OUR COMMON SHARES.
F. DIVIDENDS AND PAYING AGENTS
Holders of our Common Shares are entitled to receive such dividends as may
be declared from time to time by our board of directors, in its discretion, out
of funds legally available for that purpose. However, no
71
dividends have been paid on any class of our shares since the date of our
incorporation and it is not contemplated that any dividends will be paid in the
immediate or foreseeable future.
G. STATEMENTS BY EXPERTS
See pages 78 and 79 of this registration statement.
H. DOCUMENTS ON DISPLAY
The documents concerning us may be viewed at the offices of our corporate
solicitor, Clark Wilson, at Suite 800 -- 885 West Georgia Street, Vancouver,
British Columbia V6C 3H1, during normal business hours.
I. SUBSIDIARY INFORMATION
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our reporting currency is the Canadian dollar. We are exposed to foreign
exchange risk on our net U.S. dollar asset position, which was approximately
$7.2 million (U.S. $4.7 million) at February 28, 2001. The main exposure in this
regard is the Canadian dollar strengthening against the U.S. dollar, which would
cause our net U.S. position to "decline" after translation to the Canadian
dollar.
Significant exposure arises from the fact that we purchase a large volume
of goods in Canadian dollars (approximately CDN $15.8 million and U.S. $10.0
million for the year ended February 28, 2001) that are sold to customers in U.S.
dollar denominated sales. As the related accounts payable are in Canadian
dollars and related accounts receivable are in U.S. dollars, any significant
appreciation in the Canadian dollar will cause a translation loss on the U.S.
dollar receivables without any offsetting translation gain that would arise had
the accounts payable been denominated in U.S. dollars. Therefore, the full
accounts receivable balance on U.S. sales arising from purchases in Canadian
dollars is subject to foreign currency fluctuations. We have not hedged against
this risk and any gains or losses are recorded in income for the year.
Our net U.S. asset position is presented in note 3 to our consolidated
financial statements on page F-10 of this registration statement, and is
summarized as follows (in Canadian dollars):
[Download Table]
Cash....................................................... $ 400,000
Accounts receivable........................................ 15,600,000
Prepayments................................................ 1,800,000
------------
Cash and current assets.................................... 17,800,000
Non-current assets......................................... 5,800,000
Accounts payable........................................... (4,900,000)
Loans payable.............................................. (11,400,000)
------------
Net U.S. dollar denominated assets......................... $ 7,300,000
============
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. DEBT SECURITIES
Not Applicable
B. WARRANTS AND RIGHTS
As consideration for the provision of certain bridge loans to us, we have
issued the following warrants which remain outstanding:
- warrants entitling the holders thereof to acquire a total of 1,450,250
Common Shares, at a price of $2.00 per share, expiring October 8, 2001;
72
- warrants entitling the holder thereof to acquire a total of 133,334
Common Shares, at a price of $4.00 per share, expiring on April 30, 2002;
- warrants entitling the holder thereof to acquire a total of 50,000 Common
Shares, at a price of $4.00 per share, expiring on March 19, 2002;
- warrants entitling the holder thereof to acquire a total of 66,666 Common
Shares, at a price of $4.00 per share, expiring on March 28, 2003;
- warrants entitling the holder thereof to acquire a total of 50,000 Common
Shares, at a price of $4.25 per share, expiring on September 30, 2001;
- warrants entitling the holder thereof to acquire a total of 50,000 Common
Shares, at a price of $4.00 per share, expiring on December 20, 2001;
- warrants entitling the holder thereof to acquire a total of 50,000 Common
Shares, at a price of $4.00 per share, expiring on February 15, 2002;
- warrants entitling the holder thereof to acquire a total of 50,000 Common
Shares, at a price of $4.00 per share, expiring on April 14, 2002;
- warrants entitling the holder thereof to acquire a total of 33,333 Common
Shares, at a price of $4.25 per share, expiring on September 13, 2002;
and
- warrants entitling the holder thereof to acquire a total of 55,000 Common
Shares, at a price of $4.00 per share, expiring on April 30, 2003.
All warrants issued by us provide that the exercise price of such warrants
is subject to adjustment in circumstances where the outstanding Common Shares
are subdivided or consolidated.
C. OTHER SECURITIES
Not Applicable.
D. AMERICAN DEPOSITARY SHARES
Not Applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not Applicable.
ITEM 15. (RESERVED)
ITEM 16. (RESERVED)
PART III
ITEM 17. FINANCIAL STATEMENTS
We have provided the financial information specified in Item 18 in lieu of
Item 17.
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ITEM 18. FINANCIAL STATEMENTS
See attached pages F-1 through F-86.
ITEM 19. EXHIBITS
[Download Table]
EXHIBIT NO. DESCRIPTION
----------- -----------
(1) ARTICLES OF INCORPORATION AND BY-LAWS:
1.1 -- Articles of Incorporation, as amended.*
1.2 -- By-laws.*
(2) INSTRUMENTS DEFINING RIGHTS OF HOLDERS OF EQUITY SECURITIES BEING
REGISTERED:
2.1 -- See 1.1 above.*
(3) MATERIAL CONTRACTS:
4.1 -- Memorandum of Agreement, dated July 31, 2000, among MFI
Export Finance Inc., Commercial Consolidators Corp.,
Business Supplies Are Us Inc., ACC Corp., and Mirage Trading
Corp. for a revolving credit facility of US $3.3 million to
assist with financing of accounts receivable.*
4.2 -- General Security Agreement, dated July 31, 2000, in favor of
MFI Export Finance Inc.*
4.3 -- Agreement between ACC Corporation (the name under which
Mirage Trading Corp. conducts business in Cuba) and
Uimtex/Tecnotex, dated April, 1999, regarding building and
sale of television assembly plant to be operated by S.J.
Electronica.*
4.4 -- Agreement and Plan of Merger between Commercial
Consolidators Corp. and CCC Acquisition Inc., a Florida
company, and YAM International Communication Inc., dated
March 28, 2000, to acquire 100% of Yam International
Communications Inc.*
4.5 -- Employment contracts, dated July 31, 2000, with Messrs.
Vanon and Sasson.*
4.6 -- Share Purchase Agreement between Commercial Consolidators
Corp., La Societe Desig Inc., Groupe de Gestion Marcoux
Inc., and Gestion Clauvic Inc. et al, to acquire a 100%
interest in La Societe Desig Inc., dated June 17, 2000.*
4.7 -- Employment contracts, dated July 5, 2000, with Messrs. Noce,
Marcoux, Bolduc and key employees of Desig.*
4.8 -- Bridge Loan With Warrants Agreement between Dr. Abraham
Gotman and Commercial Consolidators Corp., dated May 1,
2000. The loan was retired on January 15, 2001. The loan was
secured by a General Security Agreement dated October 2,
2000.*
4.9 -- Bridge Loan With Warrants Agreement between Forum
Interamerican Corp., a Panamanian company, and Mirage Impex
Inc. (name was subsequently changed to Commercial
Consolidators Corp., a Panamanian company) and Commercial
Consolidators Corp., dated September 11, 2000.*
4.10 -- Bridge Loan With Warrants Agreement between Grupo Carrera
SA, Commercial Consolidators Corp (Panama), and Commercial
Consolidators Corp., dated September 20, 2000. The loan is
secured by a General Security Agreement dated September 20,
2000. This loan was retired on December 20, 2000.*
4.11 -- Bridge Loan With Warrants Agreement between Trident Plus
Inc., a company incorporated under the laws of Belize,
Commercial Consolidators Corp.(Panama), and Commercial
Consolidators Corp., dated December 15, 2000. The loan is
secured by a General Security Agreement dated December 15,
2000.*
4.12 -- Bridge Loan With Warrants Agreement between 1220356 Ontario
Limited and Commercial Consolidators Corp., dated January
15, 2001. The loan is secured by a General Security
Agreement dated January 15, 2001.*
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[Download Table]
EXHIBIT NO. DESCRIPTION
----------- -----------
4.13 -- Promissory Note between Frederick McLean, a Director of the
Company, and Commercial Consolidators Corp., dated May 15,
2000. The loan is secured by a General Security Agreement
dated May 15, 2000.*
4.14 -- Promissory Note between JCI Timely Services Inc., and
Commercial Consolidators Corp., dated May 15, 2000. The loan
is secured by a General Security Agreement dated May 15,
2000.*
4.15 -- Lease Agreement with The Great West Life Assurance Company,
dated August 1, 1999, for the premises at 5255 Yonge Street,
Toronto, Ontario, Canada.*
4.16 -- Lease Agreement between Jolex Holdings Ltd. (landlord) and
Business Supplies Are Us Inc. (tenant) and Commercial
Consolidators Corp. (indemnifier) for the premises at 39
Rivaldi Road, Toronto, Ontario, Canada, dated January 15,
2001.*
4.17 -- Lease Agreement between O&B Properties, Inc. and Yam
International Communications, Inc. dated May 26, 2000, for
the premises at 3061 N.W. 107th Avenue, Miami, Florida.*
4.18 -- Lease Agreement between Complexe Pitfield Inc. and La
Societe Desig Inc., dated October 1, 1999, for the premises
at 9300 Henri Bourassa Ouest, Suite 280, Ville St-Laurent,
Quebec.*
4.19 -- Lease Agreement between Parkway Properties LP, a Delaware
limited partnership, and Central Point Technologies, Inc.,
for the premises at 700 West Hillsboro Blvd., Deerfield
Beech, Florida.*
4.20 -- Share Purchase Agreement between Commercial Consolidators
Corp. and Max Systems Group Inc., dated November 28, 2000,
to purchase all of the capital of Max Systems Group Inc. and
its U.S. subsidiary, Max USA Inc.*
4.21 -- Employment Contract dated December 28, 2000, with Mr. Joe
Franklin.*
4.22 -- Employment Contract dated August 1, 2000, with Mr. Guy
Jarvis.*
4.23 -- Employment Contract dated February 19, 2001, with Mr. Peter
Cook.*
4.24 -- Loan Agreement between Congress Financial Corporation
(Canada) and Max Systems Group Inc. dated January 31, 2001,
for a revolving credit facility of CDN $5 million.*
4.25 -- Loan Agreement between the Business Development Bank of
Canada and Commercial Consolidators Corp. dated October 7,
1999, for $600,000 (of which $300,000 has been received to
date), bears interest at 13% per annum, repayable in monthly
instalments of $8,350 plus a royalty of 0.0306% of the gross
revenues of Commercial Consolidators Corp. for each year the
loan is outstanding.*
4.26 -- Share Purchase Agreement between Commercial Consolidators
Corp. and Tri-Vu Interactive Corporation dated February 20,
2001, to purchase all of the capital of Tri-Vu Interactive
Corporation.*
4.27 -- Offering Circular for the purchase of all of the issued and
outstanding securities of 1058199 Ontario Inc.*
4.28 -- Form of Letter of Acceptance and Transmittal to Deposit
1058199 Ontario Inc. Securities (which accompanied the stock
certificates issued to the purchasers).*
4.29 -- Employment and Non-Competition Agreement among Commercial
Consolidators Corp., Tri-Vu Interactive Corporation and
William Krahule.*
4.30 -- Amendment to Bridge Loan Warrants Agreement, dated March 13,
2001, between Forum Interamerica Corp. and Commercial
Consolidators Corp.*
4.31 -- Bridge Loan With Warrants Agreement between Dr. Abraham
Gotman and Commercial Consolidators Corp., dated March 20,
2000, for $1.54 million (U.S. $1.0 million).*
4.32 -- Bridge Loan With Warrants Agreement between Dr. Abraham
Gotman and Commercial Consolidators Corp., dated April 5,
2001, for $1.54 million (U.S. $1.0 million).*
75
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EXHIBIT NO. DESCRIPTION
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4.33 -- Amendment to Bridge Loan With Warrants Agreement, dated
April 27, 2001, between Frederick McLean and Commercial
Consolidators Corp.*
4.34 -- Amendment to Bridge Loan With Warrants Agreement, dated
April 27, 2001, between JCI Timely Services Inc. and
Commercial Consolidators Corp.*
4.35 -- Bridge Loan With Warrants Agreement between Dunross Capital
Ltd. and Commercial Consolidators Corp., dated April 20,
2001, for $1.7 million (U.S. $1.1 million).*
4.36 -- Amending Agreement, dated June 18, 2001, among 686545
Alberta Inc., 1187247 Ontario Inc. and 1188273 Ontario Inc.
(as Vendors); Joe Franklin, Russell Roberts and Frank Del
Cogliano (as Principals); and Commercial Consolidators Corp.
(as Purchaser).**
(8) MATERIAL SUBSIDIARIES:
8.1 -- List of material subsidiaries.*
---------------
* Previously filed
** Filed herewith
76
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Amendment No. 2 to the Registration
Statement Form 20-F to be signed on its behalf by the undersigned, hereunto duly
authorized.
COMMERCIAL CONSOLIDATORS CORP.
By: /s/ GUY JARVIS
------------------------------------
Guy Jarvis
Chief Executive Officer
Dated: August 2, 2001
77
CONSENT OF INDEPENDENT AUDITORS
We have issued our report to the Directors of Commercial Consolidators
Corp. as at February 28, 2001, February 29, 2000, February 28, 1999 and 1998 and
for the years then ended in respect of financial statements being included in an
initial filing on Form 20-F and amendments thereto. Our report was dated May 1,
2001. We consent to the inclusion of the aforementioned report in the initial
filing on Form 20-F and amendments thereto by Commercial Consolidators Corp.
We also consent to our unqualified opinion addressed to the Directors dated
June 15, 2000 on the financial statements of YAM International Communications
Inc. as at March 31, 2000 and for the three months then ended as well as our
unqualified opinion dated February 14, 2001, and December 31, 1999 and 1998 and
for the years then ended as included in the initial filing Form 20-F and
amendments thereto as a significant subsidiary acquired during the year ending
February 28, 2001.
We also consent to our unqualified opinion addressed to the Directors dated
February 22, 2001 on the financial statements of MAX Systems Group Inc. as at
July 31, 2000 and 1999 and for the years then ended included as a significant
subsidiary acquired by Commercial Consolidators Corp. during the year ended
February 28, 2001 as included in the initial filing Form 20-F and amendments
thereto.
Yours very truly,
MINTZ & PARTNERS LLP
/s/ Phillip Lev
--------------------------------------
Phillip Lev for Elliott M. Jacobson,
Partner
July 27, 2001
78
CONSENT OF INDEPENDENT AUDITORS
We have issued our reports to the Shareholders of La Societe Desig Inc. as
at April 30, 2000, October 31, 1999 and 1998 and for the periods then ended in
respect of the financial statements being included in an initial filing on Form
20-F and amendments thereto of Commercial Consolidators Corp. Our reports were
dated May 17, 2000 and March 13, 2000. We consent to the inclusion of the
aforementioned report in Amendment No. 2 to Form 20-F of Commercial
Consolidators Corp.
Yours very truly,
POIRIER & ASSOCIATES,
CHARTERED ACCOUNTANTS
/s/ Andre Poirier
--------------------------------------
Andre Poirier
Partner
August 1, 2001
79
INDEX TO FINANCIAL STATEMENTS
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PAGE
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COMMERCIAL CONSOLIDATORS CORP.
Auditors' Report.......................................... F-2
Consolidated Balance Sheets as at November 30, 2000 and
1999, and February 28/29 2001, 2000, 1999 and 1998..... F-3
Consolidated Statements of Retained Earnings for the nine
months ended November 30, 2000 and 1999 and the years
ended February 28/29 2001, 2000, 1999 and 1998......... F-4
Consolidated Statements of Operations for the nine months
ended November 30, 2000 and 1999 and the years ended
February 28/29 2001, 2000, 1999 and 1998............... F-5
Consolidated Statements of Cash Flows for the nine months
ended November 30, 2000 and 1999 and the years ended
February 28/29 2001, 2000, 1999 and 1998............... F-6
Notes to Consolidated Financial Statements................ F-7
YAM INTERNATIONAL COMMUNICATIONS, INC.
Auditors' Report.......................................... F-46
Balance Sheet as at December 31, 1999 and 1998............ F-47
Statement of Retained Earnings for the years ended
December 31, 1999 and 1998............................. F-48
Statement of Operations for the years ended December 31,
1999 and 1998.......................................... F-49
Statement of Cash Flows for the years ended December 31,
1999 and 1998.......................................... F-50
Notes to Financial Statements............................. F-51
Auditors' Report.......................................... F-54
Balance Sheet as at March 31, 2000 (audited) and 1999
(unaudited)............................................ F-55
Statement of Operations and Retained Earnings for the
three months ended March 31, 2000 (audited) and 1999
(unaudited)............................................ F-56
Statement of Cash Flows for the three months ended March
31, 2000 (audited) and 1999 (unaudited)................ F-57
Notes to Financial Statements............................. F-58
LA SOCIETE DESIG INC.
Auditors' Report.......................................... F-61
Auditors' Report.......................................... F-62
Consolidated Statement of Operations for six months ended
April 30, 2000 and twelve months ended October 31, 1999
and 1998............................................... F-63
Consolidated Statement of Retained Earnings for six months
ended April 30, 2000 and twelve months ended October
31, 1999 and 1998...................................... F-64
Consolidated Statement of Cash Flows for six months ended
April 30, 2000 and twelve months ended October 31, 1999
and 1998............................................... F-65
Consolidated Balance Sheet as at April 30, 2000 and
October 31, 1999 and 1998.............................. F-66
Notes to Consolidated Financial Statements................ F-67
MAX SYSTEMS GROUP INC.
Auditors' Report.......................................... F-74
Consolidated Statements of Loss and Deficit for the years
ended July 31, 2000 and 1999........................... F-75
Consolidated Balance Sheets as at July 31, 2000 and
1999................................................... F-76
Consolidated Statements of Cash Flows for the years ended
July 31, 2000 and 1999................................. F-77
Notes to Consolidated Financial Statements................ F-78
Interim Unaudited Consolidated Balance Sheet as at
November 30, 2000 and 1999............................. F-81
Interim Unaudited Consolidated Statement of Operations and
Deficit for the four months ended November 30, 2000 and
1999................................................... F-82
Interim Unaudited Consolidated Statement of Cash Flows for
the four months ended November 30, 2000 and 1999....... F-83
Notes to Interim Unaudited Consolidated Financial
Statements............................................. F-84
F-1
AUDITORS' REPORT
To the Directors of
Commercial Consolidators Corp.
We have audited the consolidated balance sheets of Commercial Consolidators
Corp. as at February 28, 2001, February 29, 2000, February 28, 1999 and 1998,
and the consolidated statements of operations, retained earnings and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with Canadian and United States
generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the corporation as at February
28, 2001, February 29, 2000, February 28, 1999 and 1998, and the results of
operations and its cash flows for the years then ended in accordance with
Canadian generally accepted accounting principles.
"MINTZ & PARTNERS LLP"
Chartered Accountants
Toronto, Ontario
May 1, 2001
F-2
COMMERCIAL CONSOLIDATORS CORP.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
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AS AT
AS AT NOVEMBER 30,
---------------------------------------------------------
------------------------- FEBRUARY 28,
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2000 1999 2001
2000 1999 1998
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(UNAUDITED)
