As filed with the Securities and Exchange Commission on February 24,
2003 Registration No. 333-98397
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-1
AMENDMENT NO. 3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Commission file number 333-98397
Ontario, Canada 2741 ---------------- (Jurisdiction of incorporation (Primary Standard Industrial or organization) Classification Code Number |
Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of Proposed Proposed
Each Class Amount to Maximum Maximum Amount of
Of be Offering Aggregate Registration
Securities to Registered Price per Offering Fee
be Registered Share (1) Price (1)
Common
Stock, no 4,700,000 .08125 $381,875 35.13
Par value
Per share
Shares of
Common Stock 3,275,000 .08125 $266,093.75 24.45
Underlying
Warrants
Total 7,975,000 $647,968.75 59.58
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Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457 under the Securities Act of 1933. The Company's average of the Company's bid and ask price on the TSX Venture Exchange was US$.08125 for purposes of this section.
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
LINGO MEDIA, INC.
Resale of 4,700,000 shares of common stock and 3,275,000 shares of common stock underlying warrants
The prospectus relates to the registration of the resale of 4,700,000 shares of our common stock and 3,275,000 shares of common stock underlying warrants by the selling stockholders listed on page 59. Shares offered by the selling stockholders may be sold by one or more of the following methods:
ordinary brokerage transactions in which a broker solicits purchases; and face to face transactions between the selling stockholders and purchasers without a broker.
Selling stockholders will sell at the set price of $.40 per share until such time as our shares are quoted on the OTC Bulletin Board and then thereafter at prevailing market prices or privately negotiated prices. A current prospectus must be in effect at the time of the sale of the shares of common stock discussed above. We will not receive any proceeds from the resale of common stock by the selling stockholders. The selling stockholders will be responsible for any commissions or discounts due to brokers or dealers. We will pay all of the other offering expenses.
Each selling stockholder or dealer selling the common stock is required to deliver a current prospectus upon the sale. In addition, for the purposes of the Securities Act of 1933, selling stockholders may be deemed underwriters. Therefore, the selling stockholders may be subject to statutory liabilities if the registration statement, which includes this prospectus, is defective by virtue of containing a material misstatement or failing to disclose a statement of material fact. We have not agreed to indemnify any of the selling stockholders regarding such liability.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD RETAIN OR ACQUIRE OUR STOCK ONLY AFTER CONSIDERING THE RISKS ASSOCIATED WITH US. WE URGE YOU TO READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE 8ALONG WITH THE REST OF THIS PROSPECTUS BEFORE YOU MAKE YOUR INVESTMENT DECISION.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
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Prospectus Summary 3
The Offering 6
Summary Consolidated Financial Data 7
Risk Factors 8
Identity of Directors, Senior Management and Advisors 20
Selected Financial Data 22
Market Information 24
Description of Securities 24
Forward-Looking Statements 25
Business Overview 26
Capitalization and Indebtedness 26
Operating and Financial Review and Prospects 39
Directors and Senior Management 47
Principal Shareholders 52
Related Party Transactions 53
Plan of Distribution and Selling Stockholders 59
Taxation 63
Qualitative and Quantitative Disclosures and Market Risk 64
Memorandum and Articles of Association 73
Validity of Securities 78
Experts 78
Where You Can Find More Information 78
Financial Statements 79
Indemnification of Directors and Officers 80
Recent Sales of Unregistered Securities 81
Exhibits and Financial Statement Schedules 83
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You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.
PROSPECTUS SUMMARY
Item 3. Summary Information, Risk Factors, and Ratio of Earnings to Fixed Charges
This summary highlights material information found in greater detail elsewhere in this document. In addition to this summary, we urge you to read the entire document carefully, especially the discussion of the risks of investing in our ordinary shares under "Risk Factors," before deciding to buy our ordinary shares. References in this document to "Lingo Media," the "Company," "we," "our" and "us" refer to Lingo Media Inc., an Ontario company, and its subsidiaries.
During the year ended December 31, 2001, we had revenues of $333,691, a gross profit of $291,553, and a loss of $44,706.
Our auditors have expressed substantial doubt regarding our ability to continue as a going concern, based on operating losses we have incurred since inception.
Lingo Media is a provider of language learning products for the domestic and international markets, with a particular emphasis on China and Canada. The products include traditional media, i.e. books, audiocassettes, CD-ROMs, and supplemental products. Additionally, the Company is developing an online service for English language learning.
The Company's fiscal year ends December 31st.
The Company's common shares trade on the TSX Venture Exchange under the symbol "LMD.V".
The Company currently has four subsidiaries: Lingo Media Ltd "LML", Lingo Media International Inc. "LMII", EnglishLingo, Inc. "ELI" and Mail Box Kids Corporation "MBK".
LML was incorporated pursuant to the Business Corporations Act (Ontario) on November 21, 1994 under the name Alpha Corporation. Alpha Corporation changed its name to Lingo Media Ltd on August 25, 2000.
LMII was incorporated pursuant to the Companies Act of Barbados on September 11, 1996 under the name International Alpha Ventures Inc. On May 13, 1997, wholly-owned subsidiary's name was changed to International Alpha Media, Inc. and then was changed to Lingo Media International Inc. on September 20, 2000.
ELI was incorporated under the laws of Delaware on April 6, 1999. On June 9, 1999, its articles were amended to increase its authorized capital and to include certain provisions with respect to the liability and indemnification of directors. On May 18, 2000 its name was changed from Yangtze OnLine, Inc. to EnglishLingo, Inc. ELI is 100% owned by the Company.
MBK was incorporated under the laws of Delaware on November 10, 1998. On December 22, 1998, the articles of the company were amended to increase the authorized capital and to include certain provisions with respect to the liability and indemnification of directors. MBK is owned 57.5% by the Company. The only asset of MBK which was a children software program was transferred to LMII and this company has been inactive for last two years.
THE OFFERING
Common Stock to be Resold 4,700,000 shares of common stock and
3,275,000 shares of common stock underlying
warrants
Common Stock Outstanding 20,733,287 Shares
Use of Proceeds The Company will receive no proceeds from the
resale of shares of common stock, but will
receive proceeds from the exercise of
warrants.
Limited Market Outside
of the U.S. Prior to this offering, there has been a
limited public market for our shares of common
stock on the TSX Venture Exchange under the
stock symbol LMD.
No Market in U.S. Prior to this offering, there has been no
public market for our shares of common stock
in the U.S. We provide no assurance that
there will be a market in the United States in
the future for our common stock. In the event
a market develops for our common stock, it
will likely be sporadic and volatile.
Determination of Offering
Price The initial public trading price of our shares
of common stock will be determined by market
makers independent of us.
Risk Factors The securities offered hereby involve a high
degree of risk. See "Risk Factors".
Common Stock Outstanding After
Offering Assuming No Exercise
Of Warrants 20,733,287 shares of common stock
Common Stock Outstanding
After Offering Assuming Exercise
of Warrants 24,008,287 shares of common stock
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SUMMARY CONSOLIDATED FINANCIAL DATA
You should read the following summary financial data in conjunction with our consolidated financial statements and the related notes, "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this document. Our financial statements are reported in Canadian dollars and presented in accordance with Canadian generally accepted accounting principles and reconciled to U.S. generally accepted accounting principles in the, footnotes, for the fiscal years ended December 31, 2001, December 31, 2000, December 31, 1999, and December 31, 1998 as well as the 13 months ended December 31, 1997 which was the Company's first audit report and includes an additional month to reflect the period since inception. The financial reports mentioned above have all been audited by KPMG LLP and information for the nine months ended September 30, 2002 and September 30, 2001 are unaudited.
When we refer to "Canadian dollars" and "$" in this document, we are referring to Canada dollars, the legal currency of Canada. When we refer to "U.S. dollars," and "US$" in this document, we are referring to United States dollars, the legal currency of the United States.
Nine Months Ended September 30, Year Ended December 31, 13 Months
2002 2001 2001 2000 1999 1998 1997
STATEMENT OF
OPERATIONS
DATA:
Revenue $ 1,032,322 $ 84,051 $ 333,691 $ 527,051 $ 732,127 $ 1,926,786 $1,316,085
Cost of sales 386,523 - 42,138 371,668 475,957 1,608,956 751,490
Gross profit 645,799 84,051 291,553 155,383 256,170 317,830 564,595
(loss)
General and 418,439 356,139 406,961 661,170 472,671 458,408 544,335
administrative
expenses
Operating income (loss) 9,766 (344,476) (253,832) (649,997) (420,421) (307,557) (43,819)
Gain on sale - 197,719 197,719 - - - -
of subsidiary
Gain on 101,438 - - - 143,962 - -
issuance of
shares of
subsidiary
Net income 111,203 (146,757) (44,706) (774,997) (276,459) (307,557) 8,090
(loss)
Net income
(loss) per
ordinary
share:
Basic and $ .00 $ (.01) $ (.00) $ (.05) $ (.03) $ (.03) $ (.00)
diluted
Weighted 17,281,401 15,966,978 16,095,471 14,567,994 10,783,827 10,615,499 8,729,597
Average
number of
common shares
outstanding
US GAAP net 79,029 (243,459) (467,000) (1,103,000) (219,000) (150,000)
profit (loss)
US GAAP basic (0.00) (0.01) (0.04) (0.08) (0.01) (0.01)
loss per
share
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September 30, As of December 31,
BALANCE SHEET 2002 2001 2000 1999 1998 1997
DATA:
Cash $ 35,062 $ 7,473 $ 44,207 - - $ 45,610
Working 409,437 (85,471) (78,085) (791,646) (401,445) 197,912
capital
Total assets 1,971,253 1,883,377 1,749,181 1,182,633 1,238,140 1,325,883
Short-term 131,903 411,096 195,700 561,302 428,884 288,200
Borrowings
and current
portion of
long term debt
Long term debt - 54,480 47,250 92,950 143,650 198,575
Shareholders' 1,581,220 1,211,572 1,142,778 75,903 352,362 352,719
equity
US GAAP equity 554,656 123,085 (511,000) 228,000 123,000 77,000
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The Company is subject to a number of risks and uncertainties. If any of the following risks occur, our business, results of operations and financial condition would likely suffer. In any such events, the market price of our common stock could decline and you may lose all or part of your investment in our shares of common stock.
Although the Company has secured a commitment from People Education Press in Beijing for EFL materials, there can be no assurance that the educational system in China will continue to accept the educational publications produced by the Company. In addition, although the use of the Internet in China is growing, the success of the Company's on-line educational services in that country will depend in large part on the widespread continued adoption of the Internet for general and educational use. In the event of failure to achieve or maintain such market acceptance, there could be a material adverse impact on the development of such on-line educational services on the Internet that in turn could have a negative impact on the Company.
The Company's planned on-line educational services in China may be subject to various laws and regulations relating to Internet usage and access. The regulatory environment related to such usage and access may evolve to address issues such as privacy, content, copyrights, distribution and characteristics and quality of products and services. The enactment of further regulatory mechanisms laws or regulations may impede the development and implementation of such services on the Internet and, in turn, could decrease the demand for the products and services that the Company provides as well as increase the Company's costs of doing business. The extent and applicability of existing laws to the Internet in China in respect of issues such as content ownership, privacy, rights of publicity, language requirements and content restrictions are uncertain and could expose the Company to significant liabilities. In addition, the extent and application of any new laws and regulations to the Internet could have a material adverse effect on the Company.
The Company has limited experience in the provision of traditional educational publishing and on-line services in China. Although the Company has retained the services of Canadian and Chinese educators to assist the Company with these endeavors, there can be no assurance that the Company will be able to attract and retain qualified personnel with relevant experience for the continued management and development of this area of its business.
The investment by the Company in the operations of EnglishLingo, Inc. may be accompanied by risks commonly encountered as businesses diversify into new areas of operation. Such risks include, among other things, the difficulty of assimilating the operations and personnel of the new areas of operation, the potential disruption of the Company's ongoing business, the distraction of management from the business of the Company, the inability of management to maximize the financial and strategic position of the Company, the maintenance of uniform standards, controls, procedures and policies and the impairment of relationships with employees and clients as a result of any integration of new management personnel. The failure to successfully integrate the new business operations of the Company could have a material adverse effect on the Company's business, revenues, operating results and financial condition.
The Company has developed strategic alliances in the form of Master Agreements to Develop, Publish, Sell Products And Product Agreements with People Education Press "PEP", Foreign Language Teaching and Research Press "FLTRP", Renzhen Group "RG" and China International Publishing Group "CIPG". The Company has also formed a marketing alliance with Clever Software Group Co., Ltd., a leading educational software company in China. The termination of these alliances may have an adverse effect on the Company's results of operation and financial conditions in the traditional educational publishing and web learning services sectors if the Company were unable to develop suitable substitute arrangements.
The Company's customers in China, excluding Clever Software Group Co. Ltd and Renzhen Group, are directly or indirectly owned or controlled by the state government of China. Accordingly, their business strategies, capital expenditure budgets and spending plans are largely decided in accordance with government policies, which, in turn, are determined on a centralized basis at the highest level by the State Planning Commission of the PRC. As a result, the growth of our business is heavily dependent on government policies for English language learning and training. Despite the high priority currently accorded by the government to this area, and a high level of funding allocated by the government to this sector, insufficient government allocation of funds to sustain its growth in the future could reduce the demand for our products and services and have a material adverse effect on our ability to grow our business.
Since the establishment of the PRC in 1949, the Communist Party has been the governing political party in China. The highest bodies of leadership are the Politburo of the Communist Party, the Central Committee and the National People's Congress. The State Council, which is the highest institution of government administration, reports to the National People's Congress and has under its supervision various commissions, agencies and ministries, including Ministry of Foreign Trade and Economic Co-operation "MOFTEC". Since the late 1970s, the Chinese government has been reforming the Chinese economic system. Reforms have included decollectivization of farms; legalization of interregional and international trade by individuals and businesses; legalization of markets in most goods and services; elimination of price controls; and privatization of some state-owned productive assets. Reforms began in the farming sector and rural industry, and were later implemented in various service industries. In the last five years, China has also begun dismantling large state monopolies in heavy industry. Although the Company believes that economic reform and the macroeconomic measures adopted by the Chinese government have had and will continue to have a positive effect on the economic development in China, there can be no assurance that the economic reform strategy will not from time to time be modified or revised. Such modifications or revisions, if any, could have a material adverse effect on the overall economic growth of China and investment in the English language learning and training sectors in China. Such developments could reduce, perhaps significantly, the demand for our products and services. There is no guarantee that the Chinese government will not impose other economic or regulatory controls that would have a material adverse effect on our business. Furthermore, changes in political, economic and social conditions in China, adjustments in policies of the Chinese government or changes in laws and regulations could adversely affect our industry in general and our competitive position in particular. Changes in government policies might include increased restrictions on the nature of business activities that foreign-owned enterprises may perform or additional tax/fee/license requirements for foreign-owned enterprise; increased restrictions on the publishing industry, including restrictions on the nature of business activities that publishers may perform; additional tax/fee/license requirements; requirements to publish or not to publish certain content; and direct state supervision or control of publisher's activities; and more intensive approval requirements for educational materials.
The educational publishing market in China is rapidly changing. Competitors to the Company's strategic co-publishing partners in the market mainly include provincial educational publishing companies such as Yilin Educational Press and Shanghai Foreign Language Educational Press. In addition, there are many large multinational educational publishing companies with substantial, existing publishing operations in Asian markets including China that have significantly greater financial, technological, marketing and human resources. Should additional multinational educational publishing companies decide to enter the English language learning and training market in China, this could hurt the Company's future profitability and erode its market share.
Our competitors, some of whom have greater financial, technical and human resources than us, may be able to respond more quickly to new and emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of new products or services. It is possible that competition in the form of new competitors or alliances, joint ventures or consolidation among existing competitors may decrease our market share. Increased competition could result in fewer customer engagements, reduced gross margins and loss of market share, any one of which could materially and adversely affect our profits and overall financial condition.
The Chinese economy has experienced uneven growth across geographic and economic sectors and has recently been slowing. There can be no assurance that the economic slow down will not continue. The China economy is also experiencing deflation which may continue in the future. The current economic situation may adversely affect our profitability over time as expenditures for English as a Foreign Language product may decrease due to the results of slowing domestic demand and deflation. In addition, the Chinese government may implement changes in fiscal policy that could increase our costs of operating our business in China or slow demand for our products. We cannot predict what effects changes in Chinese government policies may have on our business or results of operations.
In recent years, the Chinese economy has experienced periods of rapid growth as well as relatively high rates of inflation, which in turn has resulted in the periodic adoption by the Chinese government of various corrective measures designed to regulate growth and contain inflation. Since 1993, the Chinese government has implemented an economic program designed to control inflation, which has resulted in the tightening of working capital available to Chinese business enterprises. The recent Asian financial crisis has resulted in a general reduction in domestic production and sales, and a general tightening of credit, throughout China.
Substantially all of the revenues and operating expenses of our Chinese business are denominated in Renminbi or RMB. The Renminbi is currently freely convertible under the "current account", which includes dividends, trade and service-related foreign exchange transactions, but not under the "capital account", which includes foreign direct investment.
Currently, Chinese publishing companies which are a party to co-publishing agreements with foreign publishers, such as our Master Agreements with PEP, FLTRP, RG and CIPG may purchase foreign exchange for settlement of "current account transactions", including payment of dividends, without the approval of the State Administration for Foreign Exchange. However, we cannot assure you that the relevant Chinese governmental authorities will not limit or eliminate the Company's ability or the Company's Co-Publishing partners' ability to purchase and retain foreign currencies in the future.
Since a significant amount of our future revenues will be in the form of US dollars linked to the pegged exchange rate of Renminbi, any future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside China.
Foreign exchange transactions are still subject to limitations and require government approval. This could affect the ability of our existing or future Chinese partners to obtain foreign exchange. Effective December 1, 1998, all foreign exchange transactions involving the Renminbi must take place through authorized banks in China at the prevailing exchange rates quoted by the People's Bank of China.
Our reporting currency is the Canadian Dollar. However, substantially all revenues from China activities are denominated in US dollars linked to the pegged exchanged rate of the Renminbi. Our assets and revenues are expressed in our Canadian Dollar. Financial statements will decline in value if the Renminbi depreciates relative to the Canadian and United States Dollar. Any such depreciation could adversely affect the market price of our common stock. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by Chinese exchange control regulations that restrict our and our Chinese partners' ability to convert Renminbi into United States Dollars.
The Company's future success is dependent on the success and ability of its key management and product development teams. The Company has obtained keyman insurance on its senior executive in the amount of $1,000,000. The loss of key personnel or the inability to attract and retain highly qualified personnel, consultants or advisors, particularly with respect to the Company's intended expansion into on-line educational services in China, could adversely affect the Company's business. The Company faces competition for such personnel from other companies and organizations. There can be no assurance that the Company will be successful in hiring or retaining qualified personnel. The inability of the Company to retain and attract the necessary personnel or the loss of services of any of its key personnel could have a material adverse effect on the Company.
As the Company endeavors to increase its sales and develop new lines of business, it will be subject to a number of risks associated with the management of such growth. These risks include increased responsibilities for existing personnel, the need to hire additional qualified personnel and, in general, higher levels of operating expenses. In order to manage current operations and any future growth effectively, the Company will need to continue to implement and improve its operational, financial and management information systems and to hire, train, motivate, manage and retain qualified employees. In particular, as the Company proceeds with anticipated development of on-line and traditional educational services for the Chinese market, it will need to ensure that adequate mechanisms are in place to address potential growth from the largely untapped Chinese marketplace and to ensure that the Company has hired, trained and retained employees that are familiar with that marketplace. There can be no assurance that the Company will be able to manage such growth effectively, that its management, personnel or systems will be adequate to support the Company's operations or that the Company will be able to achieve the increased levels of revenue commensurate with the increased levels of operating expenses associated with this growth. In the event the Company is unable to manage its growth effectively due to expenses exceeding sales, the timing of expenses becoming due or other reasons, the Company may be forced to reduce or curtail operations.
We have derived and believe that we will continue to derive a significant portion of our revenues from a limited number of large customers. In 1999, four customers accounted for 92% of our revenues. In 2000, three different customers accounted for 100% of our revenues. In 2001, two customers accounted for 93% of our revenues with a new customer accounting for 74% of such revenues. The loss, cancellation or deferral of any large contract by any of our large customers would have a material adverse effect on our revenues, and consequently our profits. In addition, there can be no assurance that we will continue to bring in new significant customers.
Both the traditional publishing industry and the on-line services industry continue to experience technological change. The publishing industry continues to evolve from traditional mechanical format printing to full digital printing. The inability of the Company to keep pace with the new technologies and standards in the print industry could render its products and services non-competitive. The Company's future success will depend on its ability to address the increasingly sophisticated needs of its customers by producing and marketing enhancements to its products and services that respond to technological changes or customer requirements. The Company may be required to invest significant capital in additional technology in order to remain competitive. In addition, the provision of on-line services is characterized by continuing improvements in technology that results in the frequent introduction of new products, short product life cycles and continual improvement in product price/performance characteristics. A failure on the part of the Company to effectively manage a product transition will directly affect the demand for the Company's products and the profitability of the Company's operations.
The Company does transact some business involving currencies other than the Canadian currency in both purchasing and selling goods and services. The Company is exposed to fluctuations in foreign currency exchange rates that may have an adverse effect on the Company's businesses.
The traditional media platform is being increasingly challenged by the growing body of multimedia products. Multimedia products serve as ancillary tools to traditional publishing mediums such as print but can also serve as stand-alone interactive tools replacing traditional publishing mediums. Although the Company is continuing its own publishing activities using multimedia interactive mediums, the continued growth of multimedia products may detract from the viability of traditional publishing activities.
A key component of the continued success of the traditional publishing activities of the Company will be the ability of the Company to maintain high quality editorial content. The Company must continue to develop new and innovative materials to sustain its educational publishing activities in order to ensure the continued viability of the traditional publishing aspects of its business. Although the Company continues to retain leading educators to develop content for its educational publications, there can be no assurance that the Company will be able to continue hiring leading educators to maintain the current high levels of editorial content for future publications.
Recent funding cuts by both federal and provincial governments in Canada to all forms of educational institutions have presented a major hurdle to the Canadian publishing industry over the last several years. In an effort to meet deficit-reduction targets, both levels of government in Canada have significantly cut funding for, amongst other things, textbook purchases. Any further change in curriculum development and selection policies by governmental bodies responsible for those activities, both in Canada and in other countries, may have a negative effect on the Company's strength and profitability.
The Canadian publishing industry is large and diverse with many competing participants. While the Company's particular area of concentration in educational books does not face the level of competition as other areas of the publishing industry, the Company does face competition within the Canadian marketplace from other competitors that have larger and substantially greater resources than the Company. In addition, other publishing companies may expand their range of activities to directly compete in these segments. Competition to provide educational print services in Canada is largely based on price, product innovation and quality, timeliness of product delivery and ability to service the specialized needs of customers. There can be no assurance that the Company will be able to compete effectively with its publishing competitors. In addition, although the Company is unaware of any specific competitor competing in on-line educational services marketplace in China, the Company faces considerable competition from traditional educational publishing companies and from educational software providers in China both of which offer the same or similar services as are available from the Company's traditional publishing operations and will be available via the Company's on-line educational services. In addition, it is anticipated that as the world's largest market becomes more open to foreign involvement, in the Chinese marketplace in general and in educational programs in particular, the level of competition will further intensify.
The specialty publishing business is a form of promotion and advertising. There can be no assurances that the Company's specialty publishing clients will continue to use their promotional and advertising expenditures on such forms of promotion and advertising or will not increase their utilization of other forms of advertising and promotion such as billboards, newspapers and radio/television commercials.
For the nine months ended September 30, 2002, we had revenues of $1,032,322, and as of September 30, 2002 we had cash of $35,062, accounts receivable of $685,436, and current liabilities of $390,034. We will not receive any proceeds from the resale of the shares registered in this offering, but may receive proceeds from the exercise of warrants. We believe that our current cash on hand along with our accounts receivable and recurring sales, will satisfy our working capital requirements for at least the next twelve months. After that, we may need to raise additional funds in order to finance our operations. The Company presumes that corporate growth will be funded both out of positive cash flow and from the sale of equity and/or debt to help generate needed capital. Insuring that capital is available to increase production, sales and marketing capacity and to provide support materials and training in the market place is essential to success. We cannot assure you that financing will be available on terms favorable to us, or at all. If adequate funds are not available on acceptable terms, we may be forced to curtail or cease our operations. Even if we are able to continue our operations, the failure to obtain financing could have a substantial adverse effect on our business and financial results.
The Company has had a history of losses and there is no assurance that it can reach profitability in the future. The Company will require significant additional funding to meet its business objectives. Capital will need to be available to help expand not only the production capacity of the corporation's vendors but also to improve market penetration and sales through an increasing distribution network.
In the United States, reporting standards for auditors require the addition of an explanatory paragraph when the financial statements are affected by conditions and events that cast doubt on the Company's ability to continue as a going concern, such as those described in note 1 to the consolidated financial statements. Our financial statements do not include any adjustments that might result from the outcome of that uncertainty. The auditors' report to the shareholders dated May 3, 2002, is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors' report when these are adequately disclosed in the financial statements.
From time to time, the markets in which the Company sells its products experience weak economic conditions that may negatively affect the Company's sales. Any general economic, business or industry conditions that cause customers to reduce or delay their investments in educational publications and products may have a negative effect on the Company's strength and profitability. The Company may experience some seasonal trends in the sale of its publications. For example, sales of published materials experience seasonal fluctuations with higher sales in the third calendar quarter and first calendar quarter.
Prior to this prospectus, there has been no public trading market for our common stock in the U.S. Upon the registration statement becoming effective, the common stock will not be listed on a national securities exchange, Nasdaq, or on the OTC Bulletin Board. Management's strategy is to list the common stock on the OTC Bulletin Board as soon as practicable. However, to date we have not solicited any such securities brokers to become market-makers of our common stock. There can be no assurance that an active trading market for the common stock will develop or be sustained upon the registration statement becoming effective or that the market price of the common stock will not decline below the initial public trading price. The initial public trading price will be determined by market makers independent of us.
Upon the registration statement becoming effective, the common stock will not be listed on a national securities exchange, Nasdaq, or on the OTC Bulletin Board. Management's strategy is to list the common stock on the OTC Bulletin Board as soon as practicable. However, to date we have not solicited any such securities brokers to become market-makers of our common stock. The initial public trading price will be determined by market makers independent of us.
Prior to this Offering, there has been no public market for our common shares. If a public trading market does develop, the market price of our common shares could fluctuate substantially due to:
Quarterly fluctuations in operating results;
Announcements of new products or services by us or our competitors;
Technological innovations by us or our competitors;
General market conditions or market conditions specific to our or our
customer's industries; or
Changes in earning estimates or recommendations by analysts.
In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has at times been instituted against the company. If we become subject to securities litigation, we could incur substantial costs and experience a diversion of management's attention and resources.
Approximately 15% of the issued and outstanding common shares of the Company including options and warrants which are exercisable within 60 days are held by officers and directors of the Company. As a result, the shareholders will be able to exercise significant influence over all matters requiring shareholder approval, including the election of directors and significant corporate transactions.
We intend to apply to have our common shares quoted on the OTC Electronic Bulletin Board, a NASD sponsored and operated quotation system for equity securities. It is a more limited trading market than the NASDAQ Small Cap Market, and timely, accurate quotations of the price of our common shares may not always be available. You may expect trading volume to be low in such a market. Consequently, the activity of only a few shares may affect the market and may result in wide swings in price and in volume.
Once our common shares are listed on the NASD OTC Bulletin Board, they will be subject to the requirements of Rule 15(g)9, promulgated under the Securities Exchange Act as long as the price of our common shares is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trade involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.
The stock market has experienced significant price and volume fluctuations, and the market prices of companies, have been highly volatile. Investors may not be able to sell their shares at or above the then current, OTCBB price. In addition, our results of operations during future fiscal periods might fail to meet the expectations of stock market analysts and investors. This failure could lead the market price of our common shares to decline.
The preponderance of our assets are located outside the United States and are held through companies incorporated under the laws of Canada, Barbados, and arrangements established in China. Our current operations are conducted in China. In addition, a majority of our directors and officers are nationals and/or residents of countries other than the United States. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for shareholders to effect service of process within the United States upon these persons. In addition, investors may have difficulty enforcing, both in and outside the United States, judgments based upon the civil liability provisions of the securities laws of the United States or any state thereof.
Included in this Form F-1 Registration Statement are various forward-looking statements that can be identified by the use of forward looking terminology such as "may", "will", "expect", "anticipate", "estimate", "continue", "believe", or other similar words. We have made forward-looking statements with respect to the following, among others:
- the Company's goals and strategies;
- the Company's ability to obtain licenses/permits to operate in China;
- the importance and expected growth of English as a Foreign Language in
China;
- the Company's revenues;
- the Company's potential profitability; and
- the Company's need for external capital.
These statements are forward-looking and reflect our current expectations. They are subject to a number of risks and uncertainties, including but not limited to, changes in the economic and political environments in China, changes in technology and changes in the Internet marketplace. In light of the many risks and uncertainties surrounding China and the Internet marketplace, prospective purchasers of our shares should keep in mind that we cannot guarantee that the forward-looking statements described in this Form F-1 will transpire.
Item 4. Information With Respect To The Registrant And The Offering.
Table No. 1
Directors
Name (1) Age Date First Elected/Appointed
----------------------------------------------------------------------------
Richard J.G. Boxer (2)(3) 54 November 1996
Richard H. Epstein (3) 39 July 2001
Chen Geng (3) 32 July 2001
Michael P. Kraft (3) 39 November 1996
Scott Remborg (2)(3) 54 July 2000
----------------------------------------------------------------------------
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(1) The business address of each Director is 151 Bloor St. West, Ste. 890,
Toronto, Ontario Canada M5S 1S4.
(2) Member of Audit Committee.
(3) Resident/Citizen of Ontario, Canada.
Table No. 2
Senior Management
Date of
First
Name (1) Position Age Appointment
----------------------------------------------------------------------------
Michael P. Kraft(2) President/CEO 39 April 1996
Imran Atique Secretary/Treasurer 26 September 2001
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(1) The business address of each member of Senior Management is 151 Bloor
Street West, Toronto, Ontario, Canada M5S 1S4
(2) He spends 80% of his time on the affairs of the Company.
(3) He spends 20% of his time on the affairs of the Company.
Michael P. Kraft's business functions, as President/CEO of the Company, include strategic planning, business development, product development, financing and banking, and reporting to the Board of Directors.
Imran Atique's business functions, as Secretary and Treasurer of the Company, include assisting the Chief Financial Officer and the President in all financial matters and assisting the Board of Directors in carrying out their duties.
Khurram R. Qureshi's business functions, as Chief Financial Officer of the Company, include financial administration, project management, accounting, providing support to the President/CEO in financing issues.
The selected financial data should be read in conjunction with the financial statements and other financial information included elsewhere in the Registration Statement.
The Company has not declared any dividends since incorporation and does not anticipate that it will do so in the foreseeable future. The present policy of the Company is to retain future earnings for use in its operations and the expansion of its business.
Selected Financial Data
Nine Months Ended
September 30, Year Ended December 31, 13 Months
2002 2001 2001 2000 1999 1998 1997
STATEMENT OF
OPERATIONS
DATA:
Revenue $ 1,032,322 $ 84,051 $ 333,691 $ 527,051 $ 732,127 $ 1,926,786 $1,316,085
Cost of sales 386,523 - 42,138 371,668 475,957 1,608,956 751,490
Gross profit 645,799 84,051 291,553 155,383 256,170 317,830 564,595
(loss)
General and 418,439 356,139 406,961 661,170 472,671 458,408 544,335
Administrative
Expenses
Operating 9,766 (344,476) (253,832) (649,997) (420,421) (307,557) (43,819)
income (loss)
Gain on sale - 197,719 197,719 - - - -
of subsidiary
Gain on 101,438 - - - 143,962 - -
issuance of
shares of
subsidiary
Net income 111,203 (146,757) (44,706) (774,997) (276,459) (307,557) 8,090
(loss)
Income Taxes. . 94,097
Net income
(loss) per
ordinary
share:
Basic and $ (.00) $ (.01) $ (.00) $ (.05) $ (.03) $ (.03) $ (.00)
Diluted
Weighted 17,281,401 15,966,978 16,095,471 14,567,994 10,783,827 10,615,499 8,729,597
Average
number of
common shares
outstanding
US GAAP net 79,029 (243,459) (467,000) (1,103,000) (219,000) (150,000)
profit (loss)
US GAAP basic (0.00) (0.01) (0.04) (0.08) (0.01) (0.01)
loss per
share
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September 30, As of December 31,
BALANCE SHEET 2002 2001 2000 1999 1998 1997
DATA:
Cash $ 35,062 $ 7,473 $ 44,207 - - $ 45,610
Working 409,437 (85,472) (78,085) (791,646) (401,445) 197,912
Capital
Total assets 1,971,253 1,883,377 1,749,181 1,182,633 1,238,140 1,325,883
Short-term 131,903 411,096 195,700 561,302 428,884 288,200
Borrowings
and current
portion of
long term debt
Long term debt - 54,480 47,250 92,950 143,650 198,575
Shareholders' 1,581,220 1,211,572 1,142,778 75,903 352,362 352,719
Equity
US GAAP equity 554,656 123,085 (511,000) 228,000 123,000 77,000
(1) a)Under US GAAP SFAS 123, companies are encouraged but not required to
include in compensation the fair value of stock options granted to
employees. On a pro-forma basis, the expensing of such "costs" would have
increased reported loss by $271,881; $1,127,018 and $499,894 or Fiscal
2001, Fiscal 2000 and Fiscal 1999, respectively; the effects on pro-forma
disclosure of applying SFAS 123 are not likely to be representative of the
effects on pro-forma disclosures in future years. The weighted average
estimated fair value at date of grant, as defined by SFAS 123, for options
granted in Fiscal 2000 was $0.45 (1999 - $0.18).
b) Under US GAAP, development costs are expensed as incurred: 2001 -
$168,184; 2000 - $348,689; and 1999 - $144,874.
c) Under US GAAP, development costs amortized under Canadian GAAP would be
reversed to calculate Loss per Share: 2001 - $43,910; 2000 - $74,500; and
1999 - $82,916.
d) Under US GAAP, software development costs are expensed as incurred: 2001
- $ nil; 2000 - $30,957; and 1999 - $93,227.
e) Under US GAAP, compensation expense based on the fair market value of
stock options granted in exchange for services from consultants is
recorded: 2001 - $59,983; 2000 - $22,500; and 1999 - $35,500.
f) On 5/28/2001, the Company sold its investment in AlphaCom Corporation
and recorded a gain on sale of discontinued operations of $197,720.
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The Company's common shares began trading on the Alberta Stock Exchange in Calgary, Alberta, Canada under its former name Alpha Ventures Inc. in November 1996. The Alberta Stock Exchange was absorbed by the Canadian Venture Exchange, which was absorbed by the TSX Venture Exchange. The Company's listing was automatically transferred from the Alberta Stock Exchange to the TSX Venture Exchange "TSX VEN" as a Tier 2 company. The current stock symbol on the TSX VEN is "LMD".
The TSX Venture Exchange ("Exchange") currently classifies Issuers into different tiers based on standards, including historical financial performance, stage of development and financial resources of the Issuer at the time of listing. Specific Minimum Listing Requirements for each industry segment in each of Tier 1 and Tier 2 have been established by the Exchange.
Policy 2.1 of the Exchange outlines the Minimum Listing Requirements for each industry segment in Tier 1 and Tier 2. Under this policy, Lingo Media Inc. is a Tier 2 Issuer in the industry segment category of Technology or Industrial. Each industry segment is further divided into categories. Quantitative minimum requirements for listing for the industry segment Technology or Industrial and Tier 2 are provided in Section 4.3 of Exchange Policy 2.1.
Similarly, Policy 2.5 of the Exchange sets out the minimum standards to be met by Issuers to continue to qualify for listing in each Tier, referred to as Tier Maintenance Requirements ("TMR"). A Tier 2 Issuer which fails to meet one of the Tier 2 TMR will not automatically be suspended or designated as "Inactive". The Exchange will provide notice of failure to meet one of the Tier 2 TMR and will allow the Issuer 6 months from the date of notice to meet the requirement, failing which the Exchange may designate the Issuer as Inactive. If a Tier 2 Issuer fails to meet more than one Tier 2 TMR, notice will be given to the Issuer by the Exchange and if the requirements are not met within 90 days of the notice, the Exchange will designate the Issuer as Inactive and apply the restrictions on Inactive Issuers retroactively. An Inactive Issuer may continue to trade on Tier 2 of the Exchange for 18 months from the date it is designated as Inactive. If the Issuer does not meet all of the applicable Tier 2 TMR within that 18 month period, its listed shares may be suspended from trading by the Exchange.
To maintain a listing as an active Tier 2 Issuer, an Issuer must meet all Tier 2 TMR for its industry segment as set out in Section 4 of the Exchange Policy 2.5.
The table below lists the volume of trading and high, low and closing sales prices on the TSX Venture Exchange (Alberta Stock Exchange) for the Company's common shares for: the last thirteen fiscal quarters; and the last five fiscal years.
TSX Venture Exchange
Common Shares Trading Activity
- Sales -
Period Canadian Dollars
Ended Volume High Low Closing
---------------------------------------------------------------------------------
Monthly
January 44,250 0.09 0.08 0.08
December 307,000 0.10 0.05 0.10
November 52,000 0.10 0.05 0.09
October 87,000 0.10 0.05 0.05
September 5,000 0.11 0.09 0.09
August - - - -
July 32,500 0.13 0.12 0.13
June 23,500 0.13 0.12 0.13
May 129,300 0.10 0.03 0.10
April 20,500 0.15 0.09 0.10
Quarterly
9/30/2002 37,500 0.13 0.09 0.09
6/30/2002 173,300 0.13 0.10 0.13
3/31/2002 176,000 0.15 0.04 0.10
12/31/2001 1,614,236 0.12 0.04 0.12
9/30/2001 174,776 0.18 0.07 0.07
6/30/2001 206,700 0.20 0.10 0.11
3/31/2001 122,600 0.35 0.15 0.20
12/30/2000 502,950 0.50 0.18 0.40
9/30/2000 292,100 0.60 0.30 0.45
6/30/2000 590,900 1.00 0.35 0.50
3/31/2000 7,359,200 1.40 0.10 0.90
12/31/1999 249,400 0.25 0.05 0.25
9/30/1999 40,400 0.07 0.07 0.07
6/30/1999 196,000 0.10 0.10 0.10
3/31/1999 69,999 0.17 0.09 0.17
Yearly
12/31/2001 2,118,312 0.35 0.04 0.12
12/31/2000 8,745,150 1.40 0.10 0.40
12/31/1999 554,800 0.25 0.05 0.25
12/31/1998 1,094,300 0.45 0.10 0.19
12/31/1997 1,178,200 0.55 0.23 0.34
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. These forward-looking statements relate to analyses and other information which are based on forecasts of future results and estimates of amounts not yet determinable. When our management makes assumptions for such forecasts, it makes them in light of the information it currently has available.
Many of the forward-looking statements are identified by their use of terms and phrases such as "anticipate", "believe", "could", "estimate", expect", "intend", "should", "may", "plan", "potential", "predict", "project", "will" and similar terms and phrases and may include references to assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described in "Risk Factors" and elsewhere in this prospectus. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our views only as of the date of this prospectus. We undertake no obligation to update these statements or publicly to release the result of any revisions to these statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.
Such forward-looking statements in this prospectus include, among others, our current intent, belief or expectations regarding the following:
- The Company's goals and strategies;
- The Company's ability to obtain licenses/permits to operate in China;
- The importance and expected growth of English as a Foreign Language in
China;
- The Company's revenues;
- The Company's potential profitability; and
- The Company's need for external capital.
The following table sets forth the capitalization and indebtedness of the Company as of September 30, 2002 in Canadian dollars.
Capitalization and Indebtedness
September 30, 2002
Long-Term Portion of Long-Term Debt $0
Long-Term Loans Payable $0
Shareholders' equity:
Common Shares, no par value;
Unlimited Number of shares authorized,
20,733,827 shares issued and outstanding $3,077,391
Deferred Stock Based Compensation ($3,958)
Retained Earnings (deficit) ($1,492,213)
Net Stockholders' Equity $1,581,220
TOTAL CAPITALIZATION $1,581,220
Stock Options Outstanding 2,498,340
Warrants Outstanding: 3,275,000
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Background
Lingo Media is a provider of language learning products to domestic and international markets, with a particular emphasis on China and Canada. The products include traditional media, such as books, audio, CD-ROM, and supplemental products. Additionally, the Company is developing an online service for English language learning.
Lingo Media's strengths and opportunities lie in its approach to the development of original language learning materials-including English as a Second/Foreign Language (ESL/EFL) and Language Arts for English speakers. In China, the Company pre-sells its program to educational ministries through co-publishing with local publishers, while retaining full copyright ownership and distribution rights for all other markets. In Canada, the Company has received Ontario Ministry of Education approval for one of its elementary programs.
Additionally, Lingo Media through its subsidiary EnglishLingo, Inc. intends to launch EnglishNIHAO.com which plans include the presentation of online language exercises, quizzes, course modules and innovative contests. It is anticipated that some of the materials and services will be offered free while others will be provided on a paid subscription basis. The Company plans to leverage the valuable publishing and distribution relationships it has established in China. Consequently, Lingo Media is working with a local strategic partner, Clever Software Group Co., Ltd., and plans to launch the online service in the first quarter of 2003. As of February 19, 2003, the online service has not been launched.
CHINA
Lingo Media has spent four years developing English as a Foreign Language (EFL), products, programs, and relationships in the Chinese market. Learning to communicate in English is seen as a top priority for Chinese school students and young adult learners. Along with learning how to use a PC, English skills are perceived as a key determinant of their future levels of prosperity. The Company's EFL book, audio and CD-based programs are unique in that they have a special focus on the spoken language. In addition to developing learning materials, considerable resources have been expended on the development of relationships with leading Chinese publishers, both in the education and trade sectors, as well as in extensive marketing and pre-selling of Lingo Media's programs.
The Company is capitalizing on its co-development approach in the Chinese market. Lingo Media sees its relationships with leading Chinese publishers; its Canadian and Chinese author teams; and its original custom-developed content as key factors in opening up the Chinese educational market. The Company has secured long-term publishing contracts for the Kindergarten to Grade 12 (K-12) and higher educational markets, which it anticipates will generate ongoing revenue streams from the sale of its programs.
CANADA
Lingo Media adapted The Out Loud Program: Rhymes, Rhythms and Patterns for Language Learning and created a school edition in the summer of 2001 for the primary school market.
The Company has successfully entered the Ontario education market. The Ontario Ministry of Education has approved and listed The Out Loud Program: Rhymes, Rhythms and Patterns for Language Learning as part of their early reading strategy intended to enhance the reading ability of primary school children. The Out Loud Program which now includes student textbooks, teacher's source books, poster cards and audiocassettes was launched in Ontario in November 2001. Marketing began on a Canada-wide basis in January 2002 and The Out Loud Program was launched in the United States at the International Reading Association Annual Conference in April 2002 in San Francisco.
Lingo Media has a strategic relationship in place with one of China's leading educational software companies, Clever Software Group Co., Ltd., for the launch of an English language-learning portal. Now at 26.5 million, the number of Internet users in China is growing at a furious pace; it has doubled every 6 months over the past 2 years. This makes electronic delivery of Lingo Media's content over the web a natural extension. In Clever Software, the Company has identified a strategic partner not only for development of the online service, but also for marketing of the service. Clever will play a key role in generating traffic to the site. With 22 district sales offices, and staff of 1,200, Clever has established an enviable relationship with students and educators throughout China. Lingo Media's business model with the Clever partnership is based on a combination of subscription and e-commerce revenues.
E-LEARNING
CHINA:
Use of Lingo Media's EFL experience, relationships and content.
Relationship with Clever Software Group Co., Ltd.
Lingo Media specializes in the publishing of materials for language learning.
LIN'GO - probably from the French Provincial for "tongue"; originally from Latin. Strange or incomprehensible language or speech: as a foreign language or the special vocabulary of a specific field of interest.
LIN'GO ME'DI.A - a company whose goal is to make the English language accessible to precisely targeted and researched markets through the development of unique books, tapes, CDs, videos, and online content. With its international partners in research, distribution and marketing and teams of writers and educators, Lingo Media is equipped to profit from the coming growth in English language learning. There are two distinct markets: English as a Second Language (ESL) is the study of English in a country where the native tongue is English, whereas English as a Foreign Language (EFL) is the study of the English language in a country where the native tongue is not English. English for Special Purposes (ESP) is an extension of English language learning.
Over the past decade, English has become the international language; it's the lingua franca of the Internet, the international tongue for professionals ranging from banking to air transportation, and the language of technology and science. As the world shrinks, trade, commerce and communication are increasingly global. Country after country is now recognizing that the future will belong to those who are proficient in the English language. The Company is on the cusp of huge growth in English language acquisition; not by people wanting to emigrate but by people wanting the competitive advantage of English language skills in their home country.
The Lingo Media Approach
To gain maximum penetration and acceptance in a country, materials must reflect
the culture of the learners. Yet, all too often, English as a Foreign Language
(EFL) materials are merely repackaged English as a Second Language (ESL)
materials originally intended for an emigrant market. At Lingo Media, we team
top North American writers and educators with their counterparts in our target
countries and work with local publishers and educational organizations to ensure
that we are creating the right kinds of materials - materials that will be the
backbone of an EFL curriculum.
What makes learning English more accessible to an audience? Two simple concepts that are easy to see but challenging to implement: quality and relevance. Our core philosophy is to develop English language learning materials that are customized to the market we are trying to reach. Our approach involves:
Researching and understanding the market The whole process begins with relationship building and communication. We talk with key organizations; associations and ministries in a country to better understand needs and concerns. We look for the right niche for the Company, and then seek local partners/stakeholders to develop/produce a customized program. Moreover, we search for individuals in market countries who can manage the Company's affairs. These individuals become our links to that country's community and culture.
Creating bilateral author teams
Once we have Lingo Media liaisons in place, we establish a team of writers from
North America with writers from the target country. This team's goal is to
ensure that materials serve the intended market and meet the highest educational
standards.
Developing original culturally relevant material We've found the multiple-perspective approach of dual-country author teams adds immensely to the quality and relevance of the programs we publish. Moreover, our people in the field within the target country are constantly measuring the development of the program; does the material serve the intended audience? Is everything on track?
Comprehensive product development
Because we know that a language-learning program needs to serve a number of
different groups, we consider the requirements of all of the ultimate users:
administrators, teachers and students. Each group will have its own
perspective, which we integrate into an approach that works for all.
Collaborative partnerships
We know that when clients are involved with the process of developing programs,
they are much more likely to be pleased with the results. In fact, because our
partners are so involved with every stage of program development from content
creation through distribution, we think of our clients as strategic team
members.
CHINA STATISTICS:
Population 1.3 billion (4) Internet users (2001) 26.5 million (1) Projected Internet users by mid 2003 33 million (Source: BDA) P.C. users 14 million (Company estimate) Students in primary/secondary grades 198 million (4) Students learning English (mandatory) 115 million (3) Total English Learners 165 million (Company estimate) Teachers 11.4 million (2) Homes with TV 330 million (Company estimate) Bookstores 13,573 (4)
(1) Source: SemiAnnual Survey Report On Internet Development In China
(2001.7)(CNNIC")
(2) Source: "China" New Star Publishers 1999)
(3) Source: People's Education Press)
(4) Source: China National Statistics Bureau)
(5) Source: BDA
Historically, the importance of education has been a high priority in China, where children take care of their parents later in life, and by extension where parents do everything they can to contribute to their children's prosperity. As parents are now able to have only one child, resources are channeled even more intensively to ensure their child's success. Next to learning how to use a PC, learning how to speak English is considered critical for future prosperity. However, because it is only in recent years that English has been taught at all, enormous resources will be required to meet these educational needs. The market is vast and diverse, encompassing EFL and ESP studies for children, adolescents and adults.
China
We selected China as our first country of exploration because, with some 115 million students currently learning English in schools, it is the largest EFL market in the world. In China, Lingo Media has forged links and established partnerships with Chinese government organizations and private businesses in order to help us maximize our market penetration.
Bilateral Authoring Teams
September 2000 marked the launch of the Company's first pilot program in China:
Let's Learn English! Beginning English for Young Learners. The program was
developed by an international team of educational writers: Jack Booth, David
Booth, Linda Booth and Larry Swartz (the award winning Canadian authors of the
elementary language arts text Impressions), together with Meng Yanjun, Zhang
Lingdi, and Lin Li from the Beijing Educational Commission.
Relevant Material
Our teams ensure that program material is relevant and culturally appropriate,
as well as educationally sound. Beginning English for Young Learners for
example, was specifically created for China, and addresses the need to focus on
spoken English.
Collaborative Partnerships
Throughout the preparation and production of Beginning English for Young
Learners, we benefited from a close practical relationship with our local
partner. The Beijing Educational Commission assembled a Chinese author team to
work with the Canadian authors. Such a relationship enhanced the quality of the
materials produced, and ensured the success of the program.
Comprehensive Product Development
Before we even started developing a program such as Beginning English for Young
Learners, we spent time forging relationships with select government authorities
and educational publishing experts. We needed to understand their perspective
on English language learning and their criteria when developing a curriculum.
By asking the right questions, and listening to the answers, we were ready by
July 1999 to begin delivering a solution. Now that the pilot program has
launched in Beijing, we're listening again. Our plan is for this program to be
implemented nationally. That means our relationship will continue with Beijing
Educational Commission and the Company's distribution partner, Peoples Education
Press as we collect and assess relevant feedback.
Series: Beginning English For Young Learners
Launch Date: In process, not launched yet
Type of Program: English as a Foreign Language (EFL)
English as a Second Language (ESL)
Description: A series of student books, audiocassettes, teacher
resource books and ancillary materials. The program
promotes oral language use through partner-based
activities suited for both large and small groups.
It enhances listening, speaking and emerging literacy
skills, using an activity-based approach.
Components: Student Books: 4
Audiocassettes: 8
Teacher Resource Books: 2
Target Audience: Elementary Schools: Grade 1 and 2
Author Teams: Canada: David Booth, Jack Booth,
Linda Booth, Larry Swartz
China: Meng Yanjun, Zhang Lingdi, Lin Li
Publisher: Lingo Media
China School Edition: Co-Publisher -
People's Education Press
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Series: PEP Primary English
Launch Date: September 2001
Type of Program: English as a Foreign Language (EFL)
English as a Second Language (ESL)
Description: A series of student books, audiocassettes, teacher
Resource books and ancillary materials. The program
employs a variety of learning strategies to promote
interactive, two-way communication as students
explore the content through task-based activities.
Components: Student Books: 8
Audiocassettes: 8
Teacher Resource Books: 8
Ancillary Materials: in development
Target Audience: Elementary Schools: Grade 3-6
Author Teams: Canada: David Booth, Jack Booth,
Linda Booth, Larry Swartz
China: Gong Yafu, Wu Yuexin
Publisher: Lingo Media
China School Edition: Co-Publisher -
People's Education Press
Series: Starting Line
Launch Date: September 2001
Type of Program: English as a Foreign Language (EFL)
English as a Second Language (ESL)
Description: A series of student books, audiocassettes, teacher
Resource books and ancillary materials. The program
employs interactive, two-way communication to help
and encourage students to build word power in
listening, speaking, reading, and writing as they
participate in task-based activities designed for use
in multi-level classrooms.
Components: Student Books: 12
Audiocassettes: 12
Teacher Resource Books: 12
Ancillary Materials: in development
Target Audience: Elementary Schools: Grade 1-6
Author Teams: Canada: David Booth, Jack Booth,
Linda Booth, Larry Swartz
China: Gong Yafu, Li Jinchun
Publisher: Lingo Media
China School Edition: Co-Publisher -
People's Education Press
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Series: The Out Loud Program: Rhymes, Rhythms and Patterns
for Language Learning
Launch Date: September 2001
Type of Program: Language Arts
English as a Second Language (ESL)
English as a Foreign Language (EFL)
Description: A series of student books, audiocassettes, teacher
Resource books and ancillary materials. The program
is based on the principle that becoming fluent in a
language depends largely on the participants being
involved in authentic, interactive discourse using
the language. As young learners experience the sounds
of the English language found in these fascinating
and inviting materials, they are immediately working
with the language, participating in its structures
and vocabulary from the inside out. This program
presents teachers with hundreds of helpful models of
the English language to explore with students.
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Components: School Edition
Student Books: 6
Audiocassettes: 6
Teacher Resource Books: 6
Poster Sets(20): 6
Trade Edition
Student Books: 3
Audiocassettes: 3
Target Audience: Elementary 3/: Grades K-2
Author Team: Canada: Larry Swartz, David Booth,
Jack Booth, Linda Booth
Publisher: Lingo Media
Canada School Edition: Publisher -
Lingo Media
China Trade Edition: Co-Publisher -
Renzhen Group
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Series: Junior Reading Comprehension
Launch Date: March 2001
Type of Program: English as a Foreign Language (ESP)
English as a Second Language (EFL)
Description: A series of student books to supplement the widely
used PEP textbooks for grades 7-9. These supplemental
books provide a wide range of reading selections and
follow-up activities, language games, puzzles, and
other sources for developing comprehension.
Components: Student Books: 6
Target Audience: Junior Middle Schools: Grades 7-9
Author Team: Canada: David Booth, Jack Booth,
Linda Booth, Larry Swartz
Publisher: Lingo Media
China School Edition: Co-Publisher -
People's Education Press
|
Series: Subject-Based English Launch Date: In process, not launched yet |
Type of Program: English for Special Purposes (ESP)
Description: A series of student text books, audiocassettes, and
teacher resource books. The first set of six subjects
includes Law, Mathematics, Physics, Geological
Prospecting and Mining, Biology, and Transportation.
This program is required in order to meet the
Curriculum mandated by the Chinese State Ministry of
Education stating that all third and fourth year
students not majoring in English must take English
courses related to their subject area.
Components: Student textbooks: 6
Audiocassettes: 12
Teacher Resource Books: 6
Target Audience: Third and fourth year university students majoring in
subjects other than English
Author Teams: Canada: William Marshall, Brigid Fitzgerald
China: Bu Yukun
Publisher: Lingo Media
China School Edition: Co-Publisher -
Foreign Languages Teaching and
Research Press
|
Series: English in Business Communications
Launch Date: February 2001
Type of Program: English for Special Purposes (ESP)
Description: A series of self-study books and audiocassettes for
Adult English learners focused on specific English
language needs for a variety of professions and
occupations. The series is designed to develop and
enhance listening comprehension, vocabulary
development and pronunciation. Subject areas include
Insurance, Marketing, Meetings, Negotiations,
Banking, Presentations and English for Hosts.
Components: Self-Study Books: 6
Audiocassettes: 12
Target Audience: Self-Study Adult Market
Author Team: William Marshall, Bridgid Fitzgerald
Publisher: Lingo Media
|
China Trade Editions: Co-Publishers: English for Hosts - Foreign Languages Press English in Insurance - Renzhen Group English in Marketing - Renzhen Group English in Meetings - Renzhen Group English in Negotiations - Renzhen Group English in Banking - Renzhen Group |
English in Presentations - Renzhen Group
During the fiscal years ended December 31, 2001, 2000 and 1999, respectively, $nil, $nil and $nil of sales revenue were generated in the United States.
During the fiscal years ended December 31, 2001, 2000 and 1999, respectively, $312,623, $44,060, and $nil of sales revenue were generated in China.
During the fiscal years ended December 31, 2001, 2000 and 1999, respectively, $nil, $nil and $83,060 of sales revenue were generated in the United Kingdom and Australia/New Zealand.
At December 31, 2001, December 31, 2000 and December 31, 1999, substantially all of the Company's assets were located in Canada.
The Company's executive offices are located in rented premises of approximately 1,674 sq. ft. at 151 Bloor Street West, #890, Toronto, Ontario, Canada M5S 1S4. The Company began occupying these facilities, through its subsidiary Lingo Media Ltd. in November 1994.
The Company is outsourcing its manufacturing, warehousing and distribution services.
The following discussion for the fiscal years ended December 31, 2001, December 31, 2000, and December 31, 1999, and for the nine months ended September 30, 2002 and September 30, 2001 should be read in conjunction with the consolidated financial statements of the Company and the notes thereto.
The following discussion contains forward-looking statements that are subject to significant risks and uncertainties. Readers should carefully review the risk factors described herein and in other documents the Company files from time to time with the SEC.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions.
In management's opinion, Revenue Recognition, Development Costs, Acquired publishing Content, Software Development Costs and Use of estimates as presented in the financial statements of the year ended December 31, 2001 are critical accounting policies and are as follows:
Revenue recognition:
Revenue from the sale of publishing and ancillary products is recognized upon delivery and as long as all vendor obligations have been satisfied. Amounts received in advance of revenue recognition are recorded as customer deposits.
Development costs:
Development costs associated with pre-operating expenses of Alpha Media(TM), Alpha Publishing(TM) and Alpha Brand Name Books(TM) have been capitalized. In addition, the Company has capitalized pre-operating costs relating to establishing a business base in the United States and the development of business in China. Pre-operating costs are capitalized until the commencement of commercial operations and then amortized on a straight-line basis, over a maximum of five years. The carrying value is assessed on a periodic basis to determine if a write-down is required.
Acquired publishing content:
The costs of obtaining the English as a Foreign Language ("EFL") program entitled "Communications: An Interactive EFL Program" and an international folktale series entitled
"Stories Lost and Found: The Universe of Folktale" have been capitalized and are being amortized over a five-year period. The carrying value is assessed on a periodic basis to determine if a write-down is required.
Software development costs:
The Company has deferred software development costs incurred in connection with a computer software program to be used by children in reading and writing that promotes and facilitates the development of communication skills in the English language. Software development costs are deferred once technological feasibility for a product is established.
Software development costs are amortized on a straight-line basis over a maximum of three years. The carrying value is assessed on a periodic basis to determine if a write-down is required.
Use of estimates:
The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting year. Actual results could differ from those estimates. The Company's deferred costs relating to pre-operating expenses and certain other intangible assets have been stated at cost less accumulated amortization on the basis that amounts will be recoverable from commercial operations. The Company supports the carrying value of these assets based on the undiscounted value of expected future operating income. Significant changes in these estimates of future operating income could result in material impairments of development costs, software development costs and acquired publishing content.
These policies involve management's judgment and analysis in recording the current year revenues and forecasting the revenues for upcoming year, which impact the valuation of Acquired Publishing Content, development Costs and Software development costs.
Revenues for the nine months ending September 30, 2002 were $1,032,322 compared to $84,051 in the same period last year, a 1,128% increase. The increase in revenues is principally due to the launch of three of the Company's publishing programs in China resulting in revenues of $648,945 and the launch of an elementary school publishing program in Canada resulting in revenues of $375,877.
Cost of sales for the nine months ended September 30, 2002 were $386,523 as compared to nil during the same period ended September 30, 2001. This difference in cost of sales was due to the difference in the nature of revenue in the respective periods. Revenue for the nine months ended September 30, 2001 was from royalty income as opposed to revenue for the nine months ended September 30, 2002 which was from direct publishing and co-publishing. There were no direct costs attributable to the royalty income earned in the first nine months of 2001.
Selling, general and administrative costs consist of costs incurred at the corporate level including executive compensation, consulting fees, administration, marketing and shareholder services and professional fees. Such expenses were $418,439 for the nine months ended September 30, 2002 as compared to $356,139 for the nine months ended September 30, 2001, an increase of 17%. Executive compensation increased from $89,568 for the nine months ended September 30, 2001 to $95,845 for the nine months ended September 30, 2002. Consulting fees and employee compensation decreased to $101,072 for the nine months ended September 30, 2002 from $111,063 for the nine months ended September 30, 2001. Administrative expenses comprised of rent, telephone, and office expenses increased from $144,611 for the nine months ended September 30, 2001 to $158,393 for the nine months ended September 30, 2002. Marketing expenses increased to $9,139 for the nine months ended September 30, 2002 from $1,476 for the nine months ended September 30, 2001. Shareholder services and professional fees increased to $91,266 for the nine months period ended September 30, 2002 from $9,420 for the same period ended September 30, 2001. The Company is receiving a grant in the amount of $50,000, of which $37,500 will reduce selling, general and administrative expenses for the nine months ended September 30, 2002. The Company received oral confirmation from the Minister of Heritage confirming the grant. The increase in executive compensation, administrative expenses and marketing expenses were due to the Company's increased activity and management's efforts to increase sales. Shareholder services and professional fees for the period ended September 30, 2001 were lower due to management's successful negotiations of credit notes for approximately $48,172, therefore, the actual shareholder services and professional fees amounted to $57,592 for the first nine months of the year 2001. The increase in shareholder services and professional fees was due to the increased costs associated with the Company's efforts to become publicly traded in the United States.
Amortization of capital assets and deferred assets increased by 291% from $48,985 for the nine months ended September 30, 2001 to $191,712 for the nine months ended September 30, 2002. The increase was due to increased amortization of deferred costs.
The Company reported net income of $111,203, ($0.00) per share for the nine months ended September 30, 2002 compared to a net loss of $146,757, ($0.01) per share for the nine months ended September 30, 2001. Net loss for the nine months ended September 30, 2002 reflects a gain on the issuance of shares of a subsidiary in the amount of 101,438 and income taxes of $94,097. Net loss for the nine months ended September 30, 2001 reflects a gain on sale of subsidiary of $197,719.
Other Interest/Bank Charges rose from $36,805 in 1999 to $44,589 in 2000 and then declined to $4,698 in 2001. The increase related to costs of borrowing more funds and lending fees paid for project financing and the decrease resulted from the decrease in borrowed funds.
The Company recorded a gain on the sale of a subsidiary of $197,719 for the year ended December 31, 2001 resulting from the sale of its majority-owned subsidiary, AlphaCom Corporation. There were no similar transactions during fiscal 2000 or fiscal 1999.
The Company had a gain in April 1999 of $143,962 when it sold 1% of the outstanding shares of AlphaCom Corporation to the public. The Company recorded a gain of $48,750 on the issuance of shares by English Lingo, Inc. a subsidiary of the Company, during fiscal 2001. AlphaCom Corporation was a marketing and distribution company
The weighted average number of shares increased to 16,095,471 in 2001 from 14,567,994 in 2000, from 10,783,827 in 1999. The increase in 2000 was the result of the March/April 2000 private placement of 5,000,000 units and the result in 2001 was due to a private placement of 1,000,000 units in November 2001.
For the nine months ended September 30, 2002, we had revenues of $1,032,322, and as of September 30, 2002, we had cash of $35,062, accounts receivable of $685,436, and current liabilities of $390,034. We will not receive any proceeds from the resale of the shares registered in this offering, but may receive proceeds from the exercise of warrants. We believe that our current cash on hand along with our accounts receivable and recurring sales, will satisfy our working capital requirements for at least the next twelve months. After that, we may need to raise additional funds in order to finance our operations.
As of February 19, 2003 we did not have any principal commitments to raise capital for the Company. Although we have no material commitments for capital expenditures, we expect our capital requirements to increase significantly over the next several years as we increase sales and administration infrastructure. Our future liquidity and capital funding requirements will depend on numerous factors, including, but not limited to, the cost and timing of the expansion of our sales and marketing efforts.
We currently do not maintain any lines of credit nor do we have any agreements for additional sources of financing.
In the future, we may be required to seek additional capital by selling debt or equity securities, curtailing operations, selling assets, or otherwise be required to bring cash flows in balance when it approaches a condition of cash insufficiency. The sale of additional equity securities, if accomplished, may result in dilution to our shareholders. We cannot assure you, however, that financing will be available in amounts or on terms acceptable to us, or at all.
Our obligations as of September 30, 2002, were as follows:
Obligation Expiring Balance ---------- ---------------- -------- Rent January 31, 2006 $133,000 ----------------- ---------------- -------- Equipment Lease 1 November 1, 2002 $ 2,116 ----------------- ---------------- -------- Equipment Lease 2 May 1, 2006 $ 11,273 ----------------- ---------------- -------- |
The Company had working capital of $409,437 as of September 30, 2002. The Company had cash of $35,062 and accounts receivable of $685,436 as of September 30, 2002.
Cash Provided By Operating Activities for the nine months ended September 30, 2002 totaled $24,233 largely attributable to changes in accounts payable of $53,151; work in process of $100,380 and accounts receivable of $(348,596).
Cash Used in Investing Activities for the nine months ended September 30, 2002 was $(11,970) attributable to deferred expenses and an increase in capital assets.
Cash Used in Financing Activities for the nine months ended September 30, 2002 was $15,327, including the issuance of capital stock of $349,000 and a decrease in long-term debt of $333,673.
Proceeds from a private placement completed in November 2001 in the amount of $100,000 were used for working capital requirements.
The Company had a working capital deficit of $85,471 at December 31, 2001 along with cash of $7,473 and accounts receivable of $336,840.
Cash Used in Operating Activities for the Fiscal Year Ended December 31, 2001 totaled ($354,676), including the ($44,706) Net Loss. Significant adjustments included: ($197,719) from gain on sale of subsidiary; $43,910 amortization of "development costs", $67,099 in short-term investments; ($193,173) in accounts receivable; ($50,329) work in progress; ($33,087) accounts payable and accrued liabilities; and ($50,250) in customer deposits.
Cash Used in Investing Activities for the Fiscal Year ended December 31, 2001 was ($18,184), representing: ($168,184) in development costs and $150,000 from the proceeds on sale of subsidiary.
Cash Provided by Financing Activities for the Fiscal Year Ended December 31, 2001 was $336,126 including ($145,000) for repayment of bank indebtedness; $566,713 increase in long-term debt; ($199,087) repayment of long-term debt; and $113,500 from the issuance of capital stock.
These funds were used to help pay for increased "development costs", "software development costs", the repayment of debt, and increased "selling/general/administrative costs". These costs rose during 2000 because of increased activity related to developing and preparing to market new products in China.
Cash Used in Operating Activities for the Fiscal Year Ended December 31, 2000 totaled ($866,637), including the ($774,997) Net Loss. Significant adjustments included: $12,612 amortization of capital assets; $74,500 amortization of "development costs", $125,000 in future income taxes, and ($303,752) in net changes in non-cash working capital items, including a ($110,396) increase in accounts receivable related to Sears Custom Publishing project.
Cash Used in Investing Activities for the Fiscal Year ended December 31, 2000 was ($425,951), representing: ($30,957) in software development costs; ($46,305) purchase of capital assets; and ($348,689) in development costs.
Cash Provided by Financing Activities for the Fiscal Year Ended December 31, 2000 was $1,316,510 including: the aforementioned $1.8 million private placement; ($420,362) repayment of long-term debt; and ($105,000) repayment of bank indebtedness.
These funds were used to help pay for increased "development costs", "software development costs", and increased "selling/ general/administrative costs". These costs rose during 1999 because of increased activity related to developing and preparing to market new products in China.
Cash Provided by Operating Activities for the Fiscal Year Ended December 31, 1999 totaled $71,109, including the ($276,459) Net Loss. Significant adjustments included: $82,916 amortization of pre-operating costs; $6,869 amortization of capital assets; and $257,783 in net changes in non-cash working capital items, including a $142,375 increase in accounts payable/accrued liabilities, a $110,296 reduction in accounts receivable, and ($96,916) customer deposit related to IMG and Loblaws projects.
Cash Used in Investing Activities for the Fiscal Year ended December 31, 1999 was ($246,602), representing: ($144,874) of deferred development costs; ($93,227) of deferred software development costs; and ($8,501) purchase of capital assets.
Cash Provided by Financing Activities for the Fiscal Year Ended December 31, 1999 was $195,778, including bank indebtedness of $108,716, increase in long-term debt of $137,762 and repayment of long-term debt of $(50,700).
Prior to January 1, 2002, the Company did not recognize compensation expense under Canadian GAAP when stock or stock options were issued to consultants. Under United States GAAP, the Company has always recorded compensation expense based on the fair value of stock or stock options granted in exchange for services from consultants.
If United States GAAP were employed, the loss in each year would be adjusted as follows:
2001 2000 1999
Loss for the year, Canadian GAAP ($44,706) ($774,997) ($276,459)
Impact of US GAAP and adjustments:
(144,874)
Development costs (168,184) (348,689)
Amortization of development costs 43,910 74,500 82,916
- (93,227)
Software development costs (30,957)
Amortization of Software Development Costs 10,349 - -
Compensation expense ($59,983) ($22,500) ($35,500)
Loss for the year, US GAAP ($218,614) ($1,102,643) ($467,144)
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The consolidated financial statements are prepared in accordance with GAAP as applied in Canada. In the following respects, GAAP as applied in the United States differs from that applied in Canada:
September 30, 2002 September 30, 2001
------------------------------------------------------------------------------------------------------
Net income (loss) for the period - Canadian GAAP $ 17,106 $(146,757)
Impact of U.S. GAAP and adjustments:
Development costs (a) (10,313) (94,626)
Amortization of development costs 89,607 39,728
Software development costs (b) - -
Amortization of software development costs 41,395 -
Compensation expense (c) (58,767) (41,804)
--------------------------------------------------------------------------------------------------------
Gain (Loss) for the year - U.S. GAAP $ 79,029 $(243,459)
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Diluted earnings per share under Canadian GAAP and US GAAP give effect to all potential common shares outstanding during the year. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options using the treasury stock method.
The following table reconciles the numerators and denominators of the basic and diluted earnings per share under U.S. GAAP as required by SFAS 128:
2001 2000 1999
============ ============ ===========
numerator for basic and diluted loss per share
=================================================
Loss - US GAAP $ (218,614) ($1,102,643) ($467,144)
================================================= ============ ============ ===========
Denominator for basic and diluted loss per share:
=================================================
Weighted average common shares 16,095,471 14,567,994 10,783,827
================================================= ============ ============ ===========
Basic and diluted loss per share - US GAAP ($0.01 ) ($0.08) ($0.04)
================================================= ============ ============ ===========
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Directors and Senior Management
Date of
First
Election or
Name Position Age Appointment
-----------------------------------------------------------------
Michael P. Kraft President/CEO/Director 39 November 1996
Khurram R. Qureshi Chief Financial Officer 40 April 1997
Richard J.G. Boxer Director 54 November 1996
Richard H. Epstein Director 39 July 2001
Chen Geng Director 32 July 2001
Scott Remborg Director 54 July 2000
Imran Atique Secretary/Treasurer 26 September 2001
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Michael P. Kraft has served as President, Chief Executive Officer and Director of the Company since its inception in April 1996. Since June 1999, Mr. Kraft has served as Chief Executive Officer, Secretary and Director of EnglishLingo, Inc., a subsidiary of the Company. Since December 2000, Mr. Kraft has also served as the President of EnglishLingo, Inc. Since 1994, Mr. Kraft has served as President, Chief Executive Officer, Director and co-founder of Lingo Media Ltd. (formerly Alpha Corporation), a subsidiary of the Company that pre-sells or licenses book, audio and other complementary multi-media products through traditional and alternative distribution channels in Canada and international markets. From 1990 to early 1993, Mr. Kraft was Vice-President of Madison Marketing Limited, a specialty book publisher. He received a Bachelor of Arts in Economics from York University in Toronto in 1985. Also, he has been a Director of Canadian Shield Resources Inc. since 1996. Also, he had been President, CEO and Secretary of AlphaCom Corporation, a subsidiary of the Company that was sold in May 2001.
Khurram R. Qureshi, Chief Financial Officer of the Company since June 1997, and brings to Lingo Media Inc. over thirteen years of experience in the field of finance and accounting, including experience working for several public companies. Mr. Qureshi graduated from York University (Toronto), with a Bachelors Degree in Administrative Studies and qualified as a Chartered Accountant in 1990. From 1987 to 1996, he gained valuable experience while working with Kraft, Berger, Grill, Schwartz, Cohen & March LLP. Mr. Qureshi also has served as Chief Financial Officer of other private and public companies. In addition, Mr. Qureshi served as Chief Financial Officer of AlphaCom Corporation, a subsidiary of the Company that was sold in May 2001.
Richard J.G. Boxer has served as Director of the Company since April 1996. Mr. Boxer serves as the President of Buckingham Capital Corporation, a private merchant banking company, which provides capital and financial advice to both private and public corporations. He is on the board of a number of private companies. Mr. Boxer received an M.B.A. from York University in 1976 and received his Chartered Accountant designation in 1973.
Richard H. Epstein has served as a Director of the Company since July 2001. Mr. Epstein is a partner in Gowling Lafleur Henderson LLP. Called to the Bar in 1992, his practice includes restructuring, corporate finance, and mergers and acquisitions. Since 1999, Mr. Epstein has been providing advice to the Company on various matters. He received his BSc from McGill University in 1986 and his LLB from Osgoode Hall Law School in 1990.
Chen Geng has served as a Director of the Company since July 2001. Since June 1999, Mr. Geng has served as a Director of EnglishLingo, Inc., a subsidiary of the Company. From June 1999 through March 2001, Mr. Geng served as Vice President for EnglishLingo, Inc. Mr. Geng was Managing Director - Greater China Region of Lingo Media from June 1999 to June 2001. Prior to joining Lingo Media, he was a Chinese Trade Commissioner promoting bilateral trade and investment between China and Canada. From 1996 to 1999, Mr. Chen was the Consul for Economic and Commercial Development at the Chinese Consulate in Toronto, and held a senior post at the Canada Desk in the Chinese Ministry of Foreign Trade and Economic Cooperation (MOFTEC) from 1992 to 1996. Mr. Chen received his BA from Beijing Foreign Studies University in 1992.
Scott Remborg has served as a Director of the Company since July 2001. Mr. Remborg has served as Chairman of the Board of EnglishLingo, Inc., a subsidiary of the Company since June 1999. Mr. Remborg served as the President of EnglishLingo, Inc. from June 1999 through December 2000. Mr. Remborg served as a Consultant to EnglishLingo, Inc. from July 1999 to December 2000. He is the General Manager, E-business at Air Canada since mid-January 2001. From 1994 to 1998, Mr. Remborg was senior Vice-President, Internet of MediaLinx Interactive, Inc. of Toronto a new media company that developed and implemented the Sympatico Internet portal on behalf of Bell Canada and Stetnor Alliance. Prior to that, he was Vice-President, Business Development for Ivation Datasystems Inc. of Toronto, a software and consulting company developing software solutions for the government markets.
Imran Atique has served as Secretary and Treasurer of the Company since September 2001 and began as a consultant in August 2000. He brings six years accounting experience to Lingo Media. Mr. Atique received his Bachelor's of Commerce (Honours) from St. Mary's University (Halifax) in 1999 and is currently enrolled in the MBA program at York University (Toronto) and the Certified Management Accountants (CMA) program with the Society of Management Accounts of Ontario
The Directors have served in their respective capacities since their election and/or appointment and will serve until the next Annual General Meeting or until a successor is duly elected, unless the office is vacated in accordance with the Articles/By-Laws of the Company.
The Senior Management serves at the pleasure of the Board of Directors with management service contracts but without term of office, except as disclosed herein.
Despite the Company's Executive Officers spending material portions of their time on businesses other than the Company, the Company believes that they devote sufficient time to the Company to properly carry out their duties.
No Director and/or Executive Officer has been the subject of any order, judgment, or decree of any governmental agency or administrator or of any court or competent jurisdiction, revoking or suspending for cause any license, permit or other authority of such person or of any corporation of which he is a Director and/or Executive Officer, to engage in the securities business or in the sale of a particular security or temporarily or permanently restraining or enjoining any such person or any corporation of which he is an officer or director from engaging in or continuing any conduct, practice, or employment in connection with the purchase or sale of securities, or convicting such person of any felony or misdemeanor involving a security or any aspect of the securities business or of theft or of any felony.
There are no arrangements or understandings between any two or more Directors or Executive Officers, pursuant to which he was selected as a Director or Executive Officer. There are no family relationships between any two or more Directors or Executive Officers.
The table below sets forth information concerning the compensation paid, during each of the last three fiscal years (as applicable), to the Company's chief executive officer and other executive officers of the Company and its subsidiaries who received total remuneration, determined on the basis of base salary and bonuses in excess of $100,000 during the last three fiscal years ended December 31 (the "Named Executive Officers").
Summary Compensation Table
Annual Compensation Long Term Compensation
Name Year Salary (1) Bonus Other Annual Compensation Awards Payouts
and (1)(2)
Principal
Position
Securities Restricted LTIP(4) All Other
Under Shares or Payouts Compensation
Options/SARS Restricted
(3)Granted Share
Units
Michael P. 2001 100,000 - 12,146.40 500,000 - - 5,000
Kraft(5) 2000 73,000 - 11,522.73 nil - - 50,000(6)
1999 36,000 - 12,000 nil - - nil
(1) Paid by Lingo Media Ltd., a wholly-owned subsidiary of the Company.
(2) These amounts include automobile allowance.
(3) Stock appreciation rights.
(4) Long term incentive plans.
(5) Mr. Kraft's salary of $100,000 per year was paid by Lingo Media Ltd. to his holding company, Michael P.
Kraft & Associates Inc.
(6) Represents success fees.
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Management Agreement. Michael P. Kraft provides his services pursuant to a Management Agreement dated May 1,1998 (and most recently amended on June 30, 2000) between Michael P. Kraft Associates Inc. ("MPK Inc.") pursuant to which Lingo Media Ltd. (formerly Alpha Corporation), a wholly-owned subsidiary of the Company, engaged MPK Inc. to provide administration and management services. Pursuant to the June 2000 amendment, Lingo Media Ltd. is to pay MPK Inc. $10,000 per month beginning July 2000 in addition to providing an allowance for a health plan and life insurance policy. MPK Inc. is to be reimbursed for all travel, entertainment and other expenses actually and properly incurred. The Management Agreement also provides for a reasonable automobile allowance and a success fee based on the aggregate amount arranged for project debt and equity financing. MPK Inc. is a private corporation controlled by Michael P. Kraft, President/CEO/Director of the Company.
SHAREHOLDINGS OF DIRECTORS AND EXECUTIVE OFFICERS
SHAREHOLDINGS OF 5% SHAREHOLDERS
TITLE AMOUNT AND NATURE PERCENT OF OF BENEFICIAL OF CLASS NAME OF BENEFICIAL OWNER OWNERSHIP CLASS --------------------------------------------------------------- COMMON MICHAEL P. KRAFT (1) 3,676,823 17.3% COMMON KRAFT INVESTMENTS CORP. 1,781,597 8.6% COMMON RICHARD A. SHERMAN (2) 1,733,437 8.3% COMMON 1077431 ONTARIO LIMITED 1,426,082 6.9% COMMON RICHARD J. G. BOXER (3) 576,167 2.8% COMMON SCOTT REMBORG (4) 188,667 * COMMON CHEN GENG (5) 188,667 * COMMON KHURRAM R. QURESHI (6) 45,000 * COMMON RICHARD H. EPSTEIN (7) 85,417 * COMMON IMRAN ATIQUE (8) 200,000 * COMMON CHEBUCTO INTERNATIONAL (9) 1,500,000 7.1% DIRECTORS/OFFICERS AS A GROUP (7 PERSONS) 4,973,073 22.5% ---------------------------------------------------------------- |
* Less than 1%.
(1) Includes options to purchase 566,667 shares exercisable within 60 days. 1,781,597 shares are held indirectly by Kraft Investments Corp. a private company controlled by Mr. Kraft. Includes 159,061 shares held in the registered retirement savings plan. Includes 1,169,498 shares owned by members of his family.
(2) Includes options to purchase 90,000 shares exercisable within 60 days, 1,426,082 shares held by 1077431 Ontario Limited, a private company controlled by Mr. Sherman. Includes 120,365 shares owned by members of his family.
(3) Includes options to purchase 91,667 shares exercisable within 60 days, warrants to purchase 150,000 shares exercisable within 60 days, and 34,500 shares are held indirectly by Buckingham Capital Corp., a private company controlled by Mr. Boxer.
(4) Includes options to purchase 171,667 shares exercisable within 60 days.
(5) Includes options to purchase 150,667 shares exercisable within 60 days.
(6) Includes options to purchase 45,000 share exercisable within 60 days.
(7) Includes options to purchase 41,667 shares exercisable within 60 days and warrants to purchase 18,750 shares exercisable within 60 days
(8)Includes options to purchase 100,000 shares exercisable within 60 days.
(9) Includes warrants to purchase 500,000 shares exercisable within 60 days.
# Based on 20,733,827 shares outstanding as of December 18, 2002 and stock options and warrants held by each beneficial holder exercisable within sixty days.
Officer/Director Loans obtained after January 1, 2001, bear interest at 12% per annum and shareholder loans obtained prior to January 1, 2001 bear interest at 10% per annum.
(1) Controlled by Michael P. Kraft
In March 2001, Michael P. Kraft & Associates Inc., a company controlled by Michael P. Kraft, loaned the Company $25,000 which loan bears interest at 12% per annum. As of the date of this filing, the Company has repaid Michael P. Kraft & Associates Inc. in full.
From August2002 through November 2002, LMK Capital Corporation, a company controlled by the wife of Michael P. Kraft, loaned the Company an aggregate of $155,000, which loan bears interest at 12% per annum. As of the date of this filing, the Company owes LMK Capital Corporation principal in the amount of $75,500.
In October 2002, 867214 Ontario Ltd., a company controlled by Richard J.G. Boxer, loaned the Company $100,000 which loan bore interest at 12% per annum and was paid in full in December 2002. 867214 Ontario Ltd. has reloaned the Company $100,000 in February 2003 which bears interest at 12% per annum and is secured by the assets of the Company. As of the date of this filing, the Company has a principal balance owing of $100,000.
Other than as disclosed above, there have been no transactions since December 31, 1997, or proposed transactions, which have materially affected or will materially affect the Company in which any director, executive officer, or beneficial holder of more than 10% of the outstanding common stock, or any of their respective relatives, spouses, associates or affiliates has had or will have any direct or material indirect interest. Management believes the transactions referenced above were on terms at least as favorable to the Company as the Company could have obtained from unaffiliated parties.
Such "terms and conditions", including the pricing of the options, expiration and the eligibility of personnel for such stock options; are described below.
The TSX VEN policy in respect of incentive stock options provides that shareholder approval is not required if the aggregate number of common shares that may be reserved for issuance pursuant to incentive stock options does not exceed 10% of the issued common shares of the Company, 5% to any one individual and 2% to any consultant at the time of granting.
Shareholder approval of the grant of incentive stock options is required pursuant to the rules of the TSX VEN where the grant will result in the Company having options outstanding which, in aggregate, are exercisable to acquire over 10% (to a maximum of 20%) of the outstanding common shares of the Company.
In addition, disinterested shareholders (all shareholders excluding insiders and associates of insiders) approval is required pursuant to the rules of the TSX VEN where:
(a) grant of incentive stock options could result at any time in:
(i) the Company having options outstanding to insiders which,
in aggregate, are exercisable to acquire over 20% of the
outstanding common shares of the Company; or
(ii) the issuance to insiders, within a one year period, of
common shares which, in aggregate, exceed 10% of the
outstanding common shares of the Company; or
(iii) the issuance to any one insider and such insider's
associates, within a one year period, of common shares
which, in aggregate, exceed 5% of the outstanding common
shares of the Company; or
(iv) the issuance to any consultant of common shares which, in
aggregate, exceed 2% of the outstanding common shares of
the Company; or
(b) the Company is proposing to decrease the exercise price of
stock options held by any insiders.
Initial Plan
Until November 13, 1996, the Company had a stock option plan (the "Initial Plan") whereby the directors could grant options to directors, officers, employees and consultants of the Company. The number of common shares subject to option and granted under the Initial Plan was limited to ten percent in the aggregate, and five percent with respect to any one optionee, of the number of issued and outstanding common shares of the Company then outstanding at prices and on other terms which corresponded with the rules of the Alberta Stock Exchange in regard to stock options. As of February 19, 2003, there were no options outstanding under the Initial Plan.
1996 Plan
Effective November 13, 1996, a new stock option plan (the "1996 Plan") was adopted by the board of directors of the Company to encourage ownership of common shares by directors, senior officers, employees and consultants of the Company and its subsidiaries. Options could be granted under the Subsequent Plan only to directors, senior officers, employees, consultants and personal holding corporations controlled by a director or senior officer of the Company and its subsidiaries as designated from time to time by the board of directors.
The number of shares that may be reserved for issuance under the Initial Plan and under the 1996 Plan is limited to 1,078,000 common shares, provided that the board has the right, from to time, to increase such number subject to the approval of the shareholders of the Company and to obtaining all necessary regulatory approval. The maximum number of common shares that could be reserved for issuance to any one person under the 1996 Plan is 5% of the common shares outstanding at the time of the grant (calculated on a non-diluted basis) less the number of shares reserved for issuance to such person under any option to purchase common shares granted as a compensation or incentive mechanism. Any shares subject to an option granted under the 1996 Plan that for any reason were cancelled or terminated prior to exercise will be available for a subsequent grant under the 1996 Plan.
The option price of any common shares cannot be less than the closing price of the shares on the day immediately preceding the day upon which the option is granted. Options granted under the 1996 Plan were exercisable during a period not exceeding five years, subject to earlier termination upon the termination of the optionee's employment, upon the optionee ceasing to be an employee, senior officer, director or consultant of the Company or any of its subsidiaries, as applicable, or upon the optionee retiring, becoming permanently disabled or dying. The options are non-transferable. The 1996 Plan contains provisions for adjustment in the number of shares issuable there under in the event of a subdivision, consolidation, reclassification or change of the common shares, a merger or other relevant changes in the Company's capitalization. The board of directors may from time to time amend or revise the terms of the 1996 Plan or may terminate the 1996 Plan at any time.
The 1996 Plan provides that the Company may provide financial assistance in respect of options granted under the 1996 Plan by means of loans to optionees. No loans were granted by the Company pursuant to the 1996 Plan.
As of February 19, 2003, there are 370,000 reserved for issuance pursuant to options granted under the 1996 Plan.
2000 Plan
A new stock option plan was adopted by the board of directors of the Company on May 30, 2000 to encourage ownership of common shares by directors, officers, employees and consultants of the Company. In accordance with the rules of the Canadian Venture Exchange, (the predecessor of the TSX VEN) this plan was approved by shareholders on July 4, 2000 at the Company's Annual Meeting. At that time, the number of shares reserved for issuance under this plan was limited to 2,384,074 common shares less the number of shares reserved for issuance pursuant to options granted under the Initial Plan and under the 1996 Plan. By approval of the shareholders at the Company's Annual and Special Meeting held on June 28, 2002, this plan was amended (this new stock option plan, as amended being hereinafter called the "2000 Plan") to increase the number of options to purchase common shares that may be granted under the plan from 2,384,074 to 4,416,765 common shares.
The rules of the TSX VEN require that the number of shares reserved for issuance under a stock option plan be set at a fixed number. Te amount of common shares from time to time reserved under the 2000 Plan is not necessarily reflective of the number of options that are outstanding at any given time because options that are exercised do not replenish the number reserved, but are merely an indication of the number of potential shares in respect of which a listing fee has been paid to the TSX VEN upon the Company's common shares that are listed on the TSX VEN.
Options may be granted under the 2000 Plan only to directors, officers, employees, consultants and personal holding corporations controlled by a director of officer of the Company as designated from time to time by the board of directors.
The number of shares which may be reserved for issuance under the 2000 Plan is currently limited to 4,146,765 common shares less the number of shares reserved for issuance pursuant to options granted under the Initial Plan (currently nil shares) and under the 1996 Plan (currently 610,000 shares), provided the number of shares reserved for issuance under stock options granted at any time under the 2000 Plan do not exceed 10% of the Company's then issued and outstanding shares. In addition, the board has the right, from time to time, to increase such number subject to the approval of the relevant exchange on which the shares are listed and the approval of the shareholders of the Company. The maximum number of common shares which may be reserved for issuance to any one person under the 2000 Plan is 5% of the common shares outstanding at the time of the grant less the number of shares reserved for issuance to such person under any option to purchase common shares granted as a compensation or incentive mechanism. Any shares subject to an option granted under the Initial Plan, the 1996 Plan or the 2000 Plan, which for any reason is cancelled/terminated prior to exercise, will be available for a subsequent grant under the 2000 Plan.
The option price of any common shares cannot be less than the closing price of the shares on the day immediately preceding the day upon which the option is granted less any permitted discount.
Section 2.6 (a) of Policy 4.4 of TSX Venture Exchange provides that the minimum exercise price of an incentive stock option plan (such as the Stock Option Plan for Lingo Media Inc.) must not be less than the "Discounted Market Price".
Policy 1.1 of the Exchange defines "Discounted Market Price" to mean the last closing price of the Issuer's Listed Shares before either the issuance of a news release respecting the granting of options or the filing of the Price Reservation Form (Form 4N) required to fix the price at which the securities are to be issued ("Market Price") less a discount, which shall not exceed the amount set forth below, subject to a minimum price of Cdn$0.10:
CLOSING PRICE DISCOUNT ------------- -------- Up to $0.50 (Cdn) 25% $0.51 to $2.00 (Cdn) 20% Above $2.00 (Cdn) 15% |
Options granted under the 2000 Plan may be exercised during a period not exceeding five years, subject to earlier termination upon the termination of the optionee's employment, upon the optionee ceasing to be an employee, officer, director or consultant of the Company or of its subsidiaries, as applicable, or upon the optionee retiring, be coming permanently disabled or dying.
Options granted to optionees vest over an 18-month period with no greater than 16.67% of any options granted to an optionee vesting in any three-month period or such longer period as the board may determine. The options under the 2000 Plan will be non-transferable. The 2000 Plan contains provisions for adjustment in the number of shares issuable thereunder in the event of a subdivision, consolidation, reclassification or change of the common shares, a merger of other relevant changes in the Company's capitalization. The board of directors may from time to time amend or revise the terms of the 2000 Plan or may terminate the 2000 Plan at any time.
The 2000 Plan provides that the Company may provide financial assistance in respect of options granted under the 2000 Plan by means of loans to optionees. Under the terms of the 2000 Plan, the Company may, but is not obligated to, loan to an optionee the funds required to exercise any particular option. The 2000 Plan provides that any such loan will be for a term not exceeding ten years and will be non-interest bearing. Any such loan will be repayable at maturity or upon the death of the optionee or earlier in certain other circumstances. Any loans made under the 2000 Plan are to be secured by a pledge of the shares acquired upon the exercise of the option exercised being funded to a trustee for such purposes. In the event that any loan amount is not fully repaid when due the trustee holding the pledged shares is entitled to realize on the shares being held by it as security for the loan. Loans made under the 2000 Plan are made on a full recourse basis. The 2000 Plan provides that any shares acquired pursuant to loans made under the 2000 Plan may be sold by the optionee from time to time provided that an amount equal to the aggregate option exercise price or the balance of the loan is applied in repayment of the loan. Any financial assistance so provided under the 2000 Plan will be subject to and made in accordance with all applicable laws and regulatory policies at the time of making the loan.
As of February 19, 2003, options to purchase an aggregate of 1,973,340 common shares are outstanding under the 2000 Plan.
The names and titles of the Directors/Executive Officers of the Company to whom outstanding stock options have been granted and the number of common shares subject to such options are set forth in the Table below as of February 19, 2003, as well as the number of options granted to Directors and all employees as a group.
Stock Options Outstanding
Number of Shares of $
Common Exer. Grant Expir'n
Name Stock Price Date Date
---- ------ ------ ------ ------
Michael P. Kraft 400,000 $.10 10/9/02 10/9/07
Michael P. Kraft 500,000 $0.12 6/07/01 6/07/06
Richard J.G. Boxer 50,000 $0.45 5/16/00 5/16/05
Richard J.G. Boxer 50,000 $0.10 11/01/01 11/01/06
Scott Remborg 130,000 $0.50 9/30/00 9/13/05
Scott Remborg 50,000 $0.10 11/01/01 11/01/06
Chen Geng 100,000 $0,20 5/25/99 5/25/04
Chen Geng 50,000 $0.10 11/01/01 11/01/06
Khurram R. Qureshi 25,000 $0.22 5/12/98 5/12/03
Khurram R. Qureshi 20,000 $0.22 5/20/98 5/20/03
Richard H. Epstein 50,000 $0.10 11/01/01 11/01/06
Imran Atique 100,000 $0.22 02/15/01 02/15/06
Total Officers/Directors 1,480,000
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The Directors and the management of the Company know of no active or pending proceedings against anyone that might materially adversely affect an interest of the Company.
PLAN OF DISTRIBUTION AND SELLING STOCKHOLDERS
This prospectus relates to the resale of 4,700,000 shares of common stock by the selling stockholders as well as the resale of 3,275,000 shares of common stock underlying warrants. The table below sets forth information with respect to the resale of shares of common stock and the resale of shares of common stock underlying warrants by the selling stockholders. We will not receive any proceeds from the resale of common stock by the selling stockholders for shares currently outstanding. However, we may receive proceeds from the exercise of the warrants.
Resale of Common Stock by Selling Stockholders
Stockholder Shares Amount Shares Percentage
Beneficially Offered Beneficially (if
Owned Before (Assuming Owned After greater
Resale all Shares Resale than 1%)
Immediately
Sold)
Richard J. G. Boxer
155 Dawlish Ave.,
Toronto, Ontario
M4N 1H6
571,166(1) 350,000(2) 221,166(3) 2.7%
Chebucto Services
(International) Ltd.,
Sunstead, 9 Farringdon
Close, Paradise Heights, St.
James, Barbados
1,500,000(4) 1,500,000(4) 0 7.1%
Richard H. Epstein
534 Roselawn Ave.
Toronto, Ontario
M5N 1J8
60,416(5) 43,750(6) 16,666(7)
Fred Grespan
64 Fairfield Ave.
Kitchener, Ontario
N2H 6C1
1,443,750(8) 1,443,750(8) 0 6.8%
Paul E. Grespan
230 Old Chicopee Drive
Kitchener, Ontario
N2A 4W6
1,575,000(9) 1,575,000(9) 0 7.4%
Robert B. Raphael
1750 Steeles Ave West 1,181,250(10) 1,181,250(10) 0 5.6%
Unit #2
Concord, Ontario
L4K 2L7
Sander Sigal 1,575,000(11) 1,575,000(11) 0 7.4%
65 Lawrie Road
Thornhill, Ontario
L4J 3N6
Ann Singer 306,250(11) 306,250(11) 0 1.5%
14 Kainona Ave.
Toronto, Ontario M3H 3HM
(1) Includes 150,000 shares underlying warrants and options exercisable within 60 days to
purchase 86,666 shares.
(2) Includes 200,000 shares and 150,000 shares underlying warrants.
(3) Includes 150,000 shares underlying options exercisable within 60 days and 71,166 shares of
common stock.
(4) Includes 500,000 shares underlying warrants.
(5) Includes 18,750 shares underlying warrants and options exercisable within 60 days to
purchase 16,666 shares.
(6) Includes 18,750 shares underlying warrants.
(7) Includes 16,666 shares underlying options exercisable within 60 days.
(8) Includes 618,750 shares underlying warrants.
(9) Includes 675,000 shares underlying warrants.
(10) Includes 506,250 shares underlying warrants.
(11) Includes 675,000 shares underlying warrants.
(12) Includes 131,250 shares underlying warrants.
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The 4,700,000 shares offered by the selling stockholders as well as the resale of 3,275,000 shares of common stock underlying the warrants may be sold by one or more of the following methods, without limitation, with the exception of the shares and shares underlying warrants being registered for Richard J.G. Boxer and Richard H. Epstein which are subject to resale pursuant to Rule 144 as discussed below:
- ordinary brokerage transactions and transactions in which the broker
solicits purchases; and
- face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the
selling stockholders may arrange for other brokers or dealers to
participate.
Such brokers or dealers may receive commissions or discounts from the selling stockholders in amounts to be negotiated. Such brokers and dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act, in connection with such sales. The selling stockholder or dealer effecting a transaction in the registered securities, whether or not participating in a distribution, is required to deliver a prospectus. As a result of such shares being registered under the Securities Act, holders who subsequently resell such shares to the public may be deemed to be underwriters with respect to such shares of common stock for purposes of the Securities Act with the result that they may be subject to certain statutory liabilities if the registration statement to which this prospectus relates is defective by virtue of containing a material misstatement of omitting to disclose a statement of material fact. We do not have any plans regarding the use of specific broker-dealers for distribution nor do we have any agreements or understandings with such entities. We have not agreed to indemnify any of the selling stockholders regarding such liability.
The shares and shares underlying warrants owned by Richard J.G. Boxer and Richard H. Epstein are subject to the resale provisions of Rule 144 as they are Directors of the Company and are treated as affiliates pursuant to Rule 144. In general, under Rule 144 of the Securities Act as currently in effect, beginning 90 days after this registration statement is declared effective by the SEC, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year, including a person who may be deemed an affiliate, is entitled to sell within any three-month period a number of shares of Common Stock that does not exceed the greater of 1% of the then-outstanding shares of our Common Stock (approximately 207,338 shares after giving effect to this Offering) and the average weekly trading volume of our common stock during the four calendar weeks preceding such sale. Sales under Rule 144 of the Securities Act are subject to certain restrictions relating to manner of sale, notice and the availability of current public information about us. A person who is not our affiliate at any time during the 90 days preceding a sale, and who has beneficially owned shares for at least two years, would be entitled to sell such shares immediately following this Offering without regard to the volume limitations, manner of sale provisions or notice or other requirements of Rule 144 of the Securities Act. However, the transfer agent may require an opinion of counsel that a proposed sale of shares comes within the terms of Rule 144 of the Securities Act prior to effecting a transfer of such shares.
Upon the registration statement becoming effective, the common stock will not be listed on a national securities exchange, NASDAQ, or on the OTC Bulletin Board. Management's strategy is to list the common stock on the OTC Bulletin Board as soon as practicable. However, to date we have not solicited any such securities brokers to become market-makers of our common stock. Selling stockholders will sell at the set price of $.40 per share until such time as our shares are quoted on the OTC Bulletin Board and then thereafter at prevailing market prices or privately negotiated prices.
Expenses of the Issue ===================== SEC Registration Fee $60.00 ==================== ====== Legal Fees and Expenses $25,000 ======================= ======= Accounting $7,500 ========== ====== Miscellaneous $1,000 ============= ====== Total $33,560 ===== ======= |
On July 15, 2002, the shareholders' list for the Company's common shares showed 25 registered shareholders and 20,733,827 shares issued and outstanding. Six of these shareholders were U.S. residents, owning 812,700 shares representing approximately four percent of the issued and outstanding common shares.
Upon liquidation, dissolution or winding up of the Company, holders of common stock are entitled to receive pro rata the assets of Company, if any, remaining after payments of all debts and liabilities. No shares have been issued subject to call or assessment. There are no pre-emptive or conversion rights and no provisions for redemption or purchase for cancellation, surrender, or sinking or purchase funds.
Provisions as to the modification, amendment or variation of such shareholder rights or provisions are contained in the Business Corporations Act (Ontario). Unless the Business Corporations Act or the Company's Articles or Memorandum otherwise provide, any action to be taken by a resolution of the members may be taken by an ordinary resolution or by a vote of a majority or more of the shares represented at the shareholders' meeting.
There are no restrictions on the repurchase or redemption of common shares of the Company while there is any arrearage in the payment of dividends or sinking fund installments.
Preference Share Description
The Company has not issued any preference shares. The unlimited number of
no-par preference shares designated in the Company's certificate of
incorporation is "blank check" preference shares, which authorizes the board of
directors to authorize and issue one or more series of preference shares with
the designations, rights and preferences as determined, from time to time, by
the board of directors. The board of directors is authorized to make such
designations without shareholder approval.
Subject to the Articles of Incorporation and any unanimous shareholder agreement, the board may fix their remuneration.
2) subject to the rights of the holders of Preferred Shares, to receive the remaining property of the Corporation upon a dissolution; and
3) subject to the rights of the holders of Preferred Shares, to receive all other dividends declared by the Corporation.
1) Directors' Rights to Issue in One or More Series. The Preferred Shares may at any time or from time to time be issued in one or more series, each series to consist of such number of shares as may before the issue thereof be determined by the Directors by resolution; the Directors of the Company may (subject as hereinafter provided) by resolution fix, from time to time before the issued thereof, the designation, rights, privileges, restrictions and conditions attaching to the shares of such series including, without limiting the generality of the foregoing (1) the issue price, (2) the rate, amount or method of calculation of dividends and whether the same are subject to change of dividends and whether the same are subject to change or adjustment, (3) whether such dividends shall be cumulative, non-cumulative or partly cumulative, (4) the dates, manner and currencies of payments of dividends and the dates from which dividends shall accrue, (5) the redemption and/or purchase prices and terms and conditions of redemption and/or purchase, with or without provision for sinking or similar funds, (6) conversion and/or exchange and/or classification rights, (7) the voting rights if any, and/or (8) other provisions, the whole subject to the following provisions, and to the issue of Certificate(s) of Amendment setting forth such designations, rights, privileges, restrictions and conditions attaching to the shares of each series.
2) Ranking of Preferred Shares. The Preferred Shares shall be entitled to preference over the Common Shares of the Corporation and over any other shares ranking junior to the Preferred Shares with respect to payment of dividends and distribution of assets in the event of liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of the assets of the Corporation among its shareholders for the purpose of winding up its affairs and may also be given such other preferences not inconsistent with paragraphs (1) and (2) hereof over the Common Shares of the Corporation and over any other shares ranking junior to the Preferred Shares as may be determined in the case of each series of Preferred Shares authorized to be issued.
3) Amendment with Approval of Holders of Preferred Shares. The rights, privileges, restrictions and conditions attaching to the Preferred Shares as a class may be repealed, altered, modified, amended or amplified by Certificate(s) of Amendment, but in each case with the approval of the holders of Preferred Shares (only as a class but not as individual series) given as hereinafter specified.
4) Approval of Holders of Preferred Shares. Subject to the Provisions of the Business Corporations Act, any consent or approval given by the holders of Preferred Shares as a class shall be deemed to have been sufficiently given if it shall have been given in writing by the holders of at least sixty-six and two-thirds percent (66 / %) of the outstanding Preferred Shares or by a resolution passed at a meeting of holders of Preferred Shares duly called and held upon not less than fifteen days' notice at which the holders of at least a majority of the outstanding Preferred Shares are present or are represented by proxy and carried by the affirmative vote of not less than sixty-six and two-thirds percent of the votes cast at such meetings, in addition to any other consent or approval required by the Business Corporation Act. If at any such meeting the holders of a majority of the outstanding Preferred Shares are not present or represented by proxy within one-half hour after the time appointed for such meeting, then the meeting shall be adjourned to such date not less than fifteen days thereafter and to such time and place as may be designated by the Chairman, and not less than ten days' written notice shall be given of such adjourned meeting. At such adjourned meeting the holders of the Preferred Shares present or represented by proxy may transact the business for which the meeting was originally convened and a resolution passed by the affirmative vote of not less than sixty-six and two-thirds percent of the votes cast at such meeting shall constitute the consent or approval of the holders of Preferred Shares. On every poll taken at every meeting, every holder of Preferred Shares shall be entitled to one vote in respect of each share held. Subject to the foregoing, the formalities to be observed in respect of the giving or waiving of notice of any such meeting and the conduct thereof shall be those from time to time prescribed in the Bylaws of the Corporation with respect to meetings of shareholders. Any consent or approval given by the holders of Preferred Shares or a series as a class shall be deemed to have been sufficiently given if in the same manner as provided herein regarding holders of Preferred Shares as a class.
e) Voting Rights. Neither the Company's Bylaws nor its Articles of Incorporation provide for the election or re-election of directors at staggered intervals.
A meeting of shareholders may be called at any time by resolution or by the Chairman of the Board or by the President and the Secretary shall cause notice of a meeting of shareholders to be given when directed so to do by resolution of the board or by the Chairman or the Board or the President.
The board shall call an annual meeting of the shareholders not later than eighteen (18) months after the Corporation comes into existence and subsequently not later than fifteen (15) months after holding the last preceding annual meeting.
A special meeting of shareholders may be called at any time and may be held in conjunction with an annual meeting of shareholders.
Meeting of shareholders shall be held at the place within Canada determined by the board from time to time. Notwithstanding the above subsection, a meeting of shareholders may be held outside Canada if all the shareholders entitled to vote at that meeting so agree, and a shareholder who attends a meeting of shareholders held outside Canada is deemed to have so agreed except when he attends the meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully held.
Neither the Articles of Incorporation nor the Bylaws of the Company discuss limitations on the rights to own securities or exercise voting rights thereon.
Although not expressly enumerated in the Articles, pursuant to Canadian regulations, shareholder ownership must be disclosed by any shareholder who owns more than 10% of the Company's common stock.
There is no provision of the Company's Articles of Incorporation or Bylaws that would delay, defer or prevent a change in control of the Company, and that would operate only with respect to a merger, acquisition, or corporate restructuring involving the Company (or any of its subsidiaries). The Company's Bylaws do not contain a provision indicating the ownership threshold above which shareholder ownership must be disclosed. With respect to the matters discussed in this Item 10B, the law applicable to the Company is not significantly different from United States law. Neither the Articles of Incorporation nor Bylaws contain provisions governing changes in capital that are more stringent than the conditions required by law.
The Ontario Business Corporations Act contains provisions that require a
"special resolution" for effecting certain corporate actions. Such a "special
resolution" requires a three-quarters vote of shareholders rather than a simple
majority for passage. The principle corporate actions for which the Company
would require a "special resolution" include:
a. Changing its name;
b. Changing the place where its registered office is situated;
c. Adding, changing or removing any restriction on the business
or businesses that the corporation may carry on;
d. Certain reorganizations of the corporation and alterations of
share capital;
e. Increasing or decreasing the number of directors or the
minimum or maximum number of directors;
f. Any amendment to its articles regarding constraining the
issue or transfer of shares to persons who are not resident
Canadians; and
g. Dissolution of the corporation.
Notwithstanding the aforementioned: the Company is unaware of any dividend restrictions; has no specific procedure for the setting of the date of dividend entitlement; but might expect to set a record date for stock ownership to determine entitlement; has no specific procedures for non-resident holders to claim dividends, but might expect to mail their dividends in the same manner as resident holders. The Company has not nominated any financial institutions to be the potential paying agents for dividends in the United States.
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rates prevailing at the consolidated balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Transactions in foreign currencies are translated into Canadian dollars at the approximate rates prevailing at the dates of the transactions. Foreign exchange gains and losses are included in loss for the year.
Integrated foreign operations of subsidiaries are translated into Canadian dollars at exchange rates prevailing at the consolidated balance sheet date for monetary items and at exchange rates prevailing at the transaction dates for non-monetary items. Revenue and expenses are translated at exchange rates prevailing during the year. Exchange gains and losses are included in loss during the year.
The Company is exposed to foreign currency risk through its activities outside of Canada. Unfavorable changes in the exchange rate may affect the operating results of the Company. The Company is also exposed to foreign exchange risk as a substantial amount of its revenue is denominated in U.S. dollars and Chinese Rminibi ("RMB").
The Company does not actively use derivative instruments to reduce its exposure to foreign currency risk.
The table sets forth the rate of exchange for the Canadian Dollar at the end of the five most recent fiscal periods ended December 31st, the average rates for the period, and the range of high and low rates for the period. The data for the nine-month periods ended March 31, 2001 and March 31, 2001 is also provided. The data for each month during the previous ten months is also provided. The exchange rate was 1.5994 on March 31, 2002 and 1.5110 on June 30, 2002.
For purposes of this table, the rate of exchange means the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. The table sets forth the number of Canadian Dollars required under that formula to buy one U.S. Dollar. The average rate means the average of the exchange rates on the last day of each month during the period.
U.S. Dollar/Canadian Dollar
Average High Low Close
-----------------------------------------------------------------
September 2002 1.58 1.59 1.55 1.59
August 2002 1.57 1.59 1.55 1.56
July 2002 1.55 1.59 1.51 1.58
June 2002 1.53 1.55 1.51 1.51
May 2002 1.55 1.57 1.53 1.53
April 2002 1.58 1.60 1.56 1.57
March 2002 1.59 1.60 1.58 1.59
February 2002 1.60 1.61 1.59 1.60
January 2002 1.60 1.61 1.59 1.59
Fiscal Year Ended 12/31/2001 1.55 1.60 1.49 1.59
Fiscal Year Ended 12/31/2000 1.50 1.56 1.44 1.50
Fiscal Year Ended 12/31/1999 1.49 1.53 1.44 1.44
Fiscal Year Ended 12/31/1998 1.49 1.57 1.41 1.54
Fiscal Year Ended 12/31/1997 1.39 1.44 1.34 1.43
Fiscal Year Ended 12/31/1996 1.36 1.38 1.33 1.37
=================================================================
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A brief description of provisions of the tax treaty between Canada and the United States is included below, together with a brief outline of certain taxes, including withholding provisions, to which United States security holders are subject under existing laws and regulations of Canada. The consequences, if any, of provincial, state and local taxes are not considered.
Security holders should seek the advice of their own tax advisors, tax counsel or accountants with respect to the applicability or effect on their own individual circumstances of the matters referred to herein and of any provincial, state or local taxes.
Material Canadian Federal Income Tax Consequences The discussion under this heading relates to the principal Canadian federal income tax consequences of acquiring, holding and disposing of shares of common stock of the Company for a shareholder of the Company who is not a resident of Canada but is a resident of the United States and who will acquire and hold shares of common stock of the Company as capital property for the purposes of the Income Tax Act (Canada) (the "Canadian Tax Act"). This summary does not apply to a shareholder who carries on business in Canada through a "permanent establishment" situated in Canada or performs independent personal services in Canada through a fixed base in Canada if the shareholder's holding in the Company is effectively connected with such permanent establishment or fixed base. This information is based on the provisions of the Canadian Tax Act and the regulations thereunder and on an understanding of the administrative practices of Canada Customs and Revenue Agency, and takes into account all specific proposals to amend the Canadian Tax Act or regulations made by the Minister of Finance of Canada as of the date hereof. This discussion is not a substitute for independent advice from a shareholder's own Canadian and U.S. tax advisors.
The provisions of the Canadian Tax Act are subject to income tax treaties to which Canada is a party, including the Canada-United States Income Tax Convention (1980), as amended (the "Convention").
Dividends on Common Shares and Other Income. Under the Canadian Tax Act, a non-resident of Canada is subject to Canadian withholding tax at the rate of 25 percent on dividends paid or deemed to have been paid to him or her by a corporation resident in Canada. The Convention limits the rate to 15 percent if the shareholder is a resident of the United States and the dividends are beneficially owned by and paid to such shareholder, and to 5 percent if the shareholder is also a corporation that beneficially owns at least 10 percent of the voting stock of the payor-corporation.
The amount of a stock dividend (for tax purposes) would be equal to the amount by which the paid up or stated capital of the Company had increased because of the payment of such dividend. The Company will furnish additional tax information to shareholders in the event of such a dividend. Interest paid or deemed to be paid on the Company's debt securities held by non-Canadian residents may also be subject to Canadian withholding tax, depending upon the terms and provisions of such securities and any applicable tax treaty.
The Convention exempts from Canadian income tax dividends paid to a religious, scientific, literary, educational or charitable organization or to an organization constituted and operated exclusively to administer a pension, retirement or employee benefit fund or plan, if the organization is a resident of the United States and is exempt from income tax under the laws of the United States.
Dispositions of Common Shares. Under the Canadian Tax Act, a taxpayer's capital gain or capital loss from a disposition of a share of common stock of the Company is the amount, if any, by which his or her proceeds of disposition exceed (or are exceeded by, respectively) the aggregate of his or her adjusted cost base of the share and reasonable expenses of disposition. One-half of a capital gain (the "taxable capital gain") is included in income, and one-half of a capital loss in a year (the" allowable capital loss") is deductible from taxable capital gains realized in the same year. The amount by which a shareholder's allowable capital loss exceeds the taxable capital gain in a year may be deducted from a taxable capital gain realized by the shareholder in the three previous or any subsequent year, subject to adjustment when the capital gains inclusion rate in the year of disposition differs from the inclusion rate in the year the deduction is claimed.
If a share of common stock of the Company is disposed of to the Company other than in the open market in the manner in which shares would normally be purchased by the public, the proceeds of disposition will, in general terms, be considered as limited to the paid-up capital of the share and the balance of the price paid will be deemed to be a dividend. In the case of a shareholder that is a corporation, the amount of any capital loss otherwise determined may be reduced by the amount of dividends previously received in respect of the shares disposed of, unless the corporation owned the shares for at least 365 days prior to sustaining the loss and (together with corporations, persons and other entities, with whom the corporation was not dealing at arm's length) did not own more than five percent of the shares of any class of the corporation from which the dividend was received. These loss limitation rules may also apply where a corporation is a member of a partnership or a beneficiary of a trust that owned the shares disposed of.
Under the Canadian Tax Act, a non-resident of Canada is subject to Canadian tax on taxable capital gains, and may deduct allowable capital losses, realized on a disposition of "taxable Canadian property." Shares of common stock of the Company will constitute taxable Canadian property of a shareholder at a particular time if the shareholder used the shares in carrying on business in Canada, or if at any time in the five years immediately preceding the disposition 25 percent or more of the issued shares of any class or series in the capital stock of the Company belonged to one or more persons in a group comprising the shareholder and persons with whom the shareholder did not deal at arm's length.
The Convention relieves United States residents from liability for Canadian tax on capital gains derived on a disposition of shares unless (a) the value of the shares is derived principally from "real property" in Canada, including the right to explore for or exploit natural resources and rights to amounts computed by reference to production, (b) the shareholder was resident in Canada for 120 months during any period of 20 consecutive years preceding, and at any time during the 10 years immediately preceding, the disposition and the shares were owned by him when he or she ceased to be resident in Canada, or (c) the shares formed part of the business property of a "permanent establishment" that the holder has or had in Canada within the 12 months preceding the disposition.
Material United States Federal Income Tax Considerations The following discussion is based upon the sections of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, published Internal Revenue Service ("IRS") rulings, published administrative positions of the IRS and court decisions that are currently applicable. This discussion does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation that, if enacted, could be applied, possibly on a retroactive basis, at any time. Holders and prospective holders of shares of the Company should consult their own tax advisors about the Federal; state, local and foreign tax consequences of purchasing, owning and disposing of shares of the Company.
U.S. Holders. As used herein, a "U.S. Holder" includes a holder of shares of the Company who is a citizen or resident of the United States, a corporation created or organized in or under the laws of the United States or of any political subdivision thereof, any entity that is taxable as a corporation for U.S. tax purposes and any other person or entity whose ownership of shares of the Company is effectively connected with the conduct of a trade or business in the United States. A U.S. Holder does not include persons subject to special provisions of Federal income tax law, such as tax exempt organizations, qualified retirement plans, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, nonresident alien individuals or foreign corporations whose ownership of shares of the Company is not effectively connected with conduct of trade or business in the United States, shareholders who acquired their stock through the exercise of employee stock options or otherwise as compensation and shareholders who hold their stock as ordinary assets and not as capital assets.
Distributions on Shares of the Company. U.S. Holders receiving dividend distributions (including constructive dividends) with respect to shares of the Company are required to include in gross income for United States Federal income tax purposes the gross amount of such distributions to the extent that the Company has current or accumulated earnings and profits as defined under U.S. Federal tax law, without reduction for any Canadian income tax withheld from such distributions. Such Canadian tax withheld may be credited against the U.S. Holder's United States Federal income tax liability or, alternatively, may be deducted in computing the U.S. Holder's United States Federal taxable income by those who itemize deductions. (See discussion that is more detailed at "Foreign Tax Credit" below). To the extent that distributions exceed current or accumulated earnings and profits of the Company, they will be treated first as a return of capital up to the U.S. Holder's adjusted basis in the shares and thereafter as gain from the sale or exchange of the shares. Preferential tax rates for net capital gains are applicable to a U.S. Holder that is an individual, estate or trust. There are currently no preferential tax rates for long-term capital gains for a U.S. Holder that is a corporation.
Dividends paid on the shares of the Company are not expected to be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations. A U.S. Holder that is a corporation may be entitled to a 70% deduction of the United States source portion of dividends received from the Company (unless the Company qualifies as a "foreign personal holding company" or a "passive foreign investment company", as defined below) if such U.S. Holder owns shares representing at least 10% of the voting power and value of the Company.
In the case of foreign currency received as a dividend that is not converted by the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any gain or loss recognized upon a subsequent sale or other disposition of the foreign currency, including the exchange for U.S. dollars, will be ordinary income or loss. However, for tax years after 1997, an individual whose realized foreign exchange gain does not exceed U.S. $200 will not recognize that gain, to the extent that there are not expenses associated with the transaction that meet the requirement for deductibility as a trade or business expense (other than travel expenses in connection with a business trip or as an expense for the production of income).
Foreign Tax Credit. A U.S. Holder who pays (or has withheld from distributions) Canadian income tax with respect to the ownership of shares of the Company may be entitled, at the option of the U.S. Holder, to either a deduction or a tax credit for such foreign tax paid or withheld. It will be more advantageous to claim a credit because a credit reduces United States Federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income subject to tax. This election is made on a year-by-year basis and applies to all foreign taxes paid by (or withheld from) the U.S. Holder during that year. There are significant and complex limitations that apply to the credit, among which is the general limitation that the credit cannot exceed the proportionate share of the U.S. Holder's United States Federal income tax liability that the U.S. Holder's foreign source income bears to his or its worldwide taxable income. In the determination of the application of this limitation, the various items of income and deduction must be classified into foreign and domestic sources. Complex rules govern this classification process. There are further limitations on the foreign tax credit for certain types of income such as "passive income", "high withholding tax interest", "financial services income", and "shipping income". The availability of the foreign tax credit and the application of the limitations on the credit are fact specific and holders and prospective holders of shares of the Company should consult their own tax advisors regarding their individual circumstances.
In the case of certain U.S. Holders that are corporations (other than corporations subject to Subchapter S of the Code), owning 10% or more of the Company's Common Shares, a portion of the qualifying Canadian income tax paid by the Company will also be available as a foreign tax credit for U.S. federal income tax purposes, at the election of the U.S. Holder.
Disposition of Shares of the Company. A U.S. Holder will recognize a gain or loss upon the sale of shares of the Company equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received, and (ii) the shareholder's tax basis in the shares of the Company. This gain or loss will be a capital gain or loss if the shares are a capital asset in the hands of the U.S. Holder, and will be a short-term or long-term capital gain or loss depending upon the holding period of the U.S. Holder. Gains and losses are netted and combined according to special rules in arriving at the overall capital gain or loss for a particular tax year. Deductions for net capital losses are subject to significant limitations. Corporate capital losses (other than losses of corporations electing under Subchapter S or the Code) are deductible to the extent of capital gains. Non-corporate taxpayers may deduct net capital losses, whether short-term or long-term, up to U.S. $3,000 a year (U.S. $1,500 in the case of a married individual filing separately). For U.S. Holders that are individuals, any unused portion of such net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted. For U.S. Holders that are corporations (other than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years from the loss year and carried forward five years from the loss year to be offset against capital gains until such net capital loss is thereby exhausted.
Other Considerations
In the following circumstances, the above sections of this discussion may not
describe the United States Federal income tax consequences resulting from the
holding and disposition of shares of the Company:
Foreign Personal Holding Company. If at any time during a taxable year more than 50% of the total combined voting power or the total value of the Company's outstanding shares is owned, directly or indirectly, by five or fewer individuals who are citizens or residents of the United States and 60% (50% in subsequent years) or more of the Company's gross income for such year was derived from certain passive sources (e.g., from dividends received from its subsidiaries), the Company would be treated as a "foreign personal holding company". In that event, U.S. Holders that hold shares of the Company (on the earlier of the last day of the Company's tax year or the last date on which the Company was a foreign personal holding company) would be required to include in gross income for such year their allowable portions of such passive income to the extent the Company does not actually distribute such income.
Foreign Investment Company. If 50% or more of the combined voting power or total value of the Company's outstanding shares are held, directly or indirectly, by citizens or residents of the United States, United States domestic partnerships or corporations, or estates or trusts other than foreign estates or trusts (as defined by the Code Section 7701 (a)(31)), and the Company is found to be engaged primarily in the business of investing, reinvesting, or trading in securities, commodities, or any interest, it is possible that the Company might be treated as a "foreign investment company" as defined in Section 1246 of the Code, causing all or part of any gain realized by a U.S. Holder selling or exchanging shares of the Company to be treated as ordinary income rather than capital gain.
Passive Foreign Investment Company. As a foreign corporation with U.S. Holders, the Company will be treated as a passive foreign investment company ("PFIC"), as defined in Section 1297 of the Code, if 75% or more of its gross income in a taxable year is passive income, or the average percentage of the Company's assets (by value) during the taxable year which produce passive income or which are held for production of same is at least 50%. Passive income is defined to include gross income in the nature of dividends, interest, royalties, rents and annuities; excess of gains over losses from certain transactions in any commodities not arising inter alia from a PFIC whose business is actively involved in such commodities; certain foreign currency gains; and other similar types of income. Foreign mining companies that are in the exploration stage may have little or no income from operations and/or may hold substantial cash and short-term securities that pay interest and dividends while awaiting expenditure in connection with the business. Given the complexities of determining what expenditures may be deductible and of how assets held for production of active income should be valued, the Company, based on advice from its professional advisers, cannot conclude whether it is a PFIC.
It is not the intention of the Company to be considered a PFIC and the Company does not consider this to be a material risk. In the event that it were to become classified as a PFIC, the following should be taken into consideration. U.S. Holders owning shares of a PFIC are subject to a special tax and to an interest charge based on the value of deferral of U.S. tax attributable to undistributed earnings of a PFIC for the period during which the shares of the PFIC are owned. This special tax would apply to any gain realized on the disposition of shares of a PFIC. In addition, the gain is subject to U.S. federal income tax as ordinary income, taxed at top marginal rates, rather than as capital gain income. The special tax would also be payable on receipt of excess distributions (any distributions received in the current year that are in excess of 125% of the average distributions received during the 3 preceding years or, if shorter, the shareholder's holding period). If, however, the U.S. Holder makes a timely election to treat a PFIC as a qualified electing fund ("QEF") with respect to such shareholder's interest and the Company provides an annual information statement, the above-described rules will not apply. The Company will provide such an information statement upon request from a U.S. Holder for current and prior taxable years. Instead, the electing U.S. Holder would include annually in his gross income his pro rata share of the PFIC's ordinary earnings and any net capital gain regardless of whether such income or gain was actually distributed. A U.S. Holder of a PFIC treated as a QEF can, however, further elect to defer the payment of United States Federal income tax on such income and gain inclusions, with tax payments ultimately requiring payment of an interest factor. In addition, with a timely QEF election, the electing U.S. Holder will obtain capital gain treatment on the gain realized on disposition of such U.S. Holder's interest in the PFIC. Special rules apply to U.S. Holders who own their interests in a PFIC through intermediate entities or persons.
Effective for tax years of U.S. Holders beginning after December 31, 1997, U.S. Holders who hold, actually or constructively, marketable stock of a foreign corporation that qualifies as a PFIC may elect to mark such stock to the market (a "mark-to-market election"). If such an election is made, such U.S. Holder will not be subject to the special taxation rules of PFIC described above for the taxable years for which the mark-to-market election is made. A U.S. Holder who makes such an election will include in income for the taxable year an amount equal to the excess, if any, of the fair market value of the shares of the Company as of the close of such tax year over such U.S. Holder's adjusted basis in such shares. In addition, the U.S. Holder is allowed a deduction for the lesser of (i) the excess, if any, of such U.S. Holder's adjusted tax basis in the shares over the fair market value of such shares as of the close of the tax year, or (ii) the excess, if any of (A) the mark-to-market gains for the shares in the Company included by such U.S. Holder for prior tax years, including any amount which would have been included for any prior year but for Section 1291 interest on tax deferral rules discussed above with respect to a U.S. Holder, who has not made a timely QEF election during the year in which he holds (or is deemed to have held) shares in the Company and the Company is a PFIC ("Non-Electing U.S. Holder"), over (B) the mark-to-market losses for shares that were allowed as deductions for prior tax years. A U.S. Holder's adjusted tax basis in the shares of the Company will be increased or decreased to reflect the amount included or deducted as a result of mark-to-market election. A mark-to-market election will apply to the tax year for which the election is made and to all later tax years, unless the PFIC stock ceases to be marketable or the IRS consents to the revocation of the election.
The IRS has issued proposed regulations that would treat as taxable certain transfers of PFIC stock by a Non-Electing U.S. Holder that are not otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death. In such cases, the basis of the Company's shares in the hands of the transferee and the basis of any property received in the exchange for those shares would be increased by the amount of gain recognized. A U.S. Holder who has made a timely QEF election (as discussed herein) will not be taxed on certain transfers of PFIC stock, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death. The transferee's basis in this case will depend on the manner of the transfer. The specific tax effect to the U.S. Holder and the transferee may vary based on the manner in which the shares of the Company are transferred. Each U.S. Holder should consult a tax advisor with respect to how the PFIC rules affect their tax situation.
The PFIC and QEF election rules are complex. U.S. Holders should consult a tax advisor regarding the availability and procedure for making the QEF election as well as the applicable method for recognizing gains or earnings and profits under the foregoing rules.
Controlled Foreign Corporation. If more than 50% of the voting power of all classes of stock or the total value of the stock of the Company is owned, directly or indirectly, by citizens or residents of the United States, United States domestic partnerships and corporations or estates or trusts other than foreign estates or trusts, each of whom own 10% or more of the total combined voting power of all classes of stock of the Company ("United States shareholder"), the Company could be treated as a "controlled foreign corporation" under Subpart F of the Code. This classification would effect many complex results including the required inclusion by such United States shareholders in income of their pro rata share of "Subpart F income" (as specially defined by the Code) of the Company. Subpart F requires current inclusions in the income of United States shareholders to the extent of a controlled foreign corporation's accumulated earnings invested in "excess passive" assets (as defined by the Code). In addition, under Section 1248 of the Code, a gain from the sale or exchange of shares by a U.S. Holder who is or was a United States shareholder at any time during the five year period ending with the sale or exchange is treated as ordinary dividend income to the extent of earnings and profits of the Company attributable to the stock sold or exchanged. Because of the complexity of Subpart F, and because it is not clear that Subpart F would apply to the U.S. Holders of shares of the Company, a more detailed review of these rules is outside of the scope of this discussion.
If the Company is both a PFIC and controlled foreign corporation, the company will not be treated as a PFIC with respect to United States shareholders of the controlled foreign corporation. This rule will be effective for taxable years of the Company ending with or within such taxable years of United States shareholders.
The validity of the shares will be passed upon for us by David M. Loev, Attorney at Law, Houston, TX.
Our financial statements as of December 31, 2001, December 31, 2000, and December 31, 1999 and for all of the three years in the period ended December 31, 2001, included in this Registration Statement have been so included in reliance on the report of KPMG LLP, independent certified public accountants given on the authority of said firm as experts in auditing and accounting.
We have filed with the Securities and Exchange Commission a registration statement on Form F-1 under the Securities Act in connection with the offering of our shares. This prospectus, which forms a part of our registration statement, does not contain all of the information set forth in the registration statement, certain items of which are contained in the exhibits and schedules of the registration statement. For further information with respect to our company and shares offered, you should refer to the registration statement and the accompanying exhibits. With respect to each contract, agreement or other document filed as an exhibit to the registration statement, you should refer to the exhibit for a more complete discussion of the matter. The registration statement and the exhibits thereto filed by us with the Securities and Exchange Commission may be inspected at the public reference facilities of the Securities and Exchange Commission listed below.
Upon completion of this offering, we will become subject to the informational requirements of the Exchange Act. Under the Exchange Act, we will be required to file periodic reports and other information with the Securities and Exchange Commission, including annual reports on Form 20-F and quarterly and other interim reports on Form 6-K. You may inspect such reports and other information we file with the Securities and Exchange Commission in accordance with the Exchange Act at the public reference facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549. Copies of such material may also be obtained from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain information regarding the Washington D.C. Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by contacting the Securities and Exchange Commission over the internet at its website at http://www.sec.gov.
As a foreign private issuer, we will be exempt from the rules under Section 14 of the Exchange Act prescribing the furnishing and consent of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short swing profit recovery provisions contained in Section 16 of the Exchange Act with respect to their purchases and sales of shares. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we intend to furnish our shareholders with annual reports in English containing financial statements which will be audited and reported on, with an opinion expressed, by an independent public accounting firm, prepared in accordance with U.S. GAAP.
Item 5. Disclosure of Commission Position on Indemnification For Securities Act Liabilities.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
Financial Statements
Consolidated Financial Statements
(In Canadian dollars)
LINGO MEDIA INC.
Years ended December 31, 2001, 2000 and 1999
AUDITORS' REPORT
To the Board of Directors of Lingo Media Inc.
We have audited the consolidated balance sheets of Lingo Media Inc. as at December 31, 2001 and 2000 and the consolidated statements of operations and deficit and cash flows for each of the years in the three-year period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2001 and 2000 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2001 in accordance with Canadian generally accepted accounting principles.
/s/ KPMG LLP ---------------------- KPMG LLP Chartered Accountants Toronto, Canada May 3, 2002 |
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA -UNITED STATES REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of an explanatory paragraph when the financial statements are affected by conditions and events that cast doubt on the Company's ability to continue as a going concern, such as those described in note 1 to the financial statements. Our report to the shareholders, dated May 3, 2002, is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors' report when these are adequately disclosed in the financial statements.
/s/ KPMG LLP ---------------------- KPMG LLP Chartered Accountants Toronto, Canada May 3, 2002 |
LINGO MEDIA INC.
Consolidated Balance Sheets
(In Canadian dollars)
December 31, 2001 and 2000
2001 2000
----------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 7,473 $ 44,207
Short-term investments - 67,099
Accounts receivable 336,840 170,523
Loan receivable (note 3) 34,383 62,401
Prepaid expenses 52,778 86,787
Work in progress 100,380 50,051
-----------------------------------------------------------------------------------------
531,854 481,068
Capital assets, net (note 4) 51,388 64,235
Development costs, net (note 5) 850,619 726,345
Acquired publishing content, net (note 6) 335,681 353,349
Software development costs, net (note 7) 113,835 124,184
-----------------------------------------------------------------------------------------
$ 1,883,377 $ 1,749,181
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness $ - $ 145,000
Accounts payable 165,229 282,753
Accrued liabilities 41,000 30,450
Customer deposits - 50,250
Current portion of long-term debt (note 8) 411,096 50,700
-----------------------------------------------------------------------------------------
617,325 559,153
Long-term debt (note 8) 54,480 47,250
Shareholders' equity:
Capital stock (note 10) 2,720,891 2,607,391
Deficit (1,509,319) (1,464,613)
-----------------------------------------------------------------------------------------
1,211,572 1,142,778
Future operations (note 1)
Commitments (note 17)
Subsequent events (note 18)
-----------------------------------------------------------------------------------------
$ 1,883,377 $ 1,749,181
See accompanying notes to consolidated financial statements.
|
On behalf of the Board:
/s/ Michael P. Kraft Director -------------------------- Michael P. Kraft /s/ Richard J.G. Boxer Director -------------------------- Richard J.G. Boxer |
LINGO MEDIA INC.
Consolidated Statements of Operations and Deficit
(In Canadian dollars)
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------------------------------------------------------------------------------------------------
Revenue $ 333,691 $ 527,051 $ 732,127
Cost of sales 42,138 371,668 475,957
-------------------------------------------------------------------------------------------------------
291,553 155,383 256,170
Expenses:
General and administrative (note 12) 406,961 661,170 505,313
Interest on long-term debt 48,952 12,509 44,688
Other interest and bank charges 4,698 44,589 36,805
Amortization 84,774 87,112 89,785
-------------------------------------------------------------------------------------------------------
545,385 805,380 676,591
-------------------------------------------------------------------------------------------------------
Loss before the undernoted (253,832) (649,997) (420,421)
Gain on sale of subsidiary (note 15) 197,719 - -
Gain on issue of shares by subsidiary (note 16) 48,750 - 143,962
-------------------------------------------------------------------------------------------------------
Loss before income taxes (7,363) (649,997) (276,459)
Income taxes (note 11) 37,343 125,000 -
-------------------------------------------------------------------------------------------------------
Loss for the year (44,706) (774,997) (276,459)
Deficit, beginning of year (1,464,613) (689,616) (413,157)
-------------------------------------------------------------------------------------------------------
Deficit, end of year $(1,509,319) $(1,464,613) $ (689,616)
-------------------------------------------------------------------------------------------------------
Loss per share - basic and diluted $ (0.00) $ (0.05) $ (0.03)
-------------------------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 16,095,471 14,567,994 10,783,827
See accompanying notes to consolidated financial statements.
|
LINGO MEDIA INC.
Consolidated Statements of Cash Flows
(In Canadian dollars)
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
-------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Loss for the year $ (44,706) $ (774,997) $(276,459)
Items not affecting cash:
Gain on sale of subsidiary (197,719) - -
Gain on issue of shares by subsidiary (48,750) - (143,962)
Future income taxes - 125,000 -
Amortization of capital assets 12,847 12,612 6,869
Amortization of development costs 43,910 74,500 82,916
Amortization of acquired
publishing content 17,668 - -
Amortization of software
development costs 10,349 - -
Change in non-cash operating
working capital:
Short-term investments 67,099 (67,099) -
Grants receivable - - 69,387
Accounts receivable (193,173) (110,396) 110,296
Loan receivable 28,018 (62,401) -
Prepaid expenses 34,697 (68,735) 14,600
Work in progress (50,329) 129 18,041
Accounts payable and accrued liabilities (33,087) 4,750 141,337
Customer deposits (50,250) - (96,916)
-------------------------------------------------------------------------------------------------
(403,426) (866,637) (73,891)
Financing:
Bank indebtedness - - 108,716
Repayment of bank indebtedness (145,000) (105,000) -
Increase in long-term debt 566,713 - 137,762
Repayment of long-term debt (199,087) (420,362) (50,700)
Issuance of capital stock, net 113,500 1,841,872 -
Issuance of capital stock by subsidiary 48,750 - 145,000
-------------------------------------------------------------------------------------------------
384,876 1,316,510 340,778
Investments:
Purchase of capital assets - (46,305) (8,501)
Development costs (168,184) (348,689) (144,874)
Software development costs - (30,957) (93,227)
Proceeds on sale of subsidiary 150,000 - -
-------------------------------------------------------------------------------------------------
(18,184) (425,951) (246,602)
-------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (36,734) 23,922 20,285
Cash and cash equivalents, beginning of year 44,207 20,285 -
-------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 7,473 $ 44,207 $ 20,285
-------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 38,730 $ 57,098 $ 67,286
See accompanying notes to consolidated financial statements.
|
Lingo Media Inc. (the "Company") develops, publishes, licenses and distributes books, audiocassettes, multimedia and ancillary products for English language learning for the school and retail markets in China and Canada.
1. FUTURE OPERATIONS:
These consolidated financial statements have been prepared on a going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of business. The application of the going concern concept is dependent on the Company's ability to generate future profitable operations and/or obtain additional financing to fund future operations.
The Company plans to finance its operations with a combination of private placements of equity and revenue from future product sales. There are no assurances that the Company will be successful in obtaining an adequate level of financing. In the short term, the Company believes that sales from existing sales agreements should be adequate to fund its operations.
2. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated.
(b) Revenue recognition:
Revenue from the sale of publishing and ancillary products is recognized upon delivery and as long as all vendor obligations, which consist primarily of obtaining customer acceptance, have been satisfied. Amounts received in advance of revenue recognition are recorded as customer deposits.
(c) Cash and cash equivalents:
Cash and cash equivalents consist of cash in the bank and highly liquid investments with maturities of three months or less at the time of purchase.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(d) Short-term investments:
Short-term investments consist of highly liquid investments with original maturities greater than three months but less than one year when purchased and are carried at cost plus accrued interest.
(e) Work in progress:
Work in progress is recorded at the lower of cost and net realizable value.
(f) Capital assets:
Capital assets are recorded at cost and are amortized over their estimated useful lives on a declining-balance basis at the following annual rate:
Office equipment 20%
The Company regularly reviews the carrying values of its capital assets by comparing the carrying amount of the asset to the expected future cash flows to be generated by the asset. If the carrying value exceeds the amount recoverable, a write-down of the asset to estimated fair value is charged to the consolidated statements of operations and deficit.
(g) Development costs:
Development costs associated with pre-operating expenses of Alpha Media(TM), Alpha Publishing(TM) and Alpha Brand Name Books(TM) have been capitalized. In addition, the Company has capitalized pre-operating costs relating to establishing a business base in the United States and the development of business in China. Pre-operating costs are capitalized until the commencement of commercial operations and then amortized on a straight-line basis, over a maximum of five years. The carrying value is assessed on a periodic basis to determine if a write-down is required.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(h) Acquired publishing content:
The costs of obtaining the English as a Foreign Language ("EFL") program entitled "Communications: An Interactive EFL Program" and an international folktale series entitled "Stories Lost and Found: The Universe of Folktale" have been capitalized and are being amortized over a five-year period.
The Company regularly reviews the carrying values of its acquired publishing content. The Company supports the carrying value of these assets based on the undiscounted value of expected future cash flows. If the carrying value exceeds the amount recoverable, a write-down of the asset to estimated fair value is charged to the consolidated statements of operations and deficit.
(i) Software development costs:
The Company has deferred software development costs incurred in connection with a computer software program to be used by children in reading and writing that promote and facilitate the development of communication skills in the English language. Software development costs are deferred once technological feasibility for a product is established. Software development costs are amortized on a straight-line basis over a maximum of three years.
Technological feasibility is established when the Company has completed all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications, including functions, features and technical performance requirements.
The Company regularly reviews the carrying values of its software development costs. The Company supports the carrying value of these assets based on the undiscounted value of expected future cash flows. If the carrying value exceeds the amount recoverable, a write-down of the asset to estimated fair value is charged to the consolidated statements of operations and deficit.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(j) Future income taxes:
The Company follows the asset and liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for the benefit of losses available to be carried forward to future years for income tax purposes. Future income tax assets and liabilities are measured using substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. Future income tax assets are recorded in the financial statements if realization is considered more likely than not.
(k) Foreign currency translation:
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rates prevailing at the consolidated balance sheet dates. Non-monetary assets and liabilities are translated at historical rates. Transactions in foreign currencies are translated into Canadian dollars at the approximate rates prevailing at the dates of the transactions. Foreign exchange gains and losses are included in loss for the year.
The Company's integrated foreign operations are translated into Canadian dollars at exchange rates prevailing at the consolidated balance sheets date for monetary items and at exchange rates prevailing at the transaction dates for non-monetary items. Revenue and expenses are translated at exchange rates prevailing during the year. Exchange gains and losses are included in loss for the year.
(l) Use of estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates. Significant areas requiring the use of management estimates related to the useful lives and impairment of capital assets, development costs, acquired publishing content and software development costs.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(m) Loss per share:
In fiscal 2001, the Company adopted the new provisions of The Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3500, "Earnings per Share". Basic earnings per share is computed using the weighted average number of common shares that are outstanding during the year. Diluted earnings per share is computed using the weighted average number of common and potential common shares outstanding during the year. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options using the treasury stock method.
Previously, the Company calculated diluted earnings per share using the imputed earnings method. The change in accounting policy has been applied retroactively and had no impact on previously reported amounts.
(n) Stock-based compensation plan:
The Company has adopted a stock option plan for employees, officers, directors and consultants of the Company. To date, all stock options issued under this plan have an exercise price equal to the fair value of the underlying common shares on the date of grant. The stock option plan is described in note 10(b). If stock or stock options are repurchased, the excess of the consideration paid over the carrying amount of the stock or stock option cancelled is charged to deficit.
3. LOAN RECEIVABLE:
The loan receivable, which is due from a non-related party, is due on demand, bears interest at 8.5% per annum, and is secured by a personal guarantee.
4. CAPITAL ASSETS:
Capital assets consist of the following:
2001 2000
-----------------------------------------------
Office equipment:
Cost $96,438 $96,438
Less accumulated amortization 45,050 32,203
-----------------------------------------------
$51,388 $64,235
|
5. DEVELOPMENT COSTS:
Development costs consist of the following:
2001 2000
---------------------------------------------------
Cost $1,135,099 $966,915
Less accumulated amortization 284,480 240,570
---------------------------------------------------
$ 850,619 $726,345
|
6. ACQUIRED PUBLISHING CONTENT:
Acquired publishing content consists of the following:
2001 2000
-------------------------------------------------
Cost $353,349 $353,349
Less accumulated amortization 17,668 -
-------------------------------------------------
$335,681 $353,349
|
7. SOFTWARE DEVELOPMENT COSTS:
Software development costs consist of the following:
2001 2000
-------------------------------------------------
Cost $124,184 $124,184
Less accumulated amortization 10,349 -
-------------------------------------------------
$113,835 $124,184
|
8. LONG-TERM DEBT:
2001 2000
--------------------------------------------------------------------------
Bank loan, bearing interest at prime rate plus 8% per
annum, secured by a general security agreement
and due in full on April 1, 2002 $364,621 $ -
Bank loan, repayable in monthly installments of $4,225
plus interest, bearing interest at 4.75% per annum,
secured by a general security agreement, maturing
November 23, 2002. During the year, the bank
offered to extend the terms of repayment by an
additional four months thereby the loan will mature
on March 23, 2003 59,150 97,950
Shareholder loan, bearing interest at 12% per annum and
due on January 31, 2003 36,805 -
Shareholder loan, bearing interest at 12% per annum and
due on January 31, 2003 5,000 -
--------------------------------------------------------------------------
465,576 97,950
Less current portion 411,096 50,700
--------------------------------------------------------------------------
$ 54,480 $47,250
|
9. RELATED PARTY BALANCES AND TRANSACTIONS:
During the year, the Company had the following transactions with related parties that have not been disclosed elsewhere in the financial statements:
Consulting fees of $100,000 (2000 - $73,000; 1999 - $36,000) were paid to a company controlled by a director of the Company. At December 31, 2001, $10,700 (2000 - nil) is included in accounts payable. A success fee of $5,000 (2000 - $50,000; 1999 - nil) was paid to a company controlled by a director of the Company.
9. RELATED PARTY BALANCES AND TRANSACTIONS (CONTINUED):
The shareholder loans bear interest at 12% (2000 - 10%; 1999 - 10%) per annum. Interest expense for the year was $8,963 (2000 - $7,374; 1999 - $3,112).
10. CAPITAL STOCK, WARRANTS AND STOCK OPTIONS:
(a) Authorized:
Unlimited preference shares, no par value
Unlimited common shares, no par value
The following details the changes in issued and outstanding shares and warrants for the three years ended December 31, 2001:
Purchase warrants Common shares
Number Amount Number Amount
Balance, December 31,
1998 and 1999 - $ - 10,783,827 $ 765,519
Issued:
Private placement (i) 5,000,000 - 5,000,000 1,811,872
Purchase warrants expired (2,500,000) - - -
Options exercised - - 150,000 30,000
----------------------------------------------------------------------------------------
Balance, December 31, 2000 2,500,000 - 15,933,827 2,607,391
Issued:
Private placement (ii) 500,000 - 1,000,000 93,500
Purchase warrants expired (2,500,000) - - -
Options exercised - - 100,000 20,000
----------------------------------------------------------------------------------------
Balance, December 31, 2001 500,000 $ - 17,033,827 $2,720,891
(i) During March and April 2000, the Company completed a private placement of
5,000,000 common shares, 2,500,000 Class A Purchase Warrants and 2,500,000 Class B
Purchase Warrants for cash proceeds, net of issue costs, of $1,811,872. The Class A
Purchase Warrants entitled the holder to acquire one common share for a price of $0.50
per share for each warrant. The Class B Purchase Warrants entitled the holder to
acquire one common share for a price of $1.00 per share for each warrant. The Class A
Purchase Warrants expired without being exercised on December 15, 2000 and the Class B
|
10. CAPITAL STOCK, WARRANTS AND STOCK OPTIONS (CONTINUED):
(ii) On November 23, 2001, the Company completed a private placement of 1,000,000 common shares and 500,000 Class C Purchase Warrants for cash proceeds, net of issue costs, of $93,500. The Class C Purchase Warrants entitle the holder to acquire one common share for a price of $0.15 per share for each warrant. The Class C Purchase Warrants expire on November 23, 2002. As at December 31, 2001, all the Class C Purchase Warrants remain outstanding.
(b) Stock option plan:
During May 2000, the Company adopted a new stock option plan (the "New Plan") to replace the previous plan. The New Plan was established for the benefit of the directors, senior officers, employees and consultants who provide services to the Company. The maximum number of common shares which may be set aside for issuance under the New Plan is 10% of the issued and outstanding common shares, provided that the Board of Directors has the right, from time to time, to increase such number subject to the approval of the shareholders of the Company when required by law or regulatory authority. Under the New Plan, the exercise price of each option cannot be less than the market price of the shares at time of grant, except for a permitted discount as specified by the TSX Venture Exchange. Under the TSX Venture Exchange's policy the maximum permitted discount, under certain conditions, is 25% subject to a minimum price of $0.10. The exercise period of the options granted cannot exceed five years. The vesting conditions are specified by the TSX Venture Exchange whereby all options under the New Plan vest over an 18-month period with no greater than 16.67% of any options granted to an optionee vesting in any three-month period or such longer period as the Board may determine. The expiry dates for the options outstanding as at December 31, 2001 ranges from January 28, 2003 to November 1, 2006.
10. CAPITAL STOCK, WARRANTS AND STOCK OPTIONS (CONTINUED):
Changes for the stock option plans during the years ended December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999
----------------------- ---------------------- -------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
shares price shares price shares price
-------------------------------------------------------------------------------------------
Options outstanding,
beginning of year 1,210,000 $ 0.34 965,000 $ 0.20 725,000 $0.20
Options granted 925,000 0.14 700,000 0.50 370,000 0.20
Options exercised (100,000) 0.20 (150,000) 0.20 - -
Options cancelled (60,000) 0.20 (305,000) 0.20 (130,000) 0.20
Options expired (80,000) 0.20 - - - -
-------------------------------------------------------------------------------------------
Options outstanding,
end of year 1,895,000 0.43 1,210,000 0.34 965,000 0.20
-------------------------------------------------------------------------------------------
Options exercisable,
end of year 1,017,536 $ 0.26 916,664 $ 0.24 965,000 $0.20
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The following table summarizes information about stock options outstanding at December 31, 2001:
Options outstanding Options exercisable
----------------------------------------- -------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
price outstanding life price outstanding price
------------------------------------------------------------------------------------------
0.10 - $0.12 725,000 4.55 $ 0.03 87,516 $ 0.12
0.20 - $0.22 790,000 2.52 0.21 690,020 0.20
0.45 - $0.50 380,000 3.65 0.49 240,000 0.49
------------------------------------------------------------------------------------------
1,895,000 3.53 0.43 1,017,536 0.26
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11. INCOME TAXES:
The provision for income taxes reflects an effective income tax rate which differs from the Canadian corporate income tax rate as follows:
2001 2000 1999
----------------------------------------------------------------------
Combined basic Canadian federal
and provincial income tax rate 42.1% 43.6% 44.6%
Effective income tax charge on
loss before income taxes $ (3,000) $(283,000) $(123,000)
Increase (decrease) resulting form:
Change in the valuation allowance
for future tax assets allocated to
income tax expense (54,000) 318,000 -
Adjustment to future tax assets and
liabilities for enacted changes in
tax laws and rates 230,000 - -
Effect of losses, the tax effect of
which has not been recorded - - 123,000
Non-taxable portion of gain on
sale of subsidiary (55,000) - -
Non-taxable portion of gain on
issue of shares of subsidiary (21,000) - -
Withholding tax on sales to China 37,343 - -
Other (97,000) 90,000 -
----------------------------------------------------------------------
$ 37,343 $ 125,000 $ -
|
The tax effect of temporary differences representing future tax assets is as
follows:
2001 2000 1999
----------------------------------------------------------------------
Future tax assets:
Operating loss carryforwards $ 650,000 $ 660,000 $ 517,000
Share issue costs 90,000 134,000 72,000
Capital assets - - 12,000
----------------------------------------------------------------------
740,000 794,000 601,000
Valuation allowance (740,000) (794,000) (476,000)
----------------------------------------------------------------------
Net future tax assets $ - $ - $ 125,000
|
11. INCOME TAXES (CONTINUED):
During 2001, the gross value of the future tax asset relating to operating loss carry forwards was reduced as a result of a reduction in income tax rates. Future tax assets and liabilities will be impacted by changes in tax laws and rates. The future effect of these changes is not currently determinable.
In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. Management considers projected future taxable income, uncertainties related to the industry in which the Company operates and tax planning strategies in making this assessment.
At December 31, 2001, the Company has non-capital losses available for carryforward for Canadian income tax purposes amounting to $2,088,000. These losses expire in the following fiscal years:
2002 $ 121,000
2003 271,000
2005 501,000
2006 303,000
2007 505,000
2008 387,000
--------------------------------
$ 2,088,000
|
The Company also has non-capital losses available for carryforward for United States income tax purposes amounting to U.S $30,000 and U.S. $28,000, expiring in 2019 and 2021, respectively.
12. GOVERNMENT GRANTS:
The Company received government grants of nil (2000 - $141,958; 1999 - $129,967), which were used to reduce general and administrative expenses relating to the Company's publishing projects in China.
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
(a) Currency risk:
The Company is subject to currency risk through its activities outside of Canada. Unfavourable changes in the exchange rate may affect the operating results of the Company. The Company is also exposed to foreign exchange risk as a substantial amount of its revenue is denominated in U.S. dollars and Chinese Reminibi ("RMB").
The Company does not actively use derivative instruments to reduce its exposure to foreign currency risk. There were no derivative instruments outstanding at December 31, 2001 and 2000.
(b) Fair market values:
The carrying values of cash and cash equivalents, short-term investments, accounts receivable, loan receivable, bank indebtedness, accounts payable and accrued liabilities approximate their fair values due to the relatively short periods to maturity. The fair value of long-term debt is not significantly different from its carrying value based on rates for similar instruments currently available to the Company and its maturity terms. The fair value of the shareholder loans is not determinable due to their related party nature and terms.
(c) Concentration of credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, accounts receivable and loan receivable. Cash and short-term investments consist of deposits with major financial institutions. With respect to accounts receivable, the Company performs periodic credit evaluations of the financial condition of its customers and typically does not require collateral from them. Management assesses the need for allowances for potential credit losses by considering the credit risk of specific customers, historical trends and other information. The loan receivable is secured by a personal guarantee.
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED):
A summary of sales to major customers that exceeded 10% of total sales during the year and the approximate amount due from the customer, as of December 31, 2001, are as follows:
Accounts
Sales receivable
---------------------------------------------------
2001 2000 1999 2001
---------------------------------------------------
Customer 1 74% - - $210,786
Customer 2 19% 8% - 109,500
Customer 3 - 54% - -
Customer 4 - 38% - -
Customer 5 - - 52% -
Customer 6 - - 19% -
Customer 7 - - 11% -
Customer 8 - - 10% -
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14. SEGMENTED INFORMATION:
The Company operates as an international business and has no distinct reportable business segments.
The Company is developing books, audiocassettes, multimedia and ancillary products for English language learning to be sold or licensed to the school market, primarily in China and Canada. This service is called Educational Publishing. The Company also develops original publishing properties on a contract basis for corporate clients. This service is called Trade Publishing.
The Company's revenue by geographic region based on the region in which the customer is located is as follows:
2001 2000 1999
------------------------------------------------------------------
Canada $ 21,068 $482,991 $649,067
China 312,623 44,060 -
Other - - 83,060
------------------------------------------------------------------
$333,691 $527,051 $732,127
|
14. SEGMENTED INFORMATION (CONTINUED):
The Company's revenue by type of service is as follows:
2001 2000 1999
------------------------------------------------------------------
Educational Publishing $333,691 $ 43,500 $ -
Trade Publishing - 483,551 732,127
------------------------------------------------------------------
$333,691 $ 527,051 $ 732,127
|
Substantially all of the Company's identifiable assets as at December 31, 2001 and 2000 are located in Canada.
15. SALE OF SUBSIDIARY:
On May 28, 2001, the Company sold its majority-owned subsidiary, AlphaCom Corporation, for cash proceeds of $150,000. A gain of $197,719 was realized. The gain was higher than the proceeds as the carrying value of the subsidiary was a negative amount.
16. ISSUE OF SHARES BY SUBSIDIARY:
When a subsidiary issues shares to an external party, the Company records a dilution gain or loss equal to the difference between the proceeds received and the Company's proportionate book value interest given up.
On December 27, 2001, EnglishLingo, Inc., a subsidiary of the Company, issued 1,300,000 common shares at $0.0375 per share for total cash proceeds of $48,750 to "accredited investors" in Ontario pursuant to the distribution exemption as a "closely-held issuer" within the meaning of Rule 45-501 of the Ontario Securities Commission. As a result of this offering, the Company recorded a dilution gain of $48,750. Prior to the transaction the Company owned 100% of EnglishLingo, Inc.'s common shares. Subsequently, the Company's ownership interest was 93.9%. Due to the Company's loss position, no income taxes were provided on the dilution gain.
16. ISSUE OF SHARES BY SUBSIDIARY (CONTINUED):
On April 13, 1999, AlphaCom Corporation, a subsidiary of the Company, issued 100,000 common shares at $1.45 per share for total cash proceeds of $145,000 to qualified investors pursuant to the offering exemptions from registration with the Securities and Exchange Commission in the United States provided by Regulation D, Rule 504 of the 1993 Securities Act. As a result of this offering, the Company recorded a dilution gain of $143,962. Prior to the transaction the Company owned 100% of AlphaCom Corporation's common shares. Subsequently, the Company's ownership interest was 90.1%. Due to the Company's loss position, no income taxes were provided on the dilution gain.
17. COMMITMENTS:
Future minimum lease payments under operating leases for premises and equipment are as follows:
2002 $ 20,127
2003 20,127
2004 20,127
2005 4,631
-------------------------------
$ 65,012
18. SUBSEQUENT EVENTS:
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(a) Private placement:
During March 2002, the Company completed a private placement of 3,700,000 common shares and 2,775,000 Class D Purchase Warrants for cash proceeds, net of issue costs of $349,000. The Class D Purchase Warrants entitle the holder to acquire one common share for a price of $0.10 per share for each warrant. The Class D Purchase Warrants expire March 2003.
18. SUBSEQUENT EVENTS (CONTINUED):
(b) Issue of shares by subsidiary:
During January 2002, EnglishLingo, Inc., a subsidiary of the Company, issued 1,800,000 common shares at $0.0375 per share for total cash proceeds of $67,500 to "accredited investors" in Ontario pursuant to the distribution exemption as a "closely-held issuer" within the meaning of Rule 45-501 of the Ontario Securities Commission. As a result of this offering, the Company recorded a diluted gain of $67,500. Prior to the transaction, the Company owned 93.9% of EnglishLingo, Inc.'s common shares. Subsequently, the Company's ownership interest was 86.6%.
19. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP"):
The consolidated financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") as applied in Canada. In the following respects, GAAP as applied in the United States differs from that applied in Canada:
2001 2000 1999
-----------------------------------------------------------------------------
Loss for the year - Canadian GAAP $ (44,706) $ (774,997) $(276,459)
Impact of United States GAAP and
adjustments:
Development costs (a) (168,184) (348,689) (144,874)
Amortization of development costs 43,910 74,500 82,916
Software development costs (b) - (30,957) (93,227)
Amortization of software
development costs 10,349 - -
Compensation expense (c) (59,983) (22,500) (35,500)
-----------------------------------------------------------------------------
Loss for the year - United States GAAP $(218,614) $(1,102,643) $(467,144)
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19. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED):
The cumulative effect of these adjustments on the consolidated shareholders' equity of the Company is as follows:
2001 2000 1999
---------------------------------------------------------------------------
Shareholders' equity based on
Canadian GAAP $1,211,572 $1,142,778 $ 75,903
Development costs (a) (850,619) (726,345) (452,156)
Software development costs (b) (113,835) (124,184) (93,227)
Compensation expense (c) (124,033) (64,050) (41,550)
---------------------------------------------------------------------------
Shareholders' equity - United States
GAAP $ 123,085 $ 228,199 $(511,030)
Under United States GAAP, the amounts shown on the consolidated balance sheets
for development costs and software development costs would both be nil.
(a) Development costs:
Under Canadian GAAP, the Company defers the incremental costs relating to the
development and pre-operating phases of new businesses and amortizes these costs
on a straight-line basis over periods up to five years. Under United States
GAAP, these costs are expensed as incurred.
(b) Software development costs:
Under United States GAAP, the software development costs would be expensed as
incurred.
(c) Options to consultants:
Under Canadian GAAP, the Company does not recognize compensation expense when
stock or stock options are issued to consultants. Any consideration paid on
exercise of stock options or purchase of stock is credited to share capital.
Under United States GAAP, the Company records compensation expense based on the
fair value for stock or stock options granted in exchange for services from
consultants.
|
19. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED):
(d) Statement of comprehensive income:
Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), establishes standards for the reporting and disclosure of comprehensive income and its components in financial statements. Components of comprehensive income or loss include net income or loss and all other changes in other non-owner changes in equity, such as the change in the cumulative translation adjustment and the unrealized gain or loss for the year on "available-for-sale" securities. For all periods presented, comprehensive loss is the same as loss for the year.
(e) Stock-based compensation disclosure:
The Company measures compensation expense relating to employee stock option plans for United States GAAP purposes using the intrinsic value method specified by APB Opinion No. 25, which in the Company's circumstances would not be materially different from compensation expense as determined under Canadian GAAP.
Had the Company determined compensation expense based on the fair values at the grant dates of the stock options consistent with the method prescribed under Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 123 ("SFAS 123"), the Company's loss would have been reported as the pro forma amounts indicated below:
2001 2000 1999
----------------------------------------------------------------
Loss in accordance with
United States GAAP $(218,614) $(1,102,643) $(467,144)
Pro forma loss (271,881) (1,127,018) (499,894)
----------------------------------------------------------------
Pro forma loss per share -
basic and diluted $ (0.02) $ (0.08) $ (0.05)
|
The effects on pro forma disclosure of applying SFAS 123 are not likely to be representative of the effects on pro forma disclosure in future years.
19. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED):
The weighted average estimated fair value at the date of grant, as defined by SFAS 123, for options granted in fiscal 2001 was $0.13 (2000 - $0.45; 1999 - $0.18).
The fair value of each option granted was estimated on the date of grant using the Black-Scholes fair value option pricing model with the following assumptions:
2001 2000 1999
----------------------------------------------------------
Risk-free interest rate 3.65% 6.09% 5.67%
Dividend yield - - -
Expected volatility 129% 519% 576%
Expected life of the options in years 5 5 5
|
For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period on a straight-line basis.
(f) Recent accounting pronouncements:
(i) In July 2001, the CICA and FASB issued new similar standards for Business Combinations, Goodwill and Other Intangible Assets. These standards provide new guidance on the accounting for a business combination at the date a business combination is completed. Specifically, they require use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating use of the pooling-of-interests method. These standards also require that goodwill and certain other intangible assets will no longer be amortized and will be tested for impairment at least annually and written down only when impaired. The Company does not believe that the adoption of these standards will have a material impact on its financial statements.
(ii) In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. SFAS No. 143 is effective for the Company's fiscal year beginning January 1, 2002. The Company does not believe that the adoption of SFAS No. 143 will have a material impact on its financial statements.
19. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED):
(iii) In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and related literature and establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. The Company is required to adopt SFAS No. 144 for its fiscal year beginning January 1, 2002. The Company does not believe that the adoption of SFAS No. 144 will have a material impact on its financial statements.
(iv) In November 2001, the CICA amended Handbook Section 1650, Foreign Currency Translation and issued Accounting Guideline 13, Hedging Relationships ("AcG 13"). The revision to Section 1650 will eliminate the deferral and amortization of foreign currency translation differences resulting from the translation of long-term monetary assets and liabilities denominated in foreign currencies. All such translation differences will be charged directly to income, Section 1650 will be in effect as of January 1, 2002. AcG 13 establishes new criteria for hedge accounting and will apply to all hedging relationships in effect on or after January 1, 2003. On January 1, 2003, the Company will reassess all hedging relationships to determine whether the criteria are met or not and will apply the new guidance on a prospective basis. To qualify for hedge accounting, the hedging relationship must be appropriately documented at the inception of the hedge and there must be reasonable assurance, both at the inception and throughout the term of the hedge, that the hedging relationship will be effective. Effectiveness requires a high correlation of changes in fair values or cash flows between the hedged item and the hedge. The Company does not believe that the adoption of revised Section 1650 and AcG 13 will have a material impact on its financial statements.
(v) Effective January 1, 2002, the Company will adopt the new Canadian accounting standard for stock-based compensation and other stock-based payments. The new standards will require additional disclosures for options granted to employees and that compensation cost be recorded for the fair value of options granted to non-employees. The new standards for non-employees will be similar in many respects to SFAS No. 123. The Company has not determined the impact on its financial statements of adopting these standards.
20. COMPARATIVE FIGURES:
Certain comparative figures have been reclassified to conform with the financial statement presentation adopted in the current year.
LINGO MEDIA INC.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
SEPTEMBER 30, 2002
LINGO MEDIA INC.
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
SEPTEMBER 30, 2002
INDEX
Page
----
Consolidated Interim Financial Statements:
Balance Sheet I
Statement of Retained Earnings (Deficit) II
Statement of Operations III
Statement of Changes in Cash Flows IV
Notes to Financial Statements V
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LINGO MEDIA INC.
CONSOLIDATED INTERIM BALANCE SHEETS
(Expressed in Canadian dollars)
(Unaudited)
ASSETS
SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------------- -------------------
CURRENT:
Cash and cash equivalents $ 35,062 $ 7,473
Accounts receivable, net (Note 3) 685,436 336,840
Loan receivable 18,815 34,383
Prepaid expenses and other 36,830 52,778
Inventory on hand 23,328 -
Work in process - 100,380
799,471 531,854
--------------------
Capital assets, net 45,338 51,388
Development costs, net 760,976 850,619
Acquired publishing content, net 282,679 335,681
Software development costs, net 82,788 113,835
1,971,253 1,883,377
LIABILITIES
CURRENT:
Accounts payable $ 218,380 $ 165,229
Accrued liabilities 39,750 41,000
Current portion of long-term debt (Note 4) 131,903 411,096
390,034 617,326
Long-term debt - 54,480
390,034 671,806
SHAREHOLDERS' EQUITY
Authorized
Unlimited common shares and preferred shares with no par value.
Issued
20,733,827 common shares (December 31, 2001: 17,033,827) 3,077,391 2,720,891
Deferred stock-based compensation (3,958) -
Deficit (1,492,213) (1,509,319)
1,581,220 1,211,572
$ 1,971,253 $ 1,883,377
See accompanying notes to the consolidated financial statements.
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LINGO MEDIA INC.
CONSOLIDATED INTERIM STATEMENT OF DEFICIT
(Expressed in Canadian dollars)
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
FOR THE NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------
2002 2001
---- ----
Deficit, beginning of period (1,509,319) (1,464,613)
Net income (loss) for the period 17,106 (146,757)
----------- ----------
Deficit, end of period (1,492,213) (1,611,370)
=========== ==========
See accompanying notes to the consolidated financial statements.
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LINGO MEDIA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in Canadian dollars)
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
FOR THE NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------
2002 2001
---- ----
Revenue $ 1,032,322 $ 84,051
Cost of sales 386,523 -
645,799 84,051
EXPENSES
General and administrative 418,439 356,139
Interest on long term debt 20,104 20,954
Other interest and bank charges 2,237 2,449
Amortization of capital assets and deferred assets 191,712 48,985
Amortization of deferred stock-based compensation 3,542 -
---------- --------
PROFIT (LOSS) BEFORE THE UNDERNOTED 9,766 (344,476)
Gain on Issue of shares of subsidiary 101,438 -
Gain on sale of subsidiary 197,719
---------- --------
111,203 (146,757)
EARNINGS (LOSS) BEFORE INCOME TAXES
Income taxes 94,097 -
EARNINGS (LOSS) FOR THE PERIOD $ 17,106 $ (146,757)
========== ========
---------- --------
Earnings (Loss) Per Share - Basic and Diluted $ 0.00 $ (0.01)
---------- --------
Weighted average number of common shares outstanding 17,281,401 15,966,978
See accompanying notes to the consolidated financial statements.
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LINGO MEDIA INC.
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(Expressed in Canadian dollars)
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
FOR THE NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------
2002 2001
---- ----
OPERATING ACTIVITIES
Net income (loss) for the period $ 17,106 $ (146,757)
Items not affecting Cash:
Gain on Issue of shares of subsidiary (101,438) -
Amortization of capital assets and deferred assets 191,712 48,985
Amortization of deferred stock-based compensation 3,542 -
Gain on sale of subsidiary (197,719)
Change in non-cash working capital items:
Accounts receivables (348,596) 28,363
Short-term investments 22,662
Loan receivable 15,568 1,118
Prepaid expenses and other 15,947 -
Inventory on hand (23,328) -
Work in process 100,380 (17,837)
Accounts payable 53,151 (55,265)
Accrued liabilities (1,250) 19,748
---------- ------
(77,205) (296,702)
---------- ------
FINANCING ACTIVITIES
Issuance of capital stock, net 349,000 20,000
Repayment of bank indebtedness - (145,000)
Increase in long-term debt 180,621 532,497
Repayment of long-term debt (514,293) (95,460)
---------- ------
15,327 312,037
---------- ------
INVESTING ACTIVITIES
Development costs (10,313) (94,626)
Realization of net assets of discontinued operations
Purchase of capital assets (1,658)
Proceeds of sale of subsidiary 150,000
Proceeds of sale of shares of subsidiary 101,438
---------- ------
89,467 55,374
---------- ------
Increase in cash and cash equivalents 27,589 70,709
Cash and cash equivalents - Beginning of period 7,473 44,207
---------- ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 35,062 $ 114,916
========== ======
See accompanying notes to the consolidated financial statements.
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LINGO MEDIA INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
For the three months ended March 31, 2002
Lingo Media Inc. (the "Company") develops, publishes, licenses and distributes books, audiocassettes, multimedia and ancillary products for English language learning for the school and retail markets in China and Canada.
1. FUTURE OPERATIONS
These financial statements have been prepared on a going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of business. The application of the going concern concept is dependent on the Company's ability to generate future profitable operations and/or obtain additional financing to fund future operations.
2. SIGNIFICANT ACCOUNTING POLICIES:
The disclosures contained in these unaudited interim consolidated financial statements do not include all requirements of generally accepted accounting principles (GAAP) for annual financial statements. The unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2001.
The unaudited interim consolidated financial statements reflect all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary to present fairly the financial position of the Company as of September 30, 2002 and the results of operations and cash flows for the nine months ended September 30, 2001 and 2002.
The Company experiences seasonal variation in revenue.
The unaudited interim consolidated financial statements are based upon accounting principles consistent with those used and described in the annual consolidated financial statements, except the following:
(a) Business Combinations, goodwill and other intangible assets:
In September 2001, the Canadian Institute of Chartered Accountants (CICA) issued Handbook Sections 1581 "Business combinations" and 3062 "Goodwill and other intangible assets". The new standards mandate the purchase method of accounting for business combinations and require that goodwill no longer be amortized but instead be tested for impairment at least annually. The standards also specify criteria that intangible assets must meet to be recognized and reported apart from goodwill. The standards require that the value of the shares issued in a business combination be measured using the average share price for a reasonable period before and after the date the terms of the acquisition are agreed to and announced. Previously, the consummation date was used to value the shares issued in a business combination. The new standards are substantially consistent with U.S. GAAP. Adoption of the new standards has not impacted the consolidated financial statements, as the Company does not have intangible assets with an indefinite life or goodwill.
(b) Stock-based compensation and other stock-based payments:
Effective January 1, 2002, the Company adopted the new CICA Handbook Section 3870, which requires that a fair value based method of accounting be applied to all stock-based payments to non-employees and to direct awards of stock to employees. However, the new standard permits the Company to continue its existing policy of recording no compensation cost on the grant of stock options to employees with the addition of pro forma information. The Company has applied the pro forma disclosure provisions of the new standard to awards granted on or after January 1, 2002. The pro forma effect of awards granted prior to January 1, 2002 has not been included.
The standard requires the disclosure of pro forma net earnings and earnings per share information as if the Company had accounted for employee stock options under the fair value method. The fair value of the options issued in the quarter is determined using the Black-Scholes option pricing model. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to income over the vesting period. For the nine months ended September 30, 2002, the Company's pro forma net earnings is identical to reported earnings as there were no options issued to employees.
3. ACCOUNTS RECEIVABLE
The components of accounts receivables at the following dates are as follows:
September 2002 December 2001
---------------------------------------------------------
Trade Receivables $ 647,936 $ 336,840
Grant Receivable 37,500 -
---------------------------------------------------------
Total 685,436 336,840
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Grant receivable was used to reduce general and administrative expenses relating to the Company's publishing projects.
4. LONG-TERM DEBT:
September 2002 December 2001
Bank Loan, repayable in monthly installments of $4,225
plus interest, bearing interest at 4.75% per annum,
secured by a general security agreement, maturing
November 23, 2002. During the period, BDC extended
the terms of repayment by an additional four months
thereby the loan will mature on March 23, 2003. $ 25,350 $ 59,150
Shareholder loan payable due to a company controlled by a
director of the Company, is interest bearing at 12%
per annum and is due in full on January 31, 2003 5,000
Shareholder loan payable, interest bearing at 12% per annum and
is due on January 31, 2003 106,553 36,805
Bank Loan payable, interest bearing at prime rate plus 8%
per annum and was due in full on April 1, 2002 364,621
------------------------------------------------------------------------------------------------
131,903 465,576
Less current portion 131,903 411,096
------------------------------------------------------------------------------------------------
$ - $ 54,480
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5. CAPITAL STOCK, WARRANTS AND STOCK OPTIONS:
(a) Authorized:
Unlimited preference shares, no par value Unlimited common shares, no par value
The following details the changes in issued and outstanding shares and warrants for nine months ended September 30,2002.
Common Shares
Number Amount
------------------------------------------------------------------------------------------------
Balance, December 31, 2001 17,033,827 2,720,891
Issued:
Private placement (i) 3,700,000 349,000
Stock Based Compensation 7,500
------------------------------------------------------------------------------------------------
Balance, September 30, 2002 17,033,827 3,077,391
(1) During March 2002, the Company completed a private placement of
3,700,000 common shares and 2,775,000 Class D Purchase Warrants for cash
proceeds, net of issue costs, of $349,000. The Class D Purchase Warrants
entitle the holder to acquire one common share for a price of $0.10 per share
for each warrant. The Class D Purchase Warrants expire in March 2003. The
closing stock price for the Company's stock on TSX Venture Exchange was $0.10.
|
(b) Changes for the stock option plans during the nine months ended September 30,2002:
Weighted
average
Number of exercise Price
shares
------------------------------------------------------------------------------------------------
Options outstanding, beginning of the year 1,895,000 $ 0.43
Options granted 170,000 0.11
Options exercised - -
Options cancelled (91,660) 0.19
Options expired - -
------------------------------------------------------------------------------------------------
Options outstanding at the end of the year 1,973,340 0.22
------------------------------------------------------------------------------------------------
Options exercisable,
end of period 1, 715,007 0.24
------------------------------------------------------------------------------------------------
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The following table summarizes information about stock options outstanding at September 30,2002:
Options outstanding Options vested
------------------------------------- ---------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
price outstanding life price outstanding price
------------------------------------------------------------------------------------------------
0.10 - $0.12 850,000 3.89 $ 0.11 591,667 $ 0.11
0.20 - $0.22 743,340 1.59 0.20 743,340 0.20
0.45 - $0.50 380,000 2.91 0.49 380,000 0.49
------------------------------------------------------------------------------------------------
1,973,340 2.84 0.22 1,715,007 0.24
|
The following table summarizes information about warrants outstanding at September 30,2002:
Class C Warrants outstanding 500,000 (each warrant exercisable into one common share at $0.15 per share, expiring November 23, 2002 (the expiry date of the warrants has been extended to November 23, 2003)) Class D Warrants outstanding 2,775,000 (each warrant exercisable into one common share at $0.10 per share, expiring March 30, 2003) -------------------------------------------------------------------------------- Total warrants Outstanding 3,275,000 |
6. SEGMENT INFORMATION:
The Company operates as an international business and has no distinct reportable
business segments.
The Company is developing books, audiocassettes, multimedia and ancillary products for English language learning to be sold or licensed to the school market, primarily in China and Canada. This service is called Educational Publishing. The Company also develops original publishing properties on a contract basis for corporate clients. This service is called Trade Publishing.
The Company's revenue by geographic region based on the region in which the customer is located is as follows:
September 2002 September 2001
--------------------------------------------------------------------------------
Canada $ 383,377 $ 19,551
China 648,945 64,500
--------------------------------------------------------------------------------
$ 1,032,322 $ 84,051
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Substantially all of the Company's identifiable assets as at September 30, 2002 and December 31, 2001 are located in Canada.
The Company's revenue by type of service is as follows:
September 2002 September 2001
--------------------------------------------------------------------------------
Educational Publishing $ 1,024,822 $ 69,051
Trade Publishing 7,500 15,000
--------------------------------------------------------------------------------
$ 1,032,322 $ 84,051
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. 7. GAIN ON ISSUE OF SHARES BY SUBSIDIARY:
During the first nine months of year 2002, EnglishLingo, Inc., a subsidiary of the Company, issued common share for proceeds of U.S. $67,625 (CDN $101,438). As a result of this offering, the Company recorded a dilution gain of CDN$101,438.
8. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP")
The consolidated financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") as applied in Canada. In the following respects, GAAP as applied in the United States differs from that applied in Canada:
September 30, 2002 September 30, 2001
----------------------------------------------------------------------------------------------------------
Net income (loss) for the period - Canadian GAAP $ 17,106 $ (146,757)
Impact of U.S. GAAP and adjustments:
Development costs (a) (10,313) (94,626)
Amortization of development costs 89,607 39,728
Software development costs (b) - -
Amortization of software development costs 41,395 -
Compensation expense (c) (58,767) (41,804)
----------------------------------------------------------------------------------------------------------
Gain (Loss) for the year - U.S. GAAP $ 79,029 $ (243,459)
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The cumulative effect of these adjustments on the consolidated shareholders' equity of the company is as follows:
September 30, 2002 December 31, 2001
----------------------------------------------------------------------------------------------------------
Shareholders' equity based on Canadian GAAP $ 1,581,220 $ 1,211,572
Development costs (a) (760,976) (850,619)
Software development costs (b) (82,788) (113,835)
Compensation expense (c) (182,800) (124,033)
-----------------------------------------------------------------------------------------------------------
Shareholders' equity - U.S. GAAP $ 554,656 $ 123,085
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Under United States GAAP, the amounts shown on the consolidated balance sheet for development costs and software development costs would both be nil.
(a) Development costs:
Under Canadian GAAP, the Company defers the incremental costs relating to the development and pre-operating phases of new businesses and amortizes these costs on a straight-line basis over periods up to five years. Under United States GAAP, these costs are expensed as incurred.
(b) Software development costs:
Under United States GAAP, the software development costs would be expensed as incurred.
8. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP")
(c) Options to consultants:
Prior to January 1, 2002, the Company did not recognize compensation expense under Canadian GAAP when stock or stock options were issued to consultants. Under U.S. GAAP, the Company has always recorded compensation expense based on the fair value for stock or stock options granted in exchange for services from consultants.
(d) Statement of comprehensive income:
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes standards for the reporting and disclosure of comprehensive income and its components in financial statements. Components of comprehensive income or loss include net income or loss and all other changes in other non-owner changes in equity, such as the change in the cumulative translation adjustment and the unrealized gain or loss for the year on "available-for-sale" securities. For all periods presented, comprehensive income is the same as net income.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Bylaws contain provisions to (i) eliminate the personal liability of our directors and officers for monetary damages resulting from breaches of their fiduciary duty (other than breaches from their own willful neglect or default) provided that nothing shall relieve our directors and officers from the duty to act in accordance with the Business Corporations Act of Ontario and the regulations thereunder or from liability for any breach thereof and (ii) indemnify our directors and officers if he acted honestly and in good faith with a view to the best interests of the Company, and in the case of a criminal or administrative proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing that his conduct was lawful. We believe that these provisions are necessary to attract and retain qualified persons as directors and officers. As a result of these provisions, the ability of the Company or a stockholder thereof to successfully prosecute an action against a director for a breach of his duty of care has been limited. However, the provision does not affect the availability of equitable remedies such as an injunction or rescission based upon a director's breach of his duty of care. The Securities and Exchange Commission has taken the position that the provisions will have no effect on claims arising under the federal securities laws.
ITEM 7. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has financed its operations through borrowings and/or private issuance of common shares:
During May 1996, Lingo Media Ltd., formerly Alpha Corporation, a wholly-owned subsidiary of the Company issued 957,022 shares of common stock in consideration for forgiveness of debt in the amount of $95,702 owed to two individuals and one entity. The Company believes that these transactions were exempt from registration pursuant to Section 4(2) of the Securities Act as transactions by an Issuer not involving a public offering.
During August 1996, Lingo Media Ltd., formerly Alpha Corporation, a wholly-owned subsidiary of the Company, issued 700,000 shares for $120,000 to eight individuals and two corporations. The Company believes that the transaction was exempt from registration pursuant to Section 4(2) of the Securities Act as a transaction by an Issuer not involving a public offering.
During April 1996, the Company issued 1,200,000 shares to six individuals in consideration for $120,000, which included Michael P. Kraft, our chief executive officer, president and director, and Richard J.G. Boxer, a Company director. The Company believes that the transaction was exempt from registration pursuant to Section 4(2) of the Securities Act as a transaction by an Issuer not involving a public offering.
During May 1997, a stock option was exercised by a former director for 70,000 shares resulting in proceeds to the Company of $14,000. The Company believes that the transaction was exempt from registration pursuant to Section 4(2) of the Securities Act as a transaction by an Issuer not involving a public offering.
From March 2000 through April 2000 the Company issued 5,000,000 shares in consideration for net proceeds of $1,811,872 to various investors outside of the United States. The Company believes that the transaction was exempt from registration pursuant to Regulation S.
From February through March 2000, stock options were exercised by three individuals for 150,000 shares resulting in proceeds of $30,000. The Company believes that the transactions were exempt from registration pursuant to Section 4(2) of the Securities Act as transactions by an Issuer not involving a public offering.
During April 2001, a stock option was exercised by Michael P. Kraft, our chief executive officer, president and director, for 100,000 shares resulting in proceeds of $20,000. The Company believes that the transaction was exempt from registration pursuant to Section 4(2) of the Securities Act as a transaction by an Issuer not involving a public offering.
During November 2001, 1,000,000 shares were issued in consideration for $100,000 to one entity. The Company believes that the transaction was exempt from registration pursuant to Section 4(2) of the Securities Act as a transaction by an Issuer not involving a public offering.
During March 2002, 3,700,000 shares were sold in consideration for net proceeds of $349,000 to seven individual investors. The company believes that the transaction was exempt from registration pursuant to Section 4(2) of the Securities Act as a transaction by an Issuer not involving a public offering.
ITEM 8. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. The following is a list of exhibits to this registration statement:
Exhibit No.
2.1(1) Acquisition Agreements with Alpha Corporation,
dated May 7, 1997
2.2(1) Acquisition Agreements for CSVL, dated March 5, 1998
2.3(1) Stock Purchase Agreement of AlphaCom Corporation
2.4(1) Amendment to Stock Purchase Agreement of AlphaCom Corporation
3.1* Certificate of Incorporation
3.2* Bylaws
3.3* Amendment to Certificate of Incorporation
4.1 Form of share certificate
5.1* Opinion of David M. Loev, Attorney at Law - as to certain matters
10.1(1) Management Agreement with MPK Inc.
10.2(1) Amendment to Agreement with Michael P. Kraft
10.3(1) Amendment #2 to Agreement with Michael P. Kraft
|
PEOPLE'S EDUCATION PRESS:
10.4(1) Master Agreement to Develop, Publish and Sell Product
10.5(1) Product Agreement #1 - Communications: An Interactive EFL Program
(Grade 1-6)
10.6(1) Product Agreement #2 - Junior Reading Training Series
10.7(1) Product Agreement #3 - Beginning English for Young Learners
|
CRAZY ENGLISH (RENZHEN GROUP):
10.8(1) Master Agreement to Develop, Publish and Sell Product
10.9(1) Product Agreement #1 - English In Business Communications
10.10(1) Product Agreement #2 - The Out Loud Program
Escrow Agreements
10.11(1) Performance Escrow Agreement (Form C Escrow Agreement) between
Alpha Ventures Inc. (now Lingo Media Inc.), Montreal Trust Company
of Canada (Transfer Agent) and Kraft and Sherman Holding Companies
(1077431 Ontario Limited and Kraft Investments Corp.) & Kraft and
Sherman RRSP's
10.12(1) Performance Escrow Agreement between Sherman Holding Company
(1077431 Ontario Limited), Montreal Trust Company of Canada
(Transfer Agent) and Richard Sherman
10.13(1) Performance Escrow Agreement between Kraft Holding Company (Kraft
Investments Corp.), Montreal Trust Company of Canada
(Transfer Agent), and Michael P. Kraft & Associates Inc.
23.1* Consent of KPMG, LLP
23.2* Consent of David M. Loev, Attorney at Law, See Exhibit 5.1
|
* Filed Herein
(1) Filed as an exhibit to the F-1/A amended registration statement
filed on December 20, 2002.
(b) Financial Statements
Consolidated Statements of Operations and Deficit for the years ended December 31, 2001, December 31, 2000 and December 31, 1999
Consolidated Statements of Cash Flows for the years ended December 31, 2001, December 31, 2000, and December 31, 1999
Notes to Financial Statements
B. Consolidated Balance Sheet at September 30, 2002
Consolidated Statements of Operations and Deficit for the Three Months Ended September 30, 2002 and September 30, 2001 and the Nine Months Ended September 30, 2002 and September 30, 2001
Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2002 and September 30, 2001, and the Nine Months Ended September 30, 2002 and September 30, 2001
Notes to Financial Statements
ITEM 9. UNDERTAKINGS.
The registrant hereby undertakes that it will:
1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement
a) Include any prospectus required by Section 10(a)3) of the Securities Act;
b) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered if the total dollar value of securities offered would not exceed that which was registered and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b)if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and
c) Include any additional or changed material information on the plan of distribution.
2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.
3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.
4) If the registrant is a foreign private issuer, to file a post-effective amendment to the registration statement to include any financial statements required by Item 8.A. of Form 20-F (17 CFR 249.220f) at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3 (Sec.239.33 of this chapter), a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Sec.210.3-19 of this chapter if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3.
5) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
6) In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
Part II-2
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933, certifies that
it has reasonable grounds to believe that it meets all of the requirements for
filing on Form F-1 and has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Toronto, Canada,
on February 24, 2003.
By /s/ Michael P. Kraft ----------------------------- Name: Michael P. Kraft Title: Chief Executive Officer and Director By /s/ Khurram R. Qureshi ----------------------------- Name: Khurram R. Qureshi Title: Chief Financial Officer |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date /s/ Michael P. Kraft President, Chief Executive February 24, 2003 -------------------- Officer and Board Member Michael P. Kraft /s/ Khurram R. Qureshi Chief Financial Officer February 24, 2003 ---------------------- Khurram R. Qureshi /s/ Richard J. G. Boxer Board Member February 24, 2003 ----------------------- Richard J. G. Boxer /s/ Richard H. Epstein Board Member February 24, 2003 ---------------------- Richard H. Epstein /s/ Chen Geng Board Member February 24, 2003 ------------- Chen Geng /s/ Scott Remborg Board Member February 24, 2003 ----------------- Scott Remborg /s/ Imran Atique Secretary / Treasurer February 24, 2003 ---------------- Imran Atique |
ARTICLES OF INCORPORATION
1. Name of corporation:
Alpha Publishing, Inc.
2. The classes and any maximum number of shares that the corporation is
authorized to issue:
See Schedule A attached.
3. Restrictions on share transfers (if any):
None
4. Number or minimum and maximum number of directors that the corporation
may have:
Minimum - 3 Maximum - 9
5. If the corporation is restricted from carrying on a certain business, or
restricted to carrying on a certain business, specify the
restrictions:
Not applicable
6. Other rules or provisions (if any):
The corporation is a distributing corporation.
Incorporators Names: Address (including postal code) Signature
Gregory R. Harris Suite 500, 630 4th Ave. S.W. /s/ Gregory R. Harris
Calgary, Alberta T2P 0J9
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EXHIBIT II
ALPHA COMMUNICATIONS CORP.
BY-LAW NO. 2
ALPHA COMMUNICATIONS CORP.
TABLE OF CONTENTS
ARTICLE ONE
DEFINITONS AND INTERPRETATION - 1
1.01 Definitions - 1
1.02 Interpretation - 3
1.03 Headlines and Table of Contents - 3
ARTICLE TWO
GENERAL - 3
2.01 Registered Office - 3
2.02 Corporate Seal - 3
2.03 Financial Year - 3
2.04 Execution of Documents - 3
2.05 Resolutions in Writing - 4
2.06 Divisions - 4
ARTICLE THREE
DIRECTORS - 5
3.01 General - 5
3.02 Qualification - 5
3.03 Election - 5
3.04 Fixing Number of Directors - 5
3.05 Term of Office - 5
3.06 Ceasing to Hold Office - 6
3.07 Resignation of a Director - 6
3.08 Removal - 6
3.09 Vacancies - 6
3.10 Remuneration - 7
3.11 Power to Borrow - 7
3.12 Delegation of Power to Borrow - 7
ARTICLE FOUR
COMMITTEES - 7
4.01 Appointment - 7
4.02 Canadian Membership - 7
4.03 Provisions Applicable - 7
ARTICLE FIVE
MEETINGS OF DIRECTORS - 8
5.01 Place of Meetings - 8
5.02 Calling of Meetings - 8
5.03 Notice of Meetings - 9
5. 04 Regular Meetings - 9
5. 05 First Meeting of New Board - 9
5.06 Participation by Telephone - 9
5.07 Chairman - 9
5.08 Quorum - 9
5.09 Voting - 9
5.10 Auditor - 9
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ARTICLE SIX STANDARD OF CARE OF DIRECTIONS AND OFFICERS - 10 6.01 Standard of Care - 10 6.02 Liability for Acts of Others - 10 ARTICLE SEVEN FOR THE PROTECTIONS OF DIRECTORS AND OFFICERS - 11 7.01 Indemnification by Corporation - 11 7.02 Insurance - 11 7.03 Directors' Expenses - 12 7.04 Performance of Services for Corporation - 12 ARTICLE EIGHT INTERREST OF DIRECTORS AND OFFICERS IN CONTRACTS - 12 8.01 Disclosure of Interest - 12 8.02 Time of Disclosure by Director - 12 8.03 Time of Disclosure by Officer - 13 8.04 Time of Disclosure in Extraordinary Cases - 13 8.05 Voting by Interested Director - 13 8.06 Nature of Disclosure - 13 8.07 Effect of Disclosure - 14 8.08 Confirmation by Shareholders - 14 ARTICLE NINE OFFICERS - 14 9.01 Officers - 14 9.02 Appointment of President or Chairman of the Board and Secretary - 15 9.03 Remuneration and Removal of Officers - 15 9.04 Duties of Officers may be Delegated - 15 9.05 Chairman of the Board - 15 9.06 President - 15 9.07 Managing Director - 15 9.08 General Manager - 15 9.09 Vice-President - 15 9.10 Secretary - 15 9.11 Treasurer - 15 9.12 Assistant Secretary and Assistant Treasurer - 15 9.13 Delegation of Board Powers - 16 9.14 Vacancies - 16 9.15 Variation of Powers and Duties - 16 9.16 Chief Executive Officer - 16 ARTICLE TEN MEETINGS OF SHAREHOLDERS - 17 10.01 Calling of Meetings - 17 10.02 Annual Meeting - 17 10.03 Special Meeting - 17 10.04 Place of Meetings - 17 10.05 Notice - 17 10.06 Contents of Notice - 17 10.07 Waiver of Notice - 18 10.08 Notice of Adjourned Meetings - 18 10.09 Record Date for Notice - 18 10.10 Omission of Notice - 18 10.11 List of Shareholders - 19 10.12 Shareholders Entitled to Vote - 19 10.13 Persons Entitled to be Present - 20 10.14 Proxies - 20 10.15 Revocation of Proxies - 20 10.16 Deposit of Proxies - 20 10.17 Joint Shareholders - 21 10.18 Chairman and Secretary - 21 10.19 Scrutinizers - 21 10.20 Votes to Govern - 21 10.21 Show of IIands - 21 10.22 Ballots - 21 10.23 Votes on Ballots - 21 10.24 Adjournment - 22 10.25 Quorum - 22 10.26 Only One Shareholder - 22 |
ARTICLE ELEVEN SHARES AND TRANSFERS - 22 11.01 Issuance - 22 11.02 Commissions - 22 11.03 Share Certificates - 22 11.04 Transfer Agent - 23 11.05 Transfer of Shares - 23 11.06 Defaced, Destroyed, Stolen or Lost Certificates - 24 11.07 Joint Shareholders - 24 11.08 Deceased Shareholders - 24 ARTICLE TWELVE DIVIDENDS - 24 12.01 Declaration of Dividends - 24 12.02 Joint Shareholders - 24 12.03 Dividends from Funds Derived from Operations - 25 ARTICLE THIRTEEN RECORD DATES - 25 13.01 Fixing Record Dates - 25 13.02 No Record Date Fixed - 25 13.03 Notice of Record Date - 25 13.04 Effect of Record Date - 26 ARTICLE FOURTEEN CORPORATE RECORDS AND INFORMATION - 26 14.01 Keeping of Corporate Records - 26 14.02 Access to Corporate Records - 27 14.03 Copies of Certain Corporate Records - 27 14.04 Report to Shareholders - 27 14.05 No Discovery of Information - 27 14.06 Conditions for Inspection - 27 ARTICLE FIFTEEN NOTICES - 28 15.01 Method of Giving - 28 15.02 Shares Registered in More Than One Name - 28 15.03 Persons Becoming Entitled by Operation of Law - 28 15.04 Deceased Shareholder - 28 15.05 Signature to Notice - 28 15.06 Proof of Service - 29 15.07 Computation of Time - 29 15.08 Wavier of Notice - 29 |
ARTICLE SIXTEEN REPEAL OF BY-LAW NO. 1 - 29 16.01 Repeal - 29 |
BY-LAW NO.2
A by-law' relating generally to the
transaction of the business and affairs of
ALPHA COMMUNICATIONS CORP.
(herein called the "Corporation")
BE IT PASSED AND MADE as a by-law of the Corporation as follows:
ARTICLE ONE
DEFINITIONS AND INTERPRETATION
1 .01 Definitions
In this by-law, unless there is something in the subject matter or context inconsistent therewith,
(i) "Act" means the Business Corporations Act of Ontario, as amended or re-enacted from time to time, and includes the regulations made pursuant thereto;
(ii) "affiliate means an affiliated body corporate, and one body corporate shall he deemed to be affiliated with another body corporate if, but only it~ one of them is the subsidiary of the other or both are subsidiaries of the same body corporate or each of them is controlled by the same person:
(iii) "articles" means the original or restated articles of incorporation, articles of amendment, articles of amalgamation, articles of arrangement, articles of continuance, articles of dissolution, articles of reorganization. articles of revival, letters patent, supplementary letters patent, a special Act and any other instrument by which the Corporation is incorporated:
(iv) "auditor" means the auditor of the Corporation;
(v) "board" means the board of directors of the Corporation;
(vi) "by-law" means a by-law of the Corporation;
(vii) "Chairman of the Board", "President". "Vice-President. "Secretary".
"Treasurer", "Managing Director", "General Manager", "Assistant
Secretary", "Assistant Treasurer" or any other officer means such officer
of the Corporation;
(viii) "committee" means a committee appointed pursuant to section 4.01 of this by-law;
(ix) "director" means a director of the Corporation;
(x) "day" means a clear day and a period of days shall be deemed to commence the day following that began the period and shall be deemed to terminate at midnight of the last day of the period except that if the last day of the period fails on a Sunday or holiday the period shall terminate at midnight of the day next following that is not a Sunday or holiday;
(xi) "employee'' means an employee of the Corporation;
(xii) ''number of directors" means the number of directors set out in the articles or, where a minimum and maximum number of directors is set out in the articles, the number of directors as shall be determined from time to time by special resolution or, if the special resolution empowers the directors to determine the number, by resolution of the directors;
(xiii) "officer'' means an officer of the Corporation;
(xiv) "person" includes an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization trust, body corporate and a natural person in his capacity as trustee executor, administrator or other legal representative:
(xv) "resident Canadian" means an individual who is,
(A) a Canadian citizen ordinarily resident in Canada.
(B) a Canadian citizen not ordinarily resident in Canada who is a member of a class of persons prescribed by the Act for the purposes of the definition of "resident Canadian", or
(C) a permanent resident within the meaning of the Immigration Act of Canada and ordinarily resident in Canada except a permanent resident who has been ordinarily resident in Canada for more than one year after the time at which he first became eligible to apply for Canadian citizenship;
(xvi) "shareholder" means a shareholder of the Corporation;
(xvii) "special resolution" means a resolution that is
(A) submitted to a special meeting of the shareholders of the Corporation duly called for the purpose of considering the resolution and passed, with or without amendment, at such meeting by at least two-thirds of the votes cast, or
(B) consented to in writing by each shareholder of the Corporation entitled to vote at such a meeting or his attorney authorized in writing;
(xviii) "subsidiary" means in relation to another body corporate, a body corporate which
(A) is controlled by
(1) that other or
(2) that other and one or more bodies corporate each of which is
controlled by that other, or
(3) is a subsidiary of a body corporate that is that other's subsidiary;
(B) is a subsidiary of a body corporate that is that other's subsidiary;
1.02 Interpretation
In each by-law and resolution, unless there is something in the subject matter or context inconsistent therewith, the singular shall include the plural and the plural shall include the singular and the masculine shall include the feminine. Wherever reference is made in this or any other by-law or in any' special resolution to any statute or section thereof such reference shall be deemed to extend and refer to any amendment to or re-enactment of such statute or section, as the case may be.
1.03 Headings and Table of Contents
The headings and table of contents in this by-law' are inserted for convenience of reference only and shall not affect the construction or interpretation of the provisions of this by-law.
ARTICLE TWO
GENERAL
2.01 Registered Office
The Corporation may by resolution of the directors change the location of its registered office within the municipality or geographic township specified in the articles.
2.02 Corporate Seal
The Corporation may have a corporate seal which shall be adopted and may he changed by resolution of the directors.
2.03 Financial Year
The directors may by resolution fix the financial year end of the Corporation and the directors may from time to time by resolution change the financial year end of the Corporation.
2.04 Execution of Documents
(a) Instruments in writing requiring execution by the Corporation may he signed on behalf of the Corporation by
(i) the Chairman of the Board.
(ii) the President
(iii) any two persons one of whom holds the office of Managing Director, Vice-President or director and the other of whom holds one of the said offices or the office of Secretary Assistant Secretary, Treasurer or Assistant Treasurer, or
(iv) any two directors
and all instruments in writing so signed shall be binding upon the Corporation without any further authorization or formality. The board may from time to time by resolution appoint any officer or officers or any other person or persons on behalf of the Corporation either to sign instruments in writing generally or to sign specific instruments in writing.
(h) The corporate seal of the Corporation (if any) may he affixed to instruments in writing signed as aforesaid by any person authorized to sign the same or at the direction of any such person.
(c) The term "instruments in writing" as used herein shall include deeds, contracts, mortgages, hypothecs, charges, conveyances, transfers and assignments of property real or personal, immovable or movable, agreements, releases, receipts and discharges for the payment of money or other obligations, cheques, promissory notes, drafts, acceptances, bills of exchange and orders for the payment of money, conveyances, transfers and assignments of shares instruments of proxy powers of attorney, stocks, bonds, debentures or other securities or any paper writings.
(d) Subject to the provisions of section 11.04 hereof the signature or signatures of an officer or director, person or persons appointed as aforesaid by resolution of the directors, may, if specifically authorized by resolution of the directors, be printed, engraved, lithographed or otherwise mechanically reproduced upon all instruments in writing executed or issued by or on be half of the Corporation and all instruments in writing on which the signature or signatures of any of the foregoing officers, directors or persons shall he so reproduced, by authorization by resolution of the directors shall be deemed to have been manually signed by such officers or persons whose signature or signatures is or are so reproduced and shall be as valid as if they had been signed manually and notwithstanding that the officers, directors or persons whose signature or signatures is or are so reproduced may have ceased to hold office at the date of the delivery or issue of such instruments in writing.
2.05 Resolutions in Writing
(a) A resolution in writing, signed by all the directors entitled to vote
on that resolution at a meeting of directors or a committee of
directors, is as valid as if it had been passed at a meeting of
directors or such committee of directors.
(b) A resolution in writing signed by all the shareholders entitled to
vote on that resolution at a meeting of shareholders is as valid as if
it had been passed at a meeting of the shareholders unless a written
statement with respect to the subject matter of the resolution is
submitted by a director or representations in writing are submitted by
the auditor in accordance with the Act.
(c) Where the Corporation has only one shareholder, or only one holder of
any class or series of shares, the shareholder present in person or by
proxy constitutes a meeting.
2.06 Divisions
The board may cause the business and operations of the Corporation or any
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part thereof to be divided into one or more divisions upon such basis, including without limitation, types of business or operations, geographical territories, product lines or goods or services, as tile board may consider appropriate in each case. From time to time the hoard or any person authorized by the board may authorize, upon such basis as may be considered appropriate in each case:
(i) the further division of the business and operations of any such division into sub-units and the consolidation of the business and operations of any such divisions or sub-units;
(ii) the designation of any such division or sub-unit by and the carrying on of the business and operations of any such division or sub-unit under, a name other than the name of the Corporation; and
(iii) the appointment of officers for any such division or sub-unit, the determination of their powers and duties, and the removal of any such officer Sc) appointed without prejudice to such officer's rights under an employment contract or in law, provided that any such officer shall not, as such, be an officer of the Corporation.
ARTTCLE THREE
DIRECTORS
3.01 General
The directors shall manage or supervise the management of the business and
affairs of the Corporation.
(a) The following persons are disqualified from being a director:
(i) a person who is less than eighteen (18) years of age,
(ii) a person who is of unsound mind and has been so found by a court in Canada or elsewhere,
(iii) a person who is not an individual, and
(iv) a person who has the status of bankrupt.
(b) Unless the articles otherwise provide, a director is not required to hold shares issued by the Corporation.
(c) Unless the Corporation is a non-resident corporation, a majority of the directors shall he resident Canadians but where the Corporation has only one or two directors, that director or one of the two directors, as the case may be shall be a resident Canadian.
3.03 Election
Subject to the provisions of the Act the directors shall he elected at the first meeting of shareholders and at each succeeding annual meeting of the shareholders.
3.04 Fixing Number of Directors
If the articles provide for a minimum and maximum number of directors, the number of directors of the Corporation and the number of directors to he elected at the annual meeting of the shareholders shall he such number as shall be determined front time to time by special resolution or, if the special resolution empowers the directors to determine the number, by resolution of the directors.
3.05 Term of Office
Subject to the provisions of the articles, the tem of office of a director not elected for an expressly stated term shall commence at the close of the meeting of shareholders at which he is elected and shall terminate at the
close of the first annual meeting of shareholders following his election. If an election of directors is not held at the proper time the incumbent directors continue in office until their successors are elected.
3.06 Ceasing to Hold Office
A director ceases to hold office when
(i) he dies or, subject to section 3.07 of this bylaw, he resigns;
(ii) he is removed from office in accordance with the provisions of the Act
or the by-laws; or
(iii) he becomes disqualified from being a director under the Act or
by-laws.
3.07 Resignation of a Director
A director may resign his office as a director by giving to the Corporation
his written resignation, which resignation shall become effective at the later
of
(i) the time at which such resignation is received by the Corporation, or
(ii) the time specified in the resignation.
3.08 Removal
Subject to the provisions of the Act, the shareholders may by resolution at
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an annual or special meeting of shareholders remove any director or directors from office and may by resolution at such meeting elect any person to fill the vacancy created by the removal of such director, failing which the vacancy created by the removal of such director may be filled by the directors.
3.09 Vacancies
(a) Subject to the provisions of the Act, a quorum of directors may fill a
vacancy among the directors, except a vacancy resulting from
(i) an increase in the number of directors or in the maximum number of
directors, as the case may be, or
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(ii) a failure to elect the number of directors required to he elected at any meeting of shareholders.
(b) A director appointed or elected to fill a vacancy holds office for the unexpired tern of his predecessor.
(c) If there is not a quorum of directors, or if there has been a failure
to elect the number of directors required by the articles or by
section 3.04 hereof the directors then in office shall forthwith call
a special meeting of shareholders to fill the vacancy and. if they
fail to call a meeting or if there are no directors then in office,
the meeting may he called by an' shareholder.
(d) Subject to the articles or by-law's where there is a vacancy or
vacancies on the board the remaining directors may exercise all the
powers of the board so long as a quorum of the board remains in
office,
3.10 Remuneration
Subject to the articles and the by-laws the directors may fix the
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remuneration of the directors, officers and employees of the Corporation.
3.11 Power to Borrow
Unless the articles or by-laws otherwise provide, the directors may without authorization of the shareholders from time to time
(i) borrow money upon the credit of the Corporation:
(ii) issue, reissue, sell or pledge debt obligations of the Corporation;
(iii) subject to the Act, give a guarantee on behalf of the Corporation to
secure performance of an obligation of any person; and
(iv) mortgage, hypothecate, pledge or otherwise create a security interest
in all or ally property of the Corporation owned or subsequently
acquired, to secure any obligation of tile Corporation.
3.12 Delegation of Power to Borrow
Unless the articles or by-laws otherwise provide, the directors may by
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resolution delegate any or all of the powers referred to in section 3.11 of this by-law to a director, a committee or an officer,
ARTTCLE FOUR
COMMITTEES
4.01 Appointment
Subject to the Act, the articles or the by-laws, tile directors may appoint from their number one or more committees and may by resolution delegate to any such committee any of the powers of the directors.
4.02 Canadian Membership
Except as allowed by the Act, a majority of the members of any committee appointed by the directors shall be resident Canadians.
4.03 Provisions Applicable
The following provisions shall apply to any committee appointed by the directors:
(i) unless otherwise provided by resolution of the directors, each member of a committee shall continue to be a member thereof until the expiration of his term of office as a director:
(ii) the directors may from time to time by resolution specify which member of a committee shall he the chairman thereof and, subject to the provisions of section 4.01 of this by-law, may by resolution modify dissolve or reconstitute a committee and make such regulations with respect to and impose such restrictions upon the exercise of the powers of a committee as the directors think expedient:
(iii) the meetings and proceedings of a committee shall he governed by the provisions of tile by-laws of the Corporation for regulating the meetings and proceedings of the hoard so far as the same are applicable thereto and are not superseded by any regulations or restrictions made or imposed by the directors pursuant to tile foregoing provisions hereof;
(iv) subject to subsection (v) hereof no business shall be transacted at any meeting of a committee unless a majority of the members of such committee present are resident Canadians;
(v) business may be transacted at any meeting of a committee where a majority of resident Canadian directors is not present if
(A) a resident Canadian director who is unable to be present approves in writing or by telephone or other communications facilities the business transacted at the meeting, and
(B) a majority of resident Canadian directors would have been present had that director been present at the meeting;
(vi) the members of a committee as such shall be entitled to such remuneration for their services as members of a committee as may be fixed by resolution of tile directors, who are hereby authorized to fix such remuneration;
(vii) unless otherwise provided by resolution of the hoard, the Secretary of the Corporation shall he the secretary of any committee;
(viii) subject to the provisions of section 4.02 of this by-law, the directors shall fill vacancies in a committee by appointment from among their number, and
(ix) unless otherwise provided by resolution of tile board, meetings of a committee may be convened by the direction of any member thereof
ARTICLE FIVE
MEETINGS OF DIRECTORS
5.01 Place of Meetings
Meetings of the board and of any committee may he held at any place within or outside Ontario. In any financial year of the Corporation, a majority of the meetings of the hoard and a majority of the meetings of any committee need not beheld within Canada.
5.02 Calling of Meetings
A meeting of the board maybe called at any time by the Chairman of the Board the President (if he is a director), a Vice-President (if he is a director) or any two of the directors and the Secretary shall cause notice of a meeting of directors to be given when so directed to any such person or persons.
5.03 Notice of Meetings
(a) Notice of any meeting of the hoard specifying the time and, except where the meeting is to he held as provided for in section 5.06 of the by-law, the place for the holding of such meeting shall be given in accordance with the terms of section 15.01 hereof to every director not less than two day's before the date of tile meeting.
(b) Notice of an adjourned meeting of the hoard is not required to be given if the time and place of the adjourned meeting is announced at the original meeting.
(c) Meetings of the board may beheld at any lime without formal notice if all the directors are present or if all the directors who are not present in writing or by cable, telegram or any form of transmitted or recorded communication, waive notice or signed their consent to the meeting being held without formal notice. Notice of any meeting or any irregularity' in any meeting or in the notice thereof may be waived by any director either before or after such meeting. Attendance of a director at a meeting of the hoard is a waiver of notice of the meeting except where a director attends a meeting for the express purpose of objecting to the transaction of any business on tile grounds that the meeting is not lawfully called.
5.04 Regular Meetings
The hoard may by resolution fix a day or days in any month or months for the holding of regular meetings at a time and place specified in such resolution copy of any resolution of the board specifying the time and place for the holding of regular meetings of the board shall be sent to each director at least two days before the first of such regular meetings and no other notice shall he required for any of such regular meetings.
5.05 First Meeting of New Board
For the first meeting of the board to be held immediately following tile election of directors at an annual or other meeting of tile shareholders or for a meeting of the board at which a director is appointed to fill a vacancy in the board, no notice need be given to the newly elected or appointed director or directors.
5.06 Participation by Telephone
If all the directors present at or participating in the meeting consent, a meeting of the board or of a committee may be held by means of such telephone, electronic or other communication facilities as permit all persons participating in the meeting to communicate with each other simultaneously and instantaneously, and a director participating in such a meeting by such means is deemed to be present in person at that meeting for the purposes of the Act and this by-law.
5.07 Chairman
The chairman of any meeting of the board shall be the first mentioned of such of the following officers as have been appointed and who is a director and who is present at tile meeting: Chairman of the Board, Managing Director, President or a Vice-President. If no such officer is present, the directors present shall choose one of their numbers to be chairman.
5.08 Quorum
(a) Subject to the articles, the by-laws, and subsection 5.08(b) of this by-law, a majority of tile number of directors or minimum number of directors required by tile articles constitutes a quorum at any meeting of the board but no case shall a quorum he less than two-fifths of the number of directors or minimum number of directors, as tile case may he.
(h) Where the Corporation has fewer than three directors, the director or both directors, as the case may be, must be present at any meeting of the board to constitute a quorum.
(c) Subject to subsection 5.08 (d) hereof directors, other than directors of a non-resident corporation, shall not transact business at a meeting of directors unless a quorum of the hoard is present and a majority of the directors present are resident Canadians.
(d) Directors may transact business at a meeting of directors where a majority of resident Canadian directors is not present if,
(e) a resident Canadian director who is unable to be present approves in writing or by telephone or other communications facilities tile business transacted at the meeting, and
(i) a majority of resident Canadian directors would have been present had that director been present at tile meeting.
5.09 Voting
All questions arising at any meeting of tile hoard shall be decided by a majority of votes. In case of an equality of votes, the chairman of the meeting shall not have, in addition to his original vote, a second or casting vote,
5.10 Auditor
The auditor shall be entitled to attend at the expense of the Corporation and be heard at meetings of the board on matters relating to his duties as auditor.
ARTICLE SIX
STANDARD OF CARE OF DIRECTORS AND OFFICERS
6.01 Standard of Care
6.02 Every director amid officer ill exercising his powers and discharging his duties shah,
(i) act honestly and in good faith with a view to tile best interests of
tile Corporation; and
(ii) exercise the care, diligence and skill that a reasonably prudent
person would exercise in comparable circumstances.
6.02 Liability for Acts of Others
Subject to tile provisions of section 6.01 of this by-law, no director or
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officer shall be liable for the acts, receipts, neglects or defaults of any other director or officer or employee or for joining ill any receipts or acts for conformity or for any loss, damage, or expense happening to the Corporation through the insufficiency or deficiency of title to ally property acquired by order of the hoard for or on behalf of tile Corporation or for the insufficiency or deficiency of any security in or upon which any of the moneys of or belonging to the Corporation shall be placed out or invested or for any loss or damage arising from the bankruptcy, insolvency, or tortuous act of any person, firm or corporation with whom or which any money's, securities or effects of the Corporation shall he lodged or deposited or for any' loss occasioned by any' error of judgment or oversight on his part, or for any other loss, damage or misfortune whatsoever which may happen in the execution of the duties of his respective office or trust or in relation thereto, unless the same are occasioned by his own willful neglect or default: provided that nothing herein shall relieve any director or officer from the duty to act ill accordance with the Act and the regulations there under or from liability for any branch thereof
ARTICLE SEVEN
FOR THE PROTECTION OF DIRECTORS AND OFFICERS
7.01 Indemnification by Corporation
(a) The Corporation shall indemnify a director or officer, a former director or officer or a person who acts or acted at the Corporation's request as a director or officer of a body corporate of which the Corporation is or was a shareholder or creditor, and his heirs and legal representatives, against all costs, charges and expenses, including an an1ount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of the Corporation or such body corporate, if
(i) he acted honestly and in good faith with a view to the best interests of the Corporation: and
(ii) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing that his conduct was lawful.
The Corporation may from time to time enter into agreements pursuant to which the Corporation agrees to indemnify one or more persons in accordance with the provisions of this section.
(b) The Corporation shall, subject to the approval of the Ontario Court (General Division), indemnify a person referred to in subsection 7.01 (a) of this by-law in respect of an action by or on behalf of the Corporation or body corporate to procure a judgment ill its favor, to which he is made a party by reason of being or having been a director or an officer of the Corporation or body corporate, against all costs, charges and expenses reasonably incurred by him in connection with such action if he fulfils the conditions set out in clauses 7.0h(a)(i) and 7.Oi(a)(ii) of this by-law.
(c) Notwithstanding anything iii this Article, a person referred to in subsection 7.01 (a) of this by-law is entitled to indemnity from the Corporation in respect of all costs, charges and expenses reasonably incurred by him in connection with the defense of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of tile Corporation or body corporate, if the person seeking indemnity
(i) was substantially' successful on the merits in his defense of the action or proceeding, and
(ii) fulfills the conditions set out in clause 7.01(a)(i) of this by-law.
7.02 Insurance
The Corporation may purchase and maintain insurance for tile benefit of any person referred to in subsection 7.0 1(a) of this by-law against any liability incurred by him
(i) in his capacity as a director or officer except where the liability relates to his failure to act honestly and in good faith with a view to the best interests of the Corporation, or
(ii) in his capacity as a director or officer of another body corporate where he acts or acted In that capacity at the Corporations request, except where the liability relates to his failure to act honestly and in good faith with a view to the best interests of the body corporate.
7.03 Directors Expenses
The directors shall he reimbursed for their out-of-pocket expenses incurred in attending board, committee or shareholders' meetings or otherwise in respect of the performance by them of their duties and no confirmation by the shareholders of any such reimbursement shall be required.
7.04 Performance of Services for Corporation
Subject to Article S of tins by-law, if any director or officer shall be employed by or shall perform services for the Corporation otherwise than as a director or officer or shall he a member of a firm or a shareholder, director or officer of a body corporate which is employed by or performs services for the Corporation, the fact of his being a director or officer shall not disentitle such director or officer or such firm or company, as the case may be, from receiving proper remuneration for such services.
ARTICLE EIGHT
INTEREST OF DIRECTORS AND OFFICERS IN CONTRACTS
8.01 Disclosure of Interest
A director or officer who,
(i) is a party lo a material contract or transaction or proposed material contract or transaction with the Corporation; 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 or transaction or proposed material contract or transaction with the Corporation, shall disclose in writing to the Corporation or request to have entered in the minutes of meeting of directors the nature and extent of his interest.
8.02 Time of Disclosure by Director
The disclosure required by section 8.01 of this by-law shall he made, in
the case of a director,
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(i) at the meeting at which a proposed contract or transaction is first considered:
(ii) if the director was not then interested in a proposed contract or transaction, at the first meeting after he becomes so interested;
(iii) if the director becomes interested after a contract is made or a transaction is entered into, at the first meeting after lie becomes so interested, or
(iv) if a person who is interested in a contract or transaction later becomes a director, at the first meeting after he becomes a director,
8.03 Time of Disclosure by Officer
The disclosure required by section 8.01 of this by-law shall be made, in the case of an officer who is not a director,
(i) forthwith after he becomes aware that the contract or transaction or proposed contract or transaction is to he considered or has been considered at a meeting of directors:
(ii) if the officer becomes interested after a contract is made or a transaction is entered into, forthwith after he becomes so interested; or
(iii) if a person who is interested in a contract or transaction later becomes an officer, forthwith after he becomes an officer.
8.04 Time of Disclosure in Extraordinary Cases
Notwithstanding sections 8.02 and 8.03 of this by-law, where section 8.01 of this by-law applies to a director or officer in respect of a material contract or transaction or proposed material contractor transaction that, in the ordinary course of the Corporation's business, would not require approval by the directors or shareholders, the director or officer shall disclose in writing to the Corporation or request to have entered in the minutes of meetings of directors the nature and extent of his interest forthwith after the director or officer becomes aware of the contract or transaction or proposed contract or transaction,
8.05 Voting by Interested Director
A director referred to in section 8.01 of this by-law shall not vote on any resolution to approve the contract or transaction unless tile contract or transaction is,
(i) an arrangement by way of security for money lent to or obligations undertaken by him for the benefit of the Corporation or an affiliate;
(ii) one relating primarily to his remuneration as a director, officer, employee or agent of the Corporation or an affiliate;
(iii) one for indemnity or insurance pursuant to the provisions of the Act:
or
(iv) one with an affiliate
8.06 Nature of Disclosure
For the purposes of this Article, a general notice to the directors by a direct or officer disclosing that he is a director or officer of or has a material interest iii a person and is to be regarded as interested in any contract made or any transactional entered into with that personal is a sufficient disclosure of interest in relation to any' contract so made or transaction so entered into.
8.07 Effect of Disclosure
Where a material contract is made or a material transaction is entered into between the Corporation and a director or officer of tile Corporation, or between the Corporation and another person of which a director or officer of the Corporation is a director or officer or in which he has a material interest.
(i) the director or officer is not accountable to the Corporation or its shareholders for any profit or gain realized from the contract or transaction; and
(ii) the contract or transaction is neither void nor void able, by reason only' of that relationship or by' reason only that the director is present at or is counted to determine the presence of a quorum at the meeting of directors that authorized the contract or transaction, if the director or officer disclosed his interest in accordance with sections 8.02. 8.03. 8.04 or 8.06 of this by-law. as the case may he, and the contract or transaction was reasonable and fair to the Corporation at the time it was so approved.
8.08 Confirmation by Shareholders
Notwithstanding anything in this Article, a director or officer, acting honestly and in good faith, is not accountable to the Corporation or to its shareholders for any profit or gain realized from any such contract or trans-action by reason only of his holding the office of director or officer, and the contract or transaction, if it was reasonable and fair to the Corporation at the time it was approved, is not by reasonable only of the director's or officer's interest therein void or void able, where.
(i) the contract or transaction is confirmed or approved by special resolution at a meeting of the shareholders duly called for that purpose: and
(ii) the nature and extent of the director's or officer's interest in the contract or transaction are disclosed in reasonable detail in the notice calling tile meeting or in the information circular required pursuant to the provisions of title Act.
ARTICLE NINE
OFFICERS
9.01 Officers
Subject to the articles and the by-laws, the hoard shall, annually or as often as maybe required, by resolution appoint a President or Chairman of the Board and a Secretary. In addition, the board may from time to time by' resolution appoint such other officers as the board determines to be necessary or advisable in tile interests of tile Corporation, which officers shall, subject to the Act, have such authority and perform such duties as may from time to time be prescribed by resolution of the hoard, None of the said officers, other than the Chairman of the Board, need be a member of the hoard. Any two or more offices of title, Corporation may be held by the same person, except those of President and Vice-President. If the same person holds both the office of Secretary and the office of Treasurer, he may he known as Secretary-Treasurer.
9.02 Appointment of President or Chairman of the Board and Secretary
At the first meeting of the board after each annual meeting of shareholders, the hoard shall appoint a President or Chairman of the Board and a Secretary. In default of such appointment, the then incumbent shall hold office until his successor is appointed.
9.03 Remuneration and Removal of Officers
The remuneration of all officers shall he determined from time to time by the board. The fact that any officer is a director or shareholder shall not disqualify him from receiving such remuneration as may be so determined. All officers shall be subject to removal by resolution of the board at any time.
9.04 Duties of Officers may be Delegated
In ease of the absence or inability to act of the Chairman of the Board or the President. or any other officer of the Corporation, or for any other reason that the board may deem sufficient, the board may delegate the powers of such officer to any other officer or to any director for the time being.
9.05 Chairman of the Board
Time Chairman of the Board shall if present, preside at all meetings of directors and shareholders. 1-Ic shall sign all instruments which require his signature and shall perform all duties incident to his office, and shall have such other powers and perform such other duties as may from time to time be prescribed by resolution of the board.
9.06 President
Time President shall sign all instruments which require his signature and shall perform all duties incident to his office, and shall have such other powers and perform such other duties as may from time to time be prescribed by resolution of the board.
9.07 Managing Director
Subject to the Act, articles and by-laws, the directors may appoint from their number a Managing Director who is a resident Canadian, and may delegate to such Managing Director any of time powers of the directors. The Managing Director shall have such other powers and perform such other duties as may from time to time be prescribed by resolution of the board.
9.08 General Manager
The General Manager shall have such authority to manage the business of the Corporation and perform such duties as may from time to time be prescribed by resolution of time hoard.
9.09 Vice-President
During time President's absence or inability or refusal to act, the President's duties may be performed and his powers may he exercised by the Vice-President, or if there are more than one, by the Vice-Presidents in order of seniority or designation (as determined by the hoard), except that no Vice-President shall preside at a meeting of the hoard unless he is a director. A Vice-President shall also have such other authority and perform such other duties as may from time to time he prescribed by resolution of time board.
9.10 Secretary
The Secretary shall give, or cause to be given, all notices required to he
given to shareholders, directors, auditors and members of any committee, He
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shall enter or cause to be entered in the books kept for that purpose minutes of all proceedings at meetings of directors and of shareholders. He shall he the custodian of the seal (if any) of the Corporation and of all books, papers, records, documents and other instruments belonging to the Corporation. The Secretary have such other authority and perform such other duties as may from tulle to time be pre-scribed by resolution of the board.
9.11 Treasurer
The Treasurer shall have the care and custody of all the funds and securities of the Corporation and shall deposit the same in the name of the Corporation in such hank or hanks or with such depositary or depositaries as the board may by resolution direct, He shall at all reasonable times exhibit his books and accounts to any director upon application at the office of the Corporation during business hours. He shall sign or countersign such instruments as require his signature and shall perform all duties incident to his office or that are properly required of him by resolution of the board. He may be required to give such bond for the faithful performance of his duties as the hoard in its uncontrolled discretion may require hut no director shall he liable for failure to require any bond or for the insufficiency of any bond or for any loss by reason of the failure of the Corporation to receive any indemnity thereby provided. Tile Treasurer shall also have such other authority and perform such other duties as may from time to time be prescribed by resolution of the board.
9.12 Assistant Secretary and Assistant Treasurer
(a) During the Secretary's absence or inability or refusal to act, the Assistant Secretary shall perform all the duties of the Secretary. The Assistant Secretary' shall also have such other authority and perform such other duties as may from time to time be prescribed by resolution of the board.
(b) During the Treasurer's absence or inability or refusal to act, the Assistant Treasurer shall perform all the duties of the Treasurer, The Assistant Treasurer shall also have such other authority and perform such other duties as may from time to lime he prescribed by resolution of the board.
9.13 Delegation of Board Powers
In accordance with the by-laws and subject to the provisions of the Act, the hoard may from time to time by resolution delegate to any officer or officers power to manage the business and affairs of the Corporation.
9.14 Vacancies
If any office of the Corporation shall for any reason he or become vacant, the directors by resolution may appoint a person to fill such vacancy.
9.15 Variation of Powers and Duties
Notwithstanding the foregoing, the hoard may from time to time and subject to the provisions of the Act, add to or limit the powers and duties of an office or of an officer occupying any office.
9.16 Chief Executive Officer
(a) The hoard may by resolution designate any one of time officers (including the Chairman of time Board, if any) as the Chief Executive Officer of the Corporation and may from time to time by resolution rescind any such designation and designate another officer as the Chief Executive Officer of time Corporation.
(b) The officer designated as the Chief Executive Officer of the Corporation pursuant to subsection (a) of this section shall exercise general supervision over the affairs of the Corporation.
ARTICLE TEN
MEETINGS OF SIIAREHOLI)ERS
10.01 Calling of Meetings
A meeting of shareholders may he called at any time by resolution of the board or by the Chairman of the Board or by the President, and time Secretary shall cause notice of a meeting of shareholders to be given when directed so to do by resolution of the board or by the Chairman of the Board or by the President.
10.02 Annual Meeting
Subject to the provisions of the Act, the Corporation shall hold an annual meeting of shareholders not later than eighteen (18) months after the Corporation comes into existence and subsequently not later than fifteen (15) months after holding the last preceding annual meeting for the purpose of considering the financial statements and the auditor's report, electing directors and appointing auditors.
10.03 Special Meeting
Subject to the provisions of the Act, a special meeting of shareholders may be called at any time and may beheld in conjunction with an annual meeting of shareholders.
10.04 Place of Meetings
Subject to the articles, a meeting of shareholders shall beheld at such place in or outside Ontario as the directors determine or, in the absence of such a determination, at the place where the registered office of the Corporation is located.
10.05 Notice
Notice of the time and place of each meeting of shareholders shall be given not less than twenty-one (21) days and not more than fifty (50) days before the date of the meeting to each director, to the auditor and to each shareholder entitled to vote at such meeting. A notice of a meeting is not required to he sent to shareholders with were not registered on the records of the Corporation or its transfer agent on time record date determined under subsection 10.09(a) of this by-law but failure to receive a notice does not deprive a shareholder of tile right to vote at the meeting.
10.06 Contents of Notice
The notice of a meeting of shareholders shall state time day, hour and place of the meeting, and shall state or be accompanied by a statement of
(i) the nature of any special business to be transacted at the meeting in sufficient detail to permit a shareholder to form a reasoned judgment thereon, and
(ii) the text of any special resolution or by-law to he submitted to the meeting. For the purposes of this section "special business" includes all business transacted data special meeting of shareholders and all business transacted at an annual meeting of shareholders except consideration of the minutes of aim earlier meeting, the financial statements and auditor's report, election of directors and reappointment of the incumbent auditor,
10.07 Waiver of Notice
A shareholder and any other person entitled to attend a meeting of shareholders may in any manner and at any time waive notice of a meeting of shareholders, and attendance of any such person at a meeting of shareholders is a waiver of notice of time meeting, except where he attends a meeting for the express purpose of objecting to the transaction of army business on time grounds that the meeting is not lawfully called.
10.08 Notice of Adjourned Meetings
(a) If a meeting of shareholders is adjourned for less than thirty (30) days, it is not necessary to give notice of the adjourned meeting other than by announcement at tile earliest meeting that is adjourned.
(b) If a meeting of shareholders is adjourned by one or more adjournments for an aggregate of thirty (30) days or more, notice of the adjourned meeting shall he given as for an original meeting.
10.09 Record Date for Notice
(a) The directors may by resolution fix in advance a time and date as the record date for time determination of the shareholders entitled to receive notice of a meeting of tile shareholders, which record date shall not precede by more than fifty (50) days or by less than twenty-one (21) days the date on which time meeting is to be held. Where no such record date for the determination of the shareholders entitled to notice of a meeting of time shareholders is fixed by the directors as aforesaid, such record date shall be.
(i) at the chose of business on the day immediately preceding time day on which notice of such meeting is given, or
(ii) if no notice is given, the day on which the meeting is held;
(b) If a record date is fixed pursuant to subsection (a) of this section, unless notice of the record date is waived in writing by every holder of a share of the class or series affected whose name is set out in the securities register at the close of business on the day the directors fix the record date, notice thereof shall he given, not less than seven days before the date so fixed, in accordance with section 13.03 hereof
10.10 Omission of Notice
Subject to tile provisions of the Act, the accidental omission to give notice of any meeting of shareholders to any person entitled thereto or the non-receipt of any notice by any such person shall not invalidate any resolution passed or any proceedings taken at any meeting of shareholders.
10.11 List of Shareholders
(a) The Corporation shall prepare a list of shareholders entitled to receive notice of a meeting. arranged in alphabetical order and showing tile number of shares held by each shareholder, which list shall he prepared.
(i) if a record date is fixed under subsection 10.09(a) of this by-haw not later than ten days after such record date; or
(ii) if no record date is fixed.
(A) at the close of business on the day immediately preceding the day on which notice is given, or
(B) where no notice is given, on the day on which the meeting is held.
(b) A shareholder may examine the list of shareholders,
(i) during usual business hours at the registered office of the Corporation or at the place where its central securities register is maintained, and
(ii) at the meeting of shareholders for which the list was prepared.
10.12 Shareholders Entitled to Vote
(a) Where the Corporation fixes a record date under subsection 10.09(a) of this by-law, a person named in the list prepared under section 10,1! of this by-law is entitled to vote the shares shown opposite his name at the meeting to which the list relates, except to the extent that,
(i) the person has transferred any of his shares after the record date:
and
(ii) the transferee of those shares,
(A) produces properly endorsed share certificates, or
(B) otherwise establishes that he owns the shares,
and demands, not later than ten days before time meeting. or such shorter period
before lime meeting as the by
laws of the Corporation may provide that his name be included in the list before
the meeting, in which case the transferee is entitled to vote such shares at the
meeting.
(b) Where the Corporation does not fix a record date under subsection 10.09(a) of this by-law a person named in the list prepared under section 10.11 is entitled to vote the shares shown opposite his name at the meeting to which tile list relates, except to the extent that,
(i) the person has transferred any of his shares after the date on which tile 1t5t referred to in section 10.11 of this by-law is prepared, and
(ii) the transferee of those shares,
(A) produces properly endorsed share certificates, or
(B) otherwise establishes that he owns tile shares,
and demands not hater than ten day's before the meeting, or such shorter period before the meeting as the by-laws of the Corporation may provide. that his name he included in the list before the meeting to which case tile transferee is entitled to vote such shares at the meeting.
10.13 Persons Entitled to he Present
The only persons entitled to attend a meeting of shareholders shall be those entitled to vote thereat and the President, the Secretary, the directors, the scrutinizer or scrutinizers and the auditor and others who, although not entitled to vote, are entitled or required under an~ provision of the Act or the articles or the by-laws to be present at the meeting. Any other person may be admitted only on the invitation of the chairman of the meeting or with the consent of the meeting.
10.14 Proxies
(a) Every shareholder entitled to vote at a meeting of shareholders may by means of a proxy appoint a proxy holder, or one or more alternate proxy holders, who need not be shareholders, as his nominee to attend and act at the meeting in the manner. to the extent and with the authority conferred by time proxy.
(b) A proxy shall be executed by the shareholder or his attorney authorized in writing or, if tile shareholder is a body corporate, by an officer or attorney thereof duly authorized and shall conform with the requirements of the Act.
10.15 Revocation of Proxies
A shareholder may revoke a proxy
(i) by depositing an instrument in writing executed by him or by his attorney authorized in writing.
(A) at the registered office of the Corporation at any time up to and including the last business day preceding the day of the meeting, or any adjournment thereof, at which the proxy is to be used, or
(B) with the chairman of the meeting on the day of the meeting or an adjournment thereof; or
(ii) in any other manner permitted by law,
10.16 Deposit of Proxies
The directors may by resolution fix a time not exceeding forty-eight (48)
hours, excluding Saturdays and holidays, preceding any meeting or adjourned
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meeting of shareholders before which time proxies to he used at that meeting must be deposited with the Corporation or an agent thereof, and any period of time so fixed shall he specified in the notice calling the meeting.
10.17 Joint Shareholders
Where two (2) or more persons hold shares jointly, one of those holders present at a meeting of shareholders may' in the absence of tile others votes the shares, but if two (2) or more of those persons are present, in person or by proxy, they shall vote as one on the shares jointly held by them.
10.18 Chairman and Secretary
(a) The chairman of any meeting of shareholders shall he the first mentioned of such of tile following officers as have been appointed and who is present at the meeting: Chairman of the Board. President, Managing Director or in the absence of the aforesaid officers, a Vice-President who is a director, If there is no such officer or if at a meeting none of them is present within fifteen (15) minutes after the time appointed for the holding of the meeting of the shareholders present shall choose a person from their number to be the chairman.
(b) The Secretary shall be time secretary of any meeting of shareholders, hut if the Secretary is absent the chairman shall appoint some person who need not he a shareholder to act as secretary of the meeting.
10.19 Scrutineers
The chairman of any meeting of shareholders may appoint one or more persons to act as scrutineers at such meeting and in that capacity to report to the chairman such information as to attendance, representation, voting and other matters at the meeting as the chairman shall direct.
10.20 Votes to Govern
At all meetings of shareholders every question shall unless otherwise required by law, the articles, the by-laws or a unanimous shareholder agreement be determined by the majority of the votes duly east on the question. In case of an equality of votes, the chairman presiding at the meeting shall not have a second or casting vote in addition to time vote or votes to which he may be entitled as a shareholder,
10.21 Show of Hands
At all meetings of shareholders, every question submitted to time meeting shall be decided by a show of hands unless a ballot thereon is required by the chairman or is demanded by a shareholder or proxy holder present and entitled to vote. Upon a show of hands every person present who is either a shareholder entitled to vote or the duly appointed proxy holder of such a shareholder shall have one vote. Before or after a vote by a show of hands has been taken upon any question, the chairman may require, or any shareholder or proxy holder present and entitled to vote may demand, a ballot thereon. Unless a ballot is demanded, an entry in the minutes of a meeting of shareholders to the effect that the chairman declared a motion to be carried is admissible in evidence as prima facie proof of the fact without proof of the number or proportion of the votes recorded in favour of or against the motion.
10.22 Ballots
If a ballot is required by the chairman of time meeting or is duly demanded by any shareholder or proxy holder and the demand is not withdrawn, a ballot upon time question shall be taken in such manner and at such time as the chairman of the meeting shall direct.
10.23 Votes on Ballots
Unless the articles otherwise provide upon a ballot each shareholder who is present in person or represented by proxy shall be entitled to one vote for each share in respect of which he is entitled to vote at the meeting and the result of the ballot shall be the decision of the meeting
10.24 Adjournment
The chairman presiding at a meeting of shareholders may with the consent of
the meeting and subject to such conditions as the meeting decides, adjourn the
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meeting from time to time and from place to place and, subject to the provisions of the Act and subsection 10.08(b) of this by-law no notice of such adjournment or of time adjourned meeting need be given to time shareholders. Subject to the provisions of time. At any business may be brought before or dealt with at any adjourned meeting which might have been brought before or dealt with at the original meeting in accordance with the notice calling such meeting.
10.25 Quorum
At any meeting of shareholders, two (2) individuals present in person, each
of whom is either a shareholder entitled to attend and vote at such meeting or
time proxy holder of such a shareholder appointed by means of a valid proxy,
shall be a quorum for the choice of a chairman (if required) and for the
adjournment of the meeting. For all other purposes a quorum for any meeting of
shareholders (unless a greater number of shareholders and/or a greater number of
shares are required by the Act or by the articles or the by-laws) shall be two
(2) individuals present in person, each of whom is either a shareholder entitled
to attend and vote at such meeting or the proxy holder of such a shareholder
appointed by means of a valid proxy, holding or representing by proxy not less
than 5% of the total number of the issued shares of the Corporation for the time
being enjoying voting rights at such meeting.
10.26 Only One Shareholder
Where the Corporation has only one shareholder, or only one holder of any class or series of shares that shareholder present in person or by proxy constitutes a meeting.
ARTICLE ELEVEN
SHARES AND TRANSFERS
11.01 Issuance
Subject to the provisions of the Act and the articles, shares of tile Corporation may be issued at such time and to such persons and for such consideration as the directors may by resolution determine, but no share shall be issued until it is filly paid in money or in property or past service that is not less in value than the fair equivalent of the money that the Corporation would have received if time share had been issued for money.
11.02 Commissions
The directors may from time to time authorize the Corporation to pay a reasonable commission to any person in consideration of his purchasing or agreeing to purchase shares of the Corporation from the Corporation or from any other person or procuring or agreeing to procure purchasers for any such shares.
11.03 Share Certificates
(a) Every shareholder is entitled at his option to a share certificate or to a non-transferable written acknowledgment of his right to obtain a share certificate from the Corporation stating time number and class of shares and the designation of any series of shares held by him.
(b) Share certificates and acknowledgements of a shareholder's right to a share certificate, respectively, shall (subject to compliance with the provisions of tile Act) be in such form as the directors may from time to time by resolution approve and, unless otherwise provided by' resolution of the hoard, such certificates amid acknowledgements shall be signed by
(i) the Chairman of the Board, the President or a Vice-President, and
(ii) the Secretary or an Assistant Secretary holding office at the time of signing,
and notwithstanding any change in the persons holding such offices between the time of actual signing and the issuance of any certificate or acknowledgement and notwithstanding that the Chairman of the Board, the President, Vice-President. Secretary' or Assistant Secretary signing may not have held office at the date of the issuance of such certificate or acknowledgment, any such certificate or acknowledgement so signed shall he valid and binding upon the Corporation.
(c) Notwithstanding the provisions of section 2.04 of this by-law the signature of the Chairman of the Board, the President or a Vice-President may be printed, engraved, lithographed or otherwise mechanically reproduced upon certificates and acknowledgements for shares of the Corporation, and certificates amid acknowledgements so signed shall be deemed to have been manually signed by the Chairman of the Board, the President or a Vice-President whose signature is so printed, engraved, lithographed or otherwise mechanically reproduced thereon and shall be as valid as if they had been signed manually. Where the Corporation has appointed a transfer agent pursuant to subsection 11.05(a) of this by-law the signature of the Secretary or Assistant Secretary may also be printed, engraved, lithographed or otherwise mechanically reproduced, and when countersigned by or on behalf of a transfer agent share certificates and acknowledgements so signed shall be as valid as if they had been signed manually.
11.04 Transfer Agent (a) For each class of securities and warrants issued by it the Corporation may, from time to time, appoint or remove |
(i) a trustee transfer agent or other agent to keep the securities register and tile register of transfers and one or more persons or agents to keep branch
registers; and (ii) a registrar, trustee or agent to maintain a record of issued security certificates and warrants; and the person or persons appointed pursuant to this subsection shall be referred to in this by-law as a "transfer agent". |
(b) Subject to compliance with the provisions of the Act, the directors may by resolution provide for time transfer and tile registration of transfers of shares of tile Corporation in one or more places. A transfer agent shall keep all necessary books amid registers of tile Corporation for the registration and transfer of such shares of the Corporation. All share certificates issued by the Corporation for shares for which a transfer agent has been appointed as aforesaid shall be countersigned by or on behalf of the said transfer agent.
11.05 Transfer of Shares
Shares of the Corporation shall he transferable on the books of the Corporation in accordance with the applicable provisions of the Act.
11.06 Defaced. Destroyed. Stolen or lost Certificates
Where the owner of a share or shares of the Corporation claims that time certificate for such share or shares has been lost, apparently destroyed or wrongfully taken, time Corporation shall issue a new share certificate in place of the original share certificate if such owner
(i) so requests before the Corporation has notice that shares represented by the original certificate have been acquired by a bona fide purchaser:
(ii) flies with the Corporation an indemnity bond sufficient in the Corporation's opinion to protect the Corporation and any transfer agent from any loss that it or any of them may suffer by complying with the request to issue a new share certificate: and
(iii) satisfies army other reasonable requirements imposed by the Corporation.
11.07 Joint Shareholders
If two (2) or more persons are registered as joint holders of any share or shares, the Corporation is not bound to issue more than one share certificate in respect thereof and delivery of a share certificate to one of such persons is sufficient delivery to all of them.
11.08 Deceased Shareholders
In the event of the death of a holder or of one of the joint holders of any share, the Corporation shall not be required to make any entry in the securities register or register of transfers in respect thereof or to make payment of any dividends thereon except upon production of all such documents as may be required by law and upon compliance with the reasonable requirements of the Corporation or any of its transfer agents.
ARTICLE TWELVE
DIVIDENDS
12.01 Declaration of Dividends
Subject to the provisions of the Act and the articles, the directors may from time to time declare and the Corporation may pay dividends to the shareholders according to their respective rights and interests in the Corporation. Dividends maybe paid in money or property or by issuing fully paid shares of the Corporation or options or rights to acquire filly paid shares of the Corporation.
12.02 Joint Shareholders
(a) In ease several persons are registered as joint holders of any share or shares of the Corporation, the cheque for any dividend payable to such joint holders shall, unless such joint holders otherwise direct, be made payable to the order of all such joint holders and if more than one address appears on the hooks of the Corporation in respect of such joint holding the cheque shall he mailed to the first address so appearing.
(b) In case several persons are registered as the joint holders of any share or shares of time Corporation any one of such persons may give effectual receipts for all dividends and payments on account of dividends on such shares and or payments in respect of time redemption of such share.
12.03 Dividends from Funds Derived from Operations
Subject to the provisions of the Act, the Corporation may if
(i) for the time being it carries oil as its principal business the business
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of operating a producing mining, gas or oil property owned and controlled by it:
(ii) at least seventy-five per cent (75%) of its assets are of a wasting character; or
(iii) it was incorporated for the purpose of acquiring the assets or a substantial part of the assets of a body corporate and administering such assets for the purpose of converting them into cash and distributing the cash among the shareholders; declare and pay dividends out of the funds derived from its operations notwithstanding that the value of the net assets of the Corporation may be thereby reduced to less than its stated capital of all classes if the payment of the dividends does not reduce the value of its remaining assets to an amount insufficient to meet all the liabilities of the Corporation, exclusive of its stated capital of all classes.
ARTICLE THIRTEEN
RECORD DATES
13.01 Fixing Record Dates
For the purpose of determining shareholders
(i) entitled to receive payment of a dividend;
(ii) entitled to participate in a liquidation or distribution: or
(iii) for any other purpose except the right to receive notice of or
to vote at a meeting, the directors may fix in advance a date as
the record date for such determination of shareholders but such
record date shall not precede by more than fifty (50) days the
particular action to be taken.
13.02 No Record Date Fixed
If no record date is fixed pursuant to section 13.01 hereof time record
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date for the determination of shareholders for any purpose other than to establish a shareholder's right to receive notice of a meeting or to vote shall beat the close of business on the day on which the directors pass the resolution relating thereto.
13.03 Notice of Record Date
If a record date is fixed unless notice of the record date is waived in writing by every holder of a share of the class or series affected whose name is set out in the securities register at the close of business on the day the directors fix the record date, notice thereof shall he given not less than seven days before the date so fixed.
(i) by advertisement in a newspaper published or distributed in the
place where the Corporation has its registered office and in each
place in Canada where it has a transfer agent or where a transfer
of its shares may be recorded: and
(ii) by written notice to each stock exchange in Canada on which the
shares of the Corporation are listed for trading.
13.04 Effect of Record Date
In every case where a record date is fixed pursuant to section 13.01 hereof
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ill respect of tile payment of a dividend, the making of a liquidation distribution or the issue of warrants or other rights to subscribe for shares or other securities, only shareholders of record at the record date shall he entitled to receive such dividend, liquidation distribution, warrants or other rights.
ARTICLE FOURTEEN
CORPORATE RECORDS AND INFORMATION
14.01 Keeping of Corporate Records
(a) The Corporation shall prepare and maintain, at its registered office or at such other place in Ontario designated by the directors:
(i) the articles and the by-laws and all amendments thereto.
(ii) minutes of meetings and resolutions of shareholders;
(iii) a register of directors in which are set out the names and residence addresses, while directors, including the street and number, if any, of all persons who are or have been directors with the several dates on which each became or ceased to be a director;
(iv) a securities register in which are recorded the securities issued by the Corporation in registered form, showing with respect to each class or series of securities
(A) the names, alphabetically arranged, of persons who,
(1) are or have been within six years registered as shareholders and the address including the street and number, if any, of every such person while a holder, and the number and class of shares registered in the name of such holder,
(2) are or have been within six years registered as holders of debt obligations of the Corporation and the address including the street and number, if any, of every such person while a holder, and time class or series and principal amount of the debt obligations registered in the name of such holder, or
(3) are or have been within six years registered as holders of warrants of the Corporation, other than warrants exercisable within one year from tile date of issue and the address including the street and number, if any, of every such person while a registered holder, amid the class or series and number of warrants registered in the name of such holder; and
(B) the date and particulars of the issue of each security and warrants.
(b) In addition to the records described in subsection (a) of this section, the Corporation shall prepare and maintain adequate accounting records amid records containing minutes of meetings and resolutions of time directors amid any committee. The records described in this subsection shall be kept at the registered office of the Corporation or at such other place in Ontario as is designated by the directors and shall be open to examination by any director during normal business hours of the Corporation.
(c) The Corporation shall also cause to he kept a register of transfers in which all transfers of securities issued by the Corporation in registered form and the date and other particulars of each transfer shall beset out. |
14.02 Access to Corporate Records |
Shareholders and creditors of the Corporation and their agents and legal representatives may examine the records referred to in subsection 14.01(a) of this by-law during the usual business hours of the Corporation and may take extracts there from, free of charge. If tile Corporation is an offering corporation, any other person may examine such records during the usual business hours of the Corporation and may take extracts there from upon payment of a reasonable fee.
14.03 Copies of Certain Corporate Records
A shareholder is entitled upon request and without charge to one copy of the articles and by-laws.
14.04 Report to Shareholders
A copy of the financial statements of the Corporation, a copy of the auditor's report, if any, to the shareholders and a copy of any further information respecting the financial position of the Corporation and the results of its operations required by the articles or the by-laws which are to he placed before an annual meeting of shareholders pursuant to the Act shall be sent to each shareholder not less than twenty-one (21) days or before the signing of a resolution in accordance with the Act in lieu of such annual meeting, except to a shareholder who has informed the Corporation in writing that he does not wish to receive a copy of those documents,
14.05 No Discovery of Information
Except as specifically provided for in this Article, and subject to all applicable law, no shareholders shall be entitled to or to require discovery of any information respecting any details or conduct of the Corporation's business which in the opinion of the directors would be inexpedient or inadvisable in the interests of the Corporation to communicate to the public.
14.06 Conditions for Inspection
The board may from time to time by resolution determine whether and to what extent and at what times and place and under what conditions or regulations the accounts amid books of the Corporation or any of them shall he open to the inspection of shareholders and no shareholder shall have any right to inspect any account or book or document of the Corporation, except as specifically provided for in this Article or as otherwise provided for by statute or as authorized by resolution of time board.
ARTICLE FIFTEEN
NOTICES
15.01 Method of Giving
Any notice, communication or other document to be sent or give by the Corporation to a shareholder, director, officer, or auditor of the Corporation under any provision of the Act, the articles or by-laws shall be sufficiently and given if delivered personally to tile person to whom it is to he given or if delivered to his last address as shown in the records of the Corporation or its transfer agents or if mailed by prepaid ordinary mail or air mail in a sealed envelope addressed to him at his last address as shown on the records of the Corporation or its transfer agents or if sent by any means of wire or wireless or any other form of transmitted or recorded communication. The Secretary may change the address on the records of the Corporation of any shareholder in accordance with any information believed by him to be reliable. A notice, communication or document so delivered shall he deemed to have been sent and given when it is delivered personally or delivered at the address aforesaid. A notice, communication or document so mailed shall be deemed to have been sent and given on the day it is deposited in a post office or public letter box and shall be deemed to he received by the addressee on the fifth day after such mailing. A notice sent by any means of wire or wireless or any other form of transmitted or recorded communication shall be deemed to have been given when delivered to the appropriate communication corporation or agency or its representative for dispatch.
15.02 Shares Registered in More Than One Name
All notices or other documents with respect to any shares of the Corporation registered in the names of two or more persons as joint shareholders shall he addressed to all of such persons and sent to the address or addresses for such persons as shown in the records of the Corporation or its transfer agent but notice to one of such persons shall he sufficient notice to all of them,
15.03 Persons Becoming Entitled by Operation of Law
Subject to the provisions of the Act every person who by operation of law, transfer or by any other means whatsoever shall become entitled to any share or shares of the Corporation shall he hound by every notice or other document in respect of such share or shares which previous to his name and address being entered on the records of the Corporation shall be duly given to the person or persons from whom he derives his title to such share or shares.
15.04 Deceased Shareholder
Any notice or document delivered or sent by mail or left at the address of any shareholder as such address appears on the records of the Corporation shall notwithstanding that such shareholder is then deceased and whether or not the Corporation has notice of his death he deemed to have been duly given or served in respect of the shares whether held solely or jointly with other persons by such shareholder until some other person is entered in his stead on the records of the Corporation as the holder or one of the joint holders thereof amid such service of such notice shall for all purposes be deemed a sufficient service of such notice or document on his heirs, executors or administrators and on all persons, if any, interested with him in such shares,
15.05 Signature to Notice
The signature, if any, to any notice to he given by the Corporation may be written, stamped, typewritten., printed or otherwise mechanically reproduced in whole or in part.
15.06 Proof of Service
A certificate of the Chairman of the Board, the President, a Vice-President, the Secretary or the Treasurer or of any other officer in office at the time of the making of the certificate or of a transfer officer of any transfer agent or branch transfer agent of shares of army class of the Corporation as to facts in relation to the delivery or mailing or service of any notice or other document to any shareholder, director, officer or auditor or publication of any notice or other document shall, in the absence of evidence to the contrary be proof thereof
15.07 Computation of Time
Where a given number of days' notice or notice extending over any period is required to he given, the number of days or period shall be computed in accordance with the definition of "day" contained in section 1.01 of this by-law.
15.08 Waiver of Notice
Any shareholder (or his duly appointed proxy holder), director, officer, auditor or member of a committee may at any time waive any notice, or waive or abridge the time for any notice required to be given to him under any provisions of the Act, the articles, the by-laws or otherwise and such waiver or abridgement shall cure any default in the giving or in the time of such notice, as the case may be. Any such waiver or abridgement shall he in writing, except a waiver of notice of a meeting of shareholders or of the board which maybe given in any manner.
ARTICLE SIXTEEN
REPEAL OF BY-LAW NO. I
16.01 Repeal
Without affecting the validity of any actor or thing done there under, By-law No. I of time Corporation is hereby repealed.
PASSED AND MADE this 29th day of June 1998.
/s/ Michael P. Kraft, President ------------------------------- Michael P. Kraft, President |
ARTICLES OF AMENDMENT
STATUS MODIFICATION
1. The name of the corporation is: Alpha Communications Corp.
2. The name of the corporation is changed to: Lingo Media.
3. Date of incorporation: April 22, 1996
4. The articles of the corporation are amended as follows: to change the name of the corporation to Lingo Media, Inc.
5. The amendment has been duly authorized as required by Sections 168 & 170 of the Business Corporation Act.
6. The resolution authorizing the amendment was approved by the shareholders / directors of the corporation on July 4, 2000.
The articles are signed in duplicate
ALPHA COMMUNICATIONS CORP.
/s/ Michael Kraft ----------------------------- Michael Kraft |
DAVID M. LOEV, ATTORNEY AT LAW
2777 Allen Parkway, Suite 1000
HOUSTON, TX 77019
713-524-4110 PHONE
713-524-4122 FACSIMILE
February 24, 2003
Lingo Media Inc.
151 Bloor Street West
Suite 890
Toronto, Ontario, Canada M5S 1S4
Re: Form F-1 Registration Statement
Gentlemen:
You have requested that I furnished you my legal opinion with respect to the legality of the following described securities of Lingo Media Inc. (the "Company") covered by a Form F-1 Registration Statement, (the "Registration Statement"), filed with the Securities and Exchange Commission for the purpose of registering such securities under the Securities Act of 1933:
1. 4,700,000 shares of common stock, no par value (the "Shares") to be registered by the Company for resale; and
2. 3,275,000 shares of common stock, no par value underlying warrants to be registered by the Company for resale.
In connection with this opinion, I have examined the corporate records of the Company, including the Company's Articles of Incorporation, Bylaws, and the Minutes of its Board of Directors and Shareholders meetings, the Registration Statement, and such other documents and records as I deemed relevant in order to render this opinion.
Based on the foregoing, it is my opinion that, after the Registration Statement becomes effective and the Shares and shares underlying the warrants have been registered and delivered as described therein, the Shares and the shares underlying the warrants will be validly issued, fully paid and non-assessable.
I hereby consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement and further consent to statements made therein regarding our firm and use of our name under the heading "Legal Matters" in the Prospectus constituting a part of such Registration Statement.
Sincerely,
/s/ David M. Loev, Attorney at Law ---------------------------------- David M. Loev, Attorney at Law |
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Lingo Media Inc.
We consent to use of our report included herein dated May 3, 2002 relating to the consolidated balance sheets of Lingo Media Inc. as at December 31, 2001 and 2000, and the related consolidated statements of operations and deficit and cash flows for each of the years in the three-year period ended December 31, 2001.
Our report dated May 3, 2002, contains additional comments for U.S. readers on Canada - U.S. reporting difference that states that conditions and events exist that cast doubt on the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty.
/s/ KPMG LLP ------------------ KPMG LLP Toronto, Canada February 19, 2003 |