UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended DECEMBER 31, 2000 ----------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from _______ to ________ Commission file number ___________________________ INTERUNION FINANCIAL CORPORATION -------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 87-0520294 - -------- ---------- (State or other jurisdiction of (IRS Employer Identification No.) Incorporation or organization) 249 Royal Palm Way, Suite 301 H, Palm Beach, Fl 33480 - ----------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (561) 820 - 0084 (561) 655 - 0146 - ---------------- ---------------- (Issuer's telephone number) (Issuer's telecopier number) ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: $0.001 Par Value Common Shares - 1,899,937 as of December 31, 2000. Transitional Small Business Disclosure Format (Check One) Yes [ ] No [X] Page 1 of 10 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS INTERUNION FINANCIAL CORPORATION UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT FOR THREE AND NINE MONTHS ENDED DECEMBER 31, 2000
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------------------------------------- 31-Dec-00 31-Dec-99 31-Dec-00 31-Dec-99 --------------------------------------------------------- REVENUE Investment Banking 3,749 32,545 272,948 442,840 Investment Management 0 0 0 0 Interest Income 1 9,573 46,899 71,815 Other income 0 659,344 0 659,344 --------------------------------------------------------- 3,750 701,462 319,847 1,173,999 --------------------------------------------------------- EXPENSES Selling, General & Administration 41,657 63,065 319,944 156,443 Amortization & Depreciation 354 48,322 861 144,814 Foreign Exchange Loss (Gain) -3,805 -12,186 41,737 -22,040 Writedown of Investment -90 0 30,002 0 Interest Expense 20,192 -21,157 20,192 -7,840 --------------------------------------------------------- 58,308 78,044 412,735 271,377 EQUITY IN NET EARN (LOSS) OF -150,064 -132,106 -415,807 -338,224 UNCONSOLIDATED AFFILIATES --------------------------------------------------------- PROFIT (LOSS) FROM CONTINUOUS -204,622 491,312 -508,695 564,398 OPERATIONS GAIN (LOSS) FROM DISCONTINUED 0 -63,223 358,169 -67,118 OPERATIONS GAIN (LOSS) ON DISPOSAL OF 0 0 -1,413,686 0 DISCONTINUED ASSETS / SUBS. --------------------------------------------------------- NET PROFIT (LOSS) FOR THE PERIOD -204,622 428,089 -1,564,212 497,280 FOREIGN EXCHANGE TRANSLATION EFFECT 0 82,082 0 82,082 RETAINED EARNINGS (DEFICIT) BEG. PERIOD -6,885,346 -1,913,522 -5,525,755 -1,982,713 RETAINED EARNINGS (DEFICIT) - END -7,089,968 -1,403,351 -7,089,967 -1,403,351 PERIOD FINANCIAL OVERVIEW Common Shares Outstanding 1,899,937 4,243,123 1,899,937 4,243,123 Weighted Average Common Shares 14,352,787 3,495,390 14,352,787 3,495,390 Outstanding - Basic EPS - From Continuing Operations (0.014) 0.141 (0.035) 0.161 (Basic) EPS - From Discontinuing Operations 0.000 (0.018) 0.025 (0.019) (Basic) EPS (0.014) 0.122 (0.109) 0.142 Preferred Shares Outstanding - 1,500,000 - 1,500,000
See Accompanying Notes to Un-audited Consolidated Financial Statements Page 2 of 10 INTERUNION FINANCIAL CORPORATION UNAUDITED CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 2000
As at December 31 As at March 31 --------------------------------------------------------- 2000 1999 2000 1999 --------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalent 33,079 215,400 441,884 285,706 Marketable Securities 0 9,183 32,520 19,885,302 Due from brokers and dealers 0 1,368,228 3,237,515 0 Due from Clients 0 502,174 180,855 93,183 Accounts Receivable 7,886 568,409 168,506 690,374 Receivable from Affiliates 0 0 27,555 0 Refundable Income Taxes 7,502 0 6,709 5,046 Prepaid expenses and other current 6,082 52,070 22,938 25,772 assets Notes receivable 0 0 1,001,414 973,315 Loan receivable 0 69,220 59,495 0 --------------------------------------------------------- Total Current Assets 54,549 2,784,684 5,179,391 21,958,698 NON-CURRENT ASSETS: Property & equipment, net 4,727 1,053,180 42,679 1,199,953 Notes receivable, non-current portion 1,483,607 2,574,470 783,286 619,992 Other long-term assets 62,574 90,503 77,493 77,651 Investment in unconsolidated affiliates 2,938,783 5,492,459 3,639,680 5,591,892 --------------------------------------------------------- Total non-current assets 4,489,691 9,210,612 4,543,138 7,489,488 TOTAL ASSETS 4,544,240 11,995,296 9,722,529 29,448,186 CURRENT LIABILITIES: Due to brokers and dealers 0 - 0 18,899,072 Due to Clients 0 1,762,855 3,247,166 979,783 Accounts payable and accrued liabilities 79,115 215,248 433,157 253,476 Due to affiliates 78,320 13,258 168,382 0 Notes Payable, current portion 0 0 0 776,213 --------------------------------------------------------- Total Current liabilities 157,435 1,991,361 3,848,705 20,908,544 NON-CURRENT LIABILITIES: Notes Payable, Longterm Portion 860,479 634,467 633,286 619,992 --------------------------------------------------------- Total Non-Current liabilities 860,479 634,467 633,286 619,992 Total Liabilities 1,017,914 2,625,828 4,481,991 21,528,536 SHAREHOLDER'S EQUITY Capital Stock and additional paid-in- 10,616,293 10,764,412 10,766,293 9,902,363 capital Cumulative Translation Adjustment 0 8,407 37,439 -18,963 Retained Earnings (Deficit) -7,089,968 -1,403,351 -5,563,194 -1,963,750 --------------------------------------------------------- Total Shareholders' Equity 3,526,326 9,369,468 5,240,538 7,919,650 TOTAL LIABILITIES & 4,544,240 11,995,296 9,722,529 29,448,186 SHAREHOLDERS'S EQUITY
See Accompanying Notes to Un-audited Consolidated Financial Statements Page 3 of 10 INTERUNION FINANCIAL CORPORATION UNAUDITED CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 2000
As at December 31 As at March 31 ---------------------------------------------------------- 2000 1999 2000 1999 ---------------------------------------------------------- SHAREHOLDER'S EQUITY Class A Preferred Stock, $0.10 par value 0 150,000 150,000 150,000 Authorized - 1,500,000 shares Issued and outstanding - 1,500,000 Class B Preferred stock, $0.10 par value 0 0 0 0 Authorized - 1,000,000 shares Issued and outstanding - None Class C Preferred Stock, $0.10 par value 0 0 0 0 Authorized - 1,000 shares Issued and outstanding - None Common Stock, $0.001 par value Authorized -10,000,000 in 2000; 5,000,000 in 99 Issued and outstanding - 1,899,937 in 2000; 4,243,123 in 99 18,999 4,343 4,243 2,114 Additional paid-in-capital 10,597,294 10,610,069 10,612,050 9,750,249 Accumulated Comprehensive Income 0 8,407 0 0 CUMULATIVE TRANSLATION 0 0 37,439 -18,963 ADJUSTMENT ACCUMULATED DEFICIT -7,089,968 -1,403,351 -5,563,194 -1,963,750 Total Shareholder's equity 3,526,326 9,369,468 5,240,538 7,919,650 Total Liabilities and Shareholder's Equity 4,544,240 11,995,296 9,722,529 29,448,186
See Accompanying Notes to Un-audited Consolidated Financial Statements Page 4 of 10 INTERUNION FINANCIAL CORPORATION UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED
9 Months to 12 Months to ---------------------------------------------------------------- 31-Dec-00 31-Dec-99 31-Mar-00 31-Mar-99 ---------------------------------------------------------------- CASH FLOW FROM OPERATING ACTIVITIES Net income (loss) $ (1,564,213) 497,280 (3,599,444) (390,182) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization 861 151,863 1,165,392 200,171 Loss (gain) on equity investment 415,807 -330,762 1,021,500 492,917 Gain on sale of securities by subsidiary 0 0 0 (486,099) Loss (gain) on disposal of discontinued operations (358,169) 0 0 0 Non cash compensation 0 0 0 87,500 Loss on Disposal of Asset (Subsidiary) 1,413,686 0 0 0 Non cash expenses (income) 132,998 -313,882 387,633 40,000 Unrealized loss (gain) in marketable securities 0 (7,643) 1,255,987 (11,814) -------------- ------------- -------------- ------------- 40,970 4,499 231,068 (67,507) Changes in operating assets and liabilities Decrease (increase) in due to/from brokers and dealers, net 3,237,515 (20,267,300) (22,136,587) (15,762,238) Decrease (increase) in due to/from clients, net (3,066,311) 405,770 2,179,710 (1,455,276) Decrease (increase) in marketable securities 32,520 19,876,120 19,852,782 15,242,302 Increase (decrease) in accounts receivable and other assets 263,733 31,493 463,545 124,263 Increase (decrease) in accounts payable and Accrued liabilities (444,104) (69,917) (428,150) (572,359) -------------- ------------- -------------- ------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 64,323 -19,335 162,368 (2,490,815) -------------- ------------- -------------- ------------- CASH FLOW FROM FINANCING ACTIVITIES Net proceeds on issuance of capital stock 0 863,030 0 133,000 Increase (decrease) in due to related parties 0 0 0 771,109 Proceeds (repayment) of notes payable 0 (863,962) 0 (103,448) -------------- ------------- -------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 0 -932 0 800,661 CASH FLOW FROM INVESTING ACTIVITIES Purchase of property and equipment, net 0 -6,569 (6,190) (7,438) Purchase of long term investment, net 0 0 0 (437,363) Cash divested on sale of security by subsidiary 0 0 0 (195,304) Investment in notes receivable (473,128) (43,470) 0 (257,766) -------------- ------------- -------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (473,128) (50,039) (6,190) (897,871) NET INCREASE (DECREASE) IN CASH (408,805) (70,306) 156,178 (2,588,025) CASH AND CASH EQUIVALENT- Beginning of year 441,884 285,706 285,706 2,873,731 CASH AND CASH EQUIVALENT - END OF YEAR $ 33,079 $ 215,400 $ 441,884 $ 285,706 ============== ============= ============== =============
See Accompanying Notes to Un-audited Consolidated Financial Statements Page 5 of 10 INTERUNION FINANCIAL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2000 ================================================================================ 1. Interim information is un-audited; however, in the opinion of management, all adjustments necessary for a fair statement of interim results have been included in accordance with Generally Accepted Accounting Principles. All adjustments are of a normal recurring nature unless specified in a separate note included in these Notes to Un-audited Consolidated Financial Statements. The results for interim periods are not necessarily indicative of results to be expected for the entire fiscal year. These financial statements and notes should be read in conjunction with the Company's annual consolidated financial statements and the notes thereto for the fiscal year ended March 31, 2000, included in its Form 10-KSB for the year ended March 31, 2000. 2. Earning (loss) per share is computed using the weighted average number of common shares outstanding during the period. CAPITAL STOCK AND ADDITIONAL PAID-IN-CAPITAL In June 2000, the Company acquired its 243,750 Common Share at the rate of $0.6153 per share in settlement of $150,000 note receivable from an unrelated party. In September 2000, the Company converted its Class "A" Preferred Shares into Common Shares at the rate of 1 to 10. Consequently, in lieu of 1,500,000 Class "A" Preferred Shares the Company issued 15,000,000 Common Shares from the treasury under regulation "S". In November 2000, in a special meeting of the shareholders' of the company it was resolved to execute a reverse split in the issued and outstanding common stock of the Company in the ratio of ten (10) to one (1). Consequently the number of issued and outstanding common stock of the Company reduced to 1,899,937 in the 3rd quarter of fiscal 2001. SALE OF ASSETS AND DISCONTINUATION OF OPERATIONS During the second quarter, the Company sold its investment banking subsidiary, Credifinance Capital Corp. (CFCC). Effective September 30, 2000, Credifinance Capital Corp. is no longer part of the Company. As a result of the disposal of the operations of Credifinance Capital Corp. as of September 30, 2000, the Company reported a profit of $358,169 from discontinuation of the operations. The consolidated profit of Credifinance Capital Corp. of $358,169 is shown as a separate line on the consolidated statement of operations of the Company as of September 30, 2000. However, as a result of disposal of discontinued assets of Credifinance Capital Corp., the Company incurred a loss of $1,413,686. Effective September 30, 2000, the only investment asset on which InterUnion is reporting is its minority interest in InterUnion Asset Management Limited (IUAM). The un-audited financial statements of IUAM for the 3rd quarter of fiscal 2001 are attached in their entirety as an attachment. As a result of transfer of certain assets and liabilities between the Companies, InterUnion Financial Corporation owes an amount of $227,193 to the discontinued Company (CFCC). ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS (1) OVERVIEW During the 3rd quarter of fiscal 2001, InterUnion had nil revenue from investment banking as a result of its sale of assets. The only revenue reported by InterUnion is the Company's share, based on its minority interest, of unconsolidated revenue of IUAM. Page 6 of 10 INTERUNION FINANCIAL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2000 ================================================================================ During the 3rd quarter of fiscal 2001, InterUnion reported consolidated revenues of $3,750 versus $701,462 a year earlier. The revenue for the 3rd quarter of fiscal 2000 included a one time gain of $659,344 from the sale of B-12 securities which was reversed in the 4th quarter of fiscal 2000. Selected financial data from InterUnion's financial statements is (figures in 000's except per share data):
9 mos. ended 9 mos. ended 9 mos. ended Dec. 31 - 00 Dec. 31 - 99 Dec. 31 - 98 ------------ ------------ ------------ Working Capital -103 793 -205 Cash Flow 64 314 -653 Total Assets 4,544 11,995 10,902 Shareholders' Equity 3,526 9,369 7,114 Common Share, # 1,899,937 4,243,123 1,908,285 Book Value Per Share 1.86 2.21 3.73
(2) NET REVENUES For the first 9 months of fiscal 2001, InterUnion reported consolidated revenues of $319,847 versus $1,173,999 a year earlier, a decrease of 72.7%, resulting from the sale of its CFCC operations. Revenues for the 3 months ending December 31, 2000 were $3,750 versus $701,462, a decrease of about 99%. (3) EXPENSES Selling, general and administration expenses for the nine months of fiscal 2001 increased by $163,501 to $319,944 from $156,443 a year earlier. This translates into a 105% increase which is due to a provision of $211,075 for legal expenses. (4) NET INCOME FOR 9 MONTHS UNTIL DECEMBER 31, 2000 Net loss from operations for the 9 months ending December 31, 2000 was a loss of $1,564,213 or $0.109 per share, based on a weighted average number of shares of 14,352,787 versus a profit of $497,280 or $0.142 per share, based on a weighted average number of shares of 3,495,390 a year earlier. The loss in fiscal 2001 was mainly due to a loss of $1,413,686 on the disposal of discontinued assets in fiscal 2001. As a result of the disposal of the operations of Credifinance Capital Corp. as of September 30, 2000, the Company reported a profit of $358,169 from discontinuation of the operations. The consolidated profit of Credifinance Capital Corp. of $358,169 is shown as a separate line on the consolidated statement of operations of the Company as of December 31, 2000. The weighted average number of common shares outstanding for the nine months ending December 31, 2000 is 14,352,787 versus 3,495,390 a year earlier. Page 7 of 10 INTERUNION FINANCIAL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2000 ================================================================================ (5) LIQUIDITY AND CAPITAL RESOURCES
Date Number of Shares Amount Type - ---- ---------------- ------ ---- May 1998 17,002 68,008 Regulation "S" June 1998 35,000 140,000 Regulation "S" July 1998 262,142 1,048,568 Regulation "S" December 1998 10,000 40,000 Regulation "S" February 1999 180,000 630,000 Regulation "S" March 1999 25,000 87,500 Regulation "S" March 1999 1,140 4,560 Regulation "S" November 1999 114,500 57,250 Regulation "S" November 1999 2,014,198 805,679 Regulation "S" September 2000 15,000,000 150,000 Regulation "S"
(6) CONCLUDING REMARKS There are no other known trends, events or uncertainties that may have, or are reasonably likely to have, a material impact on the Company's short-term or long-term liquidity that have not been discussed above. In addition, there is no significant income or loss that has risen from the Company's continuing operations that has not been analyzed or discussed above. In addition, there has not been any material change in any line item that is presented on the financial statements that has not been discussed above. (7) CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATIONS The Company and its subsidiaries operate in a rapidly changing environment that involves a number of factors, some of which are beyond management's control, such as financial market trends and investors' appetite for new financings. It should also be emphasized that, should the Company not be successful in completing its own financing (either by debt or by the issuance of securities from treasury), its strategy to grow by acquisition will be affected. In the opinion of management the financial statements for the periods ending December 31, 2000 accurately reflect the operations of the Company and its subsidiaries. The Company has taken every reasonable step to ensure itself that its quarterly financial statements do not represent a distorted picture to anyone having a business reason to review such statements and who has also reviewed its previous audited annual financial statements for the year ended March 31, 2000. Forward-looking statements included in Management's Analysis and Discussion reflects management's best judgment based on known factors, and involves risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. Forward-looking information is provided by InterUnion pursuant to the safe harbor established by recent securities legislation and should be evaluated in the context of these factors. Page 8 of 10 INTERUNION FINANCIAL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2000 ================================================================================ PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS Credifinance Securities Limited, an ultimate wholly owned subsidiary of the Company until disposal on September 30,2000, had filed a claim against a client in 1997 for which it had raised a C$15,000,000 convertible debenture, on the Superior Court of Montreal (Quebec). The claim was originally not contested. However, the Company faced a claim from two employees of Credifinance Securities Limited for commissions, termination allowance and damages. In compliance with a court order, the total amount of the commission, C373, 920 (US$249,663) was placed in an escrow with Montreal Trust. On May 29, 2000, the Superior Court of Montreal (Quebec) rendered a judgment ordering Credifinance Securities Limited to pay C$579,617 (US$387,005) plus accrued interest to the cross claimants. The above amount has been fully provided by Credifinance Capital Corp (CFCC), the holding company of Credifinance Securities Limited in the consolidated financial statement of the CFCC for the quarter ended December 31, 2000. Upon advice from its counsel who had advised that the May 29, 2000 judgment has a strong chance of reversal, Credifinance Securities filed an appeal in the Supreme Court in Quebec on June 29, 2000. Effective September 30, 2000, as a result of disposition of Credifinance Capital Corp., the Company has no potential obligation to this lawsuit. ITEM 2 - CHANGES IN SECURITIES In the 1st quarter ending June 30, 2000 the Company acquired its 243,750 Common Shares at the rate of $0.6153 per share for $150,000 in settlement of the note receivable of $150,000 from an unrelated party. The above shares are held in treasury. Consequently, the number of outstanding Common Shares declined to 3,999,373 from 4,232,290 as of March 31, 2000. In September 2000, the Company converted its Class "A" Preferred Shares into Common Shares at the rate of 1 to 10. Consequently, in lieu of 1,500,000 Class "A" Preferred Shares the Company issued 15,000,000 Common Shares from the treasury under regulation "S". In November 2000, in a special meeting of the shareholders' of the company it was resolved to execute a reverse split in the issued and outstanding common stock of the Company in the ratio of ten (10) to one (1). Consequently the number of issued and outstanding common stock of the Company reduced to 1,899,937 in the 3rd quarter of fiscal 2001. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES There have been no defaults in the payment of principal or interest with respect to any senior indebtedness of InterUnion Financial Corporation. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5 - OTHER INFORMATION None. Page 9 of 10 INTERUNION FINANCIAL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2000 ================================================================================ ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K Exhibit 27 Financial Data Schedule (for SEC use only). SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. InterUnion Financial Corporation -------------------------------- (Registrant) Date February 13, 2000 /s/ Georges Benarroch, Director ------------------ -------------------------------- (Signature)* * Print the name and title of each signing officer under his signature. Page 10 of 10 APPENDIX INTERUNION ASSET MANAGEMENT LIMITED FINANCIAL STATEMENTS (UNAUDITED) FOR THE 3 AND 9 MONTHS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 CONTENTS - -------------------------------------------------------------------------------- COMPLIANCE CERTIFICATE 2 FINANCIAL STATEMENTS BALANCE SHEETS 3 STATEMENTS OF OPERATIONS AND DEFICIT 4 STATEMENTS OF CASH FLOWS 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-16 QUARTERLY COMPLIANCE CERTIFICATE - -------------------------------------------------------------------------------- To: Working Ventures Canadian Fund Inc. ("WV") InterUnion Financial Corporation ("IUFC") Date: December 31, 2000 I, Russell Lindsay, of InterUnion Asset Management Limited (the "CORPORATION"), hereby certify for and on behalf of the Corporation, intending that the same may be relied upon by you without further enquiry, that since April 1, 2000: (a) the attached financial statements delivered pursuant to the Agreement have been prepared in accordance with generally accepted principles in effect on the date of such financial statements and the information contained therein is true and correct in all material aspects, subject only to year-end audit adjustments, and presents fairly and consistently the results of operations and changes in the financial position of the Corporation as of and to December 31, 2000; (b) the Corporation is in compliance with all taxes and other withholding obligations and has accrued unpaid vacation pay in its financial statements; (b) the Corporation has (i) made all deductions for taxes or other obligations required to be deducted and has paid the same to the proper tax or other receiving officers; (ii) remitted to the appropriate tax authority, on a timely basis, all amounts collected on account of goods and services taxes and provincial sales taxes; and (iii) remitted to the appropriate receiving officer, on a timely basis, all amounts required to be paid by it in connection with workman's compensation legislation; (c) the Corporation is not aware of any breach or potential breach by the Corporation of any Environmental Laws (as such term is defined in the Share Purchase Agreement entered into between the parties as of January 21, 1999 (the "SHARE PURCHASE AGREEMENT")) and to the best of its knowledge is in compliance with all applicable Environmental Laws; and (d) the Corporation is not aware of any year 2000 issues of the Corporation or its major customers or suppliers that would have a material adverse effect on the Corporation or its Business and the Corporation is in compliance with its year 2000 policy. All capitalized terms not defined herein have the meaning specified thereto in the Share Purchase Agreement. Witness my hand and the corporate seal of the Corporation this 22nd day of January, 2001 By:_____________________________________ Name: Russell Lindsay Title: Senior Vice-President & Chief Financial Officer 2 INTERUNION ASSET MANAGEMENT LIMITED Consolidated Balance Sheets (unaudited) (amounts expressed in Canadian dollars unless otherwise stated) (as at December 31, 2000 and March 31, 2000) - --------------------------------------------------------------------------------
December 31, March 31, 2000 2000 ----------- ----------- ASSETS Current: Cash .......................................... $ 428,625 $ 525,621 Marketable securities, at market (note 4)...... 1,909,055 1,991,800 Accounts receivable and accrued revenue (note 10)................................... 374,612 472,166 Prepaid expenses............................... 91,789 71,317 ----------- ----------- 2,804,081 3,060,904 Future income tax asset .......................... 26,108 26,108 Management contracts, net (note 5) ............... 1,690,476 2,304,762 Capital assets, net (note 6) ..................... 369,734 447,006 Investments, at cost (note 7) .................... 20,237 71,477 Goodwill (note 8) ................................ 12,021,309 12,703,851 ----------- ----------- Total assets ..................................... $16,931,945 $18,614,108 =========== =========== LIABILITIES Current: Bank indebtedness ............................. $ -- $ 36,853 Accounts payable and accrued liabilities (note 10)................................... 558,557 542,578 Current portion of long term debt.............. 18,000 69,339 Income taxes payable........................... 24,901 146,840 ----------- ----------- 601,458 795,610 Deferred revenue and inducements (note 9) ........ 139,488 121,864 Long term debt (note 11) ......................... 44,000 151,224 Other liabilities ................................ 109,375 43,750 Preference shares (note 12) ...................... 3,500,000 3,500,000 ----------- ----------- 4,394,321 4,612,448 ----------- ----------- Non-controlling interest ......................... 192,731 301,869 =========== =========== SHAREHOLDERS' EQUITY Shareholders' equity: Share capital (note 13)......................... 16,358,558 16,358,558 Deficit ........................................ (4,013,665) (2,658,767) ----------- ----------- Total shareholders' equity ....................... 12,344,893 13,699,791 ----------- ----------- Total liabilities and shareholders' equity ....... $16,931,945 $18,614,108 =========== ===========
See accompanying notes to consolidated financial statements. 3 INTERUNION ASSET MANAGEMENT LIMITED Consolidated Statements of Operations and Deficit (unaudited) (amounts expressed in Canadian dollars unless otherwise stated) (for the periods ended December 31) - --------------------------------------------------------------------------------
3 months ended 3 months ended 9 months ended 9 months ended December 31, December 31, December 31, December 31, 2000 1999 2000 1999 -------------- -------------- -------------- -------------- Revenue: Management fees....................... $ 1,491,594 $ 1,419,655 $ 4,536,573 $ 3,763,881 Other income (loss) (note 3 and 10)... (34,046) (35,095) 178,909 (71,327) ----------- ----------- ----------- ----------- 1,457,548 1,384,560 4,715,482 3,692,554 ----------- ----------- ----------- ----------- Operating expense Commission and incentives............. 216,639 272,188 626,067 741,711 Salaries and benefits................. 846,827 790,315 2,551,939 1,965,924 Marketing and advertising............. 61,977 86,240 155,390 368,444 Office and general.................... 270,635 295,906 930,198 961,495 Professional fees..................... 75,797 35,371 337,730 152,468 Amortization of management contracts.. 71,429 48,810 264,286 98,810 Amortization of capital assets........ 31,141 22,067 99,423 47,147 ----------- ----------- ----------- ----------- 1,574,445 1,550,897 4,965,033 4,335,999 ----------- ----------- ----------- ----------- Operating loss before undernoted...... (116,897) (166,337) (249,551) (643,445) ----------- ----------- ----------- ----------- Interest expense Current............................... 842 37,508 31,065 49,138 Long term............................. 47,433 11,946 142,171 16,433 ----------- ----------- ----------- ----------- 48,275 49,454 173,236 65,571 ----------- ----------- ----------- ----------- Loss before amortization of goodwill, non-controlling interest and income taxes................................ (165,172) (215,791) (422,787) (709,016) Income taxes (note 14) Current income taxes.................. 164,133 68,056 374,044 126,442 ----------- ----------- ----------- ----------- 164,133 68,056 374,044 126,442 ----------- ----------- ----------- ----------- Loss before amortization of goodwill and non-controlling interest.......... (329,305) (283,847) (796,831) (835,458) Amortization of goodwill ................ 197,666 149,902 595,606 369,798 ----------- ----------- ----------- ----------- Loss before non-controlling interest .... (526,971) (433,749) (1,392,437) (1,205,256) Non-controlling interest ................ (32,795) 897 (37,539) (74,814) Net loss, for the period ................ (494,176) (434,646) (1,354,898) (1,130,442) Deficit, beginning of period ............ (3,519,489) (1,686,462) (2,658,767) (990,666) Deficit, end of period .................. $(4,013,665) $(2,121,108) $(4,013,665) $(2,121,108) =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 4 INTERUNION ASSET MANAGEMENT LIMITED Consolidated Statements of Cash Flows (unaudited) (amounts expressed in Canadian dollars unless otherwise stated) (for the periods ended December 31) - --------------------------------------------------------------------------------
3 months ended 3 months ended 9 months ended 9 months ended December 31, December 31, December 31, December 31, 2000 1999 2000 1999 -------------- -------------- -------------- -------------- Cash flows from operating activities Net loss.................................... $ (494,176) $ (434,646) $(1,354,437) $(1,130,442) Adjustments for: Amortization of goodwill................. 197,666 149,902 595,606 369,798 Amortization of management contracts..... 71,429 48,810 264,286 98,810 Amortization of capital assets........... 31,141 22,067 99,423 47,147 Deferred rent inducements................ 790 790 2,370 1,108 Unrealized loss on investment............ 44,476 16,809 51,240 132,809 Provision for doubtful receivable........ 20,330 -- 20,330 -- Gain on sale/Adjustment to gain.......... 21,437 -- (226,590) -- Non-controlling interest................. (32,795) 897 (37,539) (74,814) Changes in non-cash working capital Increase in accounts receivable.......... 5,696 193,070 97,554 37,590 Increase (decrease) in accounts payable.. 763 121,945 15,979 (242,584) Increase (decrease) in income taxes payable............................... (55,505) 74,269 (121,939) 113,275 Other items, net......................... (53,262) (13,013) (71,509) (46,882) ----------- ---------- ----------- ----------- (242,010) 180,900 (665,226) (694,185) ----------- ---------- ----------- ----------- Cash flows from investing activities Acquisition of capital assets, net of disposals................................ (8,320) (4,929) (22,151) (268,302) Dispositions (acquisitions), net of cash acquired (disposed)...................... -- (4,087,173) 762,798 (4,401,403) Sale (purchase) of marketable securities.... (116,864) 4,181,220 82,745 (1,927,297) ----------- ---------- ----------- ----------- (125,184) 89,118 823,392 (6,597,002) ----------- ---------- ----------- ----------- Cash flows from financing activities Increase (decrease) in bank indebtedness.... (41,662) (44,647) (36,853) 49,729 Increase (decrease) in deferred revenue and inducements.......................... 9,682 (214,195) 15,254 (243,318) Repayments of long term borrowings.......... (4,500) (8,100) (158,563) (132,768) Dividend paid to non-controlling interest... (25,000) -- (75,000) -- ----------- ---------- ----------- ----------- (61,480) (266,942) (255,162) (326,357) ----------- ---------- ----------- ----------- Net increase (decrease) in cash ............... (428,674) 3,076 (96,996) (7,617,544) Cash at beginning of period ................... 857,299 515,099 525,621 8,135,719 ----------- ---------- ----------- ----------- Cash at end of period ......................... $ 428,625 $ 518,175 $ 428,625 $ 518,175 ----------- ---------- ----------- ----------- Supplemental Cash Flows Information Interest paid............................... $ 25,826 $ 29,455 $ 85,752 $ 45,572 Income taxes paid........................... 218,231 5,618 515,609 (336) =========== ========== =========== ===========
See accompanying notes to consolidated financial statements. 5 INTERUNION ASSET MANAGEMENT LIMITED Notes to Consolidated Financial Statements December 31, 2000 (amounts expressed in Canadian dollars unless otherwise stated) - -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS InterUnion Asset Management Limited, formerly Cluster Asset Management Limited, was incorporated on August 13, 1997 under the laws of Ontario. The principal business activities of InterUnion Asset Management Limited and its subsidiaries are discretionary and advisory portfolio management services for its clients and the acquisition of investment management firms. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Principles of Consolidation These consolidated financial statements include the accounts of InterUnion Asset Management Limited and its subsidiaries. The principal operating subsidiaries are Black Investment Management Ltd., Glen Ardith-Frazer Corporation, Guardian Timing Services Inc., Leon Frazer, Black & Associates Limited, P.J. Doherty & Associates Co. Ltd. and A.I.L. Investment Services Inc. (see note 3). Unless the context implies otherwise, the term "Company" collectively refers to InterUnion Asset Management Limited and all of its subsidiaries. b) Marketable Securities Marketable securities are valued at market and unrealized gains and losses are reflected in income. c) Management Contracts Management contracts are recorded at cost less accumulated amortization and are amortized on a straight-line basis over periods from 5 to 7 years. The Company assesses the value of its management contracts by considering the future economic benefit associated with the revenue capacity of the related contracted items. d) Capital Assets Capital assets are recorded at cost less accumulated amortization. Amortization is provided on the following basis: Computer equipment 30% declining balance Furniture and fixtures 20% declining balance Leasehold improvements over the term of lease on a straight line basis e) Goodwill Goodwill being the excess of cost over assigned values of net assets acquired, is stated at cost less amortization. Amortization is provided on a straight-line basis over periods from 15 to 20 years. The value of goodwill is evaluated regularly by reviewing, among other items, the undiscounted cash flows relating to the returns of the related business, and by taking into account the risk associated with the investment. Any impairment in the value of the goodwill is written off against operations. f) Revenue Recognition Revenue is recognized by the Company on an earned basis. For its services, the Company is entitled to an annual fee payable monthly or quarterly, depending on its agreement with the client. Fees are calculated based on the fair market value of the portfolio at the end of each month. Fees billed in advance are recorded as deferred revenue and taken into income evenly over the term of the stated billing. g) Financial Instruments The Company's financial instruments consist of cash, bank indebtedness, marketable securities, accounts receivable, investments, accounts payable and accrued liabilities, due to related parties, preference shares and long term debt. It is management's opinion that the Company is not exposed 6 INTERUNION ASSET MANAGEMENT LIMITED Notes to Consolidated Financial Statements December 31, 2000 (amounts expressed in Canadian dollars unless otherwise stated) - -------------------------------------------------------------------------------- to significant interest risks arising from these financial instruments. Unless otherwise noted, the fair value of these financial instruments approximates their carrying values. The Company is exposed to credit risk on the accounts receivable from its customers. Management has adopted credit policies in an effort to minimize those risks. The Company does not have a significant exposure to any individual customer or counter-party. h) Income Taxes As recommended by The Canadian Institute of Chartered Accountants, effective April 1, 1999, the Corporation adopted the liability method of accounting for income taxes. The provisions were applied retroactively with no significant impact to prior period financial statements. Under this method, future tax assets and liabilities are recognized for 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 tax purposes that are likely to be realized. i) Stock-Based Compensation Plan The Company's stock-based compensation arrangements are described in Note 13. No compensation expense is recognized for these arrangements when stock options are issued to employees. Any consideration paid by employees on exercise of stock options is credited to share capital. If stock options are repurchased from employees, the excess of the consideration paid over the carrying amount of the stock option cancelled is charged to retained earnings. j) Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's best estimates as additional information becomes available in the future. 3. ACQUISITIONS AND DISPOSITIONS The following are acquisitions made during the periods. These acquisitions were accounted for by the purchase method and consolidated from the respective effective date of acquisition, except where noted. Fiscal 2000 Acquisitions: o The Company purchased an additional 5,978 shares in Black Investment Management Limited on April 13, 1999 for cash considerations of $209,230. The purchase increased the Company's ownership to 50.5%. o The Company purchased an additional 3,000 shares in Black Investment Management Limited on July 22, 1999 for cash consideration of $105,000. o On November 19, 1999, the Company completed the acquisition of 75% of P.J. Doherty & Associates Co. Ltd. for total consideration of $7,632,022. Goodwill of $5,340,879 resulting from this acquisition is being amortized over 15 years. 7 INTERUNION ASSET MANAGEMENT LIMITED Notes to Consolidated Financial Statements December 31, 2000 (amounts expressed in Canadian dollars unless otherwise stated) - -------------------------------------------------------------------------------- The assets acquired and consideration given are as follows:
12 months ended March 31, 2000 --------------- Cash................................................... $ 44,849 Net assets (liabilities) acquired, at fair value....... 311,601 Management contracts................................... 2,000,000 ---------- 2,356,450 ---------- Consideration Cash.................................................. 4,324,310 Class A Preference Shares............................. 3,500,000 Direct acquisition expenses........................... 121,942 ---------- 7,946,252 ---------- Goodwill.................................................. $5,589,802 ==========
Fiscal 2001 Dispositions: o On September 29, 2000, the Company sold its share ownership in A.I.L. Investment Services Inc. (AILISI), a wholly owned subsidiary, for cash proceeds of $650,000. AILISI provided all management and administrative services for one mutual fund corporation. The primary asset of AILISI was a management contract with a net book value of $350,000 on the date of sale. Included in `Other income' is a net gain of $197,000 resulting from this transaction 4. MARKETABLE SECURITIES Marketable securities are recorded at market values and comprise the following:
December 31, March 31, 2000 2000 ------------ ---------- Bankers Acceptance................... $1,572,661 $1,554,482 Money Market Mutual Funds............ 303,196 393,309 Other Mutual Funds................... 33,198 44,009 ---------- ---------- $1,909,055 $1,991,800 ========== ==========
The Bankers Acceptances outstanding at December 31, 2000 mature between March 30 and April 30, 2001. Annualized yield on these securities range from 5.81% to 5.86%. 5. MANAGEMENT CONTRACTS Management contracts comprise the following:
December 31, 2000 March 31, 2000 --------------------------------------- -------------- Accumulated Net Book Net Book Cost Amortization Value Value ---------- ------------ ---------- ---------- Management contract (see note 3)............. $ -- $ -- $ -- $ 400,000 Non-competition agreement .. 2,000,000 309,524 1,690,476 1,904,762 ---------- ---------- ---------- ---------- $2,000,000 $ 309,524 $1,690,476 $2,304,762 ========== ========== ========== ==========
8 INTERUNION ASSET MANAGEMENT LIMITED Notes to Consolidated Financial Statements December 31, 2000 (amounts expressed in Canadian dollars unless otherwise stated) - -------------------------------------------------------------------------------- 6. CAPITAL ASSETS Capital assets comprise the following:
December 31, 2000 March 31, 2000 ------------------------------------------ -------------- Accumulated Net Book Net Book Cost Amortization Value Value ---------- ------------ ---------- ---------- Computer equipment .......... $ 633,100 $ 484,233 $ 148,867 $ 176,879 Furniture, fixtures and other 441,372 324,405 116,967 137,785 Leasehold improvements ...... 158,276 54,376 103,900 132,342 ---------- ---------- ---------- ---------- $1,232,748 $ 863,014 $ 369,734 $ 447,006 ========== ========== ========== ==========
7. INVESTMENTS Investments are carried at the lower of cost and fair value and include the following:
December 31, March 31, 2000 2000 ------------ ---------- 27,224 common shares of InterUnion Financial Corporation, ............ $10,236 $17,000 a shareholder of the Company, held by a subsidiary of the company (quoted market value -- $10,236, March 31, 2000 -- $36,997) 44,477 Class A preference shares of Kanata Capital Inc., a ........... 1 44,477 corporation controlled by minority shareholders of and held by a subsidiary (it is impractical to determine a fair value as the company is privately held and there is no ready market) Other investments .................................................... 10,000 10,000 ------- ------- $20,237 $71,477 ======= =======
8. GOODWILL
December 31, March 31, 2000 2000 ------------ ----------- Cost.......................................... $13,675,099 $13,762,035 Accumulated amortization...................... 1,653,790 1,058,184 ----------- ----------- $12,021,309 $12,703,851 =========== ===========
9. DEFERRED REVENUE AND LEASE INDUCEMENTS Deferred revenue and lease inducements compromise the following:
December 31, March 31, 2000 2000 ------------ --------- Deferred revenue...................... $ 95,484 $ 76,493 Deferred rent inducement.............. 44,004 45,371 -------- -------- $139,488 $121,864 ======== ========
A controlled company's lease at its Toronto premises provides for rent-free periods and periods of significantly reduced rent. In order to properly reflect these rental inducements over the term of the lease, the total lease payments have been aggregated and allocated over the term of the lease on a straight-line 9 INTERUNION ASSET MANAGEMENT LIMITED Notes to Consolidated Financial Statements December 31, 2000 (amounts expressed in Canadian dollars unless otherwise stated) - -------------------------------------------------------------------------------- basis. This treatment of rental inducements has given rise to deferred rent inducements which will be applied to income over the term of the lease. The controlled company has sub-let certain of its leased premises for the term of the lease. Included in deferred rent inducement are expenses associated with the sub-lease arrangement which have been deferred and will be amortized over the remaining life of the sub-lease. 10. RELATED PARTY TRANSACTIONS Transactions with shareholders, officers and directors of the Company, its subsidiaries and companies influenced by the aforementioned parties are considered related party transactions. Summary of the related party transactions affecting the accounts are as follows:
9 months ended 9 months ended December 31, December 31, 2000 1999 -------------- -------------- Revenue Management fees....................... $ 57,300 $ 87,500 Other income.......................... 29,700 -- Expenses Commissions and incentives............ 64,600 -- Interest expense...................... 131,200 20,000 Office and general.................... 152,000 141,900
These transactions are in the normal course of operations and are measured at the exchange values (the amount of consideration established and agreed to by the related parties), which approximate the arm's length equivalent values. Other related party transactions are as follows: Effective February 29, 2000, the Company acquired an additional 7,610 shares in Leon Frazer, Black & Associates Limited in exchange for 100% of the Company's investment in The Glen Ardith-Frazer Corporation. The transaction was accounted for using the Company's carrying value of $2,356,927 at February 29, 2000 and represents a continuity of interest. The acquisition increased the Company's direct ownership to 59.2%. On March 7, 2000, Black Investment Management Limited transferred 192 shares in Leon Frazer, Black & Associates to the Company as a financing set up fee. This transfer was not deemed to occur in the normal course of operations and has been measured at the carrying amount (net book value) of $41,170 of the shares issued as payment. Related party balances in the accounts are as follows:
December 31, March 31, 2000 2000 ------------ --------- Accounts receivable................. $ -- $ 71,460 Accounts payable.................... 34,080 46,880 Other liabilities................... 109,380 43,740
These balances are interest-free, unsecured, payable on demand and have arisen from the transactions referred to above (except for Other liabilities which is due on November 19, 2002 and has arisen on issuance of preferred shares). 10 INTERUNION ASSET MANAGEMENT LIMITED Notes to Consolidated Financial Statements December 31, 2000 (amounts expressed in Canadian dollars unless otherwise stated) - -------------------------------------------------------------------------------- 11. LONG-TERM DEBT
December 31, March 31, 2000 2000 ------------ -------- Demand installment loan, monthly principal payments of $2,700, interest at prime plus 2%. The loan was repaid during the current quarter............ $ -- $114,100 Demand bank loan, interest at prime +1/2%, monthly principal payments of $1,500 commencing January 2000..................................... 62,000 75,500 Bank loan, interest at prime +1-1/2%, 30 monthly principal payments of $1,095 commencing September 1999, secured by computer equipment.... -- 25,164 10% note payable to a director and non-controlling interest shareholder, due on demand.............. -- 5,799 -------- -------- 62,000 220,563 Less: current portion............................... 18,000 69,339 -------- -------- $ 44,000 $151,224 ======== ========
The demand bank loan is guaranteed by two of a subsidiary company's shareholders. 12. PREFERENCE SHARES 3,500 Cumulative Redeemable Convertible Class A Preference Shares (with a value equal to $1,000 per share) were issued on November 19, 1999 as consideration for the acquisition of P.J. Doherty & Associates Co. Ltd. These Class A Preference Shares are redeemable at the option of either the holders (commencing November 19, 2002, subject to certain provisions for early redemption arising from non-payment of dividends and an Initial Public Offering of the Common Shares of the Company prior to November 19, 2002) or the Company (commencing November 19, 2001) at $1,000 per share. In the instance that the Class A Preference Shares are redeemed by the Company, the holders are entitled to a cash premium of 2.5% per annum, calculated from the original issue date together with all dividends accruing thereon whether or not declared. At any time after issuance, each Class A Preference Share is convertible to 78.408 Common Shares (see note 13) at a conversion price of $12.7538 per Common Share (subject to certain provisions with respect to the issuance of additional Common Shares). Holders of these Class A Preference Shares are entitled to quarterly cumulative cash dividends of: i.) 2.50% per annum until the third anniversary of the original issue date; and ii.) 5.00% per annum, thereafter. Holders of these Class A Preference Shares are also entitled to an additional dividend of 2.50% per annum accruing until and payable on the earlier of: i.) the third anniversary of the original issue date; ii.) the date on which Common Shares are delivered to the holder pursuant to a conversion of Class A Preference Shares; and iii.) the redemption of such Class A Preference Shares. As these Class A Preference Shares are redeemable at the option of the holders, the value of these shares have been classified as long-term debt on the balance sheet. These Class A Preference Shares are collateralized by a pledge by the Company of 4,000,000 common shares in the capital of P.J. Doherty & Associates Co. Ltd. valued at $4,000,000. 13. SHARE CAPITAL The authorized share capital of the Company consists of an unlimited number of Common Shares and an unlimited number of Preference Shares (issuable in series). 11 INTERUNION ASSET MANAGEMENT LIMITED Notes to Consolidated Financial Statements December 31, 2000 (amounts expressed in Canadian dollars unless otherwise stated) - -------------------------------------------------------------------------------- The Preference Shares were voting, convertible, and rank in priority to the Common Shares with respect to the payment of dividends and the distribution of assets on liquidation, dissolution, or wind-up. The remaining conditions attached to the Preference Shares were to be fixed by the Directors of the Corporation before any series of Preference Shares are issued. During the prior year, the articles of the Company were amended to cancel the former Preference Shares and to authorize the issuance of an unlimited number of Class A and Class B Preference Shares, issuable in Series (note 12). Details of issued share capital are as follows:
Shares Amount ---------------------- ------------------------- Common Preference Common Preference --------- ---------- ----------- ----------- December 31, 1999 & 2000.............. 1,568,161 -- $16,358,558 $ -- ========= ========== =========== ===========
A common stock warrant was issued to the majority shareholder of the Company on March 8, 1999. Under the terms of the warrant, in the event that the assets under management as represented on March 8, 1999 are subsequently determined to be less than 95% of said representation, the majority shareholder is entitled to receive additional common shares of the Company. As at December 31, 2000, the rights represented by the common stock warrant were exercised by the majority shareholder. Consequently, management has estimated that approximately 44,000 common shares will be issued to the majority shareholder subsequent to the current period end. In addition, the transaction will prompt the option and preferred share adjustment clauses in the respective agreements. A total of approximately 2,871 additional stock options will be issued to present stock option holders and the conversion ratio for Class A Preference shareholders will be adjusted to approximately 80.61 common shares for each Class A preference share. During a prior fiscal period the Board of Directors of the Company approved the granting of options to employees to purchase up to 136,300 common shares of the Company which may be granted from time to time. Various vesting requirements are associated with each employee grant.
Vested Options Number of Options -------------------------------------- ------------------------------------------------- Outstanding, Outstanding, Fiscal year Vested expiry Exercise December 31, Issued December 31, granted date price 1999 (vested) Exercised 2000 ----------- ------------- -------- ------------ -------- --------- ------------ 1999 Jan 21, 2009 $16.13 36,300 -- -- 36,300 1999 Jan 21, 2009 $ 0.001 22,000 -- -- 22,000 2000 May 10, 2009 $13.00 6,417 11,000 -- 17,417
Unvested Options Number of Options -------------------------------------- -------------------------------------------------------------- Outstanding, Outstanding, Fiscal year Vested expiry Exercise December 31, December 31, granted date price 1999 Issued Vested Forfeited 2000 ----------- ------------- -------- ------------ -------- --------- --------- ------------ 1999 Jan 21, 2009 $ 0.001 26,000 -- -- 15,000 11,000 2000 May 10, 2009 $13.00 26,583 -- 11,000 - 15,583
12 INTERUNION ASSET MANAGEMENT LIMITED Notes to Consolidated Financial Statements December 31, 2000 (amounts expressed in Canadian dollars unless otherwise stated) - -------------------------------------------------------------------------------- Unvested options with an exercise price of $0.001 will vest on the basis of specific employee performance related to the acquisition of assets under management. The unvested options will expire on March 31, 2001 if performance criteria is not met. Unvested options with an exercise price of $13.00 will vest evenly over a three-year term. 14. INCOME TAXES The Company's effective income tax rate used in determining the provision for income taxes is as follows:
9 months ended 9 months ended December 31, December 31, 2000 1999 --------------- --------------- Combined statutory tax rate (recovery)...... (43.5)% (44.6)% Deduct: Non-deductible expenses.................. 11.9 4.5 Temporary differences.................... 18.9 9.8 Unrecognized losses carried forward...... 123.6 45.9 Non-taxable gains........................ (26.0) -- Other, net............................... 3.6 2.2 ---- ---- Effective income tax rate................ 88.5% 17.8% ==== ====
As at December 31, 2000, the consolidated group had approximately $1,662,000 of non-capital losses (March 31, 2000 -- $1,512,000) and $401,000 (March 31, 2000 -- $13,000) of capital losses which may be carried forward and utilized to reduce future years' taxable income and capital gains, respectively. These figures reflect the reduction of $507,000 in non-capital losses arising from the sale of AILISI. Capital losses can be carried forward indefinitely. The right to claim the non-capital losses expires as follows:
Expiry ------ 2006......................................... $ 281,000 2007......................................... 757,000 2008......................................... 624,000 ---------- 1,662,000 ==========
During the period, the Company's future income tax asset increased by $165,000 and totaled $966,000 (March 31, 2000 -- $801,000) after applying the statutory tax rate to the temporary differences and non-capital and capital losses described above. Subsequently, the net change to the valuation allowance during the period, and the total valuation allowance as at December 31, 2000 provided by the Company, increased by $165,000 and totaled $940,000 (March 31, 2000 -- $775,000) to reduce the future income tax asset, reflecting the uncertainty of full realization of the future income tax asset. 13 INTERUNION ASSET MANAGEMENT LIMITED Notes to Consolidated Financial Statements December 31, 2000 (amounts expressed in Canadian dollars unless otherwise stated) - -------------------------------------------------------------------------------- 15. LOSS PER SHARE Basic loss per share has been calculated on a weighted average basis of common shares outstanding during the period.
9 months ended 9 months ended December 31, December 31, 2000 1999 -------------- -------------- Weighted average common shares - basic calculation..................... 1,568,161 1,568,161
The calculations of fully diluted earnings per share is based upon the common shares outstanding during the period as above and not adjusted by the unexercised convertible Class A Preference shares and vested options in computing diluted loss per share because their effects were antidilutive.
9 months ended 9 months ended December 31, December 31, 2000 1999 -------------- -------------- Basic loss per share.................... $(0.86) $(0.72)
16. COMMITMENTS The Company has basic lease payments exclusive of operating costs for the premises and office equipment for the next five years as follows:
12 months ended December 31 --------------- 2001....................................... 305,000 2002....................................... 171,000 2003....................................... 112,000 2004....................................... 32,000 2005....................................... --
The Company has employment contracts and obligations with seven of its employees at the following annual base salaries amount:
12 months ended December 31 --------------- 2001....................................... 1,110,000 2002....................................... 709,000 2003....................................... 490,000 2004....................................... 449,000 2005....................................... --
17. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. Although the change in date has occurred, it is not possible to conclude that all aspects of the Year 2000 Issue that may affect the Company, including those related to customers, suppliers, or other third parties, have been fully resolved. 14 INTERUNION ASSET MANAGEMENT LIMITED Notes to Consolidated Financial Statements December 31, 2000 (amounts expressed in Canadian dollars unless otherwise stated) - -------------------------------------------------------------------------------- 18. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). Material differences at December 31 between Canadian GAAP and accounting principles generally accepted in the United States ("U.S. GAAP") are described below: a) Statements of Operations: The application of U.S. GAAP would have the following effect on net loss for the quarter and loss per common share as reported:
9 months ended 9 months ended December 31, December 31, 2000 1999 -------------- -------------- Net loss for the period, Canadian GAAP... $(1,354,898) $(1,130,442) Stock based compensation (i)............. (51,704) (149,250) ----------- ----------- Net loss for the period, U.S. GAAP....... $(1,406,602) $(1,279,692) =========== =========== Loss per common share under U.S. GAAP.... $ (0.89) $ (0.82)
(i) Stock-Based Compensation Expense The Company does not recognize compensation expense for stock options granted. Under U.S. GAAP, Accounting Principles Board ("APB") Opinion No. 25 requires that stock based compensation cost be recorded using the intrinsic-value method. FASB Statement of Financial Accounting Standard ("SFAS") No. 123 encourages the Company to record compensation expense using the fair-value method. In reconciling Canadian GAAP with U.S. GAAP, the Company has chosen to measure compensation costs related to stock options in accordance with APB 25. Under APB 25 the intrinsic-value of vested options would have been $0 (1999 -- $0). The intrinsic-value of unvested options is estimated to be $177,000 (1999 -- $597,000) with a vesting period of two years (1999 -- three years). Accordingly, had the Company recognized compensation cost related to the unvested options the intrinsic value would have been amortized over the vesting period, or in amounts of $88,500 (1999 -- $199,000) in each vesting year. Management's best estimate is that the performance conditions attached to the unvested options will be met. Total compensation cost for the period under APB 25 would have been $51,704 (1999 -- $149,250). Had the Company booked compensation expense in accordance with APB 25, basic loss per share would have been increased by $0.03 (1999 -- $0.10). (ii) Common Stock Warrant Under U.S. GAAP, the common shares to be issued to the majority shareholder subsequent to the current period end would be reflected as issued for no consideration as at December 31, 2000. The inclusion of these common shares would not have a significant impact on loss per common share reported under U.S. GAAP. 15 INTERUNION ASSET MANAGEMENT LIMITED Notes to Consolidated Financial Statements December 31, 2000 (amounts expressed in Canadian dollars unless otherwise stated) - -------------------------------------------------------------------------------- b) Other Disclosures: (i) Stock-Based Compensation Expense For unvested options issued in the prior fiscal year, the estimated fair value of the underlying equity at date of issuance was $13.00. As such, compensation costs under SFAS 123 would have totaled $0 (1999 -- $227,700) with a vesting period of three years. The fair value estimates were determined using the Black-Scholes option-pricing model. Valuation was based on a risk-free interest rate of 5.46%, an expected term of 10 years, an expected volatility of 30% and no expected dividends. Had the Company booked compensation expense, loss per common share would have been increased by $0 (1999 -- $0.15). (ii) Comprehensive Income FASB SFAS No. 130 introduced the concept of Comprehensive Income. Under this pronouncement, U.S. GAAP requires companies to report Comprehensive Income as a measure of overall performance. Comprehensive Income includes net income and all other changes in equity, exclusive of shareholders' contributions or any distributions to shareholders. The application of FASB SFAS N0. 130 would not have a material effect on net loss for the period and loss per common share as reported under U.S. GAAP. 19. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS Certain comparative figures have been restated to conform with the current period's presentation. 16