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