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Commercial Consolidators Corp · 20FR12G/A · On 8/2/01

Filed On 8/2/01 4:29pm ET   ·   SEC File 0-31110   ·   Accession Number 950144-1-505072

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  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   ·   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 


20FR12G/A   ·   Commercial Consolidators Corp.
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page
3Part I
"Item 1. Identity of Directors, Senior Management and Advisers
4Item 2. Offer Statistics and Expected Timetable
"Item 3. Key Information
15Item 4. Information on the Company
19Business Technologies Group
"Wireless products division
22Computer products division
24Integrated applications division
26Business supplies division
28Consumer Electronics Group
33Item 5. Operating and Financial Review and Prospects
"Item 5
45Forward-Looking Statements
46Item 6. Directors, Senior Management and Employees
53Item 7. Major Shareholders and Related Party Transactions
55Item 8. Financial Information
56Item 9. The Offer and Listing
58Item 10. Additional Information
69U.S
"Foreign Tax Credit
70Foreign Personal Holding Company
"Foreign Investment Company
73Elimination of Overlap Between Subpart F Rules and PFIC Provisions
74Item 11. Quantitative and Qualitative Disclosures About Market Risk
"Item 12. Description of Securities Other Than Equity Securities
75Part Ii
"Item 13. Defaults, Dividend Arrearages and Delinquencies
"Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
"Item 15. (Reserved)
"Part Iii
"Item 17. Financial Statements
76Item 18
"Item 19. Exhibits
80Mintz & Partners Llp
83Auditors' Report
88Notes to Consolidated Financial Statements
102Statutory income tax
123Domestic
124Capital Assets
132Notes to Financial Statements
144La Societe Desig Inc
"Revenue
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 2001. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 2 TO FORM 20-F --------------------- [Download Table] [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: [Download Table] 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 [Download Table] 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
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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. [Download Table] 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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[Download Table] 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
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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) [Download Table] 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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[Download Table] 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. [Download Table] 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
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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: [Download Table] 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." [Download Table] 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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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