EX-1.6 7 ex1-6_23556.txt FINAL PROSPECTUS DATED AUGUST 28, 2000 PROSPECTUS DATED AUGUST 28, 2000. This prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons authorized to sell such securities. No securities commission or similar authority in Canada has in any way passed upon the merits of the securities offered hereunder and any representation to the contrary is an offence. The securities offered hereby have not been registered under the United States Securities Act of 1933, as amended (the "U.S. Securities Act"). Accordingly, such securities may not be offered or sold in the United States or to a U.S. person absent an exemption from such registration and this prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of such securities within the United States. See "Details of the Offering". New Issue BROCKER TECHNOLOGY GROUP LTD. 3,780,000 Common Shares Issuable upon the Exercise of Special Warrants 1,800,000 Half Warrants and 228,400 Agent's Options Brocker Technology Group Ltd. ("Brocker" or the "Corporation") is hereby qualifying for distribution 3,780,000 Common Shares and 1,800,000 Half Warrants ("Half Warrants") issuable upon the exercise of 3,600,000 outstanding special warrants ("Special Warrants"). The Special Warrants were previously issued in two private placements: The first private placement occurred on December 15, 1999 and consisted of the issuance of 1,800,000 Special Warrants (the "First Special Warrants") at a price of $2.70 per First Special Warrant which entitled the holder thereof to acquire one Common Share and one Half Warrant, at no additional cost, at any time until 4:00 p.m. (Edmonton time) (the "First Expiry Time") on the earlier of: (i) five days after the date the Corporation receives a receipt from the Alberta Securities Commission for the filing of this prospectus; and (ii) December 15, 2000. Two Half Warrants entitle the holder thereof to purchase one additional Common Share at a price of $3.15 per Common Share on or before June 15, 2001. The First Special Warrants will be deemed to have been exercised at the First Expiry Time see "Details of the Offering". The second private placement of Special Warrants occurred on January 21, 2000 and consisted of the issuance of 1,800,000 Special Warrants (the "Second Special Warrants") at a price of $6.25 per Second Special Warrant, pursuant to a special warrant indenture dated January 21, 2000 (the "Special Warrant Indenture") between the Corporation and Montreal Trust Company of Canada (the "Trustee"). See "Details of the Offering". Each Second Special Warrant entitles the holder thereof to acquire 1.1 Common Shares, at no additional cost, at any time until 4:00 p.m. (Edmonton time) (the "Second Expiry Time") on the earlier of: (i) the fifth day following the date upon which a receipt for the final prospectus is issued by the securities commission in each of the provinces of Alberta, British Columbia and Ontario (the "Filing Provinces"); and (ii) January 21, 2001, subject to adjustment in certain events. Any Second Special Warrants not exercised prior to the Second Expiry Time shall be deemed to have been exercised immediately prior to the Second Expiry Time without any further action on the part of the holder. This prospectus also qualifies for distribution the 228,400 Options (the "Agents' Options"), issuable pursuant to the exercise of the Agent's Special Option and Undertakings, in connection with the offering of the Second Special Warrants. In connection with the Offering of the First Special Warrants the Corporation issued Warrants (the "Finders' Warrants) to acquire 486,000 Common Shares. If all of the Special Warrants, Half Warrants, Finders' Warrants and Agent's Options were exercised in full, the Corporation would be required to issue a total of 5,394,000 Common Shares
--------------------------------------------------------------------------------------------------- Price to Public Agent's/Finder's Net Proceeds Fee (1)(2)(3) to Brocker(4) --------------------------------------------------------------------------------------------------- Per First Special Warrant $2.70 $0.19 $2.51 --------------------------------------------------------------------------------------------------- Total Offering of First Special Warrants $4,860,000 $340,200 $4,519,800 --------------------------------------------------------------------------------------------------- Per Second Special Warrant $6.25 $0.4375 $5.8125 --------------------------------------------------------------------------------------------------- Total Offering of Second Special Warrants $11,250,000 $784,350 $10,465,650 ---------------------------------------------------------------------------------------------------
Notes: (1) In addition to the fee paid in connection with the offering of the First Special Warrants, the Corporation also granted Finders' Warrants to acquire 486,000 Common Shares at a price of $3.15 per share on or before June 15, 2001. (2) In the offering of the Second Special Warrants, the Agent and the Sub-Agents were paid aggregate fees equal to $784,350, being 7% of the gross proceeds raised by the sale by the Agent and Sub-Agents of the Second Special Warrants. The Agent was also reimbursed its legal fees and expenses. (3) In addition to the Agent's and Sub-Agents, fee, the Corporation has also granted to the Agent an option entitling the Agent to acquire a further option exercisable to acquire in the aggregate 200,000 Common Shares of the Corporation at a price of $6.25 per Common Share until January 21, 2002, and granted to the Sub-Agents Undertakings to grant an option to the Sub-Agents to acquire an aggregate of 28,400 Common Shares at a price of $6.25 per share until January 21, 2002. This prospectus also qualifies the distribution of the Agents' Options to be granted upon exercise of the Agent's Special Option and the Undertakings. See "Details of Offering". (4) Before deducting expenses of the issue estimated to be $550,000, which will be paid from the general funds of the Corporation. 2 The Special Warrants were sold to investors pursuant to prospectus exemptions under applicable securities legislation. The sale of the First Special Warrants was completed through various finders and the sale of the Second Special Warrants was completed through the Agent and Sub-Agents. No commission or fee will be payable to the Agent or the Sub-Agents by the Corporation in connection with the distribution of the Common Shares upon the exercise of Special Warrants. See "Details of the Offering". The issue price of $2.70 per First Special Warrant was determined by the Corporation based upon the prevailing market price, and the issue price of $6.25 per Second Special Warrant was determined by negotiation between the Corporation and the Agent, respectively, based upon the prevailing market price. There is no market through which the Special Warrants may be sold. The currently outstanding Common Shares are listed on the Toronto Stock Exchange under the symbol "BKI" and are listed on Nasdaq National Market under the symbol "BTGL". On November 23, 1999 and December 7, 1999, the respective dates prior to the dates on which the issues of the First Special Warrants and Second Special Warrants were applied for, the closing price of the Common Shares on the Toronto Stock Exchange (as reported by such exchange) was $2.99 and $6.25, respectively. See "Price Range and Trading Volume of Common Shares". An investment in the Common Shares should be considered speculative due to a number of risk factors. See "Risk Factors". The effective offering price of $2.70 per Common Share for the First Special Warrants, and $6.25 per Common Share for the Second Special Warrants exceeds the net tangible book value per Common Share as at December 31, 1999, after giving effect to the issue of Common Shares upon exercise of the Special Warrants and Warrants under this offering, by $2.11 per Common Share or 78% and $5.33 per Common Share or 85%, respectively. See "Dilution". Certificates for the Common Shares will be available for delivery upon the exercise of the Special Warrants. Certain legal matters relating to the offering of the Special Warrants and the Common Shares and Warrants issuable upon exercise thereof have been passed upon on behalf of the Corporation by Chamberlain Hutchison, Edmonton, Alberta and on behalf of the Agent by Stikeman Elliott, Toronto, Ontario. All dollar amounts are in Canadian dollars unless otherwise indicated. In the opinion of Chamberlain Hutchison, counsel to the Corporation, the Common Shares, will, when listed on a prescribed stock exchange, be qualified investments for a trust governed by a registered retirement savings plan, a registered retirement income fund or a deferred profit sharing plan under the Income Tax Act (Canada) and the regulations thereunder. 3 TABLE OF CONTENTS TABLE OF CONTENTS 3 SUMMARY 5 SELECTED CONSOLIDATED FINANCIAL INFORMATION 7 GLOSSARY 8 THE CORPORATION 11 BUSINESS OF THE CORPORATION 11 Industry Overview 11 Business of the Corporation 12 Business Divisions 12 History 12 Additional Information Concerning Business Divisions 12 Vendor Services 13 Professional Services 14 Application Development 15 Application Hosting and Related Products 17 Sales and Customers 17 Research and Development 17 Intellectual Property 18 Employees 18 CERTAIN INFORMATION CONCERNING ACQUISITIONS 19 DESCRIPTION OF PROPERTIES 20 MANAGEMENT'S DISCUSSION OF OPERATING RESULTS 19 Overview 20 Comparison of Year Ended March 31, 2000, to Year Ended March 31, 1999 21 Comparison of Year Ended March 31, 1999, to Year Ended March 31, 1998 25 Comparison of Year Ended March 31, 1998 to Year Ended March 31, 1997 27 Selected Results of Operations 29 DETAILS OF THE OFFERING 29 USE OF PROCEEDS 31 DESCRIPTION OF SHARE CAPITAL 31 CAPITALIZATION 32 DIRECTORS AND OFFICERS 33 EXECUTIVE COMPENSATION 35 STOCK OPTIONS 38 INDEBTEDNESS OF DIRECTORS AND OFFICERS 39 PRINCIPAL SHAREHOLDERS 39 ESCROWED SHARES 40 PROMOTERS 41 LEGAL PROCEEDINGS 41 DIVIDEND RECORD AND POLICY 41 PRIOR SALES 41 PRICE RANGE AND TRADING VOLUME OF COMMON SHARES 42 RISK FACTORS 43 DILUTION 48 INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS 48 MATERIAL CONTRACTS 48 AUDITORS, TRANSFER AGENT AND REGISTRAR 49 4 PURCHASERS' STATUTORY RIGHTS 49 CONTRACTUAL RIGHT OF ACTION FOR RESCISSION 49 FINANCIAL STATEMENTS 50 CERTIFICATE OF THE CORPORATION 85 CERTIFICATE OF THE AGENT 86 5 SUMMARY The following summary information must be read in conjunction with the detailed information appearing elsewhere in this prospectus. Reference should be made to the Glossary that follows this Summary for the definitions of certain terms with initial capital letters used in this prospectus and in the Summary. THE CORPORATION Since its incorporation, the Corporation has been in the business of acquiring and managing companies in the IT & T industry. The principal revenue producing activities of the Corporation are the provision of vendor services for the suppliers of computer software, hardware and telecommunications solutions in Australia and New Zealand. The Corporation's business is structured as four business divisions: Vendor Services, Application Hosting, Application Development and Professional Services. The Corporation actively manages the individual business divisions within these business divisions through its wholly-owned subsidiary, Brocker Technology Group (NZ) Limited. The business divisions are focused on delivering solutions to their respective customers while utilizing the centralized business infrastructure for distribution and logistics, finance, human resource and marketing functions. THE OFFERING Issue: 3,780,000 Common Shares issuable upon the exercise of the Special Warrants and 1,800,000 Half Warrants and 228,400 Agent's Options. Special Warrants: A total of 1,800,000 First Special Warrants have been issued pursuant to prospectus exemptions under applicable securities legislation at a price of $2.70 per First Special Warrant, for an aggregate consideration of $4,860,000. See "Details of the Offering". Since the date of issue, no First Special Warrants have been exercised. A total of 1,800,000 Second Special Warrants have been issued pursuant to prospectus exemptions under applicable securities legislation at a price of $6.25 per Second Special Warrant, for an aggregate consideration of $11,250,000. The Second Special Warrants were issued pursuant to the Special Warrant Indenture. See "Details of the Offering". Since the date of issue, no Second Special Warrants have been exercised. Exercise Details: Each First Special Warrant entitles the holder to acquire, at no additional cost to the holder, one Common Share and one Half Warrant at any time until 4:00 p.m. (Edmonton Time) on the day which is the earlier of: (i) five days after the date the Corporation receives a receipt from the Alberta Securities Commission for the filing of a prospectus which qualifies the distribution of the Common Shares and Half Warrants issuable on the exercise of the First Special Warrants; and (ii) December 15, 2000. Two Half Warrants will entitle the holder thereof to purchase one additional Common Share at a price of $3.15 per Common Share on or before June 15, 2001. Any First Special Warrants not exercised prior to the First Expiry Time shall be deemed to have been exercised immediately prior to the First Expiry Time without any further action on the part of the holder. See "Details of the Offering". Each Second Special Warrant entitles the holder thereof to acquire, at no additional cost to the holder, 1.1 Common Shares at any time until 4:00 p.m. (Edmonton time) on the earlier of: (i) the fifth day following the date upon which a receipt for this prospectus is issued by the securities commission in each of the Filing Provinces; and (ii) January 21, 2001. Any Second Special Warrants not exercised prior to the Second Expiry Time shall be deemed to have been exercised immediately prior to the Second Expiry Time without any further action on the part of the holder. See "Details of the Offering". 6 Use of Proceeds: The net proceeds to the Corporation from the sale of the First Special Warrants were approximately $4,499,800 after deducting fees in the amount of $340,200 paid by the Corporation to finders and offering expenses estimated at $20,000. The Corporation intends to use the net proceeds for working capital and general corporate purposes. See "Use of Proceeds". The net proceeds to the Corporation from the sale of Second Special Warrants were approximately $9,915,650 after deducting fees in the amount of $784,350 paid by the Corporation to the Agent and Sub-Agents and offering expenses estimated at $550,000. The Corporation intends to use the net proceeds for working capital, general corporate purposes and strategic acquisitions. See "Use of Proceeds". Risk Factors: An investment in the Common Shares should be considered speculative due to a number of risk factors including: competition in the information technology and telecommunication industry; reliance on a single customer for the majority of the Corporation's revenues; currency and exchange rates, rapidly changing technology and evolving industry standards; dependence on proprietary technology and risk of third party claims for infringement; management of growth; reliance on management; dependence on key personnel; the need for future financing; potential fluctuations in quarterly results; risks related to acquisitions; dependence upon international sales; and concentration of share ownership. See "Risk Factors". 7 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following is a summary of selected financial information of the Corporation for the periods indicated.
------------------------------------------------------------------------------------------------------------------------------------ Years Ended March 31, (audited) ------------------------------------------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------------------------------------ (in thousands of dollars, except per share data) ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Revenue $136,323 $133,303 $70,811 $50,110 $22,932 $3,931 ------------------------------------------------------------------------------------------------------------------------------------ Gross Profit 17,388 17,691 14,401 9,099 5,489 814 ------------------------------------------------------------------------------------------------------------------------------------ Net Income (loss) (429) 514 797 838 323 (146) ------------------------------------------------------------------------------------------------------------------------------------ Net Income (loss) Per Share (0.04) .03 .06 .06 .04 (.02) ------------------------------------------------------------------------------------------------------------------------------------ Balance Sheet Data ------------------------------------------------------------------------------------------------------------------------------------ Total Assets 61,529 50,743 32,499 19,926 11,725 8,223 ------------------------------------------------------------------------------------------------------------------------------------ Long Term Debt 1,872 2,284 881 115 111 1,080 ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 40,387 44,074 26,657 14,042 7,123 7,382 ------------------------------------------------------------------------------------------------------------------------------------ Shareholders' Equity 21,142 6,669 5,842 5,884 4,602 841 ------------------------------------------------------------------------------------------------------------------------------------
Brocker maintains its books and records in Canadian Dollars while its subsidiaries maintain their books and records in New Zealand or Australian Dollars, as appropriate, which are reconciled to Canadian Dollars, using appropriate exchange rates determined in accordance with generally accepted accounting practices. Except as otherwise specified, all monetary amounts referred to herein are expressed in Canadian Dollars 8 GLOSSARY The following terms used throughout this prospectus have the following meanings: "1 World' means 1 World Systems Limited (formerly Microchannel Limited); "Agency Agreement" means the agreement dated January 21, 2000 with respect to the Second Special Warrants made among the Corporation, the Agent and the Trustee, as more particularly described under the heading "Details of the Offering"; "Agent" means Thomson Kernaghan & Co. Limited; "Agents' Options" means the options to be granted to the Agent and the Sub-Agents pursuant to the Agents' Special Option and the Undertakings to acquire an aggregate of 228,400 Common Shares at a price of $6.25 per share, until January 21, 2002; "Agent's Special Option" means the option granted to the Agent to acquire Agent's Options to acquire 200,000 Common Shares at a price of $6.25 per share, until January 21, 2002; "B2B" means business to business; "Brocker" or the "Corporation" means Brocker Technology Group Ltd.; "Brocker Australia" means Brocker Investments (Australia) Proprietary Limited; "Brocker Financial" means Brocker Financial Limited; "Brocker NZ" means Brocker Technology Group (NZ) Limited; "Brocker Technology Park" means the land on which the Corporation's head office in New Zealand, is located.; "Common Share" or "Common Shares" means, respectively, one or more common shares in the capital of Brocker; "Easy PC" means Easy PC Computer Rental Limited; "e-commerce" means electronic commerce; "Filing Provinces" means Alberta, British Columbia and Ontario; "Finders' Warrants" means the Warrants to acquire 486,000 Common Shares granted to finders in connection with the offering of the First Special Warrants; "First Expiry Time" means 4:00 p.m. (Edmonton time) on the earlier of: (i) the fifth day following the date upon which the Corporation receives a receipt from the Alberta Securities Commission for the filing of this prospectus; and (ii) December 15, 2000; "First Special Warrants" means the 1,800,000 Special Warrants of the Corporation issued December 15, 1999, each of which entitle the holder thereof to acquire one Common Share and one Half Warrant, at no additional cost, at 9 any time until the First Expiry Time "GAAP" means generally accepted accounting principles; "Half Warrants" means the half warrants to be issued upon the exercise of the First Special Warrants, two of which will entitle the holder to purchase one Common Share at a price of $3.15 per share on or before June 15, 2001;. "Highway Technology" means Highway Technology Limited; "ICS" means Industrial Communications Service Limited; "IT&T" means information technology and telecommunications; "Offering" means the 4,266,000 Common Shares, 1,800,000 Half Warrants and 228,400 Agent's Options being qualified pursuant to this prospectus and any amendment thereto; "Pritech" means, collectively, Pritech Corporation Limited and Pritech Australia Properties Limited; "Qualification Date" means May 20, 2000; "Rental Finance Liability" means the liability recorded for the potential recourse from defaults by customers under finance agreements for equipment purchases. See note 7 to the Financial Statements; "Rental Recourse Dealer Deed" means an agreement between the Corporation and an independent finance company pursuant to which the risk of recourse from defaults under individual finance agreements has been transferred to that finance company. See note 7 to the Financial Statements; "Sealcorp New Zealand" means Sealcorp Computer Products Limited; "Second Expiry Time" means 4:00 p.m. (Edmonton time) on the earlier of: (i) the fifth day following the date upon which a receipt for this prospectus is issued by the securities commission in each of the Filing Provinces and (ii) January 21, 2001. "Second Special Warrants" means the 1,800,000 Special Warrants issued January 21, 2000 pursuant to the Special Warrant Indenture and each of which entitles the holder thereof to acquire 1.1 Common Shares, at no additional cost, at any time until the Second Expiry Time; "Special Warrants" means, collectively, the First Special Warrants and the Second Special Warrants; "Special Warrant Indenture" means the Special Warrant Indenture dated January 21, 2000 between the Corporation and the Trustee; "STG" means Sealcorp Telecommunications Group Limited; "Sub-Agents" means the agents, other than the Agent, involved in the private placement of the Second Special Warrants; "Tech Support" means Tech Support Limited; 10 "Telecom" means Telecom New Zealand; "Trustee" means Montreal Trust Company of Canada; "Undertakings" means the undertakings by the Corporation to grant options to Sub-Agents to purchase an aggregate of 28,400 Common Shares at a price of $6.25 until January 21, 2002; "Y2K" means year 2000; 11 THE CORPORATION Brocker was incorporated pursuant to the Business Corporations Act (Alberta) as Brocker Investments Ltd. on November 23, 1993. On March 29, 1996, Brocker amended its articles to create the Series A Preferred Shares. On October 10, 1997 and November 14, 1997 the Corporation further amended its articles to amend some of the rights attaching to the Series A Preferred Shares. On December 3, 1998 the Corporation amended its articles to change its name to Brocker Technology Group Ltd. The Corporation's registered and records office is located at 1310 Merrill Lynch Tower, 10205 - 101 Street, Edmonton, Alberta, T5J 2Z2 and the head office in Canada is located at 2150 Scotia One, 10060 - Jasper Avenue, Edmonton, Alberta, T5J 3R8. The Corporation's head office in New Zealand and principal place of business is located at Brocker Technology Park, 17 Kahika Road, Beachhaven, Auckland, New Zealand. The Corporation has 15 wholly-owned operating subsidiaries and has minority interests in two companies. See "Business of the Corporation - Business Divisions". References herein to Brocker or the Corporation include its subsidiaries, as appropriate. The following chart sets out the intercorporate relationships of the Corporation and its subsidiaries.
---------------------------------- Brocker Technology Group Ltd. ---------------------------------- ---------------------------------- Brocker Technology Group (NZ) Ltd. ---------------------------------- 20% ------------------ -------- ----------- ----------- -------- -------------- ----------- ------------ ------- ------------ Sealcorp Sealcorp Brocker Brocker Easy PC Industrial Pritech Powercall 1 World Highway Telecommunications Computer Financial Investments Computer Communications Corporation Technologies Systems Technologies Group Limited Products Limited (Australia) Rentals Service Limited Limited Limited Limited Limited Pty Ltd. Limited Limited ------------------ -------- ----------- ----------- -------- -------------- ----------- ------------ ------- ------------ ----------- ----------- ----------- ------------ Sealcorp Imagecraft Pritech Powercall (Australia) Australia Corporation Technologies Pty Ltd. Pty Ltd. Australia Australia Pty Ltd. Pty Ltd. ----------- ----------- ----------- ------------
In addition the following companies are 100% beneficially owned by Brocker NZ, but they do not have any business activities at present. Brocker Properties Limited Candia Holdings Limited Beachlands Holdings Limited Technologis Finance Ltd. BUSINESS OF THE CORPORATION Industry Overview The products and services of the Corporation are sold to the IT & T industry in Australia and New Zealand. Management of Brocker believes that the IT&T industry is one of the fastest growing industries in Australia and New Zealand. The IT&T industry provides its customers with computer software and hardware solutions in addition to telecommunications solutions. IT&T industry products include computer hardware, such as computer network servers and desktop computers, software, telephone systems, voice mail systems, cellular phone systems and facsimile 12 systems. IT & T industry services include consulting, technical support and project management services related to IT & T products and their implementation. Business of the Corporation The Corporation provides technology-related products and services to the IT&T industry. Its principal business activities include (i) the development and sale of technology products, technology-related services and telecommunications products and services, and (ii) the distribution of technology and telecommunications products developed and manufactured by third parties in New Zealand and Australia. The Corporation is currently developing intellectual property for use in e-commerce applications. Brocker's management believes that changes in the economic and business environments of the Australian and New Zealand markets and the rapid evolution and adoption of the Internet and Internet technologies should enable the Corporation to reduce its reliance on the physical distribution of third party products and increase its development and sale of e-commerce products. The Corporation is investing in hardware, software and training to build the infrastructure that management believes is necessary to accommodate the development and growth of its business. Business Divisions From the Corporation's inception in November 1993, Brocker has been acquiring and managing businesses in the IT&T industry in New Zealand and Australia. Brocker actively manages the individual businesses within its four business divisions through its wholly owned subsidiary, Brocker NZ. Brocker has concentrated its business into four business divisions composed of the Application Hosting division, the Application Development division, the Professional Services division and the Vendor Services division. The business divisions utilize Brocker's centralized business infrastructure for distribution and logistics, finance, human resource and marketing functions. History Brocker was incorporated in 1993 and commenced operations in 1994 by acquiring Sealcorp New Zealand, an established computer hardware and software distribution company. The Corporation subsequently expanded its business through acquisitions and internal growth. Brocker has completed a total of eleven acquisitions, including five completed since the beginning of fiscal 1998. Additional Information Concerning Business Divisions The Application Development division is responsible for the sales and marketing of intellectual property products developed by Brocker, with such products available as Supercession, Feedback!, Powerphone, Bloodhound and Movieline. This Division includes the design operations of ICS and the design and development operations of Powercall, which offers the custom design of modified wireless telecommunication products to meet specific customer requirements, and a limited number of wireless telecommunication products for sale that the Corporation has developed. The Professional Services division includes the operations of EasyPC, Pritech and Pritech Australia. Through this division, Brocker provides computer consulting services to business and government clients in New Zealand and Australia. These services include project management, software development, and software implementation, customization and integration. The Application Hosting division is responsible for the sales and marketing of hosting services including such products as Feedback!, Powerphone, Bloodhound, various applications in Lotus Notes to enable tertiary institutions to provide distance learning modules to their clients. At present this division is operated through Tech Support. The Vendor Services division includes the operations of Sealcorp New Zealand, STG, 1World, Sealcorp Australia and the services operations of ICS. Through this division, Brocker distributes cellular telephones and other wireless telecommunication products in New Zealand, and computer software, hardware and peripheral products in New Zealand and Australia. Through this division, Brocker also offers value-added services such as technical advice relating to product selection, networking and product compatibility. Through this division, Brocker also offers a full range of repair services for cellular mobile telephones and certain other telecommunication equipment. 13 The following diagram sets out the subsidiaries whose operations form part of each business division.
----------------------------- BROCKER TECHNOLOGY GROUP LTD. ----------------------------- ----------------------- ----------------------- ----------------------- ----------------------- APPLICATION DEVELOPMENT VENDOR SERVICES APPLICATION HOSTING PROFESSIONAL SERVICES ----------------------- ----------------------- ----------------------- ----------------------- ------------------- ------------------- ------------------- ------------------- Powercall STG Tech Support Brocker Financial Technologies Limited. ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ICS Sealcorp Pritech (Design) New Zealand ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- Imagecraft 1 World Easy PC Australia Pty Ltd. ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- Powercall Sealcorp Pritech Technologies (Australia) Corporation Australia Pty Ltd Pty Ltd. Australia ------------------- ------------------- ------------------- ------------------- ------------------- Highway ICS Technology (Services) ------------------- -------------------
Set forth below is additional information concerning the Corporation's four business divisions. Vendor Services Telecommunication Products Brocker is the largest distributor of wireless telecommunication hardware products in New Zealand. Management believes that its sales account for approximately 65% of Telecom's sales of cellular phones in New Zealand. Telecom is the largest provider of cellular connections in New Zealand, holding a market share of approximately 65%. The products that are supplied by Brocker to Telecom include cellular phones, related accessories and radio pagers consisting of a variety of brands, including Ericsson, Motorola, Nokia and Phillips. The principal customers for these products are dealers and retail stores. In fiscal 2000, the Corporation's revenues from the sale of telecommunication products amounted to approximately $61 million and represented approximately 44.5% of total revenues. Brocker began distributing wireless telecommunication hardware products in 1997 when Telecom, which at the time was also a distributor of mobile phones, asked the Corporation to take over its distribution function. Brocker entered into a distribution services agreement with Telecom that continues to provide substantially reduced business risks for Brocker. In return for this the Corporation limits its net profit margin percentage relating to the distribution of wireless telecommunications products to a level that is lower than the average margin in the industry. In fiscal 2000, the Corporation's gross profit margin from the sale of wireless telecommunication hardware products was approximately 7.4%. A portion of Brocker's sales are made to parties that have submitted their purchase orders to Telecom rather than to the Corporation. In these cases, Telecom transmits the order to Brocker for fulfillment, the Corporation ships the product directly to the customer as agent for Telecom, and Telecom pays the purchase price to Brocker as the buyer. Purchase orders transmitted to Brocker by Telecom amounted to approximately $23.1 million and accounted for approximately 16.9% of the Corporation's total revenues in fiscal 2000. 14 Brocker also operates a service center in New Zealand at which it offers a full range of repair services for cellular mobile telephones. The Corporation is at present the only authorized provider of warranty repair services in New Zealand for Ericsson and Nokia cellular mobile telephones pursuant to an agreement provided by the suppliers to the Corporation. Computer-Based Technology Products Brocker distributes computer-based technology products in New Zealand and Australia. The products that are offered include: (i) business software; (ii) hardware devices such as desktop personal computers, notebook computers, network servers, and workstations; and (iii) computer peripherals such as monitors, printers and scanners. The Corporation offers value-added services, such as technical advice relating to product selection, installation, networking and product compatibility. In fiscal 2000, revenue from the sale of computer-based technology products and related value-added services amounted to approximately $65.7 million and represented approximately 48.2% of total revenue. Brocker obtains its computer-based technology products from some of the world's leading software publishers and computer product manufacturers. Its suppliers include: Accpacc International Ltd., Acer Computer NZ Limited, Autodesk Australia Pty Ltd. Company Computer NZ Ltd., Dantz Development Corporation, Digi International, Hitachi Data Systems NZ Ltd., Inprise (NZ) Ltd., Intel Semicondutor Ltd., IBM NZ Ltd., Lotus Development NZ Ltd., Network Computing Devices Inc., Novell Inc., Shiva Corporation, SGI NZ Ltd and Symantec Corporation Brocker principally distributes computer-based technology products to dealers, systems integrators and retail stores. Professional Services Brocker provides computer consulting services to business and government clients in New Zealand and Australia. Its services include project management, software development, and software implementation, customization, and integration. The Corporation has developed specialized expertise in a number of areas, including (i) the management of large projects for government agencies and large corporations; (ii) implementing, customizing and configuring solutions based on Lotus Notes, a software program developed by Lotus Development Corporation, (iii) enabling B2B e-commerce, from business planning through the delivery and implementation of comprehensive e-commerce systems, (iv) the design, development and ongoing management and hosting of internet site development for large corporations and government departments, (v) consulting services to technology companies, including an internet portal business selling, marketing and delivering technology advice in New Zealand and Australia, and object orientated software development companies in New Zealand, (vi) outsourcing of the management of computer networks and software applications to large corporations. The Corporation has generally leveraged the development of software applications for large corporations and government departments by retaining the intellectual property associated with software applications, to allow the ability to market, sell and implement selected software applications to new customers. Brocker obtains technology products from some of the worlds leading software and hardware producers. Its suppliers include IBM (NZ) Ltd., Lotus Development NZ Ltd., Microsoft (NZ) Ltd., Inprise Corporations (Australia) Pty Ltd., ABT Corporation Ltd., and GWI Corporation Ltd.. Brocker currently has approximately 35 consultants on staff. In fiscal 2000, revenues from computer consulting services amounted to approximately $5.5 million and represented approximately 4.0% of total revenues. 15 Application Development Brocker develops and markets proprietary software applications. Management's principal focus at present is on applications that facilitate business to business, or B2B e-commerce and business-related communications. The Corporation recently released its first B2B e-commerce product, which is named "Supercession". Supercession is a software application that enables a user to build an Internet site that can support a wide variety of B2B e-commerce transactions and functions. These include (i) selling products and processing payment transactions, (ii) creating and maintaining an online catalogue, and (iii) allowing customers to access a wide range of information such as data relating to products, inventory, shipping, and account status. The current version of Supercession is designed to integrate with certain finance and distribution management software, commonly referred to as enterprise resource planning or ERP software, which is sold by PeopleSoft, Inc. Supercession can also be customized to integrate with other ERP software. In addition to this product, Brocker, through its Australian operations, is developing a similar product to integrate with both client and host systems; development of this product is still in its infancy. Management is seeking to commercialize the Corporation's products by either marketing the products or marketing services based on the products. In fiscal 2000, revenues from the sale of proprietary software applications and related services amounted to approximately $1.4 million and represented approximately 1.0% of total revenues. Set forth below is certain information concerning Brocker's principal proprietary software applications and related services. The Internet Enterprise Suite Brocker is developing the Internet Enterprise Suite ("IE Suite"), an Internet-based suite of products designed to meet the needs of medium to large sized corporations. The IE Suite centralizes functions of sales and marketing and supports electronic transactions between the user and its customers while storing customers' profiles and product preferences into a secure database. The IE Suite will allow sales and marketing professionals to remotely access sales and marketing information, including inventory data, account information and product orders. Management of Brocker anticipates that the IE Suite will encompass some e-commerce software products and applications that have been developed by its various business divisions. Supercession The Corporation recently released "Supercession", its first B2B e-commerce product, which is targeted at businesses that desire to enter or enhance their existing capabilities within the e-commerce market by integrating their management system with the Internet. Supercession is a software application that provides a company with an Internet site that can support a wide variety of B2B e-commerce transactions and functions interacting with the company's ERP system. These transactions include: (i) selling products and processing payment transactions, (ii) creating and maintaining an online catalogue, and (iii) allowing customers to access a wide range of information such as data relating to products, inventory, shipping, and account status. The current version of Supercession is designed to interact with certain finance and distribution management software, commonly referred to as enterprise resource planning or ERP software, that is sold by PeopleSoft, Inc. and is used by various businesses around the world. This means that data can be transferred between Supercession and PeopleSoft's software in an interactive environment across the Internet. Brocker can also customize Supercession to integrate with other ERP software. The Corporation commenced marketing Supercession in November of 1999 and has not yet made any sales of this product to third parties, but the system is in use by two of Brocker's subsidiaries, STG and Sealcorp New Zealand Feedback! Feedback! is an Internet software program that allows employees to obtain feedback concerning their performance from multiple sources such as supervisors, co-workers, and customers. Feedback!: (i) allows an employee to select a group of people from whom feedback is desired, (ii) contacts these people by e-mail and asks each to complete an electronic questionnaire and to return it by e-mail, and then (iii) when sufficient questionnaires have been returned, automatically collates the results and e-mails them to the employee for review. Feedback! can 16 also be applied to other uses, such as project management, research and product testing, and workplace assessment. The Corporation commenced marketing Feedback! in October of 1998 and has completed sales to five arms' length parties. PowerPhone PowerPhone is a software solution sold together with a hardware peripheral that integrates local telephone systems with Microsoft Outlook and a contact management program, to facilitate access to relevant contact information when telephone calls are made or received. For example, when there is an incoming call, PowerPhone automatically displays information concerning the caller's most recent prior contact and permits the recipient to access to additional information regarding the caller. In January of 2000, Brocker commenced marketing this product through Telecom, but terminated that marketing effort because management believed it could better promote PowerPhone through different channels, and Brocker recently launched a new marketing effort in which the product is distributed through telephone systems manufacturers, such as Aria and Ericsson, and via the Internet as a software download. Bloodhound Bloodhound is a one-number telephone service and unified messaging product that allows a subscriber to be reached at various locations and telephone modalities using a single telephone number. Each Bloodhound subscriber is given a single "Bloodhound" telephone number which, when dialled, is answered by a computer that scans for the subscriber at the subscriber's various telephone locations in accordance with the subscriber's instructions, such as the subscriber's office phone, mobile phone, and home phone. If the subscriber is found, the call is transferred to the subscriber. If the subscriber is not found, or chooses not to take the call, the caller can leave a message. The Bloodhound number can also receive faxes. A subscriber can retrieve messages and faxes via the Internet. Messages that are retrieved via the Internet are in the form of an audio file. At present, there are approximately 250 users of Bloodhound in New Zealand. Other Products In addition to the above, the Corporation is in the process of developing and introducing to market the following products and services: Movie Line is an interactive voice response system that movie theatres will use to enable their customers to buy and pay for tickets over the telephone. Brocker recently entered into a partnership with Vista Entertainment Systems Limited to sell e-commerce solutions in Asia, with Movie Line being the initial product launch. Version one of this product has now been sold to customers in New Zealand, Argentina and Singapore. Further development of this product will consist of upgrades and changes to meet customer specifications. Track Master is a product that permits real time, interactive determination of the location, speed and distance travelled of a vehicle carrying the Track Master unit. This product is being re-engineered for both the vehicle and marine industries. No further development will be carried out until specifications have been provided by potential customers, which are being sought. Alarm Dialler is a cellular interface between alarm systems and a call centre for use in the security industry. Development of this product is largely complete subject to customer specifications. This product is now available for sale, but no sales have been made to date. e-Marketer is a product that utilizes Microsoft Outlook, CRM database and Microsoft Exchange to produce e-mail marketing materials using various merge and formatting functions. Core development of this product has been completed, and current development work is being done to complete commercial applications to make the product market ready. This development work includes enabling the product to be downloaded through the Internet. 17 Application Hosting and Related Products The Corporation offers various technical services and related products as described below. In fiscal 2000, revenues from the sale of these technical services and related products amounted to approximately $2.7 million and represented approximately 2.0% of total revenues. Brocker's background in managing its own computer networks and the recent expansion into the implementation and management of networks for others was a natural opportunity for Brocker to develop a hosting network. Such hosting network is used to provide over the Internet certain software products developed by Brocker as well as by its strategic partners. The hosting network makes software products available at a lower access cost, by charging customers periodic ongoing user fees instead of an up front license fee, making them affordable to a larger potential customer base. A range of subscription plans will be structured by Brocker to attempt to ensure an optimum balance between the level of service and the application pricing strategies. Brocker has installed and is maintaining the infrastructure for the hosting network Brocker considers to be sufficient to meet current and anticipated short term demand. In the longer term, additional resources and infrastructure will be required to meet further increases in demand. Custom Design of Wireless Telecommunication Products The Corporation has an engineering team that specializes in designing and modifying wireless telecommunication products to meet specific customer requirements. Certain of the products that are designed for a particular customer may have a wider application. In these cases, Brocker may seek to commercialize the product. For example, the Corporation is currently marketing a product that enables a conventional two-wire telephone device to operate over a cellular network and a product that enables an alarm system to communicate with a monitoring station over a cellular network. Sales and Customers The Corporation sells its products and services through its sales force and account managers. In addition, in the distribution business, Brocker sells products through its Internet site (www.brockergroup.com). Substantially all of Brocker's sales to date have been in New Zealand and Australia. Management is, however, seeking to expand the markets for its proprietary software applications by establishing relationships with dealers and consultants in the United States and Europe. Research and Development The current research and development efforts of the Corporation are focused on developing proprietary software applications for B2B, e-commerce and business-related communications. The table below indicates, for each period indicated, the total research and development expenditures, including deferred development expenditures. For information concerning the deferral of certain development expenditures, see notes 2 and 5 of the notes to the consolidated financial statements for the year ended March 31, 2000. --------------------------------------------------------------------------- Fiscal Year Research and Development Expenditures --------------------------------------------------------------------------- 1998 $2,078,000 --------------------------------------------------------------------------- 1999 $2,788,000 --------------------------------------------------------------------------- 2000 $3,186,000 --------------------------------------------------------------------------- 18 Intellectual Property The Corporation relies primarily on trade secrets, proprietary knowledge and confidentiality agreements to establish and protect its intellectual property relating to its proprietary software applications. The Corporation does not sell or transfer title to its proprietary software applications. Rather, it grants to its customers a time limited irrevocable license to use the applications. Employees As of March 31, 2000, the Corporation had approximately 261 employees. The following is a breakdown of these employees by function: senior management 8; finance and administration 36; sales and marketing 94; consulting services and software development 51; technical / service 26; logistics 33; clerical 13. PROPOSED ACQUISITIONS The Corporation has entered into a Heads of Agreement dated August 17, 2000 regarding the proposed acquisition by Brocker of all of the outstanding shares of Generic Technology Limited ("Generic Technology"). Generic Technology is a holding company which owns interests, ranging from 50% to 100%, in a group of companies (known as the Datec Group of Companies). This Heads of Agreement provides for Brocker to pay a purchase price for the shares of Generic Technology equal to 14.5 times the after tax earnings of Generic Technology based on the audited financial statements of Generic Technology for the year ended December 31, 1999. It is estimated that this purchase price will amount to approximately $25 million in Canadian funds. Of this price, 70% is to be satisfied by the issuance of Common Shares of the Corporation at a price of $10.00 per share; based upon a purchase price of approximately $25 million, this would result in the issuance of approximately 1,750,000 Common Shares. The vendors have agreed that the Common Shares of Brocker they will receive will be escrowed for 6 months, and thereafter in any 3 month period they will not sell a number of Common Shares that is greater than 1% of the total outstanding Common Shares of the Corporation. The remaining balance of the purchase price is to be paid in cash, with a first instalment equal to 7.5% of the purchase price payable on closing, and the balance payable in 4 performance based instalments, with the last payment due June 30, 2003. The amounts of the cash payments are subject to interest at 7.5% per annum and will be dependent upon the financial performance of Generic Technology. Brocker will have the right to satisfy the last 3 instalments by issuing Common Shares of the Corporation, but if they do so will be obligated to compensate the vendors with respect to these shares if there is a reduction in the share price following the issuance. The Heads of Agreement provides that each of Michael Ah Koy, Anthony Ah Koy and Krishna Sami is to enter into an employment contract, which is to include non-competition provisions. Completion of this transaction is dependent upon completion of a formal agreement, completion of Brocker's due diligence review, and is subject to obtaining required regulatory approvals. There is no assurance that the Corporation will be able to successfully complete the acquisition of Generic Technology. Although the Corporation currently has sufficient funds to finance the initial cash payment required for this acquisition, additional funding will be required to finance the further cash instalments of the purchase price. In the event that the required conditions are satisfied, it is anticipated that this transaction may be completed in September, 2000. The Corporation has also entered into a Heads of Agreement dated August 21, 2000 to purchase all of the shares of Certus Project Consulting Limited ("Certus"). The purchase price is to be equal to the lesser of 1.5 times sales revenue or 15 times net profit before tax of Certus for the 12 months ended September 30, 2000, up to a maximum of $2.5 million (NZ). This purchase price is to be paid by the issuance of Common Shares of Brocker based upon the closing price of the Common Shares on the day prior to signing a formal sale and purchase agreement. The vendor's have agreed that the shares will be escrowed for a period of 12 months, and that thereafter no more than 25% of those shares will be sold in any quarter. The Corporation may be required to compensate the vendors, upon the occurrence of certain events, if at such time the market price per Common Share is lower than the issue price per Common Share of the Common Shares issued to the Vendors. 19 Based upon the current exchange rate and the current market price for the Common Shares, it is anticipated that approximately 200,000 Common Shares will be issued pursuant to this transaction. Certus is a New Zealand company that provides project management consulting services regarding the information and telecommunications industries. Certus has operations in Auckland and Wellington, New Zealand and Sydney, Australia. The proposed acquisition of Certus is dependent upon completion of a formal agreement and is subject to receipt of required regulatory approvals. There is no assurance that the Corporation will be able to successfully complete this acquisition. If the required conditions are satisfied it is anticipated that this transaction would be completed in October, 2000. CERTAIN INFORMATION CONCERNING ACQUISITIONS Brocker has acquired eight companies since 1993. The table below provides certain information concerning these companies.
----------------------------------------------------------------------------------------------------------------- Name of Acquired Company Principal Business Acquired (Jurisdiction of Incorporation) ----------------------------------------------------------------------------------------------------------------- Sealcorp Computer Products Limited (New Zealand) distribution of computer-based technology December, 1994 products ----------------------------------------------------------------------------------------------------------------- Industrial Communication Services Limited (New servicing of mobile telephones; custom March 1997 Zealand) design of wireless communication products ----------------------------------------------------------------------------------------------------------------- Northmark Technologies Limited Computer based technology products March, 1997 (New Zealand)(1) ----------------------------------------------------------------------------------------------------------------- Easy PC Computer Rental Limited computer equipment leasing July 1997 (New Zealand) ----------------------------------------------------------------------------------------------------------------- Image Craft Limited development of graphics software December 1997 (New Zealand)(2) ----------------------------------------------------------------------------------------------------------------- Pritech Corporation Limited software consulting services May 1998 (New Zealand) ----------------------------------------------------------------------------------------------------------------- 1 World Systems Limited (New Zealand) distribution and implementation of June 1998 accounting software ----------------------------------------------------------------------------------------------------------------- Tech Support Limited (New Zealand) Computer technical service provider August, 1999 -----------------------------------------------------------------------------------------------------------------
(1) Operations sold and company amalgamated with Brocker NZ subsequent to the acquisition. (2) Amalgamated with Brocker NZ subsequent to the acquisition. Brocker has also completed the acquisition of the assets of the following companies:
----------------------------------------------------------------------------------------------------------------- Name of Acquired Company Principal Business Acquired (Jurisdiction of Incorporation) ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Powercall Limited (New Zealand) development of solutions to integrate May 1997 computer and telephone technologies ----------------------------------------------------------------------------------------------------------------- Q*Soft Pty Limited (Australia) distribution of software February 1999 ----------------------------------------------------------------------------------------------------------------- The Great Escape Company distribution of computer-based technology September 1996 (Australia) products -----------------------------------------------------------------------------------------------------------------
In 1998, the Corporation acquired a 20% equity interest in Highway Technology, a start up company. This company has developed, and is seeking to commercialize, a system that remotely tracks the changing location of a 20 moving motor vehicle. This product combines a global positioning system, which tracks the vehicle's location, with a wireless telecommunication system, which conveys the relevant data via a cellular network. DESCRIPTION OF PROPERTIES A listing and description of the properties of the Corporation is set out below:
----------------------------------------------------------------------------------------------- Property Description ----------------------------------------------------------------------------------------------- Brocker Technology Park This owned property is Brocker's main New 17 Kahika Road, Beachhaven, Zealand location housing Sealcorp New Auckland, New Zealand Zealand, STG, Easy PC, 1World, Brocker Financial and Tech Support. It contains 23,084 sq ft of office space and 16,101 sq ft of warehouse space. ----------------------------------------------------------------------------------------------- 2150 Scotia One, 10060 Jasper Avenue This leased property is the Corporation's Edmonton, Alberta, Canada T5J 3R8 main office in Canada. ----------------------------------------------------------------------------------------------- 4 Bond Street, Grey Lynn This leased property houses Pritech's Auckland, New Zealand Auckland office. Portions of this property sub-let by Sealcorp to third party tenants. Pritech uses 8,010 sq ft of office space and 6,047 sq ft of warehouse space. ----------------------------------------------------------------------------------------------- Level 3, PSA House, 11 Aurora Terrace, This 3,450 sq ft leased property houses the Wellington, New Zealand Wellington offices of Sealcorp New Zealand, Easy PC and Pritech. ----------------------------------------------------------------------------------------------- Unit 2, 343 Church Street This leased property houses the office of Penrose, Auckland, New Zealand ICS. ----------------------------------------------------------------------------------------------- Level 2, 25 Dundonald Street, Newton, This 3,000 sq ft leased property houses the Auckland, New Zealand call center operations of PowerCall. ----------------------------------------------------------------------------------------------- 12 Mars Road, Lane Cove, Sydney, This leased property houses the Sydney New South Wales, Australia operations of Sealcorp Australia. ----------------------------------------------------------------------------------------------- Level 8, 48 Hunter Street, Sydney, This leased property houses the Sydney New South Wales, Australia operations of Pritech Australia. ----------------------------------------------------------------------------------------------- Suites 306, 307 and 317, Level 3, 60 City Road, This leased property houses the Melbourne South Bank, Melbourne, Victoria, Australia office of Sealcorp Australia and Pritech Australia. ----------------------------------------------------------------------------------------------- Unit 8, 10 Hudson Road, Albion, This leased property houses the Queensland Queensland, Australia operations of Sealcorp Australia. -----------------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF OPERATING RESULTS Overview The Corporation maintains its books and records in Canadian Dollars while its subsidiaries maintain their books and records in New Zealand or Australian Dollars, as appropriate, which are then reconciled to Canadian Dollars. Except as otherwise specified, all monetary amounts specified in this prospectus have been presented in Canadian Dollars. The consolidated financial statements contained in this prospectus have been prepared in accordance with GAAP in Canada. See "Consolidated Financial Statements." All information should be considered in conjunction with the consolidated financial statements and the notes contained elsewhere in this prospectus. 21 Comparison of Year Ended March 31, 2000 to the Year Ended March 31, 1999 Results of Operations Revenues. ----------------------------------------------------------------------- 2000 Change 1999 Change 1998 136,322,933 2.3% 133,302,640 88.3% 70,811,220 ----------------------------------------------------------------------- The Corporation's revenues were approximately $136.3 million for the fiscal year ended March 31, 2000, ("Fiscal 2000"), representing an increase of 2.3% over the revenues of approximately $133.3 million for the comparable period in 1999. The Corporation's Vendor Services business division accounted for approximately 93% of the total revenues during Fiscal 2000 and 94% during the fiscal year ended March 31, 1999, ("Fiscal 1999"). The small increase in revenues for Fiscal 2000 principally reflected the net effect of the following: 1. Revenues in Australia from the distribution of computer-based technology products increased by approximately $26 million. This increase reflected a combination of internal growth and growth from acquisitions of approximately $9 million 2. Revenues in New Zealand from the distribution of computer-based technology products decreased by approximately $4.6 million. This decrease principally reflected the fact that, when the Digital Equipment Corporation was acquired by Compaq in June 1998, Brocker lost the exclusive right to distribute Digital personal computers in New Zealand. 3. In addition, revenues were negatively impacted towards the end of calendar 1999 and early calendar 2000, as some customers reduced their purchase levels due to concern over Year 2000 issues. 4. Revenues in New Zealand from the distribution of wireless telecommunication products decreased by approximately $14 million. This decrease primarily reflected the fact that a new competitor, Cellect Distribution Warehouse, entered the market in February 1999. However, Brocker still retains over 60% market share. During the periods under discussion, the revenues from the Corporation's other business divisions were approximately as follows: (i) Professional Services ($5.5 million in for Fiscal 2000 and $3.5 million for Fiscal 1999); (ii) Application Development ($1.4 million for Fiscal 2000 and $2.1 million for Fiscal 1999); and (iii) Technical Services ($2.7 million for Fiscal 2000 and $2.7 million for Fiscal 1999). Gross Margin. ----------------------------------------------------------------------- 2000 Change 1999 Change 1998 17,388,165 (1.7%) 17,691,092 22.8% 14,400,850 ----------------------------------------------------------------------- On an overall basis, in Fiscal 2000 the Corporation's gross margin as a percentage of revenues was at 12.8% in comparison to 13.3% for Fiscal 1999. The financial statements for Fiscal 1999 included the reclassification of interest and depreciation in relation to the treatment of the rental finance liability, as described in Note 7 of the Financial Statements. If the accounting treatment in relation to the rental finance liability had been the same for Fiscal 1999 as for Fiscal 2000, the comparable Fiscal 1999 gross margin would have been 12.6%. The gross margin as a percentage of revenues of each business division changed as discussed below: 1. The gross margin of the Vendor Services business division increased to 9.2% of revenues for Fiscal 2000 from 9.1% for Fiscal 1999. This increase primarily reflected the fact that computer-based products, which generally have a higher margin than wireless telecommunication products, 22 accounted for a greater percentage of the sales mix in Fiscal 2000, and the fact that improved margins were also experienced in some aspects of the wireless telecommunications business. 2. The gross margin of the Professional Services business division increased to 41.5% of revenues for Fiscal 2000 from 36.1% for Fiscal 1999. This increase primarily reflected the fact that the Corporation expanded into the Australian market in calendar 1999 and was able to achieve higher margins in this market. 3. The gross margin of the Application Development business division decreased to 51.1% for Fiscal 2000 from 59.8% for Fiscal 1999, reflecting higher costs in connection with the Corporation's call centre operation. 4. The gross margin of the Application Hosting business division decreased to 62.8% for Fiscal 2000 from 73% for Fiscal 1999, reflecting higher costs. Operating Expenses and Operating Income.
---------------------------------------------------------------------------------------- 2000 Change 1999 Change 1998 Depreciation 1,782,483 (11.4%) 2,010,703 18.8% 1,692,585 Net Interest 1,122,586 (20.3%) 1,409,187 110.7% 668,845 Salaries 8,904,799 40.3% 6,348,910 (1.2%) 6,431,431 Other 5,926,969 (15.8%) 7,043,157 66.7% 4,225,153 Total 17,736,837 5.5% 16,811,957 29.1% 13,018,014 % Revenue 13.0% 12.6% 18.4% ----------------------------------------------------------------------------------------
The operating expenses increased to $17.7 million, or 13.0% of revenues, in Fiscal 2000, from $16.8 million, or 12.6% of revenues, in Fiscal 1999. Operating expenses in Fiscal 2000 period included approximately $3.1 million of expenditures related to the development of proprietary software applications up from $2.8 million in Fiscal 1999. Set forth below is additional information concerning certain components of the operating expenses: 1. Depreciation and Amortization. These expenses decreased to $1.8 million, or 1.3 % of revenues, in Fiscal 2000 from $2.0 million, or 1.5% of revenues, in Fiscal 1999. This decrease is primarily attributable to the fact that certain assets, related to the leasing of equipment to customers, were treated as off-balance sheet items for the reasons discussed in note 7 to the consolidated financial statements. This decrease has been largely offset by the increase in the amortisation of deferred development costs, increasing to $500,518 in Fiscal 2000 from $152,355 in Fiscal 1999. 2. Net interest expense. The Corporation's net interest expense decreased to $1.1 million in Fiscal 2000 from $1.4 million in Fiscal 1999. This decrease was primarily attributable to (1) the fact that interest charges recorded in Fiscal 1999 relating to the leasing of equipment to customers were not recorded in Fiscal 2000 because these leases are now treated as off-balance sheet items for the reasons discussed in note 7 to the consolidated financial statements. (2) the renegotiation of the funding facility, during Fiscal 2000, employed within the Vendor Services business division, resulting in a reduction in the interest rate payable. 3. Salaries and Commissions. These expenses increased to $8.9 million, or 6.5% of revenues, in Fiscal 2000, from $6.3 million, or 4.7% of revenues, in the 1999 period. This increase was principally attributable to growth in headcount throughout the organization due to acquisitions and additional hiring to support organic growth, product development and associated administration. It should be noted that a number of the personnel recruited for the Professional Services and Application Development business divisions, being highly skilled and scarce in supply, typically require remuneration above the average paid by the Corporation. 23 4. Other Operating Expenses. These expenses were $5.9 million, or 4.3% of revenues, in Fiscal 2000 and $7.0 million, or 5.3% of revenues, in Fiscal 1999. Operating (Loss)/Income. ---------------------------------------------------------------------- 2000 Change 1999 Change 1998 (348,671) (139.7%) 879,135 (36.4%) 1,382,836 ---------------------------------------------------------------------- The operating income decreased to a loss of $348,671 in Fiscal 2000 from a profit of $879,135 in Fiscal 1999, primarily reflecting the increase in operating expenses as a percentage of revenues discussed above. In addition, the final quarter results were impacted by the increase in salaries and other remuneration as discussed above. Equity accounted losses of associated company. These losses amounted to $83,180 in Fiscal 2000 and $91,330 in Fiscal 1999. These losses represent the Corporation's share of the losses of Highway Technology, a company in which Brocker has a 20% equity interest. As at March 31, 2000, Highway Technology had completed successful field trials of its product in Tasmania, Australia and is currently preparing a bid to provide services to the same Australian customer. Liquidity and Capital Resources Shareholders Equity ---------------------------------------------------------------------- 2000 Change 1999 Change 1998 21,141,166 217.0% 6,669,369 14.2% 5,841,606 ---------------------------------------------------------------------- Recent Financing Transactions Set forth below is information concerning certain financing transactions that the Corporation completed subsequent to March 31, 1999: 1. In July 1999, Brocker sold, in a private placement, 1,000,000 units at a price per unit of either $1.25 (280,000 Units) or $1.00 (720,000 Units). Each unit was comprised of (1) a common share and (2) a warrant to purchase an additional common share at a price of $1.25 per share. Brocker received gross proceeds of approximately $1.1 million from this transaction. 2. In December 1999, Brocker sold the First Special Warrants at a price per special warrant of $2.70. Each of these First Special Warrants may be exchanged, without additional consideration, for one common share plus a Half Warrant; two Half Warrants will entitle the holder to purchase one additional Common Shares at a price of $3.15 per Common Share. The Corporation received gross proceeds of approximately $4.9 million from this transaction. In connection with this transaction, Brocker issued agents' options to purchase 486,000 Common Shares at an exercise price of $3.15 per share. 3. In January 2000, Brocker sold Second Special Warrants at a price of $6.25 per special warrant. Each of these warrants may be exchanged, without additional consideration, for 1.1 common share. The Corporation received gross proceeds of approximately $11.3 million from this transaction. In connection with this transaction, Brocker issued the Agent's Special Option and Undertakings exercisable into options to purchase an aggregate of 228,400 Common Shares at an exercise price of $6.25 per Common Share. The aggregate net proceeds from the financing transactions described above amounted to approximately $15.8 million. 24 Funding of Operations. Cash flows from: ---------------------------------------------------------------------- 2000 1999 1998 Operations (5,482,452) 2,981,643 1,469,019 Investing (1,432,315) (5,463,290) (1,854,552) Financing 15,603,467 2,224,125 (112,149) -------------------------------------------- Net cash flows 8,688,700 (257,522) (497,682) ---------------------------------------------------------------------- In Fiscal 2000, compared with Fiscal 1999, the cash generated from operations was not sufficient to completely fund the cash outlays associated with the business. More specifically, cash from operating activities in Fiscal 2000 was approximately negative $5.5 million, compared with approximately positive $3.0 million in Fiscal 1999, and cash from investing activities was approximately negative $1.4 million compared to approximately negative $5.5 million in Fiscal 1999. The Corporation principally funded its Fiscal 2000 cash shortfall from the proceeds of the financing transactions described above while mortgage financing was raised during Fiscal 1999 to fund the purchase of new premises in Auckland, New Zealand which gave rise to the negative cash flow from investing activities during Fiscal 1999. Brocker had cash-on-hand of approximately $8.6 million as of March 31, 2000, representing the remaining net proceeds of the financing transactions described above. Management believes that its currently available cash resources are adequate to support the existing operations at their current levels for the next 12 months without additional financing. However, the Corporation plans to seek additional financing before then in order to grow the business. More specifically, Brocker may seek additional financing for a variety of purposes, including (1) expanding product development efforts, (2) marketing proprietary product and (3) making additional acquisitions. However, there is no assurance that any additional financing will be available or, if available, will be available on terms that are satisfactory to the Corporation. Accounts Receivable Financing Facility. In July 1999, Brocker obtained a financing facility from The National Bank of New Zealand that allows Brocker to borrow, on a revolving basis, up to 80% of the value of the eligible accounts receivable of Sealcorp, New Zealand, Sealcorp (Australia) Pty Ltd., and STG. The maximum amount of principal and unpaid interest that can be outstanding under this facility at any time is New Zealand $20 million (equivalent to approximately Cdn. $14.5 million based on the exchange rate on March 31, 2000). Outstanding loans under this facility bear interest at a floating rate of interest equal to 0.5% above the 90 day bank rate. As of July 26, 2000, the outstanding amount under this facility was approximately $13.4 million and the applicable interest rate was 7.15%. Certain Balance Sheet Changes. Set forth below is information concerning certain changes in the March 31, 2000 balance sheet relative to the March 31, 1999 balance sheet. Working capital
-------------------------------------------------------------------------------------- 2000 Change 1999 Change 1998 Current Assets 51,990,125 25.4% 41,459,203 55.9% 26,587,194 Current Liabilities 38,429,631 (7.9%) 41,733,548 61.9% 25,776,495 ---------- ---------- ---------- Working capital 13,560,494 (274,345) 810,699 --------------------------------------------------------------------------------------
The Corporation completed a number of financing transactions subsequent to March 31, 1999, as described above. These transactions are the principal reason why (1) cash increased to approximately $8.6 million at March 31, 2000, from approximately nil at March 31, 1999, (2) working capital increased to approximately $13.6 million at March 31, 2000 from a deficit of $274,345 at March 31, 1999 and (3) shareholders' equity increased to approximately 25 $21.1 million at March 31, 2000 from approximately $6.7 million at March 31, 1999. The increase in working capital was also supported by a 32.8% increase in inventories to $20,293,533, representing the increase in stocks necessarily held to meet increased turnover and customer demand, notably in the Australian Vendor Services business division. Accounts receivable funding facility
----------------------------------------------------------------------------------------- 2000 Change 1999 Change 1998 Accounts receivable 19,068,160 (16.8%) 22,909,294 64.6% 13,915,450 Funding facility 7,502,880 133.5% 3,213,122 (44.9%) 5,827,883 Accounts payable 26,467,639 (27.8%) 36,648,724 110.4% 17,422,333 -----------------------------------------------------------------------------------------
During Fiscal 2000 the Corporation borrowed under its accounts receivable financing facility and used the proceeds to reduce payables. This is the principal reason why (1) the financing facility indebtedness increased to approximately $7.5 million at March 31, 2000, from approximately $3.2 million on March 31, 1999, and (2) accounts payables decreased to approximately $26.5 million at March 31, 2000, from approximately $36.6 million on March 31, 1999. In addition to utilising the accounts receivable funding facility a portion of equity raised, as described above, was used to reduce amounts payable to suppliers. Deferred development costs ---------------------------------------------------------------------- 2000 Change 1999 Change 1998 1,593,621 27.3% 1,252,368 155.3% 490,513 ---------------------------------------------------------------------- Deferred development costs increased to approximately $1.6 million at March 31, 2000, from approximately $1.3 million on March 31, 1999. This increase principally reflected deferred development costs relating to the Supercession and Bloodhound products. Comparison of Year Ended March 31, 1999 to Year Ended March 31, 1998 Liquidity and Capital Resources Total assets increased approximately 56% to $50.7 million during the fiscal year ended March 31, 1999 from $32.5 million during the fiscal year ended March 31, 1998. Total current assets increased approximately 55% to $41.4 million from $26.6 million. The increase in current assets resulted from (i) a 65% increase in accounts receivable to approximately $23 million, and (ii) a 58% increase in inventories to approximately $15.3 million. The increases in accounts receivable and inventories corresponded favourably with increased sales, resulting in an 88% increase in revenues in the fiscal year ended March 31, 1999, compared to the previous year. Current liabilities increased from $25.8 million in the fiscal year ended March 31, 1998 to $41.7 million in the fiscal year ended March 31, 1999, an increase of $15.9 million or 62%. The major components of this increase are (i) $1,189,000 of the Corporation's current liabilities resulting from the acquisition or incorporation of subsidiary companies during the fiscal year ended March 31, 1999, (ii) current liabilities for Sealcorp Australia rose to $9,734,000, an increase of 211% compared to the fiscal year ended March 31, 1998, which matched the 76% increase in Sealcorp Australia's value of products and services sold, (iii) Sealcorp Australia negotiated extended credit terms with key suppliers, due to the need to carry higher levels of stock in a rapidly expanding market, (iv) the current liabilities of STG increased 39% to $22.5 million, compared to the fiscal year ended March 31, 1998, which was due to the rapid growth in this business where the value of products sold increased 397% from 1998 to 1999, and (v) the general increase in business activity of all of the Corporation's business divisions together with Brocker's extension of credit terms to customers, despite increasing cash flow requirements. The increase in long term debt from $881,070 to $2.3 million resulted from Brocker NZ's purchase of new premises (Brocker Technology Park) in Auckland, New Zealand on October 1, 1998. The purchase price of NZ$3.825 million was partly financed by a mortgage of NZ$3.045 million. As of March 31, 1999, the outstanding principal and interest on that mortgage was approximately NZ$2.9 million. The purchase of the Brocker Technology 26 Park has allowed the consolidation of many of the Corporation's business divisions to one location. The Brocker Technology Park property includes vacant land that can be developed to accommodate continued growth Certain of the customers of Easy PC obtain financing of their purchases through an arms' length financing company. Prior to March 1999, Easy PC was exposed to recourse from the individual finance agreements and the financing arrangements together with the associated assets were reflected on the Corporation's balance sheet. During March 1999, the terms of the arrangement between Easy PC and the financing company were changed and Easy PC was released from substantially all of the recourse from the individual finance agreements and, accordingly, the liabilities and associated assets were eliminated from the balance sheet. The amount of working capital decreased from $810,699 as of March 31, 1998 to ($274,354) as of March 31, 1999 with a significant increase in current liabilities. Results of Operations For the fiscal year ended March 31, 1999, gross sales increased approximately 88.3% from $70.8 million in fiscal year ended March 31, 1998 to approximately $133.3 million in fiscal year ended March 31, 1999. New Zealand based revenues, spurred by the growth in the mobile telephone marketplace, increased to $109.9 million in fiscal year ended March 31, 1999, which comprised more than 82% of total revenues. Australian revenues increased approximately 73% from approximately $13.5 million in fiscal year ended March 31, 1998 to $23.4 million in fiscal year ended March 31, 1999. Gross profit increased to approximately $17.7 million, an increase of 22.8% over the fiscal year ended March 31, 1998. The increase in gross profit in absolute terms is a result of business growth. The increase in gross profit as a percentage of sales is a result of the size of the telecommunications products and services distribution business, which has a low gross margin, and a low business risk. The increase in depreciation and amortization expense to $2,010,703 for the fiscal year ended March 31, 1999, resulted from an increase in assets and an increased information technology depreciation following the implementation by Sealcorp New Zealand of the ERP software systems developed by PeopleSoft. Net interest expense increased to approximately $1.4 million which was a result of (i) the mortgage financing of the Corporation's new premises in Auckland, New Zealand, and (ii) the increase in interest payments for the increased borrowings, under its debtors finance facility during the period. Other expenses accounted for approximately $7 million, a 66.7% increase. This was due to the acquisitions of PowerCall, ImageCraft, Easy PC, Pritech and 1 World. Product and development expenses also increased over the year resulting from Brocker's emphasis on the development of e-commerce and information management software products. Net earnings of $514,814 were reduced by 35.4% compared to the previous year. The primary reason for the decrease in net earnings is that the Corporation invested significantly in product development, specifically, the development of e-commerce and information management software products. Accordingly, earnings per share were reduced similarly to $.03 per share. Acquisitions On May 15, 1998, Brocker NZ acquired Pritech for initial cash consideration of NZ$265,620. The purchase price was determined to be an amount equal to the net profit earned by Pritech for the fiscal year ended September 30, 1998, multiplied by four. Additional consideration, however, is only payable based on the cash flow of Pritech for the fiscal years ending September 30, 1999 and September 30, 2000. Therefore, any additional purchase price must be subsequently earned by Pritech during that period before such additional purchase price is payable. No additional purchase price was payable based on the cash flow for the fiscal year ended September 30, 1999, and, at the present time, it is not anticipated that any additional purchase price will be payable for the fiscal year ending September 30, 2000; however, the Corporation has reserved a maximum of 800,000 Common Shares for possible issuance pursuant to the transaction. Any additional purchase price will be paid by the issuance by the Corporation of its Common Shares from treasury. 27 On June 16, 1998, Brocker NZ acquired 1World for initial cash consideration of NZ$103,750. The maximum purchase price was determined to be an amount equal to the net profit earned by 1World for the fiscal year ended March 31, 1999, multiplied by four. Additional consideration, however, is only payable based on the cash received by 1 World for the fiscal years ending March 31, 2000 and March 31, 2001. Therefore, any additional purchase must be subsequently earned by 1 World during that period before any such purchase price is payable. Any additional purchase price will be paid by the issuance by the Corporation of Common Shares from treasury. Based upon the current exchange rate, an additional 227,000 Common Shares could be issued if all cash flow targets are achieved by March 31, 2001. On February 8, 1999, Sealcorp Australia acquired the net assets of Q*Soft for a cash consideration of AU$150,000. Comparison of Year Ended March 31, 1998 to Year Ended March 31, 1997 Liquidity and Capital Resources During the comparison period, total current assets increased approximately 56% from $17 million at March 31, 1997 to $26.6 million at March 31, 1998. The majority of that amount is represented by accounts receivable, which increased approximately 56% from $8.9 million at March 31, 1997 to $13.9 million at March 31, 1998. This increase was primarily due to a significant increase in sales in the latter months of the fiscal year ended March 31, 1998. Inventory also increased from $6.1 million to $9.7 million during the comparison period, an increase of approximately 58%. Management increased inventory in anticipation of increased sales in the first quarter of fiscal year 1998. Current liabilities increased from approximately $13.9 million to $25.8 million during the comparison period, which was primarily a result of a 60% increase in accounts payable (from $10.9 million to $17.4 million) and was comparable to the increase in inventory (increased by approximately 58%). An inclusion of $1.0 million in liabilities resulted from the Corporation's Rental Finance Liability (which totaled $1.9 million), whereas the offsetting asset entry of $1.9 million was included in capital assets. In addition, Brocker's current credit facility increased from $1.0 million to $5.8 million during the comparison period to finance its working capital requirements. The Corporation was required to replace financing provided by a financial institution that was withdrawing from the New Zealand market. Brocker negotiated new financing on more favorable terms and conditions with a decreased interest rate and an increased credit limit. Working capital decreased from $3.1 million at March 31, 1997 to $1.3 million at March 31, 1998, a reduction of approximately 58%. Although assets increased significantly, there was an even greater increase in liabilities, an increase of approximately 85%. The increase in liabilities principally relates to the increase in accounts payable referred to above. Total assets increased from $19.9 million to $32.5 million, or an increase of approximately 63%. Capital assets increased by $2.5 million to $3.7 million during the comparison period, an increase of approximately 213%. However, $1.9 million of this amount relates to the off-setting Rental Finance Liability referred to above. This $1.9 million resulted in an actual net increase in capital assets of $2.5 million, the majority of which was expended on computer hardware as part of the information services upgrade completed by the Corporation during the fiscal year ended March 31, 1998. Results of Operations Brocker experienced a significant increase in revenue, with sales for the fiscal year ended March 31, 1998 totaling $70.8 million, an increase of approximately 41.3% over the $50.1 million achieved in the previous year. Sales in its Australian operations increased by approximately 14% for the fiscal year ended March 31,1998, compared to sales achieved in the fiscal year ended March 31, 1997. In its New Zealand operations, where the majority of its revenue was earned, sales increased 50% from $38 million to $57 million. Decreased per unit sales prices for 28 computer hardware were offset by increased volumes and additional sales, in addition to revenues realized from services such as consulting and training activities. Gross profit increased from $9.1 million to $14.4 million during the comparison period (an increase of approximately 58.3%) and gross profit as a percentage of sales increased from 18.2% in the previous year to 20.3% in the fiscal year ended March 31, 1998. The Corporation's increased gross profit percentage is attributable to the Corporation's acquisition strategy of expanding computer distribution and developing additional sales using relationships with suppliers and customers. As the Corporation continued to invest in companies in associated segments of the technology business, management's emphasis was on operations with increased gross profit percentages. The increase in the depreciation and amortization expense (an increase from $0.4 million to $1.7 million) resulted from the inclusion of depreciation associated with assets financed using a recourse arrangement with an independent finance company for the Corporation's acquisition of Easy PC during the fiscal year ended March 31, 1998. Depreciation increased $0.9 million, with $0.2 million included in the net interest expense amount. These amounts are off-set by a comparable increase in revenues of $1.1 million. The balance sheet was also affected by the Rental Finance Liability of $1.9 million included in liabilities, with a comparable figure included in capital assets. The potential for defaults under the recourse arrangement was not considered significant, as the Corporation experienced seven defaults out of 421 individual contracts, with the total write-offs totalling $7,000 during the fiscal year ended March 31, 1998. Interest expenses increased from $0.2 million to $0.7 million, as a consequence of (i) increased working capital requirements to support increased borrowings, as a result of increased operations, and (ii) the treatment of the Rental Finance Liability of Easy PC Ltd., as specified above. Brocker's other expenses, including salaries, commissions and other operating expenses increased by approximately 48%. Net income of $0.80 million decreased from the $0.84 million achieved in the prior fiscal year, a decrease of 4.9%. Earnings per share at $0.06 per share were the same as the previous year. Acquisitions At the outset of the fiscal year ended March 31, 1998, Brocker completed the acquisition of ICS, a company that services telecommunications equipment. ICS also designs and develops cellular-based telecommunications products. ICS operates in the Australian telecommunications market and management anticipates expanding its operations to include global customers. A similar business structure existed in Powercall (acquired by the Corporation in May 1997) where revenues were earned from call-center operations, with software product development concentrated on computer software and hardware telephony integration. Powercall was acquired for an initial cash consideration of $3,581 and the issuance of 27,440 Common Shares. Additional consideration is payable, in Common Shares of the Corporation, based upon the lesser of 4 times the cumulative cash flow of Powercall for the years ended March 31, 1998 to 2001, or 12 times profit for the year ended March 31, 2001, up to a maximum of $14.4 million. The additional shares that may be issued are to be deposited in escrow and will only be released if they are subsequently earned out by Powercall. To date a total of 506,506 Common Shares are issued or issuable for the additional consideration, of which 201,839 have been released from escrow. If fully earned, it is possible that an additional 1,360,000 Common Shares might be issued, based upon the current exchange rate and current share price. Management identified the rental and leasing of computer equipment as being complementary to the Corporation's primary proprietary software applications. In July 1997, Brocker acquired Easy PC, a company specializing in rental and leasing operations for computer equipment. Easy PC was acquired for an initial cash consideration of the $51,522 and the issuance of 8,128 Common Shares. Additional consideration was payable based upon a 4 times multiple of profit for the year ended March 31, 1998 subject to cash flow of Easy PC for the years ended March 31, 1999 to March 31, 2000. 111,576 Common Shares were issued within escrow, of which 94,791 have been released. The earn out period has expired and it is not anticipated that the remaining 16,785 Common Shares will be released from escrow. 29 With management's intent to establish a larger international market for some of the Corporation's products, it identified various acquisition opportunities of start-up operations. The acquisition of Image Craft was determined to be an opportunity for Brocker to enhance Image Craft's digital imaging products and services in New Zealand, and to promote these products and services internationally. Subsequent to the acquisition of Image Craft, a new Image Craft operation was established in Australia. Brocker's presence in Australia has increased from a sales office and distribution operation for Sealcorp Australia to one that includes the distribution operations of the various companies that Brocker has acquired, including Sourceware, TGE and 1World. Although there was a $400,000 loss for fiscal year ending March 31, 1998, the second half of the year was profitable. Selected Results of Operations
---------------------------------------------------------------------------------------------------------------------------------- Years Ended March 31, (audited) ---------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 1995 ---------------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars, except per share data) ---------------------------------------------------------------------------------------------------------------------------------- Revenue $136,323 $133,303 $70,811 $50,110 $22,932 $3,931 ---------------------------------------------------------------------------------------------------------------------------------- Gross Profit 17,388 17,691 14,401 9,099 5,489 814 ---------------------------------------------------------------------------------------------------------------------------------- Net Income (loss) (429) 514 797 838 323 (146) ---------------------------------------------------------------------------------------------------------------------------------- Net Income (loss) Per Share (0.04) .03 .06 .06 .04 (.02) ---------------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data ---------------------------------------------------------------------------------------------------------------------------------- Total Assets 61,529 50,744 32,499 19,926 11,725 8,223 ---------------------------------------------------------------------------------------------------------------------------------- Long Term Debt 1,872 2,284 881 115 111 1,080 ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 40,387 44,074 26,657 14,042 7,123 7,382 ---------------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity 21,142 6,669 5,842 5,884 4,602 841 ----------------------------------------------------------------------------------------------------------------------------------
Foreign Currency Fluctuations Brocker is incorporated under the laws of the Province of Alberta and its consolidated financial statements are presented in Canadian dollars and in accordance with the generally accepted accounting principles of Canada. Although the financial statements are expressed in Canadian dollars, Brocker's operations are principally in New Zealand and Australia and, accordingly, the operating subsidiaries maintain their books and records in Australian or New Zealand dollars, as appropriate. In preparing the financial statements, the accounts of the foreign subsidiaries are translated into Canadian dollars in accordance with GAAP. These translations may result in gains or losses, which are recorded as a separate component of shareholders' equity captioned "Foreign Currency Translation Reserve". DETAILS OF THE OFFERING On December 15, 1999, the Corporation completed a private placement of an aggregate of 1,800,000 First Special Warrants at a price of $2.70 per First Special Warrant pursuant to prospectus exemptions under applicable securities legislation. Each First Special Warrant entitles the holder thereof to acquire one Common Share and one Half Warrant, at no additional cost, at any time until the First Expiry Time. Two Half Warrants will entitle the holder thereof to purchase one additional Common Share at a price of $3.15 per Common Share on or before June 15, 2001. Any First Special Warrants not exercised prior to the First Expiry Time, shall by their terms, be deemed to have been exercised immediately prior to the First Expiry Time without any further action on the part of the holder. Since the date of issuance, no First Special Warrants have been exercised. Certain parties acted as finders in relation to the private placement of the First Special Warrants and received a commission of seven percent of the gross proceeds raised by the sale of the First Special Warrants. In addition, the finders received an aggregate of 486,000 Finders' Warrants to acquire in the aggregate 486,000 Common Shares at a price of $3.15 per share until June 15, 2001. No additional fees will be paid by the Corporation in connection with the 30 distribution of Common Shares under this prospectus and no additional proceeds will be received by the Corporation from the issue of the Common Shares and Half Warrants upon exercise of the First Special Warrants. If all the Half Warrants, including the Finders' Warrants, are exercised, the Corporation will receive additional gross proceeds of $4,365,900. On January 21, 2000, the Corporation completed a private placement of an aggregate of 1,800,000 Second Special Warrants at a price of $6.25 per Second Special Warrant pursuant to prospectus exemptions under applicable securities legislation, pursuant to the Agency Agreement between the Agent and the Corporation. Pursuant to the Agency Agreement, the Agent agreed to sell on a private placement basis the 1,800,000 Second Special Warrants, at a price of $6.25 per Second Special Warrant. The Agency Agreement required the Corporation to pay to the Agent a fee equal to seven percent of the gross aggregate proceeds of the sale of 928,000 Second Special Warrants and 3.5 percent of the gross aggregate proceeds of the sale of 872,000 Second Special Warrants for an aggregate fee of $596,750. In addition, the Agency Agreement required the Corporation to issue the Agent's Special Option entitling the Agent to acquire an Agent's Option exercisable to acquire in the aggregate 200,000 Common Shares at an exercise price of $6.25 per Common Share until January 21, 2002. The Corporation also agreed to pay the expenses of the Agent's legal counsel to a maximum of $60,000. Sub-Agents were also retained who received a commission of three and one half percent of the gross proceeds of the Second Special Warrants which they placed amounting to $187,600. The Sub-Agents also received Undertakings from the Corporation to grant options to acquire in the aggregate 28,400 Common Share of the Corporation at a price of $6.25 per share until January 21, 2002. The Agent and Sub-Agents will receive no additional fees in connection with the distribution of Common Shares under this prospectus and no additional proceeds will be received by the Corporation from the issue of the Common Shares upon exercise of the Second Special Warrants. The Second Special Warrants were issued pursuant to the Special Warrant Indenture dated January 21, 2000 between the Corporation and the Trustee. Since the date of issuance, no Second Special Warrants have been exercised. Each Second Special Warrant entitles the holder thereof to acquire, at no additional cost to the holder, 1.1 Common Shares at any time until the Second Expiry Time. Any Second Special Warrants not exercised prior to the Second Expiry Time shall, by their terms, be deemed to have been exercised immediately prior to the Expiry Time without any further action on the part of the holder. This prospectus is being filed in the provinces of Alberta, British Columbia and Ontario to qualify the distribution of the Common Shares and Half Warrants, as the case may be, to be issued upon the exercise of the Special Warrants. The Corporation has obtained a discretionary exemption order to qualify the distribution of Common Shares issuable upon the exercise of Special Warrants to a subscriber resident in Newfoundland. All of the outstanding Common Shares are fully paid and non-assessable and the Common Shares issuable upon the exercise of the Special Warrants will, when issued, be fully paid and non-assessable. See "Description of Share Capital". This prospectus is also being filed to qualify the distribution of the Agent's Option to be granted upon the exercise of the Agent's Special Option. Holders of Special Warrants who wish to exercise their Special Warrants and acquire thereunder Common Shares or Common Shares and Warrants, as the case may be, should complete the exercise forms on the special warrant certificates and deliver the certificates and the executed exercise forms, in the case of the First Special Warrants, to the Corporation at the address of its registered office, and in the case of the Second Special Warrants, to the Trustee at its principal office in Calgary, Alberta. Certificates for the Common Shares will be available for delivery five business days following exercise of the Special Warrants. Common Shares and Half Warrants obtained on the exercise of Special Warrants, and the Common Shares issuable upon the exercise of the Agent's Options prior to the issuance of a receipt for this prospectus will be subject to hold periods prescribed by applicable securities legislation. The Special Warrants, the Half Warrants and the Common Shares to be issued on the exercise of the Special Warrants and Half Warrants have not been registered under the United States Securities Act of 1933, as amended, (the "U.S. Securities Act') and accordingly, may not be offered or sold within the United States or to a U.S. Person except in certain transactions exempt from the registration requirements of the U.S. Securities Act. In addition, until 40 days after the commencement of the distribution of Common Shares hereunder, any offer or sale of Common Shares within 31 the United States by any dealer (whether or not participating in the distribution hereunder) may violate the registration requirements of the U.S. Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A under the U.S. Securities Act. A summary of the Common Shares and Warrants being qualified pursuant to this prospectus is as follows: Common Shares issuable on exercise of: First Special Warrants 1,800,000 Half Warrants issuable on exercise of First Special Warrants 1,800,000 Common Shares issuable on exercise of Second Special Warrants 1,980,000 Agents' Options issuable on exercise of the Agents' Special Option and Undertakings 228,400 USE OF PROCEEDS The net proceeds from the sale of the First Special Warrants were $4,499,800 after deducting commissions in the amount of $340,200 paid by the Corporation and offering expenses estimated at $20,000. In the event the Warrants are fully exercised, the Corporation will receive additional gross proceeds of $4,365,900. The net proceeds to the Corporation from the sale of the Second Special Warrants were $9,915,650 after deducting fees in the amount of $784,350 paid by the Corporation to the Agent and the Sub-Agents and offering expenses estimated at $550,000. To date the Corporation has used the net proceeds from the sale of the Special Warrants for working capital, including reductions of accounts payable and inventory purchases ($10.2 million); administrative expenses ($500,000); marketing ($225,000); product development ($275,000) infrastructure ($250,000); and investments ($250,000). The balance of the net proceeds, (approximately $2.7 million) are expected to be used to fund strategic acquisitions. The Corporation anticipates that approximately $1.5 million would be required for the initial cash payment pursuant to the proposed acquisition of Generic Technology (see "Proposed Acquisitions"). DESCRIPTION OF SHARE CAPITAL The authorized share capital of Brocker consists of an unlimited number of Common Shares and an unlimited number of preferred shares ("Preferred Shares") issuable in series, of which the Corporation is authorized to issue 10,000,000 Series A Preferred Shares. As at August 28, 2000, there were 15,562,045 Common Shares issued and outstanding; 1,418,000 Common Shares reserved for issuance pursuant to outstanding stock options; an aggregate of 2,238,000 Common Shares reserved for issuance upon the exercise of share purchase warrants; an aggregate of 3,780,000 Common Shares reserved for the exercise of the Special Warrants; an aggregate of 228,400 reserved for issuance upon exercise of the Agents' Options; and an aggregate of up to 3,257,363 Common Shares reserved for issuance in connection with acquisition agreements previously entered into by the Corporation. There are no Preferred Shares outstanding. See "Details of the Offering", "Stock Options" and "Prior Sales". The following is a summary of the rights, privileges, restrictions and conditions attaching to the Common Shares, the Preferred Shares and the Series A Preferred Shares. 32 Common Shares The holders of Common Shares are entitled to vote at all meetings of shareholders, except meetings at which only holders of a specified class of shares that is not the Common Shares are entitled to vote, and on every poll taken at every such meeting every holder of Common Shares is entitled to one vote in respect of each Common Share held; subject to the rights of the holders of Preferred Shares, to receive the remaining property of the Corporation upon a dissolution; and subject to the rights to receive dividends of the holders of Preferred Shares, to receive all other dividends declared by the Corporation. Preferred Shares The Preferred Shares may at any time be issued in one or more series, each series to consist of such number of shares as may before the issue thereof be determined by the Board of Directors by resolution; the Board of Directors may by resolution fix, from time to time before the issue thereof, the designation, rights, privileges, restrictions and conditions attaching to the shares of such series including, without limiting the generality of the foregoing, (i) the issue price, (ii) the rate, amount or method of calculation of dividends and whether the same are subject to change or adjustment, (iii) whether such dividends shall be cumulative, non-cumulative or partly cumulative, (iv) the dates, manner and currencies of payments of dividends and the dates from which dividends shall accrue, (v) the redemption and/or purchase prices and terms and conditions of redemption and/or purchase, with or without provision for sinking or similar funds, (vi) conversion and/or exchange and/or reclassification rights, (vii) the voting rights if any, and/or (viii) other provisions, the whole subject to the issue of Certificate(s) of Amendment following the filing of Articles of Amendment with the applicable authorities setting forth such designations, rights, privileges, restrictions and conditions attaching to the shares of each series. The Preferred Shares are entitled to preference over the Common Shares and over any other shares ranking junior to the Preferred Shares with respect to payment of dividends and distribution of assets in the event of liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of the assets of the Corporation among its shareholders for the purpose of winding up its affairs. Series A Preferred Shares The Board of Directors have created one series of Preferred Shares, designated Series A Preferred Shares and consisting of 10,000,000 Series A Preferred Shares. The holders of the Series A Preferred Shares are entitled to receive fixed cumulative preferential cash dividends at the rate of six and one half (6.5%) percent per annum, on the amounts from time to time determined to be the stated capital thereof, payable annually on the first day of September in each year commencing September 1, 1996. Accumulated dividends that are not paid when due bear interest at the rate of six and one half (6.5%) percent per annum, calculated annually, from the payment due date (after taking into account any permitted postponement thereof up to a maximum of 60 days). The Series A Preferred Shares may be redeemed at any time by the Corporation at a ten (10%) percent redemption premium provided such redeemed shares represent not less than 10 percent of the then outstanding number of Series A Preferred Shares and at least 60 days and not more than 90 days' prior written notice is given. The Series A Preferred Shares are not retractable by the holder thereof. On the winding up, liquidation or dissolution of the Corporation, the holders of the Series A Preferred Shares are entitled to receive the stated capital of their outstanding Series A Preferred Shares together with accrued but unpaid dividends in priority to the holders of the Common Shares or any shares ranking junior to the Series A Preferred Shares. Except as described below, the holders of the Series A Preferred Shares have no right to receive notice of or vote at any meeting of shareholders of the Corporation, except as provided by law. The holders of Series A Preferred Shares may convert the same into fully paid Common Shares at any time on or before March 31, 2001. The conversion price was $2.00 per Common Share until March 31, 1999 and thereafter until March 31, 2000 is equal to the then market price. The market price is the average trading price for the 20 trading days prior to April 1st of such year. For the period April 1, 1999 to March 31, 2000, the conversion price was $1.30 per share. The holders of the Series A Preferred Shares also have the right to elect a majority of the directors if the Corporation fails to make two consecutive dividend payments. In addition, such holders have the right, as a series, to approve by special resolution certain amendments to the articles of the Corporation, which would affect their rights. All previously issued Series A Preferred Shares have been redeemed or converted into Common Shares. 33 CAPITALIZATION The following table sets forth the capitalization of Brocker as at March 31, 2000 and as at July 31, 2000, before and after giving effect to the exercise of the Special Warrants.
---------------------------------------------------------------------------------------------------------------------- As at July 31, 2000 Designation Amount As at March 31, As at July 31, 2000(1)) after giving effect Authorized 2000(2) exercise of Special Warrants ---------------------------------------------------------------------------------------------------------------------- (unaudited) (unaudited) ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- Long-Term Debt $ 1,872,229(5) $ 1,672,466 $1,759,037 ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- Shareholders' Equity ---------------------------------------------------------------------------------------------------------------------- Special Warrants $ 16,110,000 (3) $ 16,110,000 (3) Nil ---------------------------------------------------------------------------------------------------------------------- (3,600,000 Special (3,600,000 Special Warrants)(4) Warrants) (4) ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- Common Shares (1) unlimited $ 9,012,555 (3)(7) $ 9,469,226 (3) $ 25,579,226 (3) ---------------------------------------------------------------------------------------------------------------------- (15,258,804 shares) (15,562,045 shares) (19,342,045 shares) ---------------------------------------------------------------------------------------------------------------------- Preferred Shares unlimited Nil Nil Nil ----------------------------------------------------------------------------------------------------------------------
Notes: (1) As at July 31, 2000, there were 15,562,045 Common Shares issued and outstanding; 1,318,000 Common Shares reserved for issuance pursuant to outstanding stock options; an aggregate of 2,238,000 Common Shares reserved for share purchase warrants; an aggregate of 3,780,000 Common Shares reserved for Special Warrants; an aggregate of 228,400 reserved for the Agents' Options; and an aggregate of up to 3,257,363 Common Shares reserved for acquisition agreements previously entered into by the Corporation. There are no Preferred Shares outstanding. See "Details of the Offering", "Stock Options" and "Prior Sales". (2) As at March 31, 2000, Brocker had retained earnings of $1,124,961. (3) Before deducting share issue costs of $2,136,051. (4) Exchangeable for a total of 3,780,000 Common Shares. (5) Includes amounts payable pursuant to a mortgage finance liability and capital lease obligations. See Note 8(a) to the attached financial statements. (6) Subsequent to July 31, 2000 the Corporation has granted options to purchase an aggregate of 100,000 Common Shares. (7) This figure includes 963,602 Common Shares ($1,583,875) currently held in escrow, which are not included in the outstanding capital shown in the attached financial statements. See note 9(a) to the financial statements. DIRECTORS AND OFFICERS The names, municipalities of residence, positions with Brocker and the principal occupations of the directors and officers of Brocker within the five years preceding this prospectus are set out below:
----------------------------------------------------------------------------------------------------------------- Name and Municipality of Residence Office Held Principal Occupation ----------------------------------------------------------------------------------------------------------------- Michael B. Ridgway Chief Executive Officer and Chief Executive Officer of Brocker Auckland, New Zealand a Director ----------------------------------------------------------------------------------------------------------------- Richard Justice Chief Financial Officer, Chief Financial Officer and Chief Auckland, New Zealand Chief Operating Officer and Operating Officer of Brocker a Director -----------------------------------------------------------------------------------------------------------------
34
----------------------------------------------------------------------------------------------------------------- Name and Municipality of Residence Office Held Principal Occupation ----------------------------------------------------------------------------------------------------------------- Casey J. O'Byrne Chairman of the Board and a Lawyer, Tarrabain, O'Byrne & Company Edmonton, Alberta Director ----------------------------------------------------------------------------------------------------------------- Andrew J. Chamberlain Corporate Secretary and a Lawyer, Chamberlain Hutchison Edmonton, Alberta Director ----------------------------------------------------------------------------------------------------------------- Julia A. E. Clarkson Director Member, Retail Startup CC, LLC Allston, Massachusetts ----------------------------------------------------------------------------------------------------------------- Daniel F. Hachey Director Vice-President and Director of Corporate Toronto, Ontario Finance of HSBC James Capel Canada Inc. ----------------------------------------------------------------------------------------------------------------- Robert W. Singer Director Vice-President of Corporate Relations of Lakewood, New Jersey Community/Kimball Medical Centre, and Assistant Majority Leader, New Jersey State Senate. -----------------------------------------------------------------------------------------------------------------
All of the above directors and officers have held their present principal occupations or other positions with the same organisations listed above for at least the last five years except as described in their biographies below. As at August 28, 2000, the directors and officers of Brocker, as a group, beneficially owned, directly or indirectly, or exercised control over 3,629,638 Common Shares or approximately 23.3% of the issued and outstanding Common Shares (18.8% after giving effect to the issuance of the Common Shares on exercise of the Special Warrants and the Warrants). In addition, the directors and officers of Brocker, as a group, have been granted options to purchase 831,000 Common Shares under Brocker's stock option plan. See "Stock Options". The following are brief biographies of the Corporation's directors and officers: Michael B. Ridgway, Chief Executive Officer and Director Michael B. Ridgway of Auckland, New Zealand has been both the Chief Executive Officer and a member of the Board of Directors since December 1994. Prior to 1994, Mr. Ridgway was the Managing Director of Sealcorp Computer Products Limited (which is now a subsidiary of the Corporation) since 1987 when he founded Sealcorp. Sealcorp was acquired by Brocker in 1994 and is now the main business subsidiary. Mr. Ridgway is also a non-executive director of two private companies, Yes Group Limited and Virtual Warehouse Limited. Richard Justice, Chief Financial Officer, Chief Operating Officer and Director Richard Justice of Auckland, New Zealand has been both the Chief Financial Officer and a member of the Board of Directors since September 1997. Mr. Justice was appointed Chief Operating Officer of Brocker on October 28, 1999. Prior to being appointed Chief Financial Officer, Mr. Justice was the Financial Controller of Sealcorp Computer Products Limited since 1993. Mr. Justice has held various management positions with distribution corporations prior to establishing Abacus Management Services Limited, a consultancy corporation. Mr. Justice completed his Masters of Business Administration from Auckland University in 1990 and has been a licensed accountant in New Zealand since 1979. 35 Casey J. O'Byrne, Chairman of the Board and Director Casey J. O'Byrne of Edmonton, Alberta has been the Chairman of the Board since November 1998 and has been a member of the Board of Directors since the incorporation of Brocker in November 1993. Mr. O'Byrne is a lawyer and has been practicing with the firm of Tarrabain O'Byrne & Company in Edmonton, Alberta since 1990. Mr. O'Byrne has been practicing law in Alberta, Canada since he graduated from the University of Cambrensis School of Law in the United Kingdom in 1984. Andrew J. Chamberlain, Corporate Secretary and Director Andrew J. Chamberlain, of Edmonton, Alberta is the Corporate Secretary having been appointed in November 1998 and was elected to the Board of Directors on December 14, 1999. Mr. Chamberlain is a lawyer and has been practicing with the firm of Chamberlain Hutchison in Edmonton, Alberta since 1997. Prior to 1997, Mr. Chamberlain practiced law in Alberta, Canada with Davies & Co. since he graduated from the University of Alberta School of Law in 1984. Julia A. E. Clarkson, Director Julia A. E. Clarkson of Allston, Massachusetts has been a member of the Board of Directors since October 1998, and has been a member of Retail Startup CC, LLC, an operator of retail dry cleaning outlets in Newton, Massachusetts since July 1998. Ms. Clarkson completed her Masters of Business Administration from Harvard University in 1998. From 1994 to 1996, Ms. Clarkson was a consultant for Mercer Consulting (formerly Corporate Decisions Inc.). From 1992 to 1994, Ms. Clarkson was a financial analyst in the New York investment banking division of Morgan Stanley. Daniel F. Hachey, Director Daniel F. Hachey of Toronto, Ontario has been a member of the Board of Directors since January 1998. Mr. Hachey is the Senior Vice-President and Director of Corporate Finance and Head of Technology Investment Banking Group of HSBC James Capel Canada Inc. (a full service brokerage firm). Prior to holding this position, he was Senior Vice President and a director of Midland Walwyn Capital Inc. Robert W. Singer, Director Robert W. Singer, of Lakewood, New Jersey, was appointed to the Board of Directors on August 21, 2000. Mr. Singer is the Vice-President of Corporate Relations of the Community/Kimball Medical Centre, which is an affiliate of the St. Barnabas Health Care System. Mr. Singer has been a member of the New Jersey State Senate since 1993, and since 1997 has held the position of Assistant Majority Leader. Mr. Singer is on the Board of Directors of Health Choice, which is a Third Party Administrator, and is on the Board of Directors of the New Jersey Technology Council and a member of the New Jersey Commission of Science and Technology. Committees of the Board of Directors Compensation Committee The Compensation Committee of the Board of Directors is comprised of Casey O'Byrne, Daniel Hachey and Julia Clarkson. The Compensation Committee is responsible for reviewing the level and form of compensation payable to the senior officers of the Corporation and establishing human resource and conduct policies for the Corporation. Audit Committee The Audit Committee of the Board of Directors is comprised of Casey O'Byrne, Daniel Hachey and Julia Clarkson. The Audit Committee oversees the Corporation's financial reporting process and internal controls and consults with management and the Corporation's independent auditors on matters related to the annual audit, 36 accounting principles and the audit procedures being applied. EXECUTIVE COMPENSATION The following table sets forth information concerning the total compensation paid by the Corporation and its subsidiaries to the Corporation's President for the financial years ended March 31, 1998 and March 31, 1999 and March 31, 2000 and for the four most highly compensated executive officers (other than the President) for the financial year ended March 31, 1999 and March 31, 2000 (except where the aggregate salary and bonus did not exceed $100,000). No other executive officers had aggregate salary and bonuses in excess of $100,000 during the financial year ended March 31, 1998. Aspects of this compensation are dealt with in the following table:
------------------------------------------------------------------------------------------------------------------------ Long-Term Annual Compensation Compensation ------------------------------------------------------------------------------------------------------------------------ Name and Salary ($) Bonus ($) Other Annual Number of All Other Principal Compensation ($)(1) Securities Compensation Position Under Option ------------------------------------------------------------------------------------------------------------------------ Michael B. 1998 $143,625 Nil $6,878 30,000 Nil Ridgway, President 1999 $126,976 Nil $33,072 30,000 Nil 2000 $41,411 Nil $7,309 230,000 $41,834 ------------------------------------------------------------------------------------------------------------------------ Richard Justice, Chief 1999 $100,254 Nil $18,869 Nil Nil Financial Officer and Chief Operating Officer 2000 $100,617 Nil $18,156 118,000 Nil ------------------------------------------------------------------------------------------------------------------------ Chris Spring, General 1999 $114,342 Nil Nil 50,000 Nil Manager, Brocker Australia 2000 $132,206 Nil $19,816 81,000 Nil ------------------------------------------------------------------------------------------------------------------------ David Cooke, Director, 1999 $108,496 Nil Nil Nil Nil Pritech Corporation 2000 $105,413 Nil $32,522 Nil Nil ------------------------------------------------------------------------------------------------------------------------ Richard Preston, 2000 $88,524 Nil $14,154 15,000 Nil National Sales and Marketing Manager, Sealcorp Australia ------------------------------------------------------------------------------------------------------------------------
Notes: (1) Includes taxable value of options exercised and taxable value of company vehicle use. Except as stated perquisites and other personal benefits do not exceed the lesser of $50,000 and 10% of the total annual salary and bonus. (2) The aggregate cash compensation paid to the President and the Corporation's other four most highly compensated executive officers (its "named executive officers") by the Corporation and its subsidiaries for the year ended March 31, 2000 was $468,171. Option Grants for the Fiscal Year Ended March 31, 2000 The directors and senior officers of the Corporation were granted stock options for the purchase of Common Shares pursuant to the terms of the stock option plan of the Corporation during the fiscal year ended March 31, 2000. The Corporation has not granted any share appreciation rights. The following table sets forth certain information relating to the stock options granted to the directors during the financial year ended March 31, 2000: 37 Option Grants During the Most Recently Completed Financial Year
---------------------------------------------------------------------------------------------------------------- % of Total Options Market Value of Granted/ Shares Repriced to Underlying Securities Employees in the Options at Date Under Financial Year Exercise of Grant/ Options Ended March 31, Price Repricing Name (shares) 2000(1) ($/share) ($/Share) Expiration Date ---------------------------------------------------------------------------------------------------------------- Richard Justice 118,000 19.8% $1.41 $1.41 July 2, 2004 ---------------------------------------------------------------------------------------------------------------- Chris Spring 31,000 5.2% $1.41 $1.41 July 2, 2004 ---------------------------------------------------------------------------------------------------------------- Michael Ridgway 200,000 33.6% $11.25 $11.25 February 29, 2005 ---------------------------------------------------------------------------------------------------------------- Casey O'Byrne 100,000 16.8% $11.25 $11.25 February 29, 2005 ---------------------------------------------------------------------------------------------------------------- Andrew Chamberlain 50,000 8.4% $11.25 $11.25 February 29, 2005 ----------------------------------------------------------------------------------------------------------------
Notes: (1) During the fiscal year ended March 31, 2000, the Corporation granted options to acquire shares for an aggregate of 696,000 Common Shares. Value of Aggregated Options Exercised During the Fiscal Year Ended March 31, 2000 and Financial Year End Option Values The following table sets forth certain information relating to options exercised by named executive officers and directors of the Corporation during the financial year ended March 31, 2000 and the number and accrued value of unexercised stock options as at March 31, 2000: 38 Aggregated Option Exercises During the Year Ended March 31, 2000 and Option Values at March 31, 2000
---------------------------------------------------------------------------------------------------------------- Value of Unexercised Unexercised In-The-Money Options Shares Acquired Aggregate Value Options at March at March 31, 2000(2) Name on Exercise (#) Realized ($) 31, 2000(1) (#) ($) ---------------------------------------------------------------------------------------------------------------- Michael B. Ridgway Nil Nil 230,000 $395,500 ---------------------------------------------------------------------------------------------------------------- Richard Justice Nil Nil 118,000 $1,220,120 ---------------------------------------------------------------------------------------------------------------- Casey J. O'Byrne 5,000 $37,100 302,000 $2,177,730 ---------------------------------------------------------------------------------------------------------------- Daniel Hachey 50,000 $350,500 Nil Nil ---------------------------------------------------------------------------------------------------------------- Julia Clarkson Nil Nil 50,000 $512,500 ---------------------------------------------------------------------------------------------------------------- Chris Spring Nil Nil 81,000 $813,040 ---------------------------------------------------------------------------------------------------------------- Richard Preston Nil Nil 15,000 $158,500 ---------------------------------------------------------------------------------------------------------------- Andrew Chamberlain Nil Nil 50,000 $25,000 ---------------------------------------------------------------------------------------------------------------- Paul Stein 50,000 $15,000 Nil Nil ----------------------------------------------------------------------------------------------------------------
Notes: (1) All options shown are exercisable. (2) The value of unexercised in-the-money stock options has been determined by subtracting the exercise price of the option from the closing Common Share price of $11.75 on March 31, 2000 as quoted by The Toronto Stock Exchange, and multiplying that number by the number of Common Shares that may be acquired upon the exercise of the option. The Corporation does not have a long term incentive plan established for the benefit of its named executive officers or directors. Compensation of Directors No cash remuneration was paid to the non-executive directors of the Corporation, in their capacities as directors, during the financial year ended March 31, 2000, other than reimbursement of expenses incurred in connection with their duties as directors. Compensation is payable to Daniel Hachey and Julia Clarkson on the basis of $1,000 per meeting for Board meetings and $500 per meeting for committee meetings. The Corporation has agreed to pay Robert W. Singer fees of $70,417 per year. Directors were granted options to acquire shares, the details of which are set out in the tables above. Compensation of Executive Officers The aggregate cash compensation paid by the Corporation for services rendered by its named executive officers during the last completed financial year was $468,171. The aggregate value of all other compensation paid to these five executive officers of the Corporation during its fiscal year ended March 31, 2000 did not exceed 10% of the aggregate cash compensation of the executive officers as a group. STOCK OPTIONS The Corporation has established a Stock Option Plan (the "Plan") pursuant to which the Board of Directors of the Corporation may grant options to purchase Common Shares to the officers, directors and employees of the Corporation or affiliated corporations and to consultants retained by the Corporation. The aggregate number of Common Shares reserved for issuance under the Plan is set at a maximum of 2,800,000 Common Shares (being approximately 18.2% of the presently issued and outstanding shares of the Corporation). There are presently options outstanding to purchase an aggregate of 1,418,000 Common Shares. An aggregate of 177,000 Common Shares were issued pursuant to duly exercised stock options during the fiscal year ended March 31, 2000. The aggregate number of Common Shares issuable to any one person may not exceed 5% of the total number of issued and outstanding Common Shares and the aggregate number of Common Shares issuable to insiders as a group may not exceed 10% of the total number of issued and outstanding Common Shares. The period during which an option granted under the Plan is exercisable may not exceed ten years from the date such option is granted. The price at which Common Shares may be acquired upon the exercise of an option may not be less than the closing price of the Common Shares, on the last business day prior to the date the option was granted, traded on the Toronto Stock Exchange. Options granted under the Plan are non-assignable and are subject to early termination in the event of the death of a participant or in the event a participant ceases to be an officer, director, employee, or consultant of the Corporation, or a subsidiary, as the case may be. 39 Subject to the foregoing restrictions and certain other restrictions set forth in the Plan, the Board of Directors of the Corporation is authorized to provide for the granting of options and the exercise and method of exercise of options granted under the Plan. As at August 28, 2000, there were an aggregate of 1,418,000 options issued and outstanding, the details of which are as follows:
------------------------------------------------------------------------------------------------------------- GROUP (NUMBER OF OPTIONEES) AGGREGATE COMMON DATE OF GRANT EXPIRY DATE EXERCISE PRICE SHARES UNDER OPTION ------------------------------------------------------------------------------------------------------------- Current named executive 160,000 Dec. 6, 1996 Dec. 1, 2001 $1.18 officers (5) 57,000 Dec. 6, 1996 Dec. 1, 2001 1.31 80,000 Nov. 20, 1997 Nov. 20, 2002 1.90 149,000 July 6, 1999 July 2, 2004 1.41 300,000 Feb. 29, 200 Feb. 29, 2005 11.25 ------- 746,000 ======= ------------------------------------------------------------------------------------------------------------- Current directors (who are 50,000 Nov. 30, 1998 Nov. 30, 2003 $1.50 not named executive 50,000 Feb. 29, 2000 Feb. 29, 2005 11.25 officers (2) 50,000 August 21, 2000 August 21, 2005 8.45 ------- 150,000 ======= ------------------------------------------------------------------------------------------------------------- All other Employees (8) 25,000 Dec. 6, 1996 Dec. 1, 2001 $1.18 250,000 Nov. 20, 1997 Nov. 20, 2002 1.90 197,000 July 6, 1999 July 2, 2004 1.41 50,000 August 21, 2000 August 21, 2005 8.45 ------- 552,000 ======= -------------------------------------------------------------------------------------------------------------
INDEBTEDNESS OF DIRECTORS AND OFFICERS During the last fiscal year, the corporation provided an interest-free short-term advance to the Corporation's President, Michael B. Ridgway, of Auckland, New Zealand. The largest amount outstanding during the last fiscal year was $4,663 (NZ) and the balance as at March 31, 2000 was $4,230. Directors of the Company have exercised stock options. The funds required to exercise certain of these options have been loaned to the Directors by Brocker Technology Group (NZ) Limited. As at March 31, 2000 the outstanding amount was $540,115. The current market value of the shares, held as security over these loans is in excess of $3.8 million (this balance is included in other receivables). The maximum amount outstanding during the year in respect of these loans was $749,375. The loan to each Director is repayable on demand or within 30 days of the individual ceasing to be a Director of the Company or one of its subsidiaries. The beneficial ownership of the shares are held as security over the loan, and the Company retains the right to either sell or cancel the shares to settle any outstanding amounts and the employee may not sell or transfer the shares prior to settlement of the amounts outstanding. All loans to directors and officers of the company are full recourse loans. PRINCIPAL SHAREHOLDERS As at August 28, 2000, the following table includes the only persons who owned of record or, to the knowledge of the Corporation, owned beneficially, directly or indirectly, more than 10% of the Common Shares of the Corporation: 40
------------------------------------------------------------------------------------------------------ Prior to giving effect to the After giving effect to the exercise of the Special Warrants Exercise of the Special Warrants ------------------------------------------------------------------------------------------------------ Principal Shareholders Number % of Class Number % of Class of Shares of Shares ------------------------------------------------------------------------------------------------------ Michael B. Ridgway 3,035,848(1) 19.5% 3,035,848(1) 15.7% Auckland, New Zealand ------------------------------------------------------------------------------------------------------
Notes: As at August 28, 2000, the directors and officers of the Corporation held 3,629,638 Common Shares representing 23.3 % of the Common Shares outstanding prior to the exercise of the Special Warrants and 18.8% of the Common Shares outstanding after the exercise of the Special Warrants. (1) Does not include shares to be issued pursuant to the exercise of options. ESCROWED SHARES Pursuant to an escrow agreement (the "ICS Escrow Agreement") dated March 31, 1997 among the Corporation, Montreal Trust Company of Canada (the "ICS Trustee") and Roger Henry Carter and Roger Henry Carter, Glenda Margaret Carter and Henry Bernard Chellew as ICS Trustees of the Roger Henry Carter and Glenda Margaret Carter Family Trust (the "Escrowed ICS Shareholders"), the Escrowed ICS Shareholders have deposited with the Trustee an aggregate of 760,500 Common Shares (the " ICS Escrowed Shares") representing at August 28, 2000, prior to this offering of Special Warrants, 5% of the total outstanding Common Shares of the Corporation. Pursuant to the terms of the ICS Escrow Agreement, the ICS Escrowed Shares will be released at the rate of one share for each $1.65 of cash generated by or from Industrial Communications Service Ltd., subject to a maximum of one-third of such shares being released each year. As at August 28, 2000 there have been no releases pursuant to the ICS Escrow Agreement. The earn out period for the release of those shares expired March 31, 1999, and it is not anticipated that those escrowed shares will be released. Pursuant to a sale and purchase of business agreement (the "Powercall Agreement") dated April 1, 1997 among Powercall, the Corporation and N & N Lyttle Family Trust, Reed Dewhirst Family Trust, Duncraft Family Trust and Gregory Hunt (the "Escrowed Powercall Shareholders"), the Escrowed Powercall Shareholders have deposited an aggregate of 238,135 Common Shares (the "Powercall Escrowed Shares") representing at August 28, 2000, prior to this offering of Special Warrants, 1.5% of the total outstanding Common Shares of the Corporation. Pursuant to the terms of the Powercall Agreement, the Powercall Escrowed Shares will be released at the rate of one share for each $1.75 of cash flow generated by or from Powercall Limited subject to a maximum of one-third of such shares being released each year. In addition to the shares presently being held in escrow, a further 201,839 shares have been issued and released to the Escrowed Powercall Shareholders. Pursuant to an escrow agreement (the "NZ Online Escrow Agreement") dated December 24, 1997 among the Corporation, Montreal Trust Company of Canada (the "NZ Online Trustee"), Brocker Investments (NZ) Limited and Laurence John Ryan and M & H Trustee Services Limited (the "Escrowed NZ Online Shareholders"), the Escrowed NZ Online Shareholders have agreed to deposit with the NZ Online Trustee certain of the shares issuable pursuant to the acquisition of NZ Online (the "NZ Online Escrowed Shares"). The NZ Online Escrow Agreement provides that the NZ Online Escrowed Shares may not be sold, assigned, hypothecated, alienated, released from escrow, transferred within escrow, or otherwise in any manner dealt with, without the prior written consent of the principal stock exchange on which the Corporation's Common Shares are listed and posted for trading. Pursuant to the terms of the NZ Online Escrow Agreement, the NZ Online Escrowed Shares will be released at the rate of one share for each $1.75 of cash flow generated by or from New Zealand OnLine Limited. To date no shares have been issued pursuant to the acquisition of NZ Online. 41 Pursuant to an escrow agreement (the "Easy PC Agreement") dated July 10, 1997 among Montreal Trust Company of Canada (the "Easy PC Trustee"), the Corporation and Jonathan Barker, Moira Dobson, Riley Thorp Associates, Mick Laverty, Claire Philipson, Geoff Andoe and Jo Andoe (the "Escrowed Easy PC Shareholders"), the Escrowed Easy PC Shareholders have deposited with the Easy PC Trustee an aggregate of 16,785 Common Shares (the "Easy PC Escrowed Shares") representing at August 28, 2000, prior to this offering of Special Warrants, 0.1% of the total outstanding Common Shares. The Easy PC Escrow Agreement provides that the Easy PC Escrowed Shares may not be sold, assigned, hypothecated, alienated, released from escrow, transferred within escrow, or otherwise in any manner dealt with, without the prior written consent of the stock exchange on which the Corporation's Common Shares are listed and posted for trading. Pursuant to the terms of the Easy PC Escrow Agreement, the Easy PC Escrowed Shares will be released at the rate of one share for each $1.75 of cash flow generated by or from Easy PC Computer Rentals Limited subject to a maximum of one-third of such shares being released each year. As at August 28, 2000 there have been no releases pursuant to the Easy PC Escrow Agreement Pursuant to an escrow agreement (the "1World Escrow Agreement") dated June 10, 1998 among the Corporation, Montreal Trust Company of Canada (the "1World Trustee"), Brocker and Gary McNabb ("McNabb"), McNabb agreed to deposit with the 1World Trustee certain of the shares issuable pursuant to the acquisition of 1World (the "1World Escrowed Shares"). The 1World Escrow Agreement provides that the 1World Escrowed Shares may not be sold, assigned, hypothecated, alienated, released from escrow, transferred within escrow, or otherwise in any manner dealt with, without the prior written consent of the Toronto Stock Exchange. Pursuant to the terms of the 1World Escrow Agreement, the 1World Escrowed Shares will be released at the rate of one share for each $1.31 of cash flow generated by or from New Zealand Online Limited. As at August 28, 2000 there have been no shares deposited in escrow pursuant to the 1World Escrow Agreement. PROMOTERS Michael B. Ridgway may be considered to be the promoter of the Corporation as he has taken the initiative in substantially reorganizing the Corporation. Mr. Ridgway, indirectly through holding companies, received 3,500,000 Common Shares of the Corporation, with a deemed value of $0.20 per share, in exchange for the transfer of the shares of Classic Portraits and Design Ltd. which company was subsequently disposed by the Corporation. Mr. Ridgway was also a shareholder of Sealcorp Computer Products Ltd., which was acquired by Brocker in 1994. Pursuant to that acquisition, Mr. Ridgway was issued a promissory note in the amount of NZ $907,500 bearing interest at 10% per annum. In 1996 that note was settled by Brocker issuing to Mr. Ridgway, 860,755 Series A Preferred Shares, with a deemed value of $1.00 per share, and granting to Mr. Ridgway warrants to purchase 148,500 Common Shares at a price of $1.10 per share. These warrants have been exercised by Mr. Ridgway, and the Series A Preferred Shares have all been either redeemed or converted into Common Shares. In addition, Mr. Ridgway has been granted stock options to purchase Common Shares and has been provided with loans by the Corporation. See "Stock Options". LEGAL PROCEEDINGS As at the date hereof, neither the Corporation nor any of its subsidiaries, are involved in any material legal proceedings by or against the Corporation or its subsidiaries, nor is management of the Corporation aware of any potential claims which might reasonably be expected to give rise to legal proceedings DIVIDEND RECORD AND POLICY Brocker does not intend to pay dividends on the Common Shares in the foreseeable future. The future payment of dividends will be dependent upon the financial requirements of Brocker to fund future growth, the financial condition of Brocker and other factors the board of directors of Brocker may consider appropriate in the circumstances. 42 PRIOR SALES In the 12 months prior to the date hereof, the only Common Shares issued by Brocker were as follows: Common Shares: ------------------------------------------------------------------------------ Date of Issuance Number of Issue Price Common Shares Issued Per Share ($) ------------------------------------------------------------------------------ August 25, 1999 73,565(1) 1.30 ------------------------------------------------------------------------------ August 26, 1999 173,076(1) 1.30 ------------------------------------------------------------------------------ September 13, 1999 25,000(2) 1.18 ------------------------------------------------------------------------------ September 13, 1999 36,750(1) 1.30 ------------------------------------------------------------------------------ October 28, 1999 490,874(1) 1.30 ------------------------------------------------------------------------------ November 30, 1999 710,348(1) 1.30 ------------------------------------------------------------------------------ December 7, 1999 12,000(2) 0.30 ------------------------------------------------------------------------------ December 13, 1999 20,000(2) 1.52 ------------------------------------------------------------------------------ December 17, 1999 5,000(2) 1.18 ------------------------------------------------------------------------------ January 5, 2000 15,000(2) 1.18 ------------------------------------------------------------------------------ February 2, 2000 46,337(4) 1.75 ------------------------------------------------------------------------------ February 11, 2000 50,000(2) 1.99 ------------------------------------------------------------------------------ February 17, 2000 25,000(3) 8.50 ------------------------------------------------------------------------------ May 18, 2000 155,241(5) 1.75 ------------------------------------------------------------------------------ July 17, 2000 148,000(6) 1.25 ------------------------------------------------------------------------------ Notes: (1) Common Shares issued on conversion of Series A Preferred Shares. (2) Common Shares issued upon exercise of stock options. (3) Common Shares issued in consideration of consulting services. (4) Common Shares issued pursuant to agreement relating to the acquisition of Microchannel Ltd. (5) Common Shares issued pursuant to agreement relating to the acquisition of Powercall. (6) Common Shares issued pursuant to exercise of Warrants. Warrants: -------------------------------------------------------------------------------- Date of Issuance Number of Warrants Issued Exercise Price -------------------------------------------------------------------------------- July 16, 1999 1,000,000(1) $1.25 -------------------------------------------------------------------------------- December 15, 1999 486,000(2) $3.15 -------------------------------------------------------------------------------- January 21, 2000 200,000(3) $6.25 -------------------------------------------------------------------------------- January 21, 2000 28,400(4) $6.25 -------------------------------------------------------------------------------- Notes: (1) To date, 148,000 of these Warrants have been exercised. (2) Finders' Warrants issued to acquire Common Shares at $3.15 per share on or before June 15, 2001 issued in connection with the private placement of First Special Warrants. (3) Agent's Special Options issued in connection with the private placement of Second Special Warrants. (4) Undertakings issued in connection with the private placement of Second Special Warrants. Special Warrants: -------------------------------------------------------------------------------- Date of Issuance Number of Special Warrants Issued Purchase Price -------------------------------------------------------------------------------- December 15, 1999 1,800,000(1) $2.70 -------------------------------------------------------------------------------- January 21, 2000 1,800,000(2) $6.25 -------------------------------------------------------------------------------- Notes: (1) Each First Special Warrant entitles the holder thereof to acquire one Common Share and one Half Warrant at no additional cost. Two 43 Half Warrants entitle the holder to acquire one Common Share at a price of $3.15 on or before June 15, 2001. (2) Each Second Special Warrant entitles the holder thereof to acquire 1.1 Common Share at no additional cost. PRICE RANGE AND TRADING VOLUME OF COMMON SHARES The Common Shares are listed and posted for trading on The Toronto Stock Exchange under the symbol "BKI". The following table sets forth the high and low prices and trading volume on The Toronto Stock Exchange of the Common Shares for the periods indicated -------------------------------------------------------------- High Low Volume -------------------------------------------------------------- ($) ($) -------------------------------------------------------------- 2000 -------------------------------------------------------------- August (to the 25th) 9.05 7.10 661,650 -------------------------------------------------------------- July 7.90 7.00 234,542 -------------------------------------------------------------- June 8.20 7.10 289,067 -------------------------------------------------------------- May 9.45 6.00 496,403 -------------------------------------------------------------- April 11.65 7.75 628,044 -------------------------------------------------------------- March 17.20 10.40 1,465,760 -------------------------------------------------------------- February 11.40 8.00 786,658 -------------------------------------------------------------- January 12.10 8.50 866,839 -------------------------------------------------------------- 1999 -------------------------------------------------------------- 4th Quarter 12.50 4.00 2,730,987 -------------------------------------------------------------- 3rd Quarter 3.85 1.40 1,641,039 -------------------------------------------------------------- 2nd Quarter 1.55 1.00 851,063 -------------------------------------------------------------- 1st Quarter 1.45 1.20 224,353 -------------------------------------------------------------- 1998 -------------------------------------------------------------- 4th Quarter 1.55 1.15 476,225 -------------------------------------------------------------- 3rd Quarter 1.48 1.20 552,100 -------------------------------------------------------------- 2nd Quarter 1.76 1.25 631,292 -------------------------------------------------------------- On November 23, 1999 and December 7, 1999, the dates prior to the dates on which the issues of the First Special Warrants and Second Special Warrants were applied for, the closing price of the Common Shares on the Toronto Stock Exchange (as reported by such exchange) was $2.99 and $6.25, respectively. The Common Shares were listed on Nasdaq National Market on August 21, 2000. From that date to August 25, 2000 a total of 166,300 Common Shares have traded on Nasdaq National Market with a high price of $7.00U.S. and a low price of $5.50U.S. RISK FACTORS In addition to risks described elsewhere in this prospectus, prospective investors should carefully consider each of, and the cumulative effect of all of, the following risk factors. General and Economic Risk The Corporation's New Zealand operations represent the major geographical component of its business. Last year New Zealand operations contributed approximately 63.7% of the Corporation's sales and, accordingly, represents one of the major considerations in terms of future uncertainties. Brocker's operations have not been detrimentally influenced by the Asian financial situation. Despite the media focus on negative issues, management of the Corporation believes the underlying fear of the Asian financial situation significantly impacting the New Zealand economy may have been over emphasized. 44 Reliance on Telecom New Zealand The Corporation's business relating to the distribution of wireless telecommunication products is primarily dependent upon its agreement with Telecom New Zealand. Sales of wireless telecommunication products pursuant to this agreement represented approximately 45% of the Corporation's revenues for the fiscal year ended March 31, 1999. The termination or non-renewal of this agreement (which is up for renewal December 31, 2000), or a reduction in sales thereunder, would have a material adverse affect on the Corporation. In October, 1998, Telecom entered into a similar arrangement with another company, which is now in competition with Brocker in that market and which has captured approximately 35% of the market share and has negatively impacted Brocker's gross margins. The agreement with Telecom is also important to Brocker because under the agreement: (i) Telecom is required to protect Brocker against many of the risks associated with this business, such as bad debts, product obsolescence and excess inventory; and (ii) Brocker is required to limit its net profit margin percentage, from this business to a level lower than is typical for this industry. Industry and Market Risk The IT & T industry has experienced decreasing prices as technological developments continue to evolve and the margins on products decrease. Recognizing this trend some time ago, the Corporation embarked on a program to increase the number and variety products and services that it offers, rather than remain restricted to those related to the traditional personal computer hardware and software that previously formed the majority of the Corporation's business. Currency and Exchange Rate Risk The Corporation hedges normal trading arrangements when possible, by purchasing options for the currency of sale. For example, where New Zealand operations purchase goods supplied from Australia the purchase price may be denominated in Australian dollars. In situations of significant risk, foreign currency risk insurance is purchased, particularly where purchases are made to satisfy specific sales contracts. Apart from trading arrangements, the key currency exposures relate to the geographic location of the assets of the Corporation's operations in New Zealand, Australia and Canada. During recent times, fluctuations in exchange rates have adversely impacted the value of Brocker's assets when denominated in Canadian Dollars. The Corporation has occasionally used a very limited number of forward exchange contracts and currency options to hedge purchases of inventory in foreign currencies. The Corporation's exchange rate commitments are intended to minimize the exposure to exchange rate movement risk on the cost of its products and on the price it is able to sell those products to its customers. Brocker does not use foreign exchange instruments for trading or any other purpose. A risk inherent in using forward contracts is the potential that the New Zealand Dollar will move favorably against the foreign currency that has been hedged. This is an opportunity cost, which is mitigated by the certainty of pricing that results from the hedge. No forward exchange contracts have been entered into during the past two financial years. During the fiscal year ended March 31, 1998, the average value of these forward contracts amounted to NZ$1,232,000 and were entered as a hedge against purchases effected in New Zealand and made in Australian dollars. The majority of the Corporation's major suppliers currently invoice in New Zealand Dollars. This should minimize Brocker's exchange risk on the transactions and, therefore, eliminates the need for foreign exchange hedging. Competition The Corporation operates in a highly competitive, dynamic and evolving industry. Competition is likely to intensify as current competitors expand their product offerings as new technologies develop and as new companies enter the industry. The Corporation must compete with a number of competitors that have greater financial, technical and marketing resources. Brocker believes that the principal factors affecting all competitors in its markets are 45 standards compliance, product quality, performance, reliability, ease-of-use, application engineering support and price. The Corporation expects that these factors will remain competitive issues in the future. There can be no assurance that the Corporation will be able to compete successfully against current or future competitors, or that the competitive pressures faced by the Corporation will not have a material adverse effect on its business, operating results or financial condition. Management of the Corporation believes that future growth depends on the Corporation's ability to successfully market its proprietary software applications. The principal focus at present is on applications that facilitate B2B e-commerce and business-related communications. The market for Brocker's proprietary products is intensely competitive, subject to rapid technological change and is significantly affected by new product introductions and other market activities of industry participants. Management expects competition to persist and intensify in the future. Competition for the Corporation's proprietary software applications currently includes: (i) software development and/or distribution companies that sell competing software solutions or development tools that can be used to develop these solutions, (ii) consulting companies that design and implement custom solutions, and (iii) in-house development efforts by prospective customers. The Corporation is seeking to compete in the market for B2B solutions by offering Supercession, which Management believes is relatively easy to implement, provides a high degree of functionality relative to its price, and is designed to integrate with certain ERP software that is sold by PeopleSoft, Inc. Many of the Corporation's competitors have substantially greater financial, technical, and marketing resources and substantially greater name recognition than the Corporation. For example, in the area of providing software solutions for B2B e-commerce, the Corporation faces competition from companies such as Broadvision, Inc., International Business Machine, Netscape Communication Corp., Microsoft Corporation, and Vignette Corp. One of the advantages of the Supercession product is that it is designed to integrate with certain PeopleSoft enterprise resource planning software. At present, PeopleSoft does not offer a product that competes with the Supercession product. There is no assurance that PeopleSoft will not do so in the future. If PeopleSoft begins to market a competing product, one of the key competitive advantages of the Corporation's product will be diminished or eliminated. Prior to Digital's merger with Compaq, Sealcorp New Zealand was contractually entitled to be the exclusive distributor of Digital products in New Zealand. As a result of that merger, Sealcorp New Zealand is no longer the exclusive distributor, and is in competition with other companies regarding the sale of Digital - Compaq products. This additional competition has reduced the Corporation's sales revenues by approximately $3 million, and has reduced the margin on Digital - Compaq products by about 50%. The Corporation had been the only company that had an agreement respecting the distribution of Wilders Telecommunication products for Telecom New Zealand. Telecom has now entered into a distribution agreement with another company, which is now in competition with the Corporation. Technological Change, New Products and Standards The Corporation's inability, for technological or other reasons, to enhance, develop and introduce products in a timely manner in response to changing market conditions or customer requirements could have a material adverse effect on the Corporation's results of operations. The ability of the Corporation to compete successfully will depend in large measure on its ability to maintain a technically competent research and development staff and to adapt to technological changes and advances in the industry, including providing for the continued compatibility of its products with evolving industry standards and protocols and competitive network operating environments. There can be no assurance that the Corporation will be successful in its efforts in these respects. Dependence on Proprietary Technology The Corporation relies on a combination of trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. Despite the Corporation's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Corporation's products or to obtain information the 46 Corporation regards as proprietary. Policing unauthorized use of the Corporation's proprietary technology, if required, may be difficult, time-consuming and costly. In addition, the laws of certain countries in which the Corporation's products are sold or licensed do not protect its products and related intellectual property rights to the same extent as the laws of New Zealand, Australia, Canada and the United States. There can be no assurance that the Corporation's means of protecting its proprietary rights will be adequate, the effect of which may be materially adverse to the Corporation. Risk of Third Party Claims for Infringement There can be no assurance that third parties will not claim that the Corporation or its licensors have infringed such third party's proprietary rights with respect to current or future products. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays, or require the Corporation to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Corporation. Management of Future Growth and Expansion The Corporation's business has grown rapidly since 1994. Planned expansion of the Corporation's business and its future success will depend on its ability to manage growth as it expands its products and marketing capacities, which may place a significant strain on the Corporation's management resources, employees and operations. To manage growth effectively, the Corporation will be required to continue to implement changes in certain aspects of its business, expand its operations and develop, train, manage and assimilate an increasing number of management-level and other employees. If management is unable to manage growth effectively, the Corporation could be adversely affected. Reliance on Management Investors are required to rely on the management of the Corporation. Investors that are not prepared to rely upon the management of the Corporation should not invest in the Corporation. Dependence on Key Personnel The success of the Corporation is largely dependent on the performance of its key employees. Failure to retain key employees and to attract and retain additional key employees with necessary skills could have a material adverse impact upon the Corporation's growth and profitability. Competition for highly skilled management, technical, research and development, sales, and other employees are intense in the IT & T industry. The Corporation's progress to date has been dependent, to a significant extent, on the skills of its senior management and in particular Michael Ridgway. The departure or death of certain members of the executive team could have a material adverse affect on the Corporation. Limited Financial Resources/Need for Future Financing The Corporation is engaged in a capital intensive business and its financial resources are substantially smaller than the financial resources of its principal current competitors. The net proceeds from the sale of the Special Warrants and the current working capital of the Corporation may not be sufficient to enable the Corporation to implement its medium to long-term business plan. There is no assurance that, if, as and when the Corporation seeks additional equity or debt financing, the Corporation will be able to obtain the additional financial resources required to successfully compete in its markets on favourable commercial terms or at all. Potential Fluctuations in Quarterly Results The Corporation's quarterly financial results will be impacted significantly by the timing of new releases of its products and the timing of substantial orders. The Corporation's operating expenses are based on anticipated revenue levels in the short term, are relatively fixed, and are incurred throughout the quarter. As a result, if expected revenues are not realized on a timely basis, the Corporation could be materially adversely affected. Quarterly financial results in the future may be influenced by these or other factors, including possible delays in the shipment of new 47 products. Accordingly, there may be significant variations in the Corporation's quarterly financial results. The Corporation's financial results are reported in Canadian dollars. A substantial portion of the Corporation's revenues are denominated in New Zealand dollars. Any fluctuations in the value of the Canadian dollar relative to the New Zealand dollar may result in variations in the sales and earnings of the Corporation expressed in Canadian dollars due to of the geographic mix of the Corporation's customers, and may have a material effect on the Corporation. Risks Related to Acquisitions The Corporation may expand its operations and business by acquiring additional businesses, products or technologies. There can be no assurance that the Corporation will be able to identify, acquire or profitably manage additional businesses or successfully integrate any acquired businesses, products or technologies into the Corporation without substantial expenses, delays or other operational or financial problems. Furthermore, acquisitions may involve a number of special risks, including diversion of management's attention, failure to retain key personnel, unanticipated events or circumstances and legal liabilities, some or all of which could have a material adverse effect on the Corporation. In addition, there can be no assurance that acquired businesses, products or technologies, if any, will achieve anticipated revenues and income. Acquisitions could also result in potentially dilutive issuances of equity securities. The failure of the Corporation to manage its acquisition strategy successfully could have a material adverse effect on the Corporation. International Sales Sales outside of Canada represent the majority of the Corporation's total gross revenues. The Corporation believes that its continued growth and profitability will require additional expansion of its sales in foreign markets. Sales to international customers are subject to a number of risks and uncertainties including, but not limited to, changes in foreign government regulations and telecommunications standards, export license requirements, tariffs and taxes, other trade barriers, fluctuations in currency exchange rates, difficulty in collecting accounts receivable, difficulty in staffing and managing foreign operations, and potential political and economic instability. While international sales are typically denominated in New Zealand dollars and Brocker typically extends limited credit terms, fluctuations in currency exchange rates could cause the Corporation's products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. There can be no assurance that the Corporation will be successful in maintaining or increasing international market demand for the Corporation's products. Year 2000 The Corporation established an initiative involving internal and external resources to identify, assess and manage its risk related to the Y2K issue. In addition, the Corporation requested confirmation of Y2K compliance from suppliers of material systems and applications. Although the Corporation's systems and hardware have operated successfully since December 31, 1999, there is no assurance that Y2K compliance problems will not arise subsequent to December 31, 1999. The risk exists that the Corporation's suppliers or the Corporation's customers are non-compliant and the Corporation could be consequently affected by such non-compliance. This could result in an interruption in supplies or demand for the Corporation's products which in turn could have a material adverse effect on the Corporation.. Dilution The effective offering price of the Common Shares underlying the Special Warrants (being $2.70 and $6.25 per Common Share, respectively) exceeds the net tangible book value per Common Share as of March 31, 2000, by $2.11 per Common Share or 78% and $5.33 per Common Share or 85%, respectively, after giving effect to the issuance of the Common Shares on exercise of the Special Warrants and Warrants. See "Dilution". Concentration of Share Ownership Michael B. Ridgway will continue to maintain effective control of the Corporation after giving effect to the 48 issuance of the Common Shares issuable upon exercise of Special Warrants. As a result, Mr. Ridgway will be able to continue to exercise significant influence over all matters requiring shareholder approval, including the election of directors and the approval of fundamental changes to the Corporation. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Corporation, its board of directors or management. See "Principal Shareholders". DILUTION The issue price of $2.70 for each First Special Warrant and $6.25 for each Second Special Warrant exceeds the net tangible book value per Common Share as at March 31, 2000, after giving effect to the exercise of the First Special Warrants and the Second Warrants by $2.11 per Common Share or 78% and $5.33 per Common Share or 85%, respectively. The following table sets forth the dilution per Special Warrant: $2.70 $6.25 Net tangible book value per Common Share before distribution 0.35 0.35 Increase in net tangible book value per Common Share attributable 0.24 0.57 to this offering ----- Net tangible book value per Common Share after the distribution 0.59 0.92 ----- Offering Price of First Special Warrants $2.70 Dilution to subscribers of First Special Warrants $2.11 ===== Percentage of dilution in relation to the offering price in respect of the 78% First Special Warrants Offering Price of Second Special Warrants $6.25 Dilution to subscribers of Second Special Warrants $5.33 ===== Percentage of dilution in relation to the offering price in respect of the 85% Second Special Warrants
INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS No director or senior officer of Brocker, insider of Brocker, or any associate or affiliate of any of the foregoing persons, has or had any material interest in any transaction within the last three years or any proposed transaction that has materially affected, or will materially affect, Brocker or any of its affiliates, except as disclosed elsewhere in this document, including under "Intercorporate Relationships", "Executive Compensation", "Stock Options" and "Indebtedness of Directors and Senior Officers" and other than the following: 1. The law firm of Cassels Brock & Blackwell provided legal services to the Corporation while Paul Stein (a partner of that firm) was a director of the Corporation. 2. Chamberlain Hutchison provides legal services to the Corporation and Andrew J. Chamberlain Professional Corporation is a partner of that firm. Andrew J. Chamberlain is the Corporate Secretary and a director of the Corporation. MATERIAL CONTRACTS Except for contracts entered into in the ordinary course of business, the only material contracts entered into by the Corporation in the two years immediately prior to the date hereof which can reasonably be regarded as presently material to the Corporation that have not been disclosed elsewhere in this prospectus are the following: 1. The Agency Agreement referred to under "Details of the Offering"; and 49 2. The Special Warrant Indenture referred to under "Details of the Offering". 3. Heads of Agreement regarding the proposed acquisition of Generic Technology, referred to under "Proposed Acquisitions' and 4. Heads of Agreement regarding proposed acquisition of Certus Project Consulting Limited, referred to under "Proposed Acquisitions". Copies of these agreements will be available for inspection at the offices of the Alberta Securities Commission, at the head office of the Corporation and at the offices of Chamberlain Hutchison, 1310 Merrill Lynch Tower, 10205 - 101 Street, Edmonton, Alberta T5J 2Z2, during normal business hours until September 30, 2000. AUDITORS, TRANSFER AGENT AND REGISTRAR The auditors of the Corporation are KPMG, Chartered Accountants, Auckland, New Zealand. Montreal Trust Company of Canada, at its offices in Calgary, Alberta and Toronto, Ontario is the transfer agent and registrar for the Common Shares and is the transfer agent and registrar of the Second Special Warrants. The Corporation at its registered office is the transfer agent and registrar of the First Special Warrants. PURCHASERS' STATUTORY RIGHTS Securities legislation in several of the provinces provide purchasers with the right to withdraw from an agreement to purchase securities within two business days after receipt or deemed receipt of a prospectus and any amendment. In several of the provinces, securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, damages where the prospectus and any amendment contains a misrepresentation or is not delivered to the purchaser, provided that such remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the applicable province. The purchaser should refer to the securities legislation of the province in which the purchaser resides for the particulars of these rights or consult with a legal advisor. CONTRACTUAL RIGHT OF ACTION FOR RESCISSION In the event that a holder of a Special Warrant, who acquires a Common Share upon the exercise of a Special Warrant as provided for in this prospectus, is or becomes entitled under applicable legislation to the remedy of rescission by reason of this prospectus or any amendment thereto containing a misrepresentation, the holder shall be entitled to rescission not only of the holder's exercise of its Special Warrant but also of the private placement transaction pursuant to which the Special Warrant was initially acquired and shall be entitled, in connection with such rescission, to a full refund of all consideration paid to the Corporation on the acquisition of the Special Warrant. In the event the holder is a permitted assignee of the interest of the original Special Warrant subscriber, that permitted assignee shall be entitled to exercise the rights of rescission and refund described herein as if the permitted assignee was the original subscriber. The foregoing is in addition to any other right or remedy available to a holder of a Special Warrant under Section 168 of the Securities Act (Alberta), Section 131 of the Securities Act (British Columbia), Section 130 of the Securities Act (Ontario) and similar sections of other applicable securities legislation or otherwise at law. 50 BROCKER TECHNOLOGY GROUP LTD FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 51 BROCKER TECHNOLOGY GROUP LTD FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 I N D E X Auditors' Report Page 2 Consolidated Balance Sheets Page 3 Consolidated Statements of Earnings Page 4 Consolidated Statements of Retained Earnings Page 5 Consolidated Statements of Movements in Foreign Currency Translation Reserve Page 5 Consolidated Statements of Cash Flows Page 6 Notes to Consolidated Financial Statements Page 7 52 Auditors' report to the directors We have audited the consolidated balance sheets of Brocker Technology Group Ltd as at March 31, 2000 and 1999 and the consolidated statements of earnings, retained earnings, foreign currency translation reserve and cash flows for the years ended March, 31 2000, 1999 and 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at March 31, 2000 and 1999 and the results of its operations and its cash flows, for the years ended March 31, 2000, 1999 and 1998, in accordance with Canadian generally accepted accounting principles. (Signed) "KPMG LLP" Chartered Accountants Auckland, New Zealand July 27, 2000 53 BROCKER TECHNOLOGY GROUP LTD CONSOLIDATED BALANCE SHEETS AS AT MARCH 31, 2000 AND 1999 Note 2000 1999 $ $ ASSETS Current Assets Cash 8,637,357 -- Accounts receivable 19,068,160 22,909,294 Other receivables 11 2,266,494 1,435,325 Inventories 20,293,533 15,276,865 Prepaid expenses and deposits 154,708 917,009 Income taxes recoverable 791,212 554,538 Future tax assets 10 778,661 366,172 ----------- ----------- 51,990,125 41,459,203 Deferred Development Costs 5 1,593,621 1,252,368 Capital Assets 4 5,307,852 5,551,068 Investment in Associated Company 6 833,000 604,433 Goodwill (Net of accumulated amortisation 1,803,957 1,876,325 of $1,312,810 ($1,036,327; 1999)) ----------- ----------- $61,528,555 $50,743,397 =========== =========== LIABILITIES Current Liabilities Bank Overdraft -- 55,433 Accounts payable 26,467,639 36,648,724 Accrued liabilities 3,824,673 1,596,241 Income taxes payable 430,910 -- Financing facility 8 7,502,880 3,213,122 Current portion of long-term debt 8 203,531 220,028 ----------- ----------- 38,429,633 41,733,548 Long-Term Debt 8 1,872,229 2,284,578 Future Tax Liability 10 85,077 55,902 ----------- ----------- 40,386,939 44,074,028 ----------- ----------- SHAREHOLDERS' EQUITY Share Capital 9 21,762,070 5,761,721 Foreign Currency Translation Reserve (1,745,415) (799,084) Retained Earnings 1,124,961 1,706,732 ----------- ----------- 21,141,616 6,669,369 ----------- ----------- Commitments 16 Contingencies 17 Subsequent Events 18 $61,528,555 $50,743,397 =========== =========== Signed on behalf of the Board (Signed) "Casey J. O'Byrne" (Signed) "Andrew J. Chamberlain" -------------------------------- -------------------------------- Director Director See the accompanying notes to the consolidated financial statements. 54 BROCKER TECHNOLOGY GROUP LTD CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
Note 2000 1999 1998 $ $ $ Revenue Sales 136,322,933 133,302,640 70,811,220 Cost of Goods Sold 118,934,768 115,611,548 56,410,370 ------------ ------------ ---------- Gross Margin 17,388,165 17,691,092 14,400,850 ------------ ------------ ---------- Operating Expenses Depreciation and amortisation 1,782,483 2,010,703 1,692,585 Net interest expense 8 1,122,586 1,409,187 668,845 Salaries and commissions 8,904,799 6,348,910 6,431,431 Other operating expenses 5,926,969 7,043,157 4,225,153 ------------ ------------ ---------- Total operating expenses 17,736,837 16,811,957 13,018,014 ------------ ------------ ---------- Operating (Loss)/Income (348,672) 879,135 1,382,836 Equity accounted losses of associated company 83,180 91,330 79,953 ------------ ------------ ---------- (Loss)/Income before Income Tax Provision (431,852) 787,805 1,302,883 Income Tax Provision 10 (2,824) 272,991 506,067 ------------ ------------ ---------- Net (Loss)/Earnings for the year $ (429,028) $ 514,814 796,816 ============ ============ ========== Earnings Per Common Share 9(d) $ (0.04) $ 0.03 0.06 ============ ============ ==========
See the accompanying notes to the consolidated financial statements. 55 BROCKER TECHNOLOGY GROUP LTD CONSOLIDATED STATEMENTS OF RETAINED EARNINGS FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
2000 1999 1998 $ $ $ Retained Earnings, Beginning of the year 1,706,732 1,355,240 703,424 Net (Loss)/Earnings for the year (429,028) 514,814 796,816 Discount on redemption of preferred shares -- -- 50,000 Preferred dividends paid (152,743) (163,322) (195,000) ----------- ----------- ----------- Retained Earnings, End of the year $ 1,124,961 $ 1,706,732 $ 1,355,240 =========== =========== ===========
BROCKER TECHNOLOGY GROUP LTD CONSOLIDATED STATEMENTS OF MOVEMENTS IN FOREIGN CURRENCY TRANSLATION RESERVE FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
2000 1999 1998 $ $ $ Beginning of the year (799,084) (881,364) (82,609) Difference arising on the translation of foreign operations (946,331) 82,280 (798,755) ----------- ----------- ----------- End of the year $(1,745,415) $ (799,084) $ (881,364) =========== =========== ===========
See the accompanying notes to the consolidated financial statements. 56 BROCKER TECHNOLOGY GROUP LTD CONSOLIDATED CASH FLOW STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
Note 2000 1999 1998 $ $ $ Cash flows from operating activities Receipts from customers 138,510,831 124,528,860 62,560,393 Payments to suppliers and employees (142,622,871) (59,656,639) (119,790,928) Interest paid (1,122,586) (1,338,547) (463,756) Taxation paid (247,826) (417,742) (970,979) ------------ ----------- ------------ Cash flows from operating activities 14 (5,482,452) 2,981,643 1,469,019 Cash flows from investing activities Proceeds from the sale of capital assets 44,750 51,597 56,814 Purchase of capital assets (1,086,880) (4,673,881) (1,045,119) Investment in associated company (356,354) (428,440) (343,066) Purchase of subsidiaries (33,831) (412,566) (523,181) ------------ ----------- ------------ Cash flows from investing activities (1,432,315) (5,463,290) (1,854,552) Cash flows from financing activities Proceeds from share options exercised 261,600 29,500 130,900 Proceeds from shares and warrants issued 15,738,616 -- -- Proceeds from share warrants exercised -- -- 495,000 Proceeds from mortgage finance raised -- 2,428,692 -- Redemption of preferred shares -- -- (543,049) Repayment of mortgage finance (244,006) (70,745) -- Payment of dividend on preferred shares (152,743) (163,322) (195,000) ------------ ----------- ------------ Cash flows from financing activities 15,603,467 2,224,125 (112,149) ------------ ----------- ------------ Net increase / (decrease) in cash equivalents 8,688,700 (257,522) (497,682) Cash / (Overdraft) at Beginning of the year (55,433) 205,365 602,233 Translation of cash equivalents to reporting currency 4,090 (3,276) 100,814 ------------ ----------- ------------ Cash/(Overdraft) at End of the year 8,637,357 (55,433) 205,365 ============ =========== ============
See the accompanying notes to the consolidated financial statements. 57 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 1. BASIS OF PRESENTATION a) General Brocker Technology Group Ltd, ("the Company"), was incorporated under the Business Corporation Act (Alberta) on November 25, 1993, and obtained its listing on the Alberta Stock Exchange on April 14, 1994. On February 28, 1998 the Company transferred its listing to the Toronto Stock Exchange. These financial statements have been prepared in accordance with the generally accepted accounting principles of Canada. b) Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. SIGNIFICANT ACCOUNTING POLICIES a) Principles of Consolidation The consolidated financial statements include the financial statements of the Company and all of its subsidiary companies since the dates of their acquisition. Its wholly owned subsidiaries are as follows: Brocker Technology Group (NZ) Limited (formerly Brocker Investments (NZ) Limited) Brocker Investments (Australia) Pty Limited Brocker Financial Limited Sealcorp Computer Products Limited Sealcorp Telecommunications Group Limited Sealcorp Australia Pty Limited Easy PC Computer Rentals Limited Image Craft Limited Image Craft Australia Pty Limited (formerly Parilott Pty Limited) Industrial Communications Service Limited Photo Magic Limited Powercall Technologies Limited Pritech Corporation Limited Pritech Australia Pty Limited 1 World Systems Limited (formerly Microchannel Limited) Tech Support Limited During 1998 Brocker Technology Group Ltd took a 20% founding shareholding in Highway Technologies Limited. This investment has been recorded using the equity method. As at March 31, 2000 the operations of Image Craft Limited, Northmark Technologies Limited and Photo Magic Limited were amalgamated with Brocker Technology Group (NZ) Limited. 58 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) b) Goodwill The excess of cost over the fair value of identifiable net assets of subsidiaries acquired is recorded as goodwill and is amortised on a straight-line basis over its estimated useful life, considered to be three to ten years. On an ongoing basis, management reviews the valuation and amortisation of goodwill taking into consideration any events and circumstances which might have impaired the fair value. Where an acquisition price is contingent on a future event or events, no additional goodwill is recognised until the final acquisition price can be reasonably determined. c) Foreign Currency Foreign currency transactions are recorded at the exchange rates in effect at the date of settlement. Monetary assets and liabilities arising from trading are translated at closing rates. Gains and losses due to currency fluctuations on these items are included in the statement of earnings. The financial statements of foreign operations are translated to Canadian dollars using weighted average exchange rates for the year for items included in the statement of earnings, year end rates for assets and liabilities included in the balance sheet and historical rates for equity transactions. The cumulative translation adjustment represents the deferred foreign exchange gain or loss on the translation of the financial statements. The following rates were used in the preparation of the financial statements: New Zealand dollar Average rate Rate at March 31 2000 0.7565 0.7238 1999 0.7862 0.7976 1998 0.8833 0.7816 Australian dollar Average rate Rate at March 31 2000 0.9436 0.8903 1999 0.9318 0.9455 1998 1.0055 0.9408 d) Inventories Inventories principally comprise finished goods and are carried at the lower of cost and net realisable value. Cost is determined on a weighted average or first in first out basis. 59 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) e) Capital Assets Capital assets are recorded at cost. Depreciation is calculated on a declining balance basis (except for leasehold improvements where a straight line basis is used) using the following rates: Land 0% Buildings 2% Office equipment 20% Vehicles 20 and 26% Furniture and fixtures 20% Computer hardware 20 to 30% Computer software 30 to 40% Plant and Equipment 20 to 26% Leasehold improvements 1 to 4 years Computer hardware held for rental 2 to 3 years f) Revenue recognition The Company earns substantially all of its revenue from the sale and delivery of products to its customers. Revenue is recorded when the products are shipped to customers. g) Research and development expenditures Research costs, other than capital expenditures, are expensed as incurred. Development costs are expensed as incurred unless they meet the criteria under generally accepted accounting principles for deferral and amortisation. Deferred development costs are amortised over the expected life of the developed product, currently a maximum of three years. h) Future Income Taxes Income taxes are accounted for under the asset and liability method. Under this method, future tax assets and liabilities are recognised for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognised in income in the period that substantive enactment or enactment occurs. Change in Accounting Policy In December 1997, the Canadian Institute of Chartered Accountants issued Handbook Section 3465, Income Taxes. The standard required a change from the deferred method of accounting for income taxed under Handbook Section 3470, Corporate Income Taxes, to the asset and liability method of accounting for income taxes. The Company has adopted Section 3465 retroactively with a minor reclassification of the 1999 balance sheet comparative figures. The adoption of Section 3465 has had no impact on the earnings for the year ended March 31, 2000. 60 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) i) Earnings Per Share Earnings per share have been calculated based on the weighted average number of common shares outstanding. The fully diluted earnings per share have been calculated based on the assumption that all options would have been exercised. In both cases, common shares to be issued, or held in escrow, in respect of the settlement of earn-out consideration in relation to acquisitions are only taken into account in the calculation of earnings per share once the number of shares can be reasonably determined. j) Stock options The Company has a stock option plan. When stock options are issued, the value of the options is not determined or recorded. Any consideration received on the exercise of stock options is credited to share capital. k) Cash and cash equivalents Cash and cash equivalents consist of cash on hand and balances with banks, and investments in money market instruments. Cash and cash equivalents included in the cash flow statement are comprised solely of balances with banks. 61 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 3. ACQUISITIONS 2000 Acquisitions On August 1, 1999 Brocker Technology Group (NZ) Limited acquired Tech Support Limited for a total cash consideration of $33,831 (NZ$45,000). Tech Support Limited offers technical support and advice to a wide range of customers in Auckland, New Zealand. No additional amounts are payable in respect to this acquisition. The purchase price may, however, be reduced in the event certain warranties made by the Vendors do not eventuate. The acquisition has been accounted for using the purchase method. Net assets acquired and consideration paid are as follows: 2000 $ Net current assets 37,470 Capital assets 9,555 Net current liabilities (22,822) Goodwill attributed 9,628 ------- Consideration paid 33,831 ======= 1999 Acquisitions Pritech Corporation Limited On May 15, 1998 Brocker Technology Group (NZ) Limited acquired Pritech Corporation Limited ("Pritech") for an initial cash consideration of $207,609 (NZ$265,620). Pritech is principally involved with software consultation and knowledge management. Pritech is a Lotus Premium Partner whose target market is enterprise and government customers in New Zealand and Australia. The maximum purchase price payable is based on the profit earned by the company for the year ended September 30, 1998 at a four times multiple. Additional consideration, however, is only payable based on the cash earned, as defined, by Pritech for the years ended September 30, 1999 to 2000, being the earn out period. That is the maximum price must be subsequently earned by Pritech, during the earn out period, before it is payable. Any additional consideration will be satisfied by the issue of common shares which will be held in escrow until the earn out criteria are met. This acquisition was accounted for using the purchase method. Net assets acquired and consideration paid were as follows: 1999 $ Net current assets 472,515 Capital assets 51,987 Net current liabilities (316,893) Goodwill attributed -- -------- Consideration paid 207,609 ======== 62 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 3. ACQUISITIONS (Continued) 1999 Acquisitions (Continued) 1 World Systems Limited (formerly Microchannel Limited) On June 16, 1998 Brocker Technology Group (NZ) Limited acquired 1 World Systems Limited ("1 World") for an initial consideration of $81,091 (NZ$103,750). 1 World is principally involved with the distribution, implementation and support of accounting software. The maximum purchase price payable is based on the profit earned by 1 World for the year ended March 31, 1999 at a four times multiple. Additional consideration, however, is only payable based on the cash earned, as defined, by 1 World for the years ended March 31, 2000 to 2001, being the earn out period. That is the maximum price must be subsequently earned by 1 World, during the earn out period, before it is payable. Any additional consideration will be satisfied by the issue of common shares which will be held in escrow until the earn out criteria are met. This acquisition was accounted for using the purchase method. Net assets acquired and consideration paid were as follows: 1999 $ Net current assets 281,790 Capital assets 43,341 Net current liabilities (182,365) Term liabilities (61,675) Goodwill attributed -- -------- Consideration paid 81,091 ======== Additional future consideration will be added to goodwill when it becomes determinable. Additional goodwill of $207,411 has been recognised in respect of shares determined to be issuable as at March 31, 2000. QSoft Pty Limited On February 8, 1999 Sealcorp Australia acquired the net assets of QSoft Pty Limited ("Qsoft") for a cash consideration of $142,170 (AUD$150,000). QSoft is a Software Distribution company based in Brisbane Australia. The net assets acquired were valued at their fair value, and as a result no goodwill arose on acquisition. 63 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 3 ACQUISITIONS (Continued) Motorola Service Contract During March 1999 Industrial Communications Service Limited acquired the net assets of a division of Hart Candy in order to fulfil the requirements of the Motorola Service contract awarded to the company. This acquisition was accounted for using the purchase method. Net assets acquired and consideration paid were as follows: 1999 $ Net current assets 8,774 Capital assets 55,677 Net current liabilities (16,595) Goodwill attributed 47,856 ------- Consideration paid 95,712 ======= 1998 Acquisitions Powercall Technologies Limited On May 10, 1997 Brocker Technology Group (NZ) Limited acquired the net assets of Powercall Limited and Powercall Services Limited for an initial cash consideration of $3,581 (NZ$4,948) and 27,440 common shares. Powercall Technologies Limited is principally involved with the design and development of telecommunication systems. Total purchase price of the entity is based on the lesser of a four times multiple of the cumulative cash earned by the company for the years ended March 31, 1998 to 2001 or a twelve times multiple of the profit for the year ended March 31, 2001. The purchase price is limited to a maximum of $14.4 million (NZ$20m). An additional one year is then allowed for this price to be earned out by the company. That is the maximum price must be subsequently earned by the company, during the earn out period, before it is payable. Any additional consideration will be satisfied by the issue of common shares which will be held in escrow until the earn out criteria are met. This acquisition was accounted for using the purchase method. Net assets acquired and consideration paid were as follows: 1998 $ Capital assets 180,582 Net current liabilities (124,556) Goodwill attributed 7,535 -------- Consideration paid 63,561 ======== On November 30, 1998 an additional 98,416 shares were issued in relation to the acquisition of Powercall, with an attributable value of $172,228. As at March 31, 2000 there were 103,422 shares due to be issued. These shares have been valued $152,030 being the market value of these shares as at June 30, 1999 being the date the conditions for their issue were met. Additional future consideration will be added to goodwill when it becomes determinable. 64 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 1999 AND 1998 3 ACQUISITIONS (Continued) Easy PC Computer Rentals Limited On July 10, 1997 Brocker Technology Group (NZ) Limited acquired Easy PC Computer Rentals Limited for an initial cash consideration of $51,522 (NZ$71,183) and 8,128 common shares. In addition an advance on the final price was paid to the previous shareholders of $108,570 (NZ$150,000). This amount is repayable to the Company based on the earn out details below, and is included within prepaid expenses and deposits. Easy PC Computer Rentals Limited is involved in the rental of computer equipment. The maximum purchase price payable is based on the profit earned by the company for the year ended March 31, 1998 at a four times multiple. Additional consideration, however, is only payable based on the cash earned by the company for the years ended March 31, 1999 to 2000, being the earn out period. That is the maximum price must be subsequently earned by the company, during the earn out period, before it is payable. Any additional consideration will be satisfied by the issue of common shares which will be held in escrow until the earn out criteria are met. This acquisition was accounted for using the purchase method. Net assets acquired and consideration paid were as follows: 1998 $ Capital assets 248,576 Rental assets, externally financed (Note 7) 1,452,174 Rental finance liability (Note 7) (1,452,174) Net current liabilities (253,602) Goodwill attributed 73,846 ---------- Consideration paid 68,820 ========== On December 31, 1998 an additional 94,782 shares were issued in relation to the acquisition of Easy-PC Computer Rentals Limited, with an attributable value of $165,869. Image Craft Limited On December 24, 1997 Brocker Technology Group (NZ) Limited acquired Image Craft Limited and its subsidiary company Parrilott Pty Limited for an initial cash consideration of $361,900 (NZ$500,000). Image Craft Limited and Parrilott Pty Limited are principally involved in the design and implementation of image processing and storage equipment for the photographic industry. This acquisition was accounted for using the purchase method. Net assets acquired and consideration paid were as follows: 1998 $ Net current assets 65,648 Capital assets 278,372 Goodwill attributed 46,780 ------- Consideration paid 390,800 ======= The maximum purchase price payable was to be based on the profit earned by the company for the year ended March 31, 1998 at a four times multiple. However, during the year an additional consideration of $115,110 (NZ$159,036) was accrued in relation to the final settlement. 65 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 4. CAPITAL ASSETS 2000 -------------------------------------- Cost Accumulated Net Book Depreciation Value Land (Note 8a) 564,564 -- 564,564 Buildings (Note 8a) 2,559,064 110,494 2,448,570 Office equipment - leased 1,918 782 1,136 - non-leased 448,460 258,070 190,390 Vehicles - non-leased 99,096 59,655 39,441 Furniture and fixtures - non-leased 424,424 223,068 201,356 Computer hardware -leased 34,163 21,010 13,153 -non leased 1,666,874 962,961 703,913 -held for rental 1,220,305 850,910 369,395 Computer software 774,687 172,898 601,789 Plant and Equipment 290,917 183,381 107,536 Leasehold improvements 103,493 36,884 66,609 -------------------------------------- 8,187,965 2,880,113 5,307,852 ====================================== 66 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 4. CAPITAL ASSETS (Continued) 1999 --------------------------------------- Cost Accumulated Net Book Depreciation Value Land (Note 8a) 622,128 -- 622,128 Buildings (Note 8a) 2,684,411 37,860 2,646,551 Office equipment - leased 72,260 31,036 41,224 - non-leased 368,147 184,704 183,443 Vehicles - leased 105,285 69,380 35,905 - non-leased 107,222 45,302 61,920 Furniture and fixtures - leased 37,456 8,317 29,139 - non-leased 464,038 172,221 291,817 Computer hardware - non-leased 1,750,998 901,607 849,391 - held for rental 830,688 369,218 461,470 Computer software 156,292 88,467 67,825 Plant and Equipment 316,838 161,297 155,541 Leasehold improvements 147,402 42,688 104,714 --------------------------------------- $7,663,165 $2,112,097 $5,551,068 ======================================= 5. DEFERRED DEVELOPMENT COSTS
2000 1999 $ $ Development costs deferred as at March 31, 1,252,368 521,428 Development costs deferred during the year ended March 31 841,771 883,295 --------- --------- 2,094,139 1,404,723 Amortised as at March 31, (500,518) (152,355) --------- --------- Development costs deferred as at March, 31 1,593,621 1,252,368 ========= =========
Development costs deferred principally relate to the development of software applications. Management has reviewed the status of the projects to which deferred development costs relate and are satisfied that the recovery of such costs is reasonably assured. However the eventual recovery of these costs is ultimately dependent on actual sales volumes being achieved in subsequent periods and as such recovery is not certain. 67 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 6. INVESTMENTS INVESTMENT IN ASSOCIATED COMPANY During 1998 Brocker Technology Group (NZ) Limited took a 20% founding shareholding in Highway Technologies Limited. This company has developed new technology capable of providing transport and highway management, operation and funding solutions. The Board of Highway Technologies Limited has identified other sources of revenue in order to reduce the amount owing to Brocker Technology Group Limited. These sources include the provision of financial and technical consulting services to parties external to the Group. In addition to the investment, Brocker Technology Group (NZ) Limited has entered an agreement to loan Highway Technologies Limited funds during the company's establishment phase up to a maximum of $1,085,700. Interest is payable on these funds at 30% per annum. As at March 31, 2000 amounts advanced to Highway Technologies Limited amounted to $1,001,270 ($689,523, 1999). No interest has been recorded on the loan for the current year (nil, 1999).
2000 1999 Carrying value of investment $ $ Initial cost of investment 87,366 87,366 Amounts owing from associate 1,001,270 689,523 Equity accounted losses to date (255,636) (172,456) ---------- -------- 833,000 604,433 ========== ======== The financial position of Highway Technologies Limited as at March 31, is represented as follows: Net Current Assets* 127 3,718 Net Current Liabilities (including amounts owing to Brocker Technology Group Limited inclusive of accrued interest) (1,124,060) (803,523) ---------- -------- Net Liabilities (1,123,933) (799,805) ========== ========
* All research and development expenditure has been expensed. Management has assessed the recoverability of the funding loan to Highway Technologies Limited, which is ultimately dependent on the future revenue stream of the software technology under development and the revenue stream from consultancy services, and are satisfied on the basis of the current status of the projects concerned that no impairment provision is required as at March 31, 2000. Management will continue to assess the need for an impairment provision in light of the actual revenues generated. 68 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 7. RENTAL FINANCE LIABILITY Easy PC Computer Rentals Limited, a subsidiary of Brocker Technology Group (NZ) Limited, acts as an intermediary between an independent finance company, which arranges finance for the purchase of equipment, and its customers. During March 1999 Easy PC Computer Rentals Limited renegotiated its Rental Recourse Dealer Deed, with the independent finance company, to ensure that all significant risk of recourse from the individual finance agreements was transferred to the independent finance company. Due to the renegotiation the Group risk of recourse as at March 31, 2000 is limited to $109,364 ($167,245, 1999). During 2000 arrangements were agreed with the independent finance company to ensure all subsequent agreements had no recourse. Included within the 1999 financial statements is revenue of $910,550 ($1,075,944, 1998) in relation to income earned on these leases during the year up to the date of the renegotiation with a corresponding depreciation expense of $736,995 ($870,855, 1998) and interest charges of $173,555 ($205,089, 1998). 69 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 8. INDEBTEDNESS
2000 1999 $ $ a) Long Term Debt Mortgage finance liability, payable in New Zealand 1,975,527 2,357,142 Dollars, with a current interest rate of 7.66%, Collateralised by land and buildings situated at 17 Kahika Road, Beachaven, Auckland, payable over 10 Years Less: Current portion (171,561) (183,352) ---------- ---------- 1,803,966 2,173,790 Capital lease obligations payable in New Zealand dollars, with interest rates ranging from 6.6% to 14.5% per annum, collateralised by related assets, payable over 1 to 3 years 49,567 91,632 Less: Current portion (31,970) (36,676) ---------- ---------- Capital lease obligations payable over 1 year 17,597 54,956 Unsecured Term Liability, repayable in NZ$ 50,666 55,832 ---------- ---------- $1,872,229 $2,284,578 ========== ==========
The total interest expense for the year in relation to long term debt, was $158,104 ($258,957, 1999, $207,048, 1998). Capital lease obligations are repayable as follows: 2000 -- 36,676 2001 31,970 36,821 2002 17,597 18,135 ---------- ---------- $49,567 $91,632 ========== ========== b) Mortgage Finance Liability $1,975,527 $2,357,142 ========== ==========
On October 1,1998 Brocker Technology Group (NZ) Limited purchased new premises in Auckland, New Zealand. The purchase price of $2,460,920 (NZ$3,400,000) was financed by mortgage finance of $2,203,971 (NZ$3,045,000). As at March 31, 2000 the amount remaining outstanding was $1,975,527, (1999, $2,357,142) and is repayable as follows:
2000 1999 $ $ In less than 1 year 171,561 183,352 1 to 2 years 185,174 196,080 2 to 3 years 199,867 209,691 3 to 4 years 215,726 224,247 4 to 5 year 232,844 239,813 5 years and over 970,355 1,303,959 ---------- ---------- 1,975,527 2,357,142 ========== ==========
70 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 8. INDEBTEDNESS (Continued) c) Financing Facility $7,502,880 $3,213,122 ========== ========== During the year ended March 31, 2000 Sealcorp Computer Products Limited, Sealcorp Telecommunications Group Limited and Sealcorp Australia Pty Limited (all subsidiaries of the company) have successfully renegotiated their financing arrangements. A new NZ$20 million financing facility, secured by a registered first debenture on the assets and undertakings of these companies, replaces the previous facility of similar terms, which was terminated during the period. The current interest rate on this facility is 6.65%. 9. SHARE CAPITAL a) Authorised Unlimited number of common shares Unlimited number of Preferred Shares 10,000,000 Series A Preferred Shares 6 1/2% cumulative Issued and outstanding 2000 1999 $ $ Common shares 7,428,680 3,353,490 Series A Preferred -- 2,450,000 Warrants Issued 16,110,000 -- Shares to be issued 359,441 -- Less: Share issue costs (2,136,051) (41,769) ----------- ---------- $21,762,070 $5,761,721 =========== ========== As at March 31, 2000 963,902 shares were being held in escrow pursuant to Escrow Agreements which provide for the release of such shares on a performance basis. In the prior year 963,602 shares were held in escrow. 71 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 9. SHARE CAPITAL b) Share Transactions
2000 1999 Common Shares Shares Amount Shares Amount Shares outstanding - at March 31, 12,125,854 4,937,365 11,704,554 4,214,324 Issue of shares for acquisition of 1World Systems Ltd (formerly Microchannel Ltd) 46,337 81,090 -- -- Issue of shares for acquisition of Powercall Technologies Limited (Note (ii)) -- -- 284,733 498,283 Issue of shares for acquisition of Easy PC Computer Rentals Limited (Note (iii)) -- -- 111,567 195,258 Conversion of Preference shares 1,884,613 2,450,000 -- -- Exercise of share warrants -- -- 25,000 29,500 Exercise of stock options 177,000 261,600 -- -- Shares issued pursuant to July 1,000,000 1,070,000 -- -- private placement Other shares issued 25,000 212,500 -- -- ------------------------------------------------------------ Shares issued - at March 31, 15,258,804 9,012,555 12,125,854 4,937,365 Acquisition shares held in escrow (Note( i) and (iii)) (963,602) (1,583,875) (963,602) (1,583,875) ------------------------------------------------------------ Shares outstanding - at March 31, 14,295,202 7,428,680 11,162,252 3,353,490 Shares issuable in relation to Warrants (Note 9(b)) 3,780,000 16,110,000 -- -- ------------------------------------------------------------ Shares and warrants outstanding - at March 31, 18,075,202 $23,538,680 11,162,252 $3,353,490 ============================================================
(i) During 1998 share script was issued in respect of the acquisition of Industrial Communications Service Limited. These shares (760,500) are currently held in escrow and are only released as earn-out provisions are achieved. As at March 31, 2000 no earn-out amounts have been determined, resulting in a prescribed value of nil. 72 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 9. SHARE CAPITAL (Continued) b) Share Transactions (Continued) (ii) During 1999 shares were issued, at $1.75, in relation to the acquisition of Powercall Technologies Limited in respect to earn-out targets that were achieved. (Note 3). As at March 31, 2000 186,317 of these shares were being held in escrow. (iii) During 1999 additional shares were issued, at $1.75 in relation to the acquisition of Easy PC Computer Rentals Limited in respect to earn-out targets that were achieved. (Note 3) As at March 31, 2000 16,785 of these shares were being held in escrow. (iv) During the year 46,337 shares were issued at $1.75 in relation to the acquisition of 1 World Systems Limited (Note 3).
2000 1999 Preferred Shares Shares Amount Shares Amount Series A shares outstanding at March 31, 2,450,000 2,450,000 2,450,000 2,450,000 Converted to Common Shares (2,450,000) (2,450,000) -- -- -------------------------------------------------------- Series A shares outstanding at March 31, -- -- 2,450,000 $2,450,000 ========================================================
In 1995 the Company acquired Brocker Investment (NZ) Limited and a liability was established in the accounts for the purchase consideration. In 1996 the liability was satisfied by the issuance of Series A preferred shares. During the year 2,450,000 shares were converted to common shares. During the year a dividend was paid at 6.5% of preferred shares outstanding at September 30, 1999. 73 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 9. SHARE CAPITAL (Continued) b) Share Transactions (Continued) Warrants 2000 Warrants outstanding at March 31, Number Amount First Special Warrants 1,800,000 4,860,000 Second Special Warrants 1,800,000 11,250,000 Other Warrants 1,000,000 -- Agents Warrants 486,000 -- Agents Options 228,400 -- --------- ---------- 5,314,400 16,110,000 ========= ========== The first private placement occurred on December 15, 1999 and consisted of the issuance of 1,800,000 Special Warrants (the "First Special Warrants") at a price of $2.70 per First Special Warrant. This entitled the holder thereof to acquire one Common Share and one Half Warrant, at no additional cost, at any time until 4:00 p.m. (Edmonton time) (the "First Expiry Time") on the earlier of: (i) five days after the date the Company receives a receipt from the Alberta Securities Commission for the filing of a prospectus; and (ii) December 15, 2000. Two Half Warrants entitle the holder thereof to purchase one additional Common Share at a price of $3.15 per Common Share on or before June 15, 2001. The First Special Warrants will be deemed to have been exercised at the First Expiry Time. The second private placement of Special Warrants occurred on January 21, 2000 and consisted of the issuance of 1,800,000 Special Warrants (the "Second Special Warrants") at a price of $6.25 per Second Special Warrant. Each Second Special Warrant entitles the holder thereof to acquire 1.1 Common Shares, at no additional cost, at any time until 4:00 p.m. (Edmonton time) (the "Second Expiry Time") on the earlier of: (i) the fifth day following the date upon which a receipt for the final prospectus is issued by the securities commission in each of the provinces of Alberta, British Columbia and Ontario (the "Filing Provinces"); and (ii) January 21, 2001, subject to adjustment in certain events. Any Second Special Warrant not exercised prior to the Second Expiry Time shall be deemed to have been exercised at the Second Expiry Time. Other warrants were created as part of the private placement that was undertaken in June 1999. These warrants entitles the holder thereof to acquire 1,000,000 Common Shares, at the cost of $1.25 per Common Share, and expire on January 16, 2002. In addition to the fee paid in connection with the offering of the First Special Warrants, the Company also granted Finders' Warrants to acquire 486,000 Common Shares at a price of $3.15 per share on or before June 15, 2001. 74 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 9. Share Transactions (Continued) Warrants (Continued) In addition to the Agent's and Sub-Agents', fee, the Company has also granted to the Agent an option entitling the Agent to acquire a further option exercisable to acquire in the aggregate 200,000 Common Shares of the Company at a price of $6.25 per Common Share until January 21, 2002, and granted to the Sub-Agents an option to acquire an aggregate of 28,400 Common Shares at a price of $6.25 per share until January 21, 2002. As at March 31, 2000 no Agents Warrants or Options had been exercised. Shares to be issued At March 31, 2000 there were 103,422 shares due to be issued in relation to the earn out of Powercall Technologies Limited. These shares have been valued $1.47 being the market value of these shares as at June 30, 1999 being the date the conditions for their issue were met. Also at March 31, 2000 there were 17,652 shares due to be issued in relation to the earn out of 1World Systems Limited. These shares have been valued at $11.75, being the market value of these shares as at March 31, 2000 being the date the conditions for their issue were met. 75 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 9. SHARE CAPITAL (Continued) c) Unexercised Options
2000 1999 Options outstanding at March 31, 889,000 $1.56 769,000 1.57 Granted 696,000 $6.36 120,000 $1.50 Exercised (177,000) $1.48 -- -- Forfeited (90,000) $1.46 -- -- ----------------------------------------------- Options outstanding at March 31, 1,318,000 $4.11 889,000 $1.56 ===============================================
As at March 31, 2000 all outstanding options are able to be exercised. Options held by the Directors of the Company (387,000, 1999) are as follows: ------------------------------------------------------------------- Number of options Exercise price Expiry date ------------------------------------------------------------------- 350,000 $11.25 02/29/05 ------------------------------------------------------------------- 145,000 $1.18 01/12/01 ------------------------------------------------------------------- 57,000 $1.31 01/12/01 ------------------------------------------------------------------- 30,000 $1.90 11/20/02 ------------------------------------------------------------------- 50,000 $1.50 11/30/03 ------------------------------------------------------------------- 118,000 $1.41 07/02/04 ------------------------------------------------------------------- Options are held by employees of the Group as follows (502,000-1999): ------------------------------------------------------------------- Number of options Exercise price Expiry date ------------------------------------------------------------------- 228,000 $1.41 07/02/04 ------------------------------------------------------------------- 300,000 $1.90 11/20/02 ------------------------------------------------------------------- 40,000 $1.18 01/12/01 ------------------------------------------------------------------- There are no criteria that need to be met before the Options can be exercised by the holder. Options are forfeited in the event the holder ceases to be a Director or employee of the Company or one of its subsidiaries. d) Earnings Per Common Share Earnings per share has been calculated on the basis of the weighted average number of common shares outstanding for the year. Net income has been adjusted for dividends paid on preferred shares of $152,743 ($163,322, 1999 and $195,000, 1998).
2000 1999 1998 ------------------------------------------------------------------------------------------ Weighted average number of shares 13,756,593 11,012,887 10,516,318 Net (loss)/income attributable to shareholders after deduction of preference dividends (581,771) 351,492 601,816 Basic (loss)/earnings per share ($0.04) $0.03 $0.06 ------------------------------------------------------------------------------------------
For the current, and previous, financial year the effect on earnings per share of the exercise of outstanding options and conversion of preferred shares, for the calculation of fully diluted earnings per share, is anti-dilutive. 76 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 10. INCOME TAX Income tax expense attributable to income from earnings was $(2,824), $272,991 and $506,067 for the years ended March 31, 2000, 1999 and 1998, respectively, and differed from the amounts computed by applying the Canadian income tax rate to pretax income from continuing operations as a result of the following:
2000 1999 1998 $ $ $ Expected income tax expense calculated at the Statutory Rate on Earnings before Taxation (192,606) 346,635 583,691 Income tax expense Amortisation of goodwill 123,311 114,487 95,497 Adjustment for foreign tax rates 41,322 (109,765) (203,497) Other 25,149 (78,366) 30,775 -------- -------- -------- (2,824) 272,991 506,067 ======== ======== ======== Total income tax expense is made up of: Current taxation expenses 17,775 180,380 648,116 Future taxation expenses (20,599) 92,611 (142,049) -------- -------- -------- (2,824) 272,991 506,067 ======== ======== ========
The significant components of future income tax expense attributable to income from continuing operations for the years ended March 31, 2000, 1999 and 1998 are as follows: Future tax expense (exclusive of the effects of other components below) (20,599) 92,611 (142,049) Adjustments to future tax assets and liabilities for enacted changes in laws and rates -- -- -- Increase (decrease) in beginning-of-the-year balance of the valuation allowance for future tax assets -- -- -- ------- ------ -------- (20,599) 92,611 (142,049) ======= ====== ========
77 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 10. INCOME TAX (Continued) The tax effects of temporary differences that give rise to significant portions of the future tax assets and future tax liabilities at March 31, 2000 and 1999 are presented below. 2000 1999 $ $ Future tax assets: Accounts receivable principally due to allowance for doubtful accounts 77,436 99,596 Inventories, principally due to allowance for obsolescence 136,695 93,277 Compensated absences, principally due to accrual for financial reporting purposes 205,935 157,570 Share issue costs 952,679 -- Net operating loss carry forwards 345,291 -- Other 13,304 15,729 ---------- --------- Total gross future tax assets 1,731,340 366,172 Less valuation allowance (952,679) -- ---------- --------- Net future tax assets 778,661 366,172 Future tax liabilities: Plant and equipment, due to differences in depreciation. (85,077) (55,902) ---------- --------- Total future tax liability $ (85,077) $(55,902) ========== ======== In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of future tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the future tax asset, the Company will need to generate future taxable income. Based upon the level of historical taxable income and projections for future taxable income over the periods which the future tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible assets. The amount of the future tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. At March 31, 2000, the Company has operating losses which are available to offset future taxable income, in New Zealand, subject to minimum continuity of shareholding tests. 78 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 11. RELATED PARTY TRANSACTIONS a) During the year, the Group provided an interest free short-term advance to the Chief Executive Officer of the Company. The balance outstanding at March 31, 2000 was $4,230 ($4,663, 1999). This balance is included in other receivables. b) The Chief Executive Officer of the Company, as at March 31, 2000, held no (923,453, 1999) preferred shares on which a dividend of $60,024 ($60,783 1999 ) was paid during the year. All preferred shares previously held were converted to 710,348 common shares during the period. c) Directors of the Company have exercised stock options. The funds required to exercise these options have been loaned to the Directors by Brocker Technology Group (NZ) Limited. As at March 31, 2000 the amount outstanding was $540,115 ($749,375, 1999). The current market value of the shares, held as security over these loans is in excess of $3.8 million ($1.6 million, 1999). Interest of $17,066 ($16,692, 1999) was charged during the year. This balance is included in other receivables. The maximum amount outstanding during the year in respect of these loans was $749,375. The loan to each Director is repayable on demand or within 30 days of the individual ceasing to be a Director of the Company or one of its subsidiaries. The beneficial ownership of the shares are held as security over the loan, and the Company retains the right to either sell or cancel the shares to settle any outstanding amounts and the employee may not sell or transfer the shares prior to settlement of the amounts outstanding. All loans to directors and officers of the company are full recourse loans d) Directors, of various subsidiary companies, have advances owing to the Group as at March 31, 2000 totaling $182,501. In all cases these Directors were shareholders of the subsidiary prior to acquisition by Brocker Technology Group (NZ) Limited. No interest is charged on the amounts outstanding and the balance is included in other receivables. e) During the year to March 31, 2000 payments of $39,186 have been made to Chamberlain Hutchison the Company's Canadian based legal advisor. During the year Andrew Chamberlain, a Principal/Partner of Chamberlain Hutchison, was appointed a Director of the Company. f) A number of Group companies transact business with each other on a regular basis. These transactions are entered into on normal commercial terms and are eliminated on consolidation. See Note 13 for Intersegment revenues. Unless otherwise stated the maximum amount outstanding during the year was the balance at March 31, 2000 or March 31, 1999. 12. EMPLOYEE SHARE OWNERSHIP PLAN In November 1996 the Company established a plan to enable a number of senior management employees to acquire stock options in the Company. Brocker Technology Group (NZ) Limited has provided financial assistance to some of these employees to exercise the options offered. The loan to each employee is repayable on demand or within 30 days of the individual ceasing to be an employee of the Company or one of its subsidiaries. The beneficial ownership of the shares are held as security over the loan, and the Company retains the right to either sell or cancel the shares to settle any outstanding amounts and the employee may not sell or transfer the shares prior to settlement of the amounts outstanding. As at March 31, 2000 the amounts outstanding in respect of these shares amounted to $86,939 ($84,297, 1999) and is included within other receivables. Interest of $11,167 ($13,729, 1999) was charged on these loans during the year. The current market value of the shares held as security is in excess of $2.35million ($600,000, 1999). The maximum amount outstanding during the year was $86,939 ($130,855, 1999) 79 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 13. SEGMENTED OPERATIONS The Group operates in two geographical segments, New Zealand and Australia. The Canadian operations shown relate to administrative items only. The reporting of all business segments is consistent with those reported in the prior year, including Vendor Services and Application Hosting which have been renamed to better reflect the operations of the segments.
---------------------------------------------------------------------------------------------------------------- 2000 ($) Canada New Zealand Australia Total ---------------------------------------------------------------------------------------------------------------- Sales -- 86,851,142 49,471,791 136,322,933 ---------------------------------------------------------------------------------------------------------------- Intersegment revenue -- -- -- -- ---------------------------------------------------------------------------------------------------------------- Net profit/(loss) -- (1,000,852) 571,824 (429,028) ---------------------------------------------------------------------------------------------------------------- Depreciation and amortisation -- 1,615,994 166,489 1,782,483 ---------------------------------------------------------------------------------------------------------------- Net interest expense (67,056) 948,337 241,305 1,122,586 ---------------------------------------------------------------------------------------------------------------- Identifiable assets 6,796,721 42,633,492 12,098,342 61,528,555 ---------------------------------------------------------------------------------------------------------------- Capital asset expenditure -- 936,416 150,464 1,086,880 ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 1999 ($) Canada New Zealand Australia Total ---------------------------------------------------------------------------------------------------------------- Sales -- 109,887,630 23,415,010 133,302,640 ---------------------------------------------------------------------------------------------------------------- Intersegment revenue -- 18,058 (18,058) -- ---------------------------------------------------------------------------------------------------------------- Net profit/(loss) -- 204,103 310,711 514,814 ---------------------------------------------------------------------------------------------------------------- Depreciation and amortisation -- 1,894,449 116,254 2,010,703 ---------------------------------------------------------------------------------------------------------------- Net interest expense -- 1,270,935 138,252 1,409,187 ---------------------------------------------------------------------------------------------------------------- Identifiable assets -- 41,473,664 9,269,733 50,743,397 ---------------------------------------------------------------------------------------------------------------- Capital asset expenditure -- 4,439,113 324,768 4,673,881 ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- 1998 ($) Canada New Zealand Australia Total ---------------------------------------------------------------------------------------------------------------- Sales -- 57,281,848 13,529,374 70,811,220 ---------------------------------------------------------------------------------------------------------------- Intersegment revenue -- -- -- -- ---------------------------------------------------------------------------------------------------------------- Net profit/(loss) (33,001) 1,208,407 (378,590) 796,816 ---------------------------------------------------------------------------------------------------------------- Depreciation and amortisation -- 1,629,985 62,600 1,692,585 ---------------------------------------------------------------------------------------------------------------- Net interest expense -- 584,070 84,775 668,845 ---------------------------------------------------------------------------------------------------------------- Identifiable assets -- 29,923,977 2,575,194 32,499,171 ---------------------------------------------------------------------------------------------------------------- Capital asset expenditure -- 1,007,960 37,159 1,045,119 ----------------------------------------------------------------------------------------------------------------
The Group principally operates in four industry segments, being the divisions by which the Group is managed, as follows: o Distribution and sale of computer and telecommunications hardware and software ("Vendor Services"); o The hosting of client hardware and software services including the provision of technical support and services for the Technology Industry ("Application Hosting"); o Software application design and development ("Application Development") ; and o Provision of professional consulting services ("Professional Services"). The corporate services operation shown relates to the Group's administrative functions in New Zealand, Australia, and Canada. 80 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 13. SEGMENTED OPERATIONS (Continued)
------------------------------------------------------------------------------------------------------------------------------- Vendor Application Application Professional Corporate 2000 ($) Services Hosting Development Services Services Total ------------------------------------------------------------------------------------------------------------------------------- Sales 126,697,563 2,687,771 1,406,155 5,528,550 2,901 136,322,940 ------------------------------------------------------------------------------------------------------------------------------- Intersegment revenue 673,636 (44,729) (6,470) (622,437) -- -- ------------------------------------------------------------------------------------------------------------------------------- Net profit/(loss) 1,814,532 (154,154) (1,108,803) (664,677) (315,926) (429,028) ------------------------------------------------------------------------------------------------------------------------------- Depreciation and 142,913 50,341 552,218 366,206 670,805 1,782,483 amortisation ------------------------------------------------------------------------------------------------------------------------------- Net interest expense 803,957 43,118 319,984 165,278 (209,751) 1,122,586 ------------------------------------------------------------------------------------------------------------------------------- Identifiable assets 39,882,005 667,427 1,536,333 2,193,936 17,248,854 61,528,555 ------------------------------------------------------------------------------------------------------------------------------- Capital asset 81,880 43,455 9,326 548,342 403,877 1,086,880 expenditure ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- Vendor Application Application Professional Corporate 1999 ($) Services Hosting Development Services Services Total ------------------------------------------------------------------------------------------------------------------------------- Sales 124,995,192 2,661,745 2,124,378 3,519,855 1,470 133,302,640 ------------------------------------------------------------------------------------------------------------------------------- Intersegment revenue 465,306 (38,691) (62,525) (364,090) -- -- ------------------------------------------------------------------------------------------------------------------------------- Net profit/(loss) 3,137,297 54,278 (407,056) (65,010) (2,204,695) 514,814 ------------------------------------------------------------------------------------------------------------------------------- Depreciation and amortisation 1,257,971 82,843 330,630 37,252 302,007 2,010,703 ------------------------------------------------------------------------------------------------------------------------------- Net interest expense 1,206,905 33,225 126,465 8,651 33,941 1,409,187 ------------------------------------------------------------------------------------------------------------------------------- Identifiable assets 49,787,311 532,667 189,390 1,100,084 (866,055) 50,743,397 ------------------------------------------------------------------------------------------------------------------------------- Capital asset expenditure 835,810 185,184 170,388 126,934 3,355,565 4,673,881 ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- Vendor Application Application Professional Corporate 1998 ($) Services Hosting Development Services Services Total ------------------------------------------------------------------------------------------------------------------------------- Sales 67,856,803 2,331,371 623,046 -- -- 70,811,220 ------------------------------------------------------------------------------------------------------------------------------- Intersegment revenue 178,283 (12,632) (165,651) -- -- -- ------------------------------------------------------------------------------------------------------------------------------- Net profit/(loss) 2,555,089 (28,671) 96,344 -- (1,825,946) 796,816 ------------------------------------------------------------------------------------------------------------------------------- Depreciation and amortisation 1,470,999 90,513 87,274 -- 43,799 1,692,585 ------------------------------------------------------------------------------------------------------------------------------- Net interest expense 540,396 70,030 2,541 -- 55,878 668,845 ------------------------------------------------------------------------------------------------------------------------------- Identifiable assets 33,281,993 441,775 306,213 -- (1,530,810) 32,499,171 ------------------------------------------------------------------------------------------------------------------------------- Capital asset expenditure 598,923 66,128 250,293 -- 129,775 1,045,119 -------------------------------------------------------------------------------------------------------------------------------
During 2000 the group conducted business with a single customer that accounted for revenue of $23,098,677 ($23,792,150, 1999). This revenue was generated in New Zealand by the Vendor Services segment. There was no such customers in 1998. 81 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 14. NOTES TO CASH FLOWS STATEMENT a) Reconciliation of net profit and cash flow from operating activities
2000 1999 1998 $ $ $ Net Earnings for the year Note (429,028) 514,814 796,816 Add/(Less) non cash items: Depreciation and amortisation 1,782,483 1,273,748 790,814 Depreciation on rental finance liability 7 -- 736,95 870,855 Interest on rental finance liability 7 -- 173,555 205,089 Income on rental finance liability 7 -- (910,550) (1,075,944) Loss of associated company 83,180 91,330 79,953 Loss on sale of capital assets 443,038 78,808 17,550 Future taxation expense (20,599) 92,611 (142,049) Unrealised exchange (gain)/loss -- (22,665) (46,558) Impact of changes in working capital items: Decrease/(Increase) in accounts receivable and prepayments 474,427 (8,913,357) (8,109,429) Increase in taxation receivable (236,427) (456,569) (112,978) Increase in inventories (6,144,101) (5,448,644) (4,577,815) (Decrease)/Increase in accounts payable, financing facility and accrued liabilities (1,435,425) 15,771,607 12,772,715 ---------- ---------- ---------- Net cash flow from operating activities (5,482,452) 2,981,64 1,469,019 ========== ========== ==========
82 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 15. FINANCIAL INSTRUMENTS Currency Risk The nature of activities and management policies with respect to financial instruments are as follows: i) Currency The Group uses a very limited number of forward exchange contracts and currency options to hedge purchases of inventory in foreign currencies. The Group's exchange rate commitments are intended to minimise the exposure to exchange rate movement risk on the cost of the Group's products and on the price it is able to sell those products to its customers. The Group does not use foreign exchange instruments for trading or any other purpose. No forward exchange contracts were entered into during the current financial year (nil, 1999). During the 1998 financial year the average value of these contracts amounted to $1,232,000 and were entered as a hedge against New Zealand purchases made in Australian dollars. ii) Concentration of credit risk In the normal course of business, the Group incurs credit risk from trade debtors and transactions with financial institutions. The Group has a credit policy which is used to manage the risk. As part of this policy, limits on exposure with counterparties have been set and are monitored on a regular basis. Anticipated bad debt losses have been provided for in the allowance for doubtful accounts. The Group has no significant concentrations of credit risk. The Group does not consider that they require any collateral or security to support financial instruments due to the quality of financial institutions and trade debtors. ii) Interest Rate Risk The Group has adopted a policy of ensuring that its exposure to changes in interest rates is on a floating rate basis. iv) Fair Values The fair values of the Group's cash accounts and other receivables, bank, indebtedness, accounts payable, accrued liabilities and lease obligations approximate their carrying values given their short term nature. The carrying value of the demand debenture and capital leases, as disclosed in note 8, also approximate their fair value. 16. COMMITMENTS a) Brocker Technology Group (NZ) Limited has entered into a number of acquisitions where the final acquisition price is dependent on the occurrence of future events. This contingent purchase price is calculated based on cash flow earned for a given period, and is settled by way of shares issued but held in escrow. Shares are released from escrow based on cash flows, as defined with each party, earned by the subsidiary over a varying number of years following acquisition, being the "earn-out" period. 83 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 16. COMMITMENTS (Continued) As at March 31, 2000 the following earn-outs were in existence.
Subsidiary Acquisition price and earn-out provisions ---------- ----------------------------------------- Industrial Communications Service Limited Maximum purchase price established and shares issued and held in escrow (refer Note 9). Earn-out based on defined cash flow earned in financial years ended March 31, 1998 - 1999. It is not currently envisaged that any shares currently held in escrow will be released in relation to this acquisition. ---------------------------------------------------------------------------------------- Powercall Technologies Limited Shares to be held in escrow based on the lessor of four times the cumulative cash flow earned for the years ended March 31, 1998 to 2001 or twelve times profit for the year ended March 31, 2001, limited to NZ$20m. Earn-out based on defined cash flow earned in financial years ended March 31, 1998 - 2002 (Note 3). ---------------------------------------------------------------------------------------- Easy PC Computer Rentals Limited Shares to be held in escrow based on cash flow earned for the year ended March 31, 1998. Earn-out based on defined cash flow earned in financial years ended March 31, 1999 - 2000 (Note 3). It is not envisaged any additional shares will be issued in relation to this acquisition. Pritech Corporation Limited Shares to be held in escrow based on cash flow earned for the year ended September 30, 1998. Earn-out based on defined cash flow earned in financial years ended September 30, 1999 - 2000 (Note 3). It is not envisaged any additional shares will be issued in relation to this acquisition. ---------------------------------------------------------------------------------------- 1 World Systems Limited Shares to be held in escrow based on cash flow earned for the year ended March 31, 1999. Earn-out based on defined cash flow earned in financial years ended March 31, 2001 - 2002 (Note 3). ----------------------------------------------------------------------------------------
84 BROCKER TECHNOLOGY GROUP LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 16. COMMITMENTS (Continued) Based on the latest available information, the directors have estimated that the maximum number of shares that could potentially be issued, including those currently in escrow, under the earn-out agreements referred to in Note 3 and above, is 2.0 million common shares. The number of shares that will ultimately be issued is dependent upon the subsidiaries concerned achieving their respective earn-out criteria. b) Group companies operate from leased premises and have other obligations under operating leases requiring annual repayments as follows: 2001 $931,008 2002 $806,187 2003 $664,788 Thereafter $821,989 17. CONTINGENT LIABILITIES In the general course of business disputes may arise with customers and other third parties. The Directors consider adequate provision has been made for all such instances. 18. SUBSEQUENT EVENTS On June 13, 2000 the Company filed its registration document, form 20-F, with the United States Securities and Exchange Commission as part of its process to obtain a NASDAQ listing. 85 CERTIFICATE OF THE CORPORATION August 28, 2000 The foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by Part 8 of the Securities Act (Alberta), Part 9 of the Securities Act (British Columbia) and by Part XV of the Securities Act (Ontario) and the respective regulations and Rules thereunder. (Signed) "Michael B. Ridgway" (Signed) "Richard Justice" ------------------------------- ------------------------------- Michael B. Ridgway Richard Justice Chief Executive Officer Chief Financial Officer ON BEHALF OF THE BOARD OF DIRECTORS (Signed) "Casey J. O'Byrne (Signed) "Andrew J. Chamberlain" ------------------------------- ------------------------------- Casey J. O'Byrne Andrew J. Chamberlain Director Director ON BEHALF OF THE PROMOTER MICHAEL B. RIDGWAY (Signed) "Michael B. Ridgway" ----------------------------- The foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by Part 8 of the Securities Act (Alberta), Part 9 of the Securities Act (British Columbia) and by Part XV of the Securities Act (Ontario) and the respective regulations and Rules thereunder. 86 CERTIFICATE OF THE AGENT August 28, 2000 To the best of our knowledge, information and belief, the foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by Part 8 of the Securities Act (Alberta) and by Part XV of the Securities Act (Ontario) and the respective regulations and Rules thereunder. Thomson Kernaghan & Co. Limited Per: (Signed) "Lionel Conacher" -------------------------- The following includes the name of every person or company having an interest, either directly or indirectly, to the extent of not less than 5% in the capital of Thomson Kernaghan & Co. Limited: T.K. Holdings Inc.