-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QSHo3pP7ul5QlNyEHXVtEuRvibZwgU0tG3AgfJ1khqqafzWPzGkkmDl/suVaoyXY Lew7IQVPteGWXkB/kCZ1rg== 0001134821-08-000021.txt : 20091204 0001134821-08-000021.hdr.sgml : 20091204 20080311161041 ACCESSION NUMBER: 0001134821-08-000021 CONFORMED SUBMISSION TYPE: 20-F/A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20080311 DATE AS OF CHANGE: 20091020 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINGO MEDIA INC CENTRAL INDEX KEY: 0001177167 STANDARD INDUSTRIAL CLASSIFICATION: BOOKS: PUBLISHING OR PUBLISHING AND PRINTING [2731] IRS NUMBER: 000000000 STATE OF INCORPORATION: A6 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F/A SEC ACT: 1934 Act SEC FILE NUMBER: 333-98397 FILM NUMBER: 08680736 BUSINESS ADDRESS: STREET 1: 151 BLOOR STREET WEST STREET 2: SUITE 703 CITY: TORONTO STATE: A6 ZIP: M5S1S4 BUSINESS PHONE: 4169277000 MAIL ADDRESS: STREET 1: 151 BLOOR STREET WEST STREET 2: SUITE 703 CITY: TORONTO STATE: A6 ZIP: M5S1S4 FORMER COMPANY: FORMER CONFORMED NAME: LINGO MEDIA INC DATE OF NAME CHANGE: 20020708 20-F/A 1 form20fa31dec06.htm FORM 20-F/A FOR THE YEAR ENDED DECEMBER 31, 2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Annual Report

FORM 20-F/A

   

       ÿ    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)

         OF THE SECURITIES EXCHANGE ACT OF 1934


OR

    X    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

         THE SECURITIES EXCHANGE ACT OF 1934


OR

    ÿ   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

        THE SECURITIES EXCHANGE ACT OF 1934

        For the transition period from __________ to ________


Commission file number _______


LINGO MEDIA CORPORATION

(FORMERLY LINGO MEDIA INC.)

(Exact name of Registrant as specified in its charter)


Ontario, Canada

(Jurisdiction of incorporation or organization)

  

151 Bloor Street West, #703, Toronto, Ontario, Canada  M5S 1S4

(Address of principal executive offices)


Securities to be registered pursuant to Section 12(b) of the Act:

None


Securities to be registered pursuant to Section 12(g) of the Act:

Common Shares, without par value

(Title of Class)


Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:                                                               None


Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.                                                             32,578,170


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 12 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.            Yes XXX   No ___


Indicate by check mark which financial statement item the registrant has elected to follow:                                   Item 17 XXX   Item 18 ___


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LINGO MEDIA INC.

FORM 20-F ANNUAL REPORT

TABLE OF CONTENTS


PART I


Item 1.  Identity of Directors, Senior Management and Advisors  3

Item 2.  Offer Statistics and Expected Timetable..............  3

Item 3.  Key Information......................................  3

Item 4.  Information on the Company........................... 17

Item 5.  Operating and Financial Review and Reports........... 32

Item 6.  Directors, Senior Management and Employees........... 43

Item 7.  Major Shareholders and Related Party Transactions.... 54

Item 8.  Financial Information................................ 57

Item 9.  The Offer and Listing................................ 58

Item 10. Additional Information............................... 62

Item 11. Quantitative and Qualitative Disclosures

          About Market Risk................................... 77

Item 12. Description of Securities Other Than

          Equity Securities................................... 77



PART II


Item 13. Default, Dividend Arrearages and Delinquencies....... 77

Item 14. Material Modifications to the Rights of

          Security Holders and Use of Proceeds................ 77

Item 15. Controls and Procedures......................... .....78

Item 16. Reserved............................................. 78



PART III


Item 17. Financial Statements................................. 78

Item 18. Financial Statements................................. 79

Item 19. Exhibits............................................. 79





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Forward-Looking Statements


Included in this annual report are various forward-looking statements that can be identified by the use of forward looking terminology such as "may", "will", "expect", "anticipate", "estimate", "continue", "believe", or other similar words.  We have made forward-looking statements with respect to the following, among others:


-

the Company’s goals and strategies;

-

the Company’s ability to obtain licenses/permits to operate in China and Canada;

-

the importance and expected growth of English language learning in China;

-

the importance and expected growth of early childhood development in Canada;

-

the Company’s revenues;

-

the Company’s potential profitability; and

-

the Company’s need for external capital.


These statements are forward-looking and reflect our current expectations.  They are subject to a number of risks and uncertainties, including but not limited to, changes in the economic and political environment in China.  In light of the many risks and uncertainties surrounding China and the early childhood market in Canada prospective purchasers of our shares should keep in mind that we cannot guarantee that the forward-looking statements described in this annual report will transpire.


PART I


ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS


Not applicable


Item 2.  OFFER STATISTICS AND EXPECTED TIMETABLE


Not applicable.


ITEM 3.  KEY INFORMATION


3.A.2.  Selected Financial Data


Our financial statements are reported in Canadian Dollars and presented in accordance with Canadian generally accepted accounting principles and reconciled to U.S. generally accepted accounting principles in the footnotes, for the fiscal years ended December 31, 2006, December 31, 2005, December 31, 2004, December 31, 2003 and December 31, 2002. These financial reports have been audited by Mintz & Partners LLP.





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The selected financial data should be read in conjunction with the financial statements and other financial information included elsewhere in the Annual Report.


The Company has not declared any dividends since incorporation and does not anticipate that it will do so in the foreseeable future.  The present policy of the Company is to retain any future earnings for use in its operations and the expansion of its business.


Please note that the US GAAP reconciliation numbers in the following table are selected from the note 19 of the December 31, 2006 financial statements and note 10 of the interim financial statements as of March 31, 2007.


Table No. 3

Selected Financial Data

Expressed in Canadian Dollars

(CDN$ in 000, except per share data)

 

Unaudited

 

Audited

 

Three Months

 

Year

Year

 

Year

Year

Year

 

Ended

Ended

 

Ended

Ended

 

Ended

Ended

Ended

 

3/31/07

3/31/06

 

12/31/06

12/31/05

 

12/31/04

12/31/03

12/31/02

 

 

 

 

 

 

 

 

 

 

Revenue

$  667 

$    2 

 

$  1574 

$   906 

 

$   590 

$  1018 

$  1329 

Gross Profit

528 

 

1255 

783 

 

495 

846 

885 

Net Loss

(310)

(310)

 

(748)

(726)

 

(795)

(257)

68 

 

 

 

 

 

 

 

 

 

 

(Loss) per Share

(0.01)

$(0.01)

 

$ (0.03)

$ (0.03)

 

(0.04)

$ (0.01)

$ (0.00)

Dividends per Share

$ 0.00 

$ 0.00 

 

$  0.00 

$  0.00 

 

$  0.00 

$  0.00 

$  0.00 

 

 

 

 

 

 

 

 

 

 

Weighted Avg. Shares (000)

29591 

26070 

 

28422 

24712 

 

22627 

18728 

16023 

Period-end Shares outstanding(000)

32628 

27890 

 

32578 

28875 

 

24109 

23545 

20734 

 

 

 

 

 

 

 

 

 

 

Working Capital

$ (401)

$   28 

 

$  (347)

$   278 

 

$   271 

$   646 

$  (516)

Long-Term Debt/ Loans Payable

395 

53 

 

348 

 

106 

54 

Shareholders' Equity

1089 

846 

 

1376 

1088 

 

938 

1620 

1627 

Total Assets

2834 

1521 

 

2884 

1417 

 

1798 

1931 

1883 

US GAAP income (Loss)

$ (293)

$ (299)

 

$  (633)

$  (710)

 

$  (427)

$  (126)

$   (60)

US GAAP Basic Loss per Share

$(0.01)

$(0.01)

 

$ (0.03)

$ (0.03)

 

$ (0.02)

$ (0.01)

$ (0.00)

 

 

 

 

 

 

 

 

 

 

US GAAP Equity

$  567 

$  398 

 

$   963 

$   625 

 

$   482 

$   764 

$  (531)

US GAAP Total Assets

$ 2713 

$ 1088 

 

$  2763 

$  1391 

 

$  1212 

$   990 

$   876 



(1)  Cumulative Net Loss since incorporation under US GAAP has been ($4,615,982).

(2)  

     a) Under US GAAP, development costs of new businesses are expensed as incurred:

        2006-$nil, 2005-$nil, and 2004-$nil.

     b) Under US GAAP, development costs amortized under Canadian GAAP would be reversed to

        calculate Loss per Share:  2006 – 156,648, 2005 – $133,290 and 2004 – $346,124.

     c) Under US GAAP, software development costs are expensed as incurred:

        2006-$nil; 2005-$nil; and 2004-$nil.






-5-

3.A.3.  Exchange Rates


In this Annual Report, unless otherwise specified, all dollar amounts are expressed in Canadian Dollars ($).  The Government of Canada permits a floating exchange rate to determine the value of the Canadian Dollar against the U.S. Dollar (US$).


The table sets forth the rate of exchange for the Canadian Dollar at the end of the five most recent fiscal periods ended December 31st, the average rates for the period and the range of high and low rates for the period.  The data for each month during the previous twelve months is also provided.  


For purposes of this table, the rate of exchange means the noon   buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.  The table sets forth the number of Canadian Dollars required under that formula to buy one U.S. Dollar.  The average rate means the average of the exchange rates on the last day of each month during the period.


Table No. 4

U.S. Dollar/Canadian Dollar


 

Average

High

Low

Close

May 2007

1.10 

1.11 

1.07 

1.10 

April 2007

1.13 

1.16 

1.11 

1.12 

March 2007

1.17 

1.18 

1.15 

1.13 

February 2007

1.17 

1.19 

1.16 

1.11 

January 2007

1.18 

1.18 

1.16 

1.12 

December 2006

1.15 

1.17 

1.14 

1.12 

November 2006

1.14 

1.15 

1.13 

1.14 

October 2006

1.13 

1.14 

1.12 

1.17 

September 2006

1.12 

1.13 

1.11 

1.18 

August 2006

1.12 

1.13 

1.11 

1.17 

July 2006

1.13 

1.14 

1.11 

1.15 

June 2006

1.11 

1.12 

1.10 

1.11 

 

 

 

 

 

Fiscal Year Ended Dec. 31, 2006

1.13 

1.16 

1.11 

1.12 

Fiscal Year Ended Dec. 31, 2005

1.21 

1.27 

1.15 

1.17 

Fiscal Year Ended Dec. 31, 2004

1.30 

1.39 

1.17 

1.21 

Fiscal Year Ended Dec. 31, 2003

1.40 

1.57 

1.29 

1.29 

Fiscal Year Ended Dec. 31, 2002

1.57 

1.67 

1.51 

1.58 



3.B.  Capitalization and Indebtedness


Not applicable





-6-

3.D.  Risk Factors



The Company is subject to a number of risks and uncertainties.

Lingo Media (the “Company”) develops, publishes and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school markets in China.  In addition, through its subsidiary, A+ Child Development (Canada) Ltd. (“A+”), the Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its proprietary curriculum through its four offices in Canada - Calgary, Edmonton, Toronto and Vancouver.

 

In 2006, through the acquisition of A+, Lingo Media extended its business to include the sale of early childhood development programs in Canada. A+ operates through its office in Calgary, Alberta, Canada. A+ is involved in the business of early childhood cognitive development, through the publishing, teaching and distribution of educational materials along with its proprietary curriculum developed by its advisory panel of psychologists.


Lingo Media operates two distinct reportable business segments as follows:


English Language Learning: The Company develops, publishes, and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school market in China.  


Early Childhood Development: The Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its unique curriculum through its four offices in Canada - Calgary, Edmonton, Vancouver and Toronto.

The Company derives the majority of its revenue from doing business in Canada and China. If any of the following risks occur, our business, results of operations and financial condition would likely suffer.  In any such events, the market price of our common stock could decline and you may lose all or part of your investment in our shares of common stock.


Risks associated with business of A+


Dependence on third party vendors


The Company sells programs that include third party products.  There is no certainty that the vendors of these products will continue the production of these products and the Company’s ability to source a replacement of such products. Such discontinuation of these products will significantly impact our ability to continue the sales of these programs.


Dependency on key personnel





-7-

The Company’s future success is dependent on the success and ability of its key management.  The loss of key personnel or the inability to attract and retain highly qualified personnel, consultants or advisors could adversely affect the Company’s business.  The Company faces competition for such personnel from other companies and organizations.  There can be no assurance that the Company will be successful in hiring or retaining qualified personnel.  The inability of the Company to retain and attract the necessary personnel or the loss of services of any of its key personnel could have a material adverse effect on the Company’s profitability.


Inability of the Company to keep pace with the new technologies may result in reduced profitability


The Company sells programs primarily consisting of printed materials.  The educational industry continues to evolve from traditional printed materials to digital products. The inability of the Company to keep pace with the new technologies and standards in the educational industry could render its products and services non-competitive.  The Company’s future success will depend on its ability to address the increasingly sophisticated needs of its customers by producing and marketing enhancements to its products and services that respond to customer requirements. The Company may be required to invest significant capital in order to remain competitive. A failure on the part of the Company to effectively manage a product transition will directly affect the demand for the Company’s products and the future profitability of the Company’s operations.< /P>


Losses may increase due to fluctuation in exchange rate


The Company’s programs include third party products that are purchased in US dollars and the Company may incur losses if the US Dollar is strengthened against the Canadian dollar.


Sales may reduce if the Company is not able to arrange consumer financing


The Company’s sales are highly dependent on its ability to arrange a third party financing for the customer.  The Company’s revenues will significantly decline if the third party financier decides to discontinue this program and we are unable to negotiate other sources of similar consumer financing program.


Limited ability to generate sales leads


Company is highly dependent on its ability to generate sales leads through its telemarketing activities.  A new technology that would block incoming telemarketing telephone calls into homes will jeopardize the Company’s ability to generate sales leads and revenues in Canada.





-8-

A+ derives all of its revenue from sales made in a clients home. This format requires that an appointment be made with the family in order for the sale to take place. The appointment can only be arranged from leads generated from our call centres. There are certain factors that could restrict the number of appointments that we are able to set. including:


1)

The number of families with children 3 and under in the territory which we serve, roughly 1 million households. We work off lists purchased from brokers to contact these people. Approximately 400,000 names of such families end up on such lists. The number of names we will require as we expand will exceed that figure. When this occurs the growth in the child development side of the company will plateau, as will profits.


2)

Other factors which could reduce appointments include:

a.

Increasingly more stringent privacy laws

b.

The possibility and indeed the likelihood of a “do not call” list being legislated.

c.

A perceptible increase in the reluctance of families to entertain a perceived “sales person” in their home.


These could lead to detrimental effects on the Company’s ability to make appointments with prospective customers and will affect productivity and therefore profitability.


Possible lack of trained management staff may reduce our future profitability


In order to provide as broad coverage as possible in the territory we serve, it is necessary to establish district sales offices, which serve between 100,000 and 300,000 prospective families. As expansion takes place we must of course have managers who can hire, train and continually advise and assist sales consultants. In order to do this the manager must have experience and knowledge in this highly specialized and unique field. This means that, ideally, the manager should be hired from within the sales consultant force. This does not totally rule out hiring a manager from outside operations, but should that be necessary, such person would probably require 6-12 months of training to effectively manage a district sales office. There is always the risk of under performing sales results, in district offices, which could restrict profitability.


Risks associated with doing business in China


Risk of failing to achieve market acceptance


Although the Company has contracts with People Education Press (“PEP”) in Beijing for English Language Learning materials, there can be no assurance that the State Ministry of Education in China will continue to accept the educational publications produced by the Company.





-9-

Our limited experience in China may impede our success


The Company has limited experience in providing traditional educational publishing in China.  Although the Company has retained the services of Canadian, US, British and Chinese educators to assist the Company with these endeavors, there can be no assurance that the Company will be able to attract and retain qualified personnel with relevant experience for the continued management and development of its business.


The growth of the Company’s business is dependent on government budgetary policy, particularly the allocation of funds to sustain the growth of the English language learning and training programs in China


The Company’s customers in China, excluding Renzhen Group, are directly or indirectly owned or controlled by the Chinese government.  Accordingly, their business strategies, capital expenditure budgets and spending plans are largely decided in accordance with government policies, which, in turn, are determined on a centralized basis at the highest level by the State Planning Commission of China.  As a result, the growth of our business is heavily dependent on government policies for English language learning and training.  Despite the high priority currently accorded by the government to this area, and a high level of funding allocated by the government to this sector, insufficient government allocation of funds to sustain its growth in the future could reduce the demand for our products and services and have a material adverse effect on our ability to grow our business.


Political and economic policies of the Chinese government could affect our industry in general and our competitive position in particular


Since the establishment of the People’s Republic of China (“PRC”) in 1949, the Communist Party has been the governing political party in China.  The highest bodies of leadership are the Politburo of the Communist Party, the Central Committee and the National People's Congress.  The State Council, which is the highest institution of government administration, reports to the National People's Congress and has under its supervision various commissions, agencies and ministries, including Ministry of Commerce of the PRC “MOFCOM”.  Since the late 1970s, the Chinese government has been reforming the Chinese economic system.  Reforms have included decollectivization of farms; legalization of interregional and international trade by individuals and businesses; legalization of markets in most goods and services; elimination of price controls; and privatization of some state-owned productive assets.  Reforms began in the farming sector and rural industry, and were later implemented in various service industries.  In the last five years, China has also begun dismantling large state monopolies in heavy industry.





-10-

Although the Company believes that economic reform and the macroeconomic measures adopted by the Chinese government have had and will continue to have a positive effect on the economic development in China, there can be no assurance that the economic reform strategy will not from time to time be modified or revised.  Such modifications or revisions, if any, could have a material adverse effect on the overall economic growth of China and investment in the English language learning and training sectors in China.  Such developments could reduce, perhaps significantly, the demand for our products and services.  There is no guarantee that the Chinese government will not impose other economic or regulatory controls that would have a material adverse effect on our business.  Furthermore, changes in political, economic and social conditions in China, adjustments in policies of the Chinese government or changes in laws and regulations could adversely affect our industry in general and our competitive position in particular.  Changes in government policies might include  increased restrictions on the nature of business activities that foreign-owned enterprises may perform or additional tax/fee/license requirements for foreign-owned enterprises; increased restrictions on the publishing industry, including restrictions on the nature of business activities that publishers may perform; additional tax/fee/license requirements; requirements to publish or not to publish certain content; and direct state supervision or control of publisher's activities; and more intensive approval requirements for educational materials.


The markets in which the Company sells its services and products are highly competitive and we may not be able to compete effectively


The educational publishing market in China is rapidly changing.   Competitors to the Company’s strategic co-publishing partners in the market mainly include provincial and municipal educational publishing companies such as Hebei Education Press and Shanghai Foreign Language Educational Press.  In addition, there are many large multinational educational publishing companies with substantial, existing publishing operations in Asian markets including China, that have significantly greater financial, technological, marketing and human resources who have entered the English language learning and training market in China, which could hurt the Company’s future prospects and erode its market share.


Most of our competitors have greater financial, technical and human resources than us, may be able to respond more quickly to new and emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of new products or services.  It is possible that competition in the form of new competitors or alliances, joint ventures or consolidation among existing competitors may decrease our market share.  Increased competition could result in fewer customer engagements, reduced gross margins and loss of market share, any one of which could materially and adversely affect our revenues and overall financial condition.





-11-

Economic risks associated with doing business in China


The Chinese economy has experienced uneven growth across geographic and economic sectors. The current economic situation may adversely affect our profitability over time as expenditures for English language training products may decrease due to the results of slowing domestic demand and deflation.  In addition, the Chinese government may implement changes in fiscal policy that could increase our costs of operating our business in China or slow demand for our products.  We cannot predict what effects changes in Chinese government policies may have on our business or results of operations.


We may suffer currency exchange losses if the Chinese Yuan Renminbi (“Yuan”) depreciates relative to the United States Dollar


Our reporting currency is the Canadian Dollar.  However, substantially all revenues from China activities are denominated in United States Dollars.  In July 2005, the Chinese government announced that the Yuan will no longer be pegged to the United States Dollar, but will float against a basket of currencies. China's currency had been pegged at 8.28 against the United States Dollar for a decade, but the adjustment allowed it to float against a number of currencies including the US dollar, the Euro, the Japanese Yen, the South Korean Won, the UK Pound, the Thai Baht and the Russian Rouble.  Since that time, the Yuan has traded below the pegged rate.

If the Yuan were no longer pegged to the basket of currencies, rate fluctuations may have a material impact on the Company’s consolidated financial reporting. The Company’s accounts receivable from China will decline in value if the Yuan depreciates relative to the Canadian and United States Dollar.  Any such depreciation could adversely affect the market price of our common stock.  Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations.  To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.  While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all.  In addition, our currency exch ange losses may be magnified by Chinese exchange control regulations that may restrict our and our Chinese partners’ ability to convert Renminbi into United States Dollars.

Growth of multimedia products and online learning may compete with and reduce the Company’s publishing activities


The traditional media platform is being increasingly challenged by the growing body of multimedia products and online learning.  Multimedia products serve as ancillary tools to traditional publishing mediums such as print but can also serve as stand-alone interactive tools replacing traditional publishing mediums.





-12-

Although the Company is considering the use of multimedia interactive content, the continued growth of multimedia products and online learning may detract from the viability of the Company’s traditional publishing activities.


Risk of the Company’s failure to manage its growth effectively as it attempts to expand operations in China


As the Company endeavors to increase its sales and develop new lines of business, it will be subject to a number of risks associated with the management of such growth. These risks include increased responsibilities for existing personnel, the need to hire additional qualified personnel and, in general, higher levels of operating expenses.  In order to manage current operations and any future growth effectively, the Company will need to continue to implement and improve it’s operational, financial and management information systems and to hire, train, motivate, manage and retain qualified employees.  In particular, it will need to ensure that adequate mechanisms are in place to address potential growth from the largely untapped Chinese marketplace and to ensure that the Company has hired, trained and retained employees that are familiar with that marketplace.  There can be no assurance that the Company will be able to manage such growth effectively, that its management, personnel or systems will be adequate to support the Company’s operations or that the Company will be able to achieve the increased levels of revenue commensurate with the increased levels of operating expenses associated with this growth. In the event the Company is unable to manage its growth effectively due to expenses exceeding sales, the timing of expenses becoming due or other reasons, the Company may be forced to reduce or curtail operations.


The Company’s customer base is concentrated and the loss of the one customer could cause the Company’s business to suffer significantly


We have derived and believe that we will continue to derive a significant portion of our revenues from one large customer.  In 2004, 2005 and 2006, one customer accounted for 91%, 98% and 75% of the Company’s revenues respectively. The loss, cancellation or deferral of the large contract with this large customer would have a material adverse effect on our revenues from China.  In addition, there can be no assurance that we will continue to bring in new significant customers in China.


Other Risk Factors


Dependence on Michael P. Kraft, the Company’s Chief Executive Officer, as well as other executives


The Company’s future success is dependent on the success and ability of its key management and product development teams.  The Company has obtained key man insurance on its senior executive in the amount of $1,000,000.





-13-

The loss of key personnel or the inability to attract and retain highly qualified personnel, consultants or advisors, could adversely affect the Company’s business.  The Company faces competition for such personnel from other companies and organizations.  There can be no assurance that the Company will be successful in hiring or retaining qualified personnel.  The inability of the Company to retain and attract the necessary personnel or the loss of services of any of its key personnel could have a material adverse effect on the Company.



Technological changes may reduce the Company’s sale of its products and services


The traditional publishing industry continues to experience technological change.  The publishing industry continues to evolve from traditional mechanical format printing to full digital printing.  The inability of the Company to keep pace with the new technologies and standards in the print industry could render its products and services non-competitive.  The Company’s future success will depend on its ability to address the increasingly sophisticated needs of its customers by producing and marketing enhancements to its products and services that respond to customer requirements.  The Company may be required to invest significant capital in order to remain competitive. A failure on the part of the Company to effectively manage a product transition will directly affect the demand for the Company’s products and the future profitability of the Company’s operations.


Exchange rate fluctuations may reduce the Company’s revenues or increase the Company’s expenses


The Company does transact some business involving currencies other than the Canadian currency in both purchasing and selling goods and services.  The Company is exposed to fluctuations in foreign currency exchange rates that may have an adverse effect on the Company’s businesses.


Dependence on key contractors for maintenance of high quality content


A key component of the continued success of the traditional publishing activities of the Company will be the ability of the Company to maintain high quality content.  The Company must continue to develop new and innovative products to sustain its educational publishing activities in order to ensure the continued viability of the traditional publishing aspects of its business.  Although the Company continues to retain experienced educators and editors to develop content for its educational publications, there can be no assurance that the Company will be able to continue hiring experienced educators and editors to maintain the current high quality level of content for future publications.





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Competition is likely to have a tremendous impact on our business


The Company faces considerable competition from traditional educational publishing companies and from educational software providers in China both of which offer the same or similar services as are available from the Company’s traditional publishing operations.  In addition, it is anticipated that as China becomes more open to foreign involvement for educational programs, the level of competition will further intensify.


We may need additional capital in the future and it may not be available on acceptable terms


We may need to raise additional funds in order to finance our operations.  The Company expects that corporate growth will be funded from equity and/or debt financing(s) to help generate needed capital.  Insuring that capital is available to increase production; sales and marketing capacity; and to provide support materials and training in the market place and to expand is essential to success.  There can be no assurance that financing will be available on terms favorable to us, or at all.  If adequate funds are not available on acceptable terms, we may be forced to curtail or cease our operations.  Even if we are able to continue our operations, the failure to obtain financing could have a substantial adverse effect on our business and financial results.


Risk of history of losses


The Company has had a history of losses and there is no assurance that it can reach profitability in the future.  The Company will require significant additional funding to meet its business objectives.  Capital will need to be available to help expand not only the Company’s product line but also to improve market penetration and sales through an increasing distribution network.


Our public trading market is highly volatile


The Company's common shares trade on the TSX Venture Exchange under the symbol "LMD", and on NASD:OTC BB under the symbol “LNGMF” and are quoted on the Berlin-Bremen Stock Exchange under the symbol LIM.BE and the German securities code is (WKN) 121226.





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The market price of our common shares could fluctuate substantially due to:

§

Quarterly fluctuations in operating results;

§

Announcements of new products or services by us or our competitors;

§

Technological innovations by us or our competitors;

§

General market conditions or market conditions specific to our or our customer’s industries; or

§

Changes in earning estimates or recommendations by analysts.

Penny stock rules


Our common shares are quoted on the OTC Electronic Bulletin Board; a NASD sponsored and operated quotation system for equity securities.  It is a more limited trading market than the NASDAQ Small Cap Market, and timely, accurate quotations of the price of our common shares may not always be available.  You may expect trading volume to be low in such a market.  Consequently, the activity of only a few shares may affect the market and may result in wide swings in price and in volume.


Our common shares are listed on the NASD OTC Bulletin Board, and are subject to the requirements of Rule 15(g) 9, promulgated under the Securities Exchange Act as long as the price of our common shares is below $5.00 per share.  Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction.  The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trade involving a stock defined  as a penny stock.  Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDA Q that has a market price of less than $5.00 per share.  The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it.  Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.


The stock market has experienced significant price and volume fluctuations, and the market prices of companies, have been highly volatile.  Investors may not be able to sell their shares at or above the then current, OTC BB price.  In addition, our results of operations during future fiscal periods might fail to meet the expectations of stock market analysts and investors.  This failure could lead the market price of our common shares to decline.





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There is uncertainty as to the Company’s shareholders’ ability to enforce civil liabilities both in and outside of the United States


The preponderance of our assets are located outside the United States and are held through companies incorporated under the laws of Canada, and Barbados and a representative office in China.  In addition, a majority of our directors and officers are nationals and/or residents of countries other than the United States.  All or a substantial portion of the assets of these persons are located outside the United States.  As a result, it may be difficult for shareholders to effect service of process within the United States upon these persons.  In addition, investors may have difficulty enforcing, both in and outside the United States, judgments based upon the civil liability provisions of the securities laws of the United States or any state thereof.


Risk Factors Associated With Jintu Joint Venture in China:


Jintu JV is a development stage company and is subject to all of the uncertainties of starting a new business segment.


A print media joint venture in China requires approvals from the General Administration of Press and Publications Bureau and from the Ministry of Commerce.  While the Company anticipates getting the requisite approvals for Jintu Joint Venture (“Jintu JV”), there can be no assurance that Jintu JV will receive the requisite government approvals and that the joint venture will obtain the necessary business registration and license.


Jintu JV requires a total of ¥5,000,000 Yuan as its Registered Capital and the Company will be required to invest its proportionate share or ¥2,550,000 Yuan (CDN$365,000) as its contribution to the Jintu JV.   There can be no assurance that the Company will have sufficient funds to finance its share of the Registered Capital required for the establishment of the Jintu JV.  


The key executives of the joint venture have prior experience in sales and marketing of a leading educational software company in China.  However, their experience is limited to managing a sales force and not in the establishment and managing of a joint venture. There can be no assurance that the management will be successful in operating the joint venture as they lack operational experience as it is a new entity with no operating history.  


The joint venture’s future success is dependent on success and ability of its key executive officer, Yan Hui Zhang. The loss of its key officer or the inability to attract and retain highly qualified personnel, consultants or advisors, particularly with respect to the Company’s intended expansion into the distribution of print media products in China, could adversely affect the Jintu JV’s operations. Jintu JV may need additional capital in the future and it may not be available on acceptable terms. If adequate





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funds are not available on acceptable terms, we may be forced to curtail or cease Jintu JV’s operations.  Even if we are able to continue Jintu JV’s operations, the failure to obtain financing could have a substantial adverse effect on its business and financial results.


ITEM 4.  INFORMATION ON THE COMPANY


4.A. History and Development of the Company


Introduction


The Company operates two distinct reportable business segments as follows:

English Language Learning: The Company develops, publishes, distributes and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school market in China and in Canada.  

Early Childhood Development: The Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its unique curriculum through its four offices in Canada - Calgary, Edmonton, Vancouver and Toronto.


The Company’s executive office is located at:

 151 Bloor Street West

 Suite 703

 Toronto, Ontario, Canada M5S 1S4

 Telephone:  (416) 927-7000

 Facsimile:  (416) 927-1222

 E-mail:  investor@lingomedia.com

 Website: www.lingomedia.com


The Company’s Beijing Representative office is located at:

 Kenzo Oriental Tower 11K  

 48 Dongzhimenwai Dajie

 Dongcheng District

 Beijing 100027 China

           

Following are the office of Company’s subsidiary A+:


Head Office

#341, 2116 – 27 Ave. N.E.

Calgary Alberta, Canada

T2E 7A6


Sales Offices A+


Edmonton

#1021, 5004 – 98 Ave.

Edmonton Alberta, Canada

T6A 0A1





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Vancouver

#204- 3997 Henning Drive

Burnaby British Columbia, Canada

V5L 6N5


Ontario

#301, 9040 Leslie Street

Richmond Hill, Ontario, Canada

L4B 3M4


The contact person is: Imran Atique – Secretary and Treasurer


The Company's fiscal year ends December 31st.


The Company's common shares trade on the TSX Venture Exchange under the symbol "LMD", and on NASD:OTC BB under the symbol “LNGMF” and are quoted on the Berlin-Bremen Stock Exchange under the symbol LIM.BE and the German securities code is (WKN) 121226.



History and Development


Incorporation and Name Changes


The Company was incorporated under the name Alpha Publishing Inc. pursuant to the Business Corporations Act (Alberta) on April 22, 1996.  The name was changed to Alpha Ventures Inc. on May 24, 1996. Pursuant to Articles of Continuance effective April 22, 1998, the Company was continued as an Ontario company under the provisions of the Business Corporations Act (Ontario) under the name, Alpha Communications Corp. The name was changed to Lingo Media Inc. on July 4, 2000.


The Company currently has four subsidiaries: Lingo Media Ltd. "LML", Lingo Media International Inc. "LMII" and Lingo Group Limited. "LGL" and A + Child Development (Canada) Ltd. (“A+”)


LML was incorporated pursuant to the Business Corporations Act (Ontario) on November 21, 1994 under the name Alpha Corporation.  Alpha Corporation changed its name to Lingo Media Ltd. on August 25, 2000.


LMII was incorporated pursuant to the Companies Act of Barbados on September 11, 1996 under the name International Alpha Ventures Inc.  On May 13, 1997, wholly-owned subsidiary's name was changed to International Alpha Media, Inc. and then was changed to Lingo Media International Inc. on September 20, 2000.


LGL was incorporated under the laws of Delaware on April 6, 1999.  On June 9, 1999, its articles were amended to increase its authorized capital and to include certain provisions with respect to the liability and indemnification of directors.





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On May 18, 2000 its name was changed from Yangtze OnLine, Inc. to EnglishLingo, Inc. In August 2002, EnglishLingo, Inc. was continued in Ontario, Canada. On October 27th, 2004, it’s name was changed to Lingo Group Limited. LGL is 83.3% owned by the Company.


A+ was incorporated pursuant to the Business Corporations Act of Alberta on February 12, 1999. A+ is 70.33% owned by the Company.


Acquisition of A + Child Development (Canada) Ltd.


In 2006, Lingo Media acquired a 62.33% controlling interest in A+ and acquired an additional 8% interest in March 2007. A+ derives revenues from publishing and distribution of educational materials aimed at the early childhood market.  A+ has developed a unique curriculum for parents to use with their children based on the latest neuroscience research. To date, A+ has focused its marketing efforts only in Canada. With Lingo Media’s established operations in Beijing, A+ plans to introduce its learning system and products to parents of pre-school children in China. Plans also include an expansion of A+’ markets to the United States and Latin America.


Under the terms of the acquisition, Lingo Media:


i)

acquired 50.33% of the outstanding capital stock of A+ from its shareholders for the purchase price of CAD$730,000 satisfied by issuing 2,650,000 common shares of Lingo Media and paying CAD$200,000 cash;


ii)

invested CAD$150,000 in A+ for an additional 12% interest;


iii)

invested a further CAD$100,000 in A+ for an additional 8% interest; and


iv)

issued an additional 3,000,000 common shares of Lingo Media to the selling shareholders of A+ subject to meeting annual earnings milestones to be held in escrow and released over a three-year period with a maximum of 1,000,000 shares released per year;


4.B.  BUSINESS OVERVIEW



Background


Lingo Media develops, publishes and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school markets in China.  In addition, through its subsidiary, A+, the Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its proprietary curriculum through its four offices in Canada - Calgary, Edmonton, Vancouver and Toronto.





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In 2006, through the acquisition of A+ Lingo Media extended its business to include the sale of early childhood development programs in Canada. A + operates through its offices in Calgary, Alberta, Canada. A+ is involved in the business of early child cognitive development, through the publishing, teaching and distribution of educational materials along with its unique curriculum developed by its advisory panel of psychologists.


Lingo Media operates two distinct reportable business segments as follows:


English Language Learning: The Company develops, publishes, and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school market in China.  


Early Childhood Development: The Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its unique curriculum through its four offices in Canada - Calgary, Edmonton, Vancouver and Toronto.

The Company derives the majority of its revenue from doing business in Canada and China. If any of the following risks occur, our business, results of operations and financial condition would likely suffer.  In any such events, the market price of our common stock could decline and you may lose all or part of your investment in our shares of common stock.


English Language Learning


Lingo Media’s strengths and opportunities lie in its approach to the development of original language learning materials-including English as a Second/Foreign Language (ESL/EFL) and Language Arts for English speakers.  In China, the Company pre-sells its program to educational ministries through co-publishing with local publishers, while retaining full copyright ownership and distribution rights for all other markets.  In Canada, the Company has received Ontario Ministry of Education approval for one of its elementary programs.


China Publishing


Lingo Media has spent six years developing English as a Foreign Language (EFL), products, programs, and relationships in the Chinese market. Learning to communicate in English is seen as a top priority for Chinese school students and young adult learners. Along with learning how to use a PC, English skills are perceived as a key determinant of their future levels of prosperity. The Company’s EFL book, audio and CD-based programs are unique in that they have a special focus on the spoken language. In addition to developing learning materials, considerable resources have been expended on the development of relationships with leading Chinese publishers, both in the education and trade sectors, as well as in extensive marketing of Lingo Media’s programs.





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The Company is capitalizing on its co-development approach in the Chinese market. Lingo Media sees its relationships with leading Chinese publishers; its Canadian and Chinese author teams; and its original custom-developed content as key factors in opening up the Chinese educational market. The Company has secured long-term publishing contracts for the Kindergarten to Grade 12 (K-12) and higher educational markets, which it anticipates will generate ongoing revenue streams from the sale of its programs.


People’s Education Press “PEP”:


People's Education Press, a division of China's State Ministry of Education, publishes more than approximately 60% of educational materials for the K-12 market throughout China, for all subjects, including English. PEP has a readership of more than 120 million students. Lingo Media has co-published four programs with PEP since August 2000. Three series target the elementary market of 100 million students: PEP Primary English (for grades 3 to 6); Starting Line (Grades 1-6); and Beginning English for Young Learners (Kindergarten, Grades 1& 2). The Junior Reading Comprehension series is for junior middle school students. Initial levels of all four programs were launched in September 2001 and subsequent levels have been introduced. All series include textbooks, activity books, audiocassettes, teacher resource books, and supplementary materials.


Foreign Language Teaching and Research Press “FLTRP”:

 

In April 2000, Lingo Media secured a publishing agreement to co-develop, publish and sell Subject-Based English with FLTRP, China’s leading university reference and K-12 publisher. This series is required in order to meet the education curriculum mandated by the State Ministry of Education in China that all 3rd and 4th year university students take intensive English studies specifically related to their majors.


Guangzhou Renzhen English Production Group “Renzhen Group”:


Lingo Media completed a co-publishing agreement for two language-learning programs with Renzhen Group in December 2000. Renzhen Group is one of China’s leading privately owned language learning publishers of book and audiocassette packages focusing on wholesaling to bookstores and newsstands throughout China, as well as on its growing mail order business. The two programs that have been launched include English In Business Communications — a series of six self-study books and 12 audiocassettes providing specialized English training; and The Out Loud Program: Rhymes, Rhythms and Patterns for Language Learning — a set of student books and audiocassette packages with 3 levels.





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China International Publishing Group “CIPG”:

Foreign Languages Press is a subsidiary of China’s largest trade publishing group, China International Publishing Group. CIPG develops and distributes books to Chinese retail bookstores, in addition to producing selected texts and supplemental books for the educational market. Lingo Media co-published with CIPG the English for Hosts book and audiocassette package.


The Lingo Media Approach

 
Lingo Media specializes in publishing materials for language learning. Lingo Media focuses on two sectors: English as a Second Language (ESL) in English-speaking countries and English as a Foreign Language (EFL) in China.

 

The key to publishing successful EFL programs are two simple concepts: quality and relevance. Our core philosophy says that English language learning materials should be relevant to the market we are trying to reach. In a nutshell, our approach involves:



Researching and understanding the market

The process began with relationship building and communication.  We talk with key organizations; associations and ministries in a each country to better understand needs and concerns. We looked for the right niche for Lingo Media, then seeked local partners to aid in the marketing and implementation of our programs.  Moreover, we searched for individuals in China who manage the Company’s affairs.  These individuals become our links to China's community and culture.



Bilateral Relationships

With Lingo Media liaisons in place, our goal is to assure that our English language learning materials meet the highest educational standards.



Constant Monitoring of Effectiveness

Our people in the field in China are constantly monitoring the effectiveness of our programs; they ask and answer the crucial questions - Does the material serve the intended audience?


Comprehensive product development

Because we know that a language learning program needs to serve a number of different groups, we considered the requirements of all of the ultimate users: administrators, teachers and students.  Each group has its own perspective. We developed an approach that works for all.






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Collaborative partnerships

With local partners and educational organizations involved with the process of implementing programs, they are pleased with the results.  Our partners are involved in all stages of program marketing, implementation and monitoring – in effect they are strategic team members.


Bilateral Development

September 2001 marked the first official launch of a Lingo Media program entitled PEP Primary English. The program was developed by an international team of respected educational writers: Jack Booth, David Booth, Linda Booth and Larry Swartz (award winning Canadian authors of the elementary language arts series Impressions), together with Yuexin Wu from Wuxi Normal School and PEP’s English Editorial Team.


Relevant Material

We know how to listen. Our teams ensure that program material is relevant and culturally appropriate, as well as educationally sound.


China Expansion Plan


As of December 1, 2004, foreign investment in the wholesale distribution of print media has been allowed as a part of World Trade Organization (WTO) reforms.  Both Joint Ventures and Wholly Foreign Owned Enterprises (WFOE’s) are now allowed to participate in the wholesale distribution of books and periodicals.  


Lingo Media intends to acquire controlling interests in new or existing Chinese print media distribution companies.  If we are able to make such acquisitions, our ability to market and distribute finished products will provide Lingo Media with an increased presence on the supply chain and perhaps capture a larger market share and increase revenues.  


We intend to acquire companies or establish a new company involved in the following distribution channels:


·

Educational market:  including the sale of supplemental educational products to K-12 public schools, vocational schools, colleges, universities and other educational institutions

·

Retail market:  including the sale of educational books, newspapers and magazines through bookstores, newsstands, book clubs and direct-to-consumer


As part of the China Expansion Plan, the Company signed a definitive Joint Venture Agreement with Sanlong Cultural Enterprises (“Sanlong”) in 2005. The joint venture company will be known as Jintu Cultural Media Company (“Jintu” or the “Joint Venture”). Jintu will continue Sanlong’s recently launched a direct-to-consumer business of distributing educational newspapers located in Shijiazhuang, Hebei Province, China. Under the JV





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Agreement, Lingo Media will invest approximately CDN $365,000 (¥2,550,000 RMB) for its 51% share of Jintu. The Joint Venture will use the proceeds for Hebei Province, to increase the size of its sales force and for operations.

China Expansion Plan


As of December 1, 2004, foreign investment in the wholesale distribution of print media has been allowed as a part of World Trade Organization (WTO) reforms.  Both Joint Ventures and Wholly Foreign Owned Enterprises (WFOE’s) are now allowed to participate in the wholesale distribution of books and periodicals.  


Lingo Media intends to acquire controlling interests in new or existing Chinese print media distribution companies.  If we are able to make such acquisitions, our ability to market and distribute finished products will provide Lingo Media with an increased presence on the supply chain and perhaps capture a larger market share and increase revenues.  


We intend to acquire companies or establish a new company involved in the following distribution channels:


·

Educational market:  including the sale of supplemental educational products to K-12 public schools, vocational schools, colleges, universities and other educational institutions

·

Retail market:  including the sale of educational books, newspapers and magazines through bookstores, newsstands, book clubs and direct-to-consumer


As part of the China Expansion Plan, the Company signed a definitive Joint Venture Agreement with Sanlong Cultural Enterprises (“Sanlong”) in 2005. The joint venture company will be known as Jintu Cultural Media Company (“Jintu” or the “Joint Venture”). Jintu will continue Sanlong’s recently launched a direct-to-consumer business of distributing educational newspapers located in Shijiazhuang, Hebei Province, China. Under the JV Agreement, Lingo Media will invest approximately CDN $365,000 (¥2,550,000 RMB) for its 51% share of Jintu. The Joint Venture will use the proceeds for Hebei Province, to increase the size of its sales force and for operations.


Early Childhood Development


A+, markets a cognitive development program to the parents of children from newborn to age five. The program is based upon the significant knowledge

of brain development that has come about since the invention of sophisticated brain scanning equipment and devices. The components of the program are designed to deliver to the child, age appropriate properly neurobiologically sequenced and developmentally valid information. It is designed with the goal of having the child in the home eventually reach his/her full intellectual potential.





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A+ has four offices in Canada - Toronto, Calgary, Edmonton and Vancouver. It is opening a sales office in Mississauga, Ontario. Expansion plans call for the opening of another sales office in Ottawa, Ontario before the end of 2007 and another sales office in London, Ontario in early 2008.


It has recently developed an Educational Assistance Program that is designed to help school aged children who are underachieving. This is a home based program which first of all brings children to the level of their peers and then proceeds on to develop sound study habits, research techniques and the ability to write reports and essays and carry out school projects. A+ also plans to re-launch its Education Universe website to develop both a parenting advice section and a on-line shopping center marketing children’s books and music CD’s at discount prices.

Products


English Language Learning product description


Programs for Children:


Series:

Beginning English For Young Learners

Type of Program:

English as a Foreign Language (EFL)
English as a Second Language (EFL)

Description:

A series of student books, audiocassettes, teacher resource books and ancillary materials. The program promotes oral language use through partner-based activities suited for both large and small groups. It enhances listening, speaking and emerging literacy skills, using an activity-based approach.

Components:

Student Books:                   4
Audiocassettes:                  8
Teacher Resource Books:          2

Target Audience:

Elementary Schools: JK, SK, Grades 1-2


Series:

PEP Primary English

Type of Program:

English as a Foreign Language (EFL)
English as a Second Language (ESL)

Description:

A series of student books, audiocassettes, teacher resource books and ancillary materials. The program employs a variety of learning strategies to promote interactive, two-way communication as students explore the content through task-based activities.

Components:

Student Books:                  8
Audiocassettes:                16
Teacher Resource Books:         8
Ancillary Materials:           56

Target Audience:

Elementary Schools: Grade 3-6






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Series:

Starting Line

Type of Program:

English as a Foreign Language (EFL)
English as a Second Language (EFL)

Description:

A series of student books, audiocassettes, teacher resource books and ancillary materials. The program employs interactive, two-way communication to help and encourage students to build word power in listening, speaking, reading, and writing as they participate in task-based activities designed for use in multi-level classrooms.

Components:

Student Books:                 12
Audiocassettes:                12
Teacher Resource Books:         6
Ancillary Materials:           72

Target Audience:

Elementary Schools: Grade     1-6




Series:

The Out Loud Program: Rhymes, Rhythms and Patterns for Language Learning

Type of Program:

Language Arts
English as a Second Language (EFL)
English as a Foreign Language (EFL)

Description:

A series of student books, audiocassettes, Teacher's Source Books and ancillary materials. The program is based on the principle that becoming fluent in a language depends largely on the participants being involved in authentic, interactive discourse using the language. As young learners experience the sounds of the English language found in these fascinating and inviting materials, they are immediately working with the language, participating in its structures and vocabulary from the inside out. This program presents teachers with hundreds of helpful models of the English language to explore with students.

Components:

Student Books:                    3
CDs/Audiocassettes:               3
Teacher's Source Books:           3
Poster Card Sets:                 3

Target Audience:

Elementary Schools: JK, SK, Grades 1–2






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Programs for Juveniles


Series:

Reading Practice

Type of Program:

English as a Foreign Language (ESP)
English as a Second Language (EFL)

Description:

A series of student books to supplement the widely used PEP textbooks for grades 7-9. These supplemental books provide a wide range of reading selections and follow-up activities, language games, puzzles, and other sources for developing comprehension.

Components:

Student Books:                        5
Ancillary Materials:  Audiocassettes: 5

Target Audience:

Junior Middle Schools: Grades 7-9

Series:

Subject-Based English

Type of Program:

English for Special Purposes (ESP)

Description:

A series of student textbooks, audiocassettes, and teacher resource books. The first set of six subjects includes Law, Mathematics, Physics, Geological Prospecting and Mining, Biology, and Transportation.
This program is required in order to meet the new curriculum mandated by the Chinese State Ministry of Education stating that all third and fourth year students not majoring in English must take English courses related to their subject area.

Components:

Student textbooks:              6
Audiocassettes:                12
Teacher Resource Books:         6

Target Audience:

Third and fourth year university students majoring in subjects other than English




Series:




English in Business Communications

Type of Program:

English for Special Purposes (ESP)

Description:

A series of self-study books and audiocassettes for adult English learners focused on specific English language needs for a variety of professions and occupations.  The series is designed to develop and enhance listening comprehension, vocabulary development and pronunciation. Subject areas include Insurance, Marketing, Meetings, Negotiations, Banking, Presentations and English for Hosts.

Components:

Self-Study Books:  6
Audiocassettes:   12

Target Audience:

Self-Study Adult Market






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Series:

Communicate 1, 2 and 3  

Type of Program:

English as a Foreign Language (EFL) English as a Second Language (ESL)

Description:

English language learning through the communicative approach.  This textbook series leads  the middle school learner  through English language learning while exploring topics such as culture and travel.  Students will learn to read, write, and speak authentic English while improving their listening comprehension as well. The student book, CD, and CD-Rom enable a student to study, practice, and prepare for each class with confidence.

  

Components:

Student Book, CD and CD-Rom

Target Audience:

Middle School Students Year 7-9

Number of Levels:

3

Author(s):

Diane Pirie

Publisher:

Lingo Media

Mexico School Edition: Co-publisher – Noriega



Series:

Vocational English

Type of Program:

English as a Foreign Language (EFL) English as a Second Language (ESL)

Description:

Create fluency and gain skills in modern spoken and written English  using modern pedagogy.  Students will gain oral fluency as they work across the four modalities—listening, speaking, reading and writing—while supporting their general knowledge skills.  This program uses two different textbooks—listening/speaking, and reading/writing, as well as audiocassettes, to support learning.

Components:

Student Books, Audiocassettes

Target Audience:

Chinese Vocational School

Number of Levels:

4

Publication Date:

September 2006

Author(s):

Lisa Bruno, Lisa Black, Sarah Miller

Publisher:

Lingo Media

China School Edition: Co-publisher – Yilin Press






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Early Childhood Development Product Description


The components of the A+ program are as follows:


1.

3 Steps Ahead – Employs colour cards with symbols and uses a magnetically activated light pen.  Teaches basic classification and discrimination.

2.

The Phonics Factory – Teaches the sounds of our language and the letters and words that are used to record those sounds.  Teaches basic language structure and the connection between sight and sound.

3.

The Math Factory – Teaches numerals and their values.  Teaches basic computations skills utilizing numerals.  

4.

Children’s Dictionary – Defines and in most cases provides illustrations of the 1,500 most commonly used words.

5.

Classical Music – Selection assist in developing linear thinking skills, increases attention span and provides a calming and soothing effect.

6.

Welcome to Reading – A complex kit divided into four modules that teaches reading recognition, basic reading skills and progresses through to reading comprehension and composition.

7.

A 15 Volume Set arranged thematically – Contains answers to most questions asked by pre-school children and allows them to pursue an interest.  Provides the beginning basic skills necessary to become an independent learner.  Provides numerous hands-on activities that can be done by the child with the parent.

8.

Launch Pad Library – Well illustrated series that concentrates on providing in-depth information on the “need to know” topics for the pre-school child.

9.

Young Scientist Series – Provides basic information on all of the sciences and progresses to a stage where they can be used throughout Elementary School.  Contains 180 elementary experiments that can be done with a parent.  

10.

Treasure Tree Knowledge – 16 Volume Set.  Well illustrated designed to be read by the children on their own.  Continue to develop reading and comprehension skills.  

11.

Student Discovery Library – 15 Volume Set.  Providing information on most relevant subjects laid out in an encyclopedic format.  Further develops the research skills needed to become an independent learner.  

12.

Interactive Reader Series – Well illustrated set that provides solid information and then tests the absorption and comprehension of the child by frequent question boxes throughout the set.

13.

Wise Old Owl – Provides 100 Coupons that can be used to obtain answers to questions that children have.  Provides those answers in age appropriate language and develops child’s delayed gratification attitude.  





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14.

The Parents Curriculum Guide – A step-by-step instruction manual that guides the parent through proper utilization of the entire A+ program.


United States vs. Foreign Sales/Assets


During the fiscal years ended December 31, 2006, 2005, and 2004 respectively, $685,521, $17,812, and $54,925 of sales revenue were generated in Canada.


During the fiscal years ended December 31, 2006, 2005, and 2004 respectively, no sales revenue were generated in the United States.


During the fiscal years ended December 31, 2006, 2005, and 2004 respectively, $888,816, $888,545, and $534,729 of sales revenue were generated in China.


At December 31, 2006, and 2005, substantially all of the Company’s assets were located in Canada. At December 31, 2006, the majority of the Company’s identifiable assets are located in Canada, except for $182,520 that are located in China.


Dependency upon intellectual property


The Company is dependent on its intellectual property and the contracts in China with various Chinese publishers and in Canada with it’s A+ Parent’s Curriculum Guide.

 

Seasonality


The Company may experience some seasonal trends in the sale of its publications.  For example, sales of educational published materials experience seasonal fluctuations with higher sales in the Spring (second calendar quarter) and Fall (fourth calendar quarter).


Research and Development, Trademarks, Licenses, and Etc.


Research and Development


During the years ended December 31, 2006, 2005 and 2004, respectively, the Company expended $152,426, $104,106 and $160,554 on research and development, under the categories of “development costs” “software development costs” and “deferred costs”.  These expenditures were primarily directed at developing products for the China market.

 





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Trademarks and Copy rights


The Company owns the trademarks, Lingo Media, EnglishLingo and EnglishNihao, in Canada and China. In addition, certain materials are copy righted.  


Employees


As of June 15, 2007, the Company had one hundred thirty eight employees including hundred eighteen employees of A+. Fourty three of these employees are part-time. None of the Company's employees are covered by collective bargaining agreements.


4.C. Organization Structure


The Company currently has four active subsidiaries: Lingo Media Ltd., Lingo Media International Inc., Lingo Group Limited and A+ Child Development (Canada) Limited. Refer to ITEM 4.  “Information on the Company, 4.A. History and Development of the Company, History and Development” for more information.


4.D.  Property, Plant and Equipment


The Company’s executive offices are located in rented premises of approximately 4,523 sq. ft. at 151 Bloor Street West, Suite 703, Toronto, Ontario, Canada M5S 1S4.  The Company began occupying these facilities, through its subsidiary Lingo Media Ltd. in March 2006.


The Company’s Beijing representative offices are located in rented premises of approximately 1,200 sq. ft. at Kenzo Oriental Tower, 11K, 48 Dongzhimenwei Dajie, Dongcheng District, Beijing, China 100027.  


A+ has following rented premises:


 

Size (sq. ft.)

Head Office

#341, 2116 – 27 Ave. N.E.

Calgary Alberta, Canada

T2E 7A6

3,366 

Edmonton

#1021, 5004 – 98 Ave.

Edmonton Alberta, Canada

T6A 0A1

1,905 

Vancouver

#204- 3997 Henning Drive

Burnaby British Columbia, Canada

V5L 6N5

1,671 

Ontario

#301, 9040 Leslie Street

Richmond Hill, Ontario, Canada

L4B 3M4

2,811 


The Company is outsourcing its manufacturing services.





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ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS


The following discussion for the fiscal years ended December 31, 2006, and December 31, 2005 and for the three months ended March 31, 2007 and March 31, 2006 should be read in conjunction with the consolidated financial statements of the Company and the notes thereto.


The following discussion contains forward-looking statements that are subject to significant risks and uncertainties.  Readers should carefully review the risk factors described herein and in other documents the Company files from time to time with the Securities and Exchange Commission.


5.A Overview


Lingo Media develops, publishes and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school markets in China.  In addition, through its subsidiary, A+, the Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its proprietary curriculum through its four offices in Calgary, Edmonton, Vancouver and Toronto.  


Critical Accounting Policies and Estimates


The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions.


In management’s opinion, revenue recognition, development costs, deferred costs, acquired publishing content and use of estimates as presented in the financial statements of the year ended December 31, 2006 are critical accounting policies and are as follows:


Revenue recognition:


Revenues from the sale of educational products in Canada are recognized at the time of delivery and when the risk of ownership is transferred and collectibility is reasonably assured.


Royalty revenue from sales by licensees of finished products in China is recognized based on confirmation of finished products produced by its licensees.  Royalty revenue from audiovisual product is recognized based on the confirmation of sales by its licensees, and when collectibility is reasonably assured.  Royalty revenues are not subject to right of return or product warranties. Amounts received in advance of the confirmation are





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treated as customer deposits. Revenue from the sale of published and supplemental products is recognized upon delivery and when the risk of ownership is transferred and collectibility is reasonably assured.


Deferred costs, investment and advances:


The pre-operating costs relating to establishing a joint venture in China are recorded as deferred costs.  Pre-operating costs are capitalized until the commencement of commercial operations and then amortized on a straight-line basis, over a maximum of five years.  Loans made in trust with a view to establishing a joint venture are recorded as investment and advances.  The carrying value of these deferred costs and advances are assessed on a periodic basis to determine if a write-down is required. Any required write-down is charged to operations in the year such write-down is determined to be necessary.   


Development costs:


The Company has capitalized pre-operating costs relating to establishing a business base in the United States and the development of business in China.  Pre-operating costs are capitalized until the commencement of commercial operations and then amortized on a straight-line basis, over a maximum of five years.  The carrying value is assessed on a periodic basis to determine if a write-down is required. Any required write-down is charged to operations in the year such write-down is determined to be necessary. Technology costs and web development costs included in deferred development costs are capitalized in accordance with Section 3062 ("goodwill and other intangible assets"), of the C.I.C.A. Handbook. Development costs are amortized on a straight-line basis over a maximum of five years.


Acquired publishing content:


The costs of obtaining the English as a Foreign Language ("EFL") program entitled "Communications: An Interactive EFL Program" and an international folktale series entitled "Stories Lost and Found: The Universe of Folktale" have been capitalized and are being amortized over a five-year period.  The Company regularly reviews the carrying values of its acquired publishing content.  The Company evaluates the carrying value of these assets based on the undiscounted value of expected future cash flows.  If the carrying value exceeds the amount recoverable, a write-down of the asset to its estimated fair value would be charged to operations in the year such a write-down is determined to be necessary.


Use of estimates:


The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and





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disclosure of contingent assets and liabilities as at December 31, 2006 and December 31, 2005 and the reported amounts of revenue and expenses during the years then ended.  Actual results may differ from those estimates.  Significant areas requiring the use of management estimates related to the useful lives and impairment of property and equipment, development costs and acquired publishing content.


Operating Results


Three Months Ended March 31, 2007 vs. Three Months Ended March 31, 2006


Revenue and Margin


Lingo Media earned revenues for three months ended March 31, 2007 as follows:


 


English Language Learning

Early Childhood Development



Total

 

 

 

 

Revenue

$     587 

$   666,946 

$   667,533 

Cost of Sales

235 

139,339 

139,574 

Margin

$     352 

$   527,607 

$   527,959 



Lingo Media earned revenues or three months ended March 31, 2006 as follows:


 


English Language Learning

Early Childhood Development



Total

 

 

 

 

Revenue

$    2,397 

$          - 

$     2,397 

Cost of Sales

1,235 

1,235 

Margin

$    1,162 

$          - 

$     1,162 


English Language Learning:


China

Lingo Media earns its royalty revenues from its key customer, People’s Education Press (“PEP”), a Chinese State Ministry of Education publisher on the following basis:


·

Finished Product Sales – PEP prints and sells Lingo Media’s English language learning programs to provincial distributors in China;


·

Licensing Sales – PEP licenses Lingo Media’s English language learning programs to provincial publishers who then print and sell the programs to provincial distributors in China.


Lingo Media earns a significantly higher royalty rate from Finished Product Sales compared to Licensing Sales.


Revenues from China for the quarter ended March 31, 2007 were $nil compared to $nil for Q1-2006. The Company continues to advance its relationship with PEP and has developed new programs to maintain its royalty revenue. The Company had unearned revenues of $177,778 as at March 31, 2007 as compared to $123,000 as at March 31, 2006.


In July 2006, the Company entered into a publishing agreement with Yilin Press to co-publish a Vocational English For College program in China.  In addition, the Company developed a new educational program – Lingo Kindergarten English – aimed at China’s vast pre-school market.


Lingo Media has expanded its in-house product development team with the appointment of Suzanne Robare as its Managing Editor in order to develop new English language learning programs.  The Company has also appointed Jenny Bao as Director of Marketing to enhance its relationships with existing customers and to secure new business.


Canada

Lingo Media continues to earn revenue from the Out Loud program launched in 2001. Revenue from this program was $587 for the first quarter of 2007 vs. $2,397 for the first quarter of 2006.  Cost of sales includes direct costs such as product cost, delivery and author royalty.


Early Childhood Development:


In 2006, Lingo Media expanded into early childhood development sector through the acquisition of A+ effective October 1, 2006. A+ publishes and distributes educational materials aimed at the early childhood market.  A+ has developed a proprietary curriculum for parents to use with their children based on the latest neuroscience research. A+ has focused its efforts in Canada and with Lingo Media’s established operations in Beijing, A+ plans to introduce its learning system and products to parents of pre-school children across China. Future plans also include an expansion to the United States and Latin America.


Lingo Media’s revenue from Early Childhood Development was $666,946 for the first quarter of 2007 compared to $nil for the same period last year as the acquisition of A+ was effective on October 1st, 2006. Cost of sales includes direct costs such as product and delivery costs of the goods sold.






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General and Administrative


General and administrative costs consist of executive compensation, consulting fees, office administration, rent, marketing, professional fees, shareholders services, any foreign exchange losses or gains and government grants which are offset against the general and administration expenses incurred during the period.


General and administrative expenses were $770,319 during the first quarter of 2007 as compared to $178,927 for the similar period of 2006. Overall, general and administrative expenses increased due to the acquisition and consolidation of A+ operations into the financials of Lingo Media for the first quarter of 2007.  Below is the detailed analysis of general and administrative expenses for the quarter ended March 31, 2007:


 

Early

English

 

 

English

 

Childhood

Language

 

 

Language

 

Development

Learning

Total

 

Learning

 

Q1-2007

 

Q1-2006

Advertising and Promotion

1,862 

5,012 

6,874 

 

2,292 

Selling

403,823 

403,823 

 

Executive Compensation

35,521 

35,521 

 

36,777 

Consulting Fees and Employee Compensation

84,140 

86,429 

170,569 

 

117,692 

Travel

12,454 

3,517 

15,971 

 

16,365 

Administration

36,258 

32,421 

68,679 

 

30,912 

Premises

33,142 

31,701 

64,843 

 

27,071 

Equipment Leases

3,166 

4,089 

7,255 

 

2,685 

Foreign Exchange

(9,768)

(9,768)

 

(39,057)

Shareholder Services

5,120 

5,120 

 

9,947 

Professional Fees

4,862 

25,320 

30,182 

 

9,636 

 

579,707 

219,362 

799,069 

 

214,319 

Less: Grants

 

(28,750)

(28,750)

 

(35,392)

Total

579,707 

190,612 

770,319 

 

178,927 


Government Grants

The Company makes applications to the Canadian government for various types of grants to support its publishing and international marketing activities.   Each year, the amount of any grant may vary depending on certain eligibility criteria (including prior year revenues) and the monies available to the pool of eligible candidates.  


These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant. The Company records a liability for the repayment of the grants in the period in which conditions arise that will cause the government grant to be repayable.  Certain government grants are repayable in the event that the Company's annual net income for each of the previous two years exceeds 15% of revenue. During the quarter, the conditions for the





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repayment of grants did not arise and no liability was recorded. Included as a reduction of general and administrative expenses, are government grants of $28,750 for the first quarter of 2007 (Q1-2006 – $35,392), relating to the Company's publishing projects in China.  While the Company will continue to apply for various government grants to fund its ongoing development and market expansion, there can be no assurance the Company will be successful in obtaining these grants in the future, that the Company will meet the eligibility requirements for the grants or that the programs will still be offered for qualifying companies.


Foreign Exchange

Included in general and administrative expenses is a foreign exchange loss of approximately $9,768 as compared to a gain of $39,057 during the first quarter of 2006, relating to the Company's currency risk through its activities denominated in foreign currencies as the Company is exposed to foreign exchange risk as a substantial portion of its revenue is denominated in US dollars and Chinese Renminbi.


Interest on Debt

During the quarter, the Company had loans payable bearing interest at 12 % (Q1-2006 - 12%) per annum.  Interest expense related to these loans for the first quarter of 2007 is $11,366 (Q1-2006 - $1,479).  At March 31, 2007, $394,771 (Q1-2006 - $52,992) was due to those lenders.

In addition, the Company has revolving lines of credit bearing interest at prime plus 2% and 2.5% per annum. These bank facilities are supported by general security agreements, a short term investment and a charge against the Company’s accounts receivable and inventory.  Interest expense paid on the loan for the quarter is $18,646 (Q1-2006: $1,802). The outstanding balance of these loans at quarter-end was $485,000.


Amortization


The following is a summary amortization schedule:


 

Q1-2007

 

Q1-2006

Property Plant and Equipment

4,120 

 

2,041 

Development Costs

16,598 

 

46,199 

Acquired Publishing Content

 

17,668 

 

20,718 

 

66,268 



Amortization expense includes amortization of property and equipment, development costs and acquired publishing content. The amortization charge for Q1-2007 was $20,718 (Q1-2006 - $66,268). This represents a significant decrease over 2006 due to reduced carrying values of development costs.




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Stock-Based Compensation


The Company amortizes stock-based compensation with a corresponding increase to the contributed surplus account. During the first quarter of 2007, the Company expensed $17,154 compared to $62,325 during Q1-2006.

  

Net Loss

 

The Company reported a net loss of ($309,674) for the first quarter of 2007 as compared to a net loss of ($309,640) for Q1-2006. The Company reported taxes paid of $nil for the first quarter  ended March 31, 2007 compared to taxes paid of $nil during the first quarter of 2006.  


Fiscal Year Ended December 31, 2006 vs. Fiscal Year Ended December 31, 2005


Revenue and Margin


Lingo Media earned revenues in China and Canada as follows:


 

English Language Learning

(China)

Early Childhood Development

(Canada)



Total

Revenue

$ 894,073 

 $ 680,264 

 $ 1,574,337 

Cost of Sales

132,968 

186,309 

319,277 

Margin

$ 761,105 

 $ 493,955 

 $ 1,255,060 


Revenues from China for the year ended December 31, 2006 were $894,073 compared to $888,545 for 2005. The Company continues to advance its relationship with PEP and has developed new programs to maintain and increase its royalty revenue.  


In July 2006, the Company entered into a publishing agreement with Yilin Press to co-publish a Vocational English For College program in China.  In addition, the Company developed a new educational program – Lingo Kindergarten English – aimed at China’s vast pre-school market.


Lingo Media has expanded its in-house product development team with the appointment of Suzanne Robare as its Managing Editor in order to develop new English language learning programs.  The Company has also appointed Jenny Bao as Director of Marketing to enhance its relationships with existing customers and to secure new business.


In 2006, Lingo Media expanded into early childhood development sector through the acquisition of A+ effective October 1, 2006.  Revenues and expenses of A+ for the period from October 1, 2006 to December 31, 2006 are included in the consolidated statements of  operations of the Company.   A+ had reported revenues of $3.1 million in 2006, of which $685,521 have been recognized as revenue and included in the operations of Lingo Media for the period from October 1, 2006 to December 31, 2006. A+ derives revenues from publishing and distribution of educational materials aimed at the early childhood market.  A+ has developed a successful and proprietary curriculum for parents to use with their children based on the latest neuroscience research. To date, A+ has focused its marketing efforts only in Canada. With Lingo Media’s established operations in Beijing, A+ will introd uce its learning system and products to parents of pre-school children across China. Future plans also include an expansion of A+’ markets to the United States and Latin America.


The Company had no unearned revenues as at December 31, 2006.


General and Administrative


General and administrative costs consist of executive compensation, consulting fees, office administration, rent, marketing, professional fees, shareholders services, any foreign exchange losses or gains and government grants which are offset against the general and administration expenses incurred during the period.


The following sets out the details for the general and administrative expenses for 2006 as compared to 2005:


General and administrative expenses were $1,417,867 during fiscal 2006 as compared to $855,118 for fiscal 2005. Overall, general and administrative expenses increased due to the acquisition and consolidation of A+ operations into the financials of Lingo Media for the last quarter of 2006.  Below is the detailed analysis of general and administrative expenses for the year ended December 31, 2006:

  [form20fa31dec06002.gif]


Government Grants

The Company makes applications to the Canadian government for various types of grants to support its publishing and international marketing activities.   Each year, the amount of any grant may vary depending on certain eligibility criteria (including prior year revenues) and the monies available to the pool of eligible candidates.  


These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant. The Company records a liability for the repayment of the grants in the period in which conditions arise that will cause the government grant to be repayable.  Certain government grants are repayable in the event that the Company's annual net income for each of the previous two years exceeds 15% of revenue. During the year, the conditions for the repayment of grants did not arise and no liability was recorded. Included as a reduction of general and administrative expenses, are government grants of $182,300 for fiscal 2006 (2005 – $219,772), relating to the Company's publishing projects in China.  While the Company will continue to apply for various government grants to fund its ongoing development and market expansion, there can be no assurance the C ompany will be successful in obtaining these grants in the future, that the Company will meet the eligibility requirements for the grants or that the programs will still be offered for qualifying companies.


Foreign Exchange

Included in general and administrative expenses is a foreign exchange loss of approximately $6,690 (2005 - $18,373), relating to the Company's currency risk through its activities denominated in foreign currencies as the Company is exposed to foreign exchange risk as a substantial portion of its revenue is denominated in US dollars and Chinese Renminbi.


Interest on Debt

During the year the Company had loans payable bearing interest at 12 % (2005 - 12%) per annum.  Interest expense related to these loans for the year is $21,766 (2005 - $11,767).  At December 31, 2006, $347,541 (2005 - $101,929) was due to those lenders.

In addition, the Company has revolving lines of credit bearing interest at prime plus 2% and 2.5%.   These bank facilities are supported by general security agreements, a short term investment and a charge against the Company’s accounts receivable and inventory.  Interest expense paid on the loan for the year is $36,897 (2005: $7,609). The outstanding balance of these loans at year end was $485,000.

Premiums paid on the Export Development Corporation insurance policy were $13,755 for the year.


Amortization


The following is a summary amortization schedule:


 

2006

 

2005

Property Plant and Equipment

  12,655 

 

  12,278 

Development Costs

  156,648 

 

  184,797 

Acquired Publishing Content

  53,003 

 

  70,670 

 

  222,306 

 

  267,745 



Amortization expense includes amortization of property and equipment, development costs and acquired publishing content. The amortization charge for 2006 was $222,306 (2005 - $267,745). This represents a significant decrease over 2005 due to reduced carrying values of development costs.


Stock-Based Compensation


The Company amortizes stock-based compensation with a corresponding increase to the contributed surplus account. During 2006, the Company expensed $193,819 compared to $214,337 during 2005.

  

Net Loss

 

The Company reported a net loss of ($748,924) for fiscal 2006 as compared to a net loss of ($725,732) for fiscal 2005. The Company reported taxes paid of $112,895 for the fiscal year ended December 31, 2006 compared to taxes paid of $128,839 for fiscal 2005.  


5.B Liquidity and Capital Resources


Three Months Ended March 31, 2007


As at March 31, 2007, the Company had bank indebtedness  of $16,701 (Q1-2006 - $14,779), short term investment of $150,000 and accounts and grants receivable of $251,805 (Q1-2006 - $533,511). The Company’s total current assets amounted to $933,049 (Q1-2006 - $705,613) with current liabilities of $1,333,852 (Q1-2006 - $677,786) resulting in a working capital deficiency of $400,802 (Q1-2006 - working capital of $27,827).   


During the course of Q1-2007, the Company received $5,000 through the exercise of stock options. The Company secured additional loans in the amount of $47,230.  As at March 31, 2007, the company had two lines of credit with a balance outstanding of $485,000. First bank facility is secured by the accounts receivable from China, which in turn are insured by the Export Development Corporation. Second bank facility is secured by a General Security Agreement and the short-term investment of $150,000.


The Company receives government grants based on certain eligibility criteria for international marketing support and publishing industry development in Canada. These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant.  The Company receives these grants throughout the quarter from different agencies and government programs.   Each grant is applied for separately based on the Company either meeting certain eligibility requirements.  The Company has relied on obtaining these grants for its operations and has been successful at securing them in the past but it cannot be assured of obtaining these grants in the future.   


Government grants received during Q1-2007 were $28,750 compared to $35,392 in Q1-2006.  





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The Company plans on raising additional equity through private placements, as the capital markets permit, in an effort to finance its growth plans in addition to finance ongoing working capital needs resulting therefrom.  The Company has been successful in raising sufficient working capital in the past.


Fiscal Year Ended December 31, 2006


As at December 31, 2006, the Company had cash on hand of $73,169 (2005 - $144,337), short term investment of $150,000 and accounts and grants receivable of $304,924 (2005 - $488,303). The Company’s total current assets amounted to $812,942 (2005 - $801,072) with current liabilities of $1,160,069 (2005 - $523,320) resulting in a working capital deficiency of $347,127 (2005 -  working capital of $277,752).   


During the course of 2006, the Company received $66,679 through the exercise of stock options. The Company secured loans  in the amount of $711,500 and it repaid $465,887 of these loans in 2006, $340,000 of the loan proceeds were used to fund the cash portion of the A+ acquisition. As at December 31, 2006, the company had two lines of credit with a balance outstanding of $485,000. First bank facility is secured by the accounts receivable from China, which in turn are insured by the Export Development Corporation. Second bank facility is secured by a General Security Agreement and the short-term investment of $150,000.


The terms of the revolving lines of credit require the Company to maintain certain measurable covenants such as current ratio, debt to equity ratio and tangible net worth.  As at December 31, 2006, the Company was in violation of all these covenants. Financial statements reflect these facilities as current liability. The Company plans to partially repay and reduce the facilities to an acceptable amount funded through an equity financing.


The Company receives government grants based on certain eligibility criteria for international marketing support and publishing industry development in Canada. These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant.  The Company receives these grants throughout the year from different agencies and government programs.   Each grant is applied for separately based on the Company either meeting certain eligibility requirements.  The Company has relied on obtaining these grants for its operations and has been successful at securing them in the past but it cannot be assured of obtaining these grants in the future.   


Government grants received during 2006 were $182,300 compared to $219,772 in 2005.  This represents a significant portion of the Company’s sources of funds.


The Company plans on raising additional equity through private placements, as the capital markets permit, in an effort to finance its growth plans in addition to finance ongoing working capital needs resulting therefrom.  The Company has been successful in raising sufficient working capital in the past.





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Fiscal Year Ended December 31, 2005


As at December 31, 2005, the Company had cash on hand of $144,337 (2004 - $29,791) and accounts receivable of $488,303 (2004 - $562,558). The Company’s total current assets amounted to $801,072 (2004 - $749,473) with current liabilities of $523,320 (2004 - $478,488) resulting in a working capital surplus of $277,752 (2004 - $270,985).   


During the year, the Company was successful in raising $735,000 via a non-brokered private placement.  The funds were used to advance working capital to Sanlong in China, for investigation and due diligence of joint ventures opportunities in China and Mexico and for general working capital.  During the course of the year, the Company was able to source $10,800 in funds by the exercise of stock options. It secured an additional third party loan in the amount of $50,279 and it drew down another $20,000 from its $150,000 available line of credit (bringing the total drawdown to $110,000).  The shareholder’s loan was partially repaid by an amount of $26,113 with $51,649 still outstanding.  The line of credit is secured by the accounts receivable from China, which are in turn insured by the Export Development Corporation.


The Company receives government grants based on certain eligibility criteria for international marketing support and publishing industry development in Canada. These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant.  The Company receives these grants throughout the year from different agencies and government programs.   Each grant is applied for separately based on the Company either meeting certain eligibility requirements or by the Company achieving specific milestones to continue ongoing support for the specific project, the proceeds of which are used to develop new or ongoing English learning programs for its markets.  The Company has relied on obtaining these grants for its operations and has been successful at securing them in the past but it cannot be assured of its future success in obtaining these grants in t he future.   


Government grants received during 2005 were $219,772 compared to $261,269 in 2004.  This represents a significant portion of the Company’s sources of funds.


During 2004, the Chinese State Ministry of Education (“MOE”) mandated PEP to increase its market share by shifting its sales from Finished Product Sales to Licensing Sales.  As a result of this new MOE stance, PEP had significantly reduced the size of its print runs for Finished Product Sales in 2004 and is now focusing on Licensing Sales.  This shift in product mix had a significant impact on the overall revenues and a decrease in cash flows from operations from China during 2004.    





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Although revenues from China during 2004 were significantly reduced compared to 2003, the Company’s 2005 Chinese revenues steadily increased back to its 2003 levels as the MOE’s mandate is in full force.   The Company has instituted budgetary measures aimed at ensuring that its core operation has sufficient funds to sustain itself for the next 12 months.  Nonetheless, the Company plans on raising additional equity through private placements, as the capital markets permit, in an effort to finance its growth plans as well as to finance ongoing working capital needs resulting therefrom.  The Company has been successful in raising sufficient working capital.


Reconciliation of Canadian and United States generally accepted accounting principles ("GAAP"):


Development Costs


Under Canadian GAAP, the Company defers the incremental costs relating to the development of and the pre-operating phases of new businesses and established business and amortizes these costs on a straight-line basis over periods up to five years.  Under United States GAAP, incremental costs related to development of and the pre-operating plan of a new business are expensed as incurred but the incremental costs incurred for established businesses are capitalized and amortized over on a straight line basis over periods up to five years.

 

Under United States GAAP, the amounts shown on the consolidated balance sheets for development costs would be $222,303 (2005 - $306,009).


Statement of comprehensive income

Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), establishes standards for the reporting and disclosure of comprehensive income and its components in financial statements.  Components of comprehensive income or loss include net income or loss and all other changes in other non-owner changes in equity, such as the change in the cumulative translation adjustment and the unrealized gain or loss for the year on "available-for-sale" securities.  For all periods presented, comprehensive loss is the same as loss for the year under US GAAP.

Options to consultants

Starting January 1, 2004 under United States and Canadian GAAP, the Company records compensation expense based on the fair value for stock or stock options granted in exchange for services from consultants and employees. Before January 1, 2003, for the options issued and vested to employees the Company did not recognize a compensation expense under Canadian GAAP but recorded a compensation expense under US GAAP and Canadian GAAP for the options issued to consultants.  





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Calculation of Loss for the Year


The consolidated financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") as applied in Canada.  In the following respects, GAAP as applied in the United States differs from that applied in Canada.


If United States GAAP were employed, the loss in each year would be adjusted as follows:


Expressed in Canadian Dollars


 

2006

2005

2004

Income (loss) for the year, Canadian GAAP

$   (748,924)

$   (725,732)

$   (795,377)


Impact of US GAAP and adjustments:

 

 

 

Amortization of development costs

156,648 

133,290 

346,124 

Amortization of software development costs

31,046 

 

 

 

 

Share issue costs

(32,191)

Effect of change in accounting policy

(8,842)

Deferred Costs

(40,316)

(117,102)

Income (loss) for the year, US GAAP

$   (632,592)

$   (709,544)

$   (459,240)



The consolidated interim financial statements for the three months ended March 31, 2007 and 2006 are prepared in accordance with GAAP as applied in Canada.  In the following respects, GAAP as applied in the United States differs from that applied in Canada:


Expressed in Canadian Dollars


 

March 2007

March 2006

Income (loss) for the year, Canadian GAAP

$  (309,674)

$   (309,640)


Impact of US GAAP and adjustments:

 

 

Amortization of development costs

16,598 

26,310 

Deferred Costs

(15,620)

Income (loss) for the year, US GAAP

$   (293,076)

$   (298,950)






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Calculation of earnings per share:


Under both US and Canadian GAAP, basic earnings per share are computed by dividing the net income for the year available to common shareholders, as measured by the respective accounting principles (numerator), by the weighted average number of common shares outstanding during that year (denominator).  Basic earnings per share exclude the dilutive effect of potential common shares.


Diluted earnings per share under Canadian GAAP and US GAAP give effect to all potential common shares outstanding during the year. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options using the treasury stock method.


The following table reconciles the numerators and denominators of the basic and diluted earnings per share under U.S. GAAP as required by SFAS 128:


Expressed in Canadian Dollars


 

2006

2005

2004

numerator for basic and diluted income (loss) per share:

 

 

 


Income (loss) – US GAAP            

$  (632,592)

$  (709,544)

$   (427,461)


Denominator for basic and diluted (loss) per share:

 

 

 


Weighted average common shares

28,422,317 

24,711,619 

22,626,746 

 

 

 

 

Basic and diluted loss per share – US GAAP

$     (0.03)

$     (0.03)

$      (0.04)



5.E Research and Development


During the years ended December 31, 2005 and 2004, respectively, the Company expended $131,641 and $104,106 on research and development, under the categories of “development costs” and “deferred costs” .  These expenditures were primarily directed at developing products for the China market.



5.F Trend Information


Lingo Media believes that the trend in English language learning in China is are strong and growing.  The State Ministry of Education in China (“MOE”) is expanding its mandate for the teaching of English learning programs to students.    Although the outlook for learning English in China remains positive, there can be no assurance that this trend will continue or that the Company will benefit from this trend.





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In Canada, pre-school supplemental education market remains strong, there can be no assurance that this trend will continue or that the Company will benefit from this trend.


5.F Tabular disclosure of contractual obligations


Our obligations as of March 31, 2007, were as follows:

Expressed in Canadian Dollars


Obligation

Expiring

Balance

Equipment Lease

April 29, 2009

$      32,789 

Rent in China

October 31, 2007

$      57,408 

Rent in Canada

December 31, 2011

$     825,003 

Loans Payable

August 31, 2008

$     394,771 

Bank Loans Payable

Demand

$     485,000 



ITEM 6.  DIRECTORS, SENIOR MANAGEMENT, AND EMPLOYEES


6.A.  Directors and Senior Management


Table No. 6

Directors and Senior Management

June 15, 2007


 

 

 

Date of

 

 

 

First

 

 

 

Election or

Name

Position

Age

Appointment

Michael P. Kraft

President/CEO/Director

43

November 1996

Khurram R. Qureshi

CFO/Director

44

April 1997

Scott Remborg

Director

58

July 2000

John P. Schram

Director

64

June 2004

Bailing Xia

Director

52

June 2004

Nereida Flannery

Director

36

June 2005

Imran Atique

Secretary and Treasurer

30

September 2001


Michael P. Kraft is the President & Chief Executive Officer of the Company since its inception in 1996. Mr. Kraft is also the President of Buckingham Group Limited, a private merchant banking corporation and President of MPK Inc., a private business consulting corporation to both private and public corporations since 1994. He is also a director of JM Capital Corp. since June 2006, Pioneering Technology Inc. since July 2006 and Grenville Gold Corporation since April 2007, TSX Venture listed companies.  Mr. Kraft received a Bachelor of Arts in Economics from York University in 1985.


Khurram R. Qureshi is the Chief Financial Officer of the Company since 1997.  Mr. Qureshi is also the Chief Financial Officer of Canadian Shield Resources Inc. since 1997 and a director since June 2004.  Mr. Qureshi received a Bachelor of Administrative Studies from York University in 1987 and received the Chartered Accountant designation in 1990. Mr. Qureshi is also a partner at Chaba Qureshi and Associate, Chartered Accountants.





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Scott Remborg is an independent consultant in Information Technology and eCommerce.  From 2001 to 2003,  he was General Manager, eBusiness, at Air Canada. From 1994 to 1999, Mr Remborg started up and led Sympatico, the largest Internet service and web portal  in Canada.  Earlier in his career he held senior management positions at Reuters and I.P. Sharp Associates.  Mr Remborg has an MBA and was educated at the BI Norwegian School of Management  in Oslo and the University of Alberta, Canada. 


John P. Schram is the President & Chief Executive Officer of We Care Health Services Inc., Canada’s largest national home health services company since 1999.  Mr. Schram has held the position of President & Chief Executive Officer in a number of Canadian and US educational publishing companies including Simon & Schuster from 1992 to 1996 and Prentice Hall Canada Limited from 1991 to 1992.  Mr. Schram received an Honours BA in Business Administration from Wilfred Laurier University in 1966.

 

Bailing Xia is a business consultant with a focus on China. Mr Xia is the Chief Representative in North America for China Central Television (CCTV) for education, science, technology, culture and health programs.  Mr. Xia sits on a number of boards on Canadian and Chinese private corporations. Mr. Xia also serves as an advisor to Chinese Medical Association and to the Chairman of Beijing Concord College of Sino-Canada.  Mr. Xia was an Assistant Professor and Deputy Head of Scientific Management and Business Administration Department and Director of Graduate Student Affairs, Faculty of Graduate Studies at the, University of Science and Technology of China from 1981 to 1988.  Mr. Xia graduated from Anhui University (economics major) in 1979 and graduated from Sino-American Scientific Technology, Industry, and Business Administration Program (the first M.B.A. Program in China) in 1981.


Nereida Flannery is a Partner and Managing Director at The Balloch Group  with over 12 years experience  in China.  Ms. Flannery  was the General Manager of the Canada China Business Counsel in China (CCBC) where she worked closely with member companies to design, execute and monitor their China market entry strategies.  She also helped members identify joint venture partners and led many negotiations between government parties, member firms and joint-venture partners.  Ms. Flannery has a degree in Political Science from Queen’s University and speaks Chinese, Greek and French.


Imran Atique has served as Secretary and Treasurer of the Company from September 2001 to March 2006 and re-joined again in October 2006. He brings eight years accounting experience to Lingo Media. Mr. Atique received his Bachelor’s of Commerce (Honours) from St. Mary’s University (Halifax) in 1999 and received Certified Management Accountant (CMA) designation in 2005.






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The Directors have served in their respective capacities since their election and/or appointment and will serve until the next Annual General Meeting or until a successor is duly elected, unless the office is vacated in accordance with the Articles/By-Laws of the Company.


The Senior Management serves at the pleasure of the Board of Directors with management service contracts but without term of office, except as disclosed herein.


Despite the Company’s Executive Officers spending material portions of their time on businesses other than the Company, the Company believes that they devote sufficient time to the Company to properly carry out their duties.


No Director and/or Executive Officer has been the subject of any order, judgment, or decree of any governmental agency or administrator or of any court or competent jurisdiction, revoking or suspending for cause any license, permit or other authority of such person or of any corporation of which he is a Director and/or Executive Officer, to engage in the securities business or in the sale of a particular security or temporarily or permanently restraining or enjoining any such person or any corporation of which he is an officer or director from engaging in or continuing any conduct, practice, or employment in connection with the purchase or sale of securities, or convicting such person of any felony or misdemeanor involving a security or any aspect of the securities business or of theft or of any felony.


There are no arrangements or understandings between any two or more Directors or Executive Officers, pursuant to which he was selected as a Director or Executive Officer.  There are no family relationships between any two or more Directors or Executive Officers.


6.B.  Compensation


The table below sets forth information concerning the compensation paid, during each of the last three fiscal years (as applicable), to the Company’s chief executive officer and other executive officers of the Company and its subsidiaries who received total remuneration, determined on the basis of base salary and bonuses in excess of $100,000 during the last three fiscal years ended December 31 (the “Named Executive Officers”).





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Summary Compensation Table

Expressed in Canadian Dollars




 



 ANNUAL COMPENSATION


LONG-TERM COMPENSATION



 

 

 

 

 

Awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payouts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities

Restricted

 

 

 

 

 

 

 

Under

Shares or

TIP(4)

 

 

 

 

Bonus

Other

Options/

Restricted

Payouts

 

 

 

 

 

Annual

SARs (3)

Share

 

 

 

 

 

($)

Compen-

Granted

Units

($)

All

 

 

 

 

sation(1)

 

 

 

Other

 

 

 

 

(2)

(#)

($)

 

Compen-

Name and

 

Salary(1)

 

 

 

 

 

sation

Principal

 

 

 

($)

 

 

 

($)

Position

Year

($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael P.

2006 

122,500 

17,704 

Kraft(5)

2005 

123,489 

16,144 

295,000 

36,750(6)

 

2004 

138,987 

17,647 

75,000 

President & CEO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Khurram R.

2006 

96,000 

9,000 

300,000 

Qureshi

2005 

96,000 

75,000 

 

2004 

96,000 

CFO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

Paid by Lingo Media Ltd., a wholly-owned subsidiary of the Company.

(2)

These amounts include automobile allowance.  

(3)

Stock appreciation rights.

(4)

Long term incentive plans.

(5)

Mr. Kraft’s salary was paid by Lingo Media Ltd. to his holding company, MPK Inc.

(6)

Represents success fees.


Management Agreement. Lingo Media Ltd., a wholly-owned subsidiary of the Company, entered into a management agreement (“Management Agreement”) dated as of May 1, 1998 with Michael P. Kraft & Associates Inc. (“MPK Inc.”) pursuant to which Lingo Media Ltd. engaged MPK Inc. to provide management





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services.  The Management Agreement provides for an initial term of 8 months and automatic annual renewals until it is terminated.  The Management Agreement provides that Lingo Media Ltd. is to pay MPK Inc. $3,000 per month plus certain sales commissions. The Management Agreement was renewed on December 3, 1998 for fiscal year 1999 and again on November 22, 1999 for fiscal year 2000.  The Management Agreement was amended on June 30, 2000, whereby Lingo Media Ltd. is to pay MPK Inc. $ 10,000 per month beginning July 2000 in addition to providing an allowance for a health plan and life insurance policy.  MPK Inc. is also to be reimbursed for all travel, entertainment and other expenses incurred.  The Management Agreement also provides for a reasonable automobile allowance and performance bonus based upon his contribution to the ongoing success of the Company.  MPK Inc. is a corporation c ontrolled by Michael P. Kraft, the President & Chief Executive Officer of the Company.   


Stock Options.  The Company grants stock options to Directors, Senior Management and employees; refer to ITEM #6.E., "Share Ownership, Stock Options”.


Director Compensation.  The non-management directors of the Company are entitled to receive a fee of $250 for each board meeting and for each committee meeting attended. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors.  The Board of Directors may award special remuneration to any Director undertaking any special services on behalf of the Company other than services ordinarily required of a Director.  Other than indicated below no Director received any compensation for his services as a Director, including committee participation and/or special assignments.


Change of Control Remuneration.  The Company has no plans or arrangements in respect of remuneration received or that may be received by Executive Officers of the Company in Fiscal 2006 to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control, where the value of such compensation exceeds US$60,000 per Executive Officer.


Other Compensation.  No Executive Officer/Director received “other compensation” in excess of the lesser of US$25,000 or 10% of such officer's cash compensation, and all Executive Officers/Directors as a group did not receive other compensation which exceeded US$25,000 times the number of persons in the group or 10% of the compensation.


Bonus/Profit Sharing/Non-Cash Compensation.  Except for the stock option program discussed in ITEM #6.E., the Company has no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to the Company's Directors or Executive Officers.





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Pension/Retirement Benefits.  No funds were set aside or accrued by the Company during Fiscal 2006 to provide pension, retirement or similar benefits for Directors or Executive Officers.


6.C.  Board Practices


6.C.1.  Terms of Office.


The Directors have served in their respective capacities since their election and/or appointment and will serve until the next Annual General Meeting or until a successor is duly elected, unless the office is vacated in accordance with the Articles/By-Laws of the Company.


The Senior Management serves at the pleasure of the Board of Directors with management service contracts but without term of office, except as disclosed herein.


6.C.2. Termination benefits


Not applicable


6.C.3.  Board of Director Committees.


The Company has two committees: Audit Committee and Compensation Committee.


The Audit Committee recommends to the Board of Directors the engagement of the independent auditors of the Company and reviews with the independent auditors the scope and results of the Company’s audits, the Company’s internal accounting controls, and the professional services furnished by the independent auditors to the Company.  The current members of the Audit Committee are: Scott Remborg and Michael P. Kraft.


The Compensation Committee establishes and modifies compensation and incentive plans and programs, and reviews and approves compensation and awards under compensation and incentive plans and programs for elected officers of the Company. The current members of the Compensation Committee are: Khurram R. Qureshi, Nereida Flannery and John Schram.


6.E.  Share Ownership


Table No. 7 lists, as of June 15, 2006, Directors and Executive Officers who beneficially own the Company's voting securities and the amount of the Company's voting securities owned by the Directors and Executive Officers as a group.  Table No. 7 includes all persons/companies where the Company is aware that they have 5% or greater beneficial interest in the Company’s securities.





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Table No. 7

Shareholdings of Directors and Executive Officers

Shareholdings of 5% Shareholders

Title

 

Amount and Nature

Percent

of

 

of Beneficial

of

Class

Name of Beneficial Owner

Ownership

Class

Common

Michael P. Kraft (1)

6,125,039 

16.60%

Common

Buckingham Group Ltd (1)

3,064,000 

8.31%

Common

Scott Remborg (2)

200,000 

Common

Khurram Qureshi (3)

861,473 

2.34%

Common

John Schram (4)

225,000 

Common

Bailing Xia (5)

225,000 

Common

Nereida Flannery (6)

75,000 

Common

Imran Atique (7)

138,485 

Directors/Officers as a group (7 persons)

7,849,99 

21.28%



*  Less than 1%.


(1)

Includes 536,667 options to purchase shares exercisable within 60 days.  3,064,000 shares are held indirectly by Buckingham Group Ltd. (Formerly Kraft Investments Corp.), a private company controlled by Mr. Kraft.  Includes 287,554 shares held in the registered retirement savings plan.  Includes 2,120,208 shares owned by members of his family.


(2)

Includes options to purchase 150,000 shares exercisable within 60 days.



(3)

Includes options to purchase 97,333 shares exercisable within 60 days.


(4)

Includes 150,000 options to purchase shares exercisable within 60 days.


(5)

Includes options to purchase 150,000 shares exercisable within 60 days.



(6)

Includes 75,000 options to purchase shares exercisable within 60 days.


(7)

Includes 101,167 options to purchase shares exercisable within 60 days.


#Based on 35,628,170 shares outstanding as of June 15, 2007 and stock options and warrants held by each beneficial holder exercisable within sixty days.

________________________________________________________________________ ________________________


Stock Options


TSX Venture Exchange Rules and Policies


The terms and conditions of incentive options granted by the Company are done in accordance with the rules and policies of the TSX Venture Exchange ("TSX VEN"), including the number of common shares under option, the exercise price and expiration date of such options, and any amendments thereto.





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Such “terms and conditions”, including the pricing of the options, expiration and the eligibility of personnel for such stock options; are described below.


The TSX VEN policy in respect of incentive stock options provides that shareholder approval is not required if the aggregate number of common shares that may be reserved for issuance pursuant to incentive stock options does not exceed 10% of the issued common shares of the Company, 5% to any one individual and 2% to any consultant at the time of granting.


Shareholder approval of the grant of incentive stock options is required pursuant to the rules of the TSX VEN where the grant will result in the Company having options outstanding which, in aggregate, are exercisable to acquire over 10% (to a maximum of 20%) of the outstanding common shares of the Company.


In addition, disinterested shareholders (all shareholders excluding insiders and associates of insiders) approval is required pursuant to the rules of the TSX VEN where:


(a) grant of incentive stock options could result at any time in:


(i)   the Company having options outstanding to insiders which,

      in aggregate, are exercisable to acquire over 20% of the

      outstanding common shares of the Company; or

(ii)  the issuance to insiders, within a one year period, of

      common shares which, in aggregate, exceed 10% of the

      outstanding common shares of the Company; or

(iii) the issuance to any one insider and such insider's

      associates, within a one year period, of common shares

      which, in aggregate, exceed 5% of the outstanding common

      shares of the Company; or

(iv)  the issuance to any consultant of common shares which, in

      aggregate, exceed 2% of the outstanding common shares of

      the Company; or


(b) the Company is proposing to decrease the exercise price of

    stock options held by any insiders.


Company Stock Option Plans



2000 Plan


A subsequent stock option plan (the “2000 Plan”) was adopted by the board of directors of the Company on May 30, 2000, with 2,384,074 common shares reserved for issuance under the plan, to encourage ownership of common shares by directors, officers, employees and consultants of the Company.  On June 28, 2002 the shareholders of the Company approved an amendment to the 2000 Plan to increase the number of options to purchase common shares that may be granted under the 2000 Plan to 4,416,765 less the number of





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shares reserved for issuance pursuant to options granted under the 1996 Plan, provided the number of shares reserved for issuance under stock options granted at any time do not exceed 10% of the Company’s then issued and outstanding shares.  The TSX Venture Exchange accepted for filing the Company’s amended and restated 2000 Plan for a rolling stock option plan reserving 10% of the issued and outstanding common shares of the Company at the time of a stock option grant, up to a maximum of 4,416,765 common shares, for issuance thereunder.


On July 3, 2003 the Shareholders of the Company approved a further amendment to the 2000 Plan to fix the maximum number of shares that may be issued under the 2000 Plan at 4,176,765 common shares, representing approximately 20% of the issued and outstanding common shares of the Company as at July 3, 2003.  The 2000 Plan was subsequently amended and restated as of June 30, 2004 to increase the maximum number of shares that may be issued under the 2000 Plan to 4,791,954 common shares, representing approximately 20% of the issued and outstanding common shares of the Company as at June 30, 2004.


Options may be granted under the 2000 Plan only to directors, officers, employees, consultants of the Company and its subsidiaries and personal holding corporations controlled by a director of officer of the Company and its subsidiaries as designated from time to time by the board of directors.  The number of shares which may be reserved for issuance under the 2000 Plan is currently limited to 4,791,954 common shares provided that the board has the right, from time to time, to increase such number subject to the approval of the relevant exchange on which the shares are listed and the approval of the shareholders of the Company.  The maximum number of common shares which may be reserved for issuance to any one person under the 2000 Plan is 5% of the common shares outstanding at the time of the grant (calculated on a non-diluted basis) less the number of shares reserved for issuance to such person under any option to purchase common shares granted as a compensation or incentive mechanism.  Any shares subject to an option granted under the 2000 Plan that for any reason is cancelled or terminated prior to exercise will be available for a subsequent grant under the 2000 Plan.  The option price of any common shares cannot be less than the closing price of the shares on the day immediately preceding the day upon which the option is granted less any permitted discount.  Options granted under the 2000 Plan may be exercised during a period not exceeding five years, subject to earlier termination upon the termination of the optionee’s employment, upon the optionee ceasing to be an employee, officer, director or consultant of the Company or any of its subsidiaries, as applicable, or upon the optionee retiring, becoming permanently disabled or dying.  Options granted to optionees vest over an 18 month period with no greater than 16.67% of any options granted to an optionee vesting in any three mo nth period or such longer period as the board may determine.  The options under the 2000 Plan are non-transferable.  The 2000 Plan contains provisions for adjustment in the number of shares issuable thereunder in the event of a subdivision, consolidation, reclassification or change of





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the common shares, a merger of other relevant changes in the Company’s capitalization.  The board of directors may from time to time amend or revise the terms of the 2000 Plan or may terminate it at any time.


The 2000 Plan provides that the Company may provide financial assistance in respect of options granted under the 2000 Plan by means of loans to optionees.  Under the terms of the 2000 Plan, the Company may, but is not obligated to, loan to an optionee the funds required to exercise any particular option.  The 2000 Plan provides that any such loan will be for a term not exceeding 10 years and will be non-interest bearing.  Any such loan will be repayable at maturity or upon the death of the optionee or earlier in certain other circumstances.  Any loans made under the 2000 Plan are to be secured by a pledge of the shares acquired upon the exercise of the option exercised being funded to a trustee for such purposes.  In the event that any loan amount is not fully repaid when due the trustee holding the pledged shares is entitled to realize on the shares being held by it as security for the loa n.  Loans made under the 2000 Plan are made on a full recourse basis.  The 2000 Plan provides that any shares acquired pursuant to loans made under the 2000 Plan may be sold by the optionee from time to time provided that an amount equal to the aggregate option exercise price or the balance of the loan is applied in repayment of the loan.  Any financial assistance so provided under the 2000 Plan will be subject to and made in accordance with all applicable laws and regulatory policies at the time of making the loan.


As of June 15, 2007, options to purchase an aggregate of 1,374,767 common shares are outstanding under the 2000 Plan.


2005 Plan


A new stock option plan (the “2005 Plan”) was adopted by the board of directors in May 30, 2005 and approved by the shareholders of the Company at the annual and special meeting of shareholders on June 30, 2005 to encourage ownership of common shares by directors, officers, employees and consultants of the Company.


Options may be granted under the 2005 Plan only to directors, officers, employees, consultants of the Company and its subsidiaries and personal holding corporations controlled by a director or officer of the Company and its subsidiaries as designated from time to time by the board of directors of the Company.  The number of shares which may be reserved for issuance under the 2005 Plan is limited to 4,821,955 common shares, representing approximately 20% of the issued and outstanding common shares of the Company as at June 30, 2005, less the number of shares reserved for issuance pursuant to options granted under the 2000 Plan (currently 3,172,834 shares), provided that the board has the right, from time to time, to increase such number subject to the approval of the relevant stock exchange on which the shares are listed and the approval of the shareholders of the Company.  The maximum number of common sha res which may





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be reserved for issuance to any one person under the 2005 Plan is 5% of the common shares outstanding at the time of the grant (calculated on a non-diluted basis) less the number of shares reserved for issuance to such person under any option to purchase common shares granted as a compensation or incentive mechanism.  Any shares subject to an option granted under the 2005 Plan that for any reason is cancelled or terminated prior to exercise will be available for a subsequent grant under the 2005 Plan.  The option price of any common shares cannot be less than the closing price of the shares on the day immediately preceding the day upon which the option is granted less any permitted discount.  Options granted under the 2005 Plan may be exercised during a period not exceeding five years, subject to earlier termination upon the termination of the optionee’s employment, upon the optionee ceasing to be an employee, officer, director or consultant of the Company or an of its subsidiaries, as applicable, or upon the optionee retiring, becoming permanently disabled or dying.  Options granted to optionees vest over an 18 month period with no greater than 16.67% of any options granted to an optionee vesting in any three month period or such longer period as the board may determine.  The options under the 2005 Plan are non-transferable.  The 2005 Plan contains provisions for adjustment in the number of shares issuable thereunder in the event of a subdivision, consolidation, reclassification or change of the common shares, a merger or other relevant changes in the Company’s capitalization.  The board of directors may from time to time amend or revise the terms of the 2005 Plan or may terminate it at any time.


The 2005 Plan provides that the Company may provide financial assistance in respect of options granted under the 2005 Plan by means of loans to optionees.  Under the terms of the 2005 Plan, the Company may, but is not obligated to, loan to an optionee the funds required to exercise any particular option.  The 2005 Plan provides that any such loan will be for a term not exceeding 10 years and will be non-interest bearing.  Any such loan will be repayable at maturity or upon the death of the optionee or earlier in certain other circumstances.  Any loans made under the 2005 Plan are to be secured by a pledge of the shares acquired upon the exercise of the option exercised being funded to a trustee for such purposes.  In the event that any loan amount is not fully repaid when due the trustee holding the pledged shares is entitled to realize on the shares being held by it as security for the loa n.  Loans made under the 2005 Plan are made on a full recourse basis.  The 2005 Plan provides that any shares acquired pursuant to loans made under the 2005 Plan may be sold by the optionee from time to time provided that an amount equal to the aggregate option exercise price or the balance of the loan is applied in repayment of the loan.  Any financial assistance so provided under the 2005 Plan will be subject to and made in accordance with all applicable laws and regulatory policies at the time of making the loan.


As of June 15, 2007, options to purchase an aggregate of 2,346,336 common shares are outstanding under the 2005 Plan.





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The names and titles of the Directors/Executive Officers of the Company to whom outstanding stock options have been granted and the number of common shares subject to such options are set forth in the Table below as of June 15, 2007, as well as the number of options granted to Directors and officers as a group.


Stock Options Outstanding

Expressed in Canadian Dollars


 

Common

Exer.

Grant

Expir'n

Name

Stock

Price

Date

Date

Nereida Flannery

75,000 

$0.21 

10/17/05 

10/05/10 

Nereida Flannery

150,000 

$0.12 

05/22/07 

05/22/12 

Michael P. Kraft

75,000 

$0.19 

10/05/04 

10/05/09 

Michael P. Kraft

295,000 

$0.19 

1/14/05 

1/14/10 

Michael P. Kraft

1,000,000 

$0.10 

02/14/07 

02/14/12 

Khurram Qureshi

14,000 

$0.19 

10/05/04 

10/05/09 

Khurram Qureshi

500,000 

$0.10 

02/14/07 

02/14/12 

Scott Remborg

75,000 

$0.19 

10/05/04 

10/05/09 

Scott Remborg

75,000 

$0.21 

10/17/05 

10/05/10 

Scott Remborg

150,000 

$0.12 

05/22/07 

05/22/12 

John Schram

75,000 

$0.19 

10/05/04 

10/05/09 

John Schram

75,000 

$0.21  

10/17/05 

10/05/10 

John Schram

150,000 

$0.12 

05/22/07 

05/22/12 

Bailing Xia

75,000 

$0.19 

10/05/04 

10/05/09 

Bailing Xia

75,000 

$0.21 

10/17/05 

10/05/10 

Bailing Xia

150,000 

$0.12 

05/22/07 

05/22/12 

Imran Atique

84,500 

$0.19 

10/05/04 

10/05/09 

Imran Atique

100,000 

$0.10 

02/14/07 

02/14/12 

Total Officers/Directors

2,968,500

 

 

 



ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS


7.A.  Major Shareholders.


7.A.1.a.  Holdings By Major Shareholders.


Refer to ITEM #6.E. and Table No. 7.





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7.A.1.b.  Significant Changes in Major Shareholders’ Holdings.


The participation in private placements of equity by the Company and exercise of stock options/share purchase warrants has lead over the last several year to some significant changes in the holdings of major shareholders; table reflects direct/indirect holdings of common shares, refer to Table No. 7 for additional information.


 

Shares

Shares

Shares

Shares

 

Owned

Owned

Owned

Owned

 

12/31/2006

12/31/2005

12/31/2004

12/31/2003

Michael P. Kraft

3,468,154 

2,495,658 

2,090,658 

2,090,658 


7.A.2.  Canadian Share Ownership. On June 15, 2006, the Company’s registered shareholders’ list showed 35,628,170 common shares outstanding with 37 registered shareholders, with 35,266,064 owned by 26 shareholders resident in Canada, 191,199 shares owned by 9 registered shareholders in US and 170,906 shares owned by 2 foreign registered shareholders.


7.A.3.  Control of Company.  The Company is a publicly owned Canadian corporation, the shares of which are owned by U.S. residents, Canadian residents and other foreign residents.  The Company is not controlled by any foreign government or other person(s) except as described in ITEM #4.A., “History and Development of the Company”, and ITEM #6.E., “Share Ownership”.


7.B.  Related Party Transactions


Michael P. Kraft, President/CEO/Director

Mr. Kraft is compensated indirectly through MPK Inc., as discussed in ITEM #6.B.


Funds Owed to Officers/Directors

Officers/Directors have lent the Company funds during the last several years to alleviate the corporate need for working capital.  Principal owed totaled:



Expressed in Canadian Dollars


Name

12/31/06

12/31/05

12/31/04

Richard J.G. Boxer

$        nil 

$  51,649(1)

$ 77,762(1)


(1)

867214 Ontario Ltd. a company controlled by Richard J.G. Boxer loaned funds to the Company.     





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Interest Payable to Officers/Directors


Officers/Directors have lent the Company funds during the last several years to alleviate the corporate need for working capital.  Officer/Director loans bear interest at 12% per annum interest payable totaled:


From June 2004 through November 2004, LMK Inc., a company controlled by the wife of Michael P. Kraft, MPK Inc., a company controlled by Michael P. Kraft, and 867214 Ontario Ltd., a company controlled by Richard J.G. Boxer, loaned the Company an aggregate of $265,000. These loans bore interest at 12% per annum.  At December 31, 2004, $ 77,762 was due to 867214 Ontario Ltd.  This loan was repaid in full during 2005.


From January 2005 through February 2005, LMK Inc., a company controlled by the wife of Michael P. Kraft, MPK Inc., a company controlled by Michael P. Kraft, and 867214 Ontario Ltd., a company controlled by Richard J.G. Boxer, loaned the Company an aggregate of $223,500. These loans bore interest at 12% per annum.  These loans were repaid in full during 2006.  


From January 2007 through May 2007, LMK Inc., a company controlled by the wife of Michael P. Kraft, MPK Inc., Bernard Kraft, the father of Michael P. Kraft loaned the Company an aggregate of $202,000. These loans bore interest at 12% per annum.  At June 15, 2007, $202,000 was outstanding related to these loans.  


On September 22, 2005 the TSX Venture Exchange approved a private placement of 3,675,000 units at a price of $0.20 per unit (the “Units”).  Each Unit consisted of one (1) common share and one-half of a share purchase warrant, each whole warrant entitled the holder to purchase an additional common share of the Company, at an exercise price of $0.40 per warrant share until September 20, 2006.  The only insiders who participated in this private placement were Michael P. Kraft, as to 495,000 Units; Khurram R. Qureshi, as to 175,000 Units; Daniel Wiseman, as to 150,000 Units; Imran Atique, as to 50,000 Units; John Booth, as to 250,000 Units; Jing Zhang, as to 50,000 Units; Nicolas Chapman, as to 185,000 Units; and Bailing Xia, as to 50,000 Units.


Other than as disclosed above, there have been no transactions since December 31, 2003, or proposed transactions, which have materially affected or will materially affect the Company in which any director, executive officer, or beneficial holder of more than 10% of the outstanding common stock, or any of their respective relatives, spouses, associates or affiliates has had or will have any direct or material indirect interest.  Management believes the transactions referenced above were on terms at least as favorable to the Company as the Company could have obtained from unaffiliated parties.





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ITEM 8.  FINANCIAL INFORMATION


8.A.  Consolidated Statements and Other Financial Information

The Company's financial statements are stated in Canadian Dollars (CDN$) and are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP), the application of which, in the case of the Company, conforms in all material respects for the periods presented with United States GAAP, except as discussed in footnotes to the financial statements.


The financial statements as required under ITEM #17 are attached hereto and found immediately following the text of this Annual Report.  The audit reports of Mintz & Partners LLP, Chartered Accountants, are included herein immediately preceding the financial statements and schedules.


Audited Financial Statements

for Fiscal 2006 and Fiscal 2005


Unaudited Financial Statements

For Three months ended March 31, 2007 and March 31, 2006



8.A.7.  Legal/Arbitration Proceedings


The Directors and the management of the Company do not know of any material, active or pending, legal proceedings against them; nor is the Company involved as a plaintiff in any material proceeding or pending litigation.


The Directors and the management of the Company know of no active or pending proceedings against anyone that might materially adversely affect an interest of the Company.


8.A.8 Company Policy on Dividend Distribution


The Company does not intend to pay dividends in cash or in kind in the foreseeable future. The Company expects to retain any earnings to finance the further growth of the Company. The directors of the Company will determine if and when dividends should be declared and paid in the future based upon the earnings and financial conditions of the Company at the relevant time and such other factors as the directors may deem relevant. All of the Common Shares of the Company are entitled to an equal share in any dividends declared and paid.


8.B.  Significant Changes


No significant change has occurred since the date of the annual financial statements, and/or since the date of the most recent interim financial statement.





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ITEM 9.  THE OFFER AND LISTING


9.A.4.  Common Share Trading Information


The Company's common shares began trading on the Alberta Stock Exchange in Calgary, Alberta, Canada under its former name Alpha Ventures Inc. in November 1996.  The Alberta Stock Exchange was absorbed by the Canadian Venture Exchange, which was absorbed by the TSX Venture Exchange.  The Company’s listing was automatically transferred from the Alberta Stock Exchange to the TSX Venture Exchange “TSX VEN” as a Tier 2 company.  The current stock symbol on the TSX VEN is “LMD”. The CUSIP number is 535745-10-3.


The TSX Venture Exchange (“Exchange”) currently classifies Issuers into different tiers based on standards, including historical financial performance, stage of development and financial resources of the Issuer at the time of listing.  Specific Minimum Listing Requirements for each industry segment in each of Tier 1, Tier 2 and Tier 3 have been established by the Exchange.


Policy 2.1 of the Exchange outlines the Minimum Listing Requirements for each industry segment in Tier 1 and Tier 2.  Under this policy, Lingo Media Inc. is a Tier 2 Issuer in the industry segment category of Junior Industrial.  Each industry segment is further divided into categories.  Quantitative minimum requirements for listing for the industry segment Junior Industrial and Tier 2 are provided in Section 4.3 of Exchange Policy 2.1.


Similarly, Policy 2.5 of the Exchange sets out the minimum standards to be met by Issuers to continue to qualify for listing in each Tier, referred to as Tier Maintenance Requirements (“TMR”).  A Tier 2 Issuer which fails to meet one of the Tier 2 TMR will not automatically be suspended or designated as “Inactive”.  The Exchange will provide notice of failure to meet one of the Tier 2 TMR and will allow the Issuer 6 months from the date of notice to meet the requirement, failing which the Exchange may designate the Issuer as Inactive.  If a Tier 2 Issuer fails to meet more than one Tier 2 TMR, notice will be given to the Issuer by the Exchange and if the requirements are not met within 90 days of the notice, the Exchange will designate the Issuer as Inactive and apply the restrictions on Inactive Issuers retroactively.  An Inactive Issuer may continue to trade on Tier 2 of th e Exchange for 18 months from the date it is designated as Inactive.  If the Issuer does not meet all of the applicable Tier 2 TMR within that 18 month period, its listed shares may be suspended from trading by the Exchange.


To maintain a listing as an active Tier 2 Issuer, an Issuer must meet all Tier 2 TMR for its industry segment as set out in Section 4 of the Exchange Policy 2.5.





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The table No.9 lists the volume of trading and high, low and closing sales prices on the TSX Venture Exchange for the Company's common shares for: the last 12 months, the last twelve fiscal quarters; and the last five fiscal years.

Table No. 9

TSX Venture Exchange

 Common Shares Trading Activity


Period

Sales -- Canadian Dollars

Ended

Volume

High

Low

Close

Monthly

 

 

 

 

May 2007

478,000 

0.150 

0.115 

0.150 

April 2007

1,028,500 

0.165 

0.12 

0.140 

March 2007

237,025 

0.135 

0.09 

0.125 

February 2007

135,615 

0.14 

0.09 

0.125 

January 2007

133,400 

0.165 

0.115 

0.140 

December 2005

510,100 

0.18 

0.10 

0.165 

November 2006

137,800 

0.195 

0.13 

0.170 

October 2006

248,715 

0.19 

0.125 

0.180 

September 2006

486,700 

0.21 

0.135 

0.195 

August 2006

103,400 

0.19 

0.14 

0.175 

July 2006

277,512 

0.19 

0.12 

0.175 

June 2006

315,064 

0.15 

0.07 

0.15 

 

 

 

 

 

Quarterly

 

 

 

 

3/31/2007

506,040 

0.165 

0.09 

0.125 

12/31/2006

896,615 

0.195 

0.10 

0.165 

9/30/2006

867,612 

0.21 

0.12 

0.195 

6/30/2006

1,313,676 

0.16 

0.07 

0.150 

3/31/2006

1,586,650 

0.19 

0.11 

0.150 

12/31/2005

584,560 

0.22 

0.11 

0.17 

9/30/2005

1,514,714 

0.265 

0.11 

0.225 

6/30/2005

996,010 

0.225 

0.12 

0.19 

3/31/2005

1,789,072 

0.325 

0.18 

0.18 

12/31/2004

1,035,710 

0.32 

0.17 

0.28 

9/30/2004

901,575 

0.25 

0.16 

0.19 

6/30/2004

2,225,398 

0.42 

0.20 

0.23 

3/31/2004

6,321,843 

0.66 

0.20 

0.42 

12/31/2003

2,361,350 

0.32 

0.15 

0.29 

9/30/2003

1,037,650 

0.29 

0.10 

0.22 

6/31/2003

364,920 

0.16 

0.10 

0.14 

 

 

 

 

 

Yearly

 

 

 

 

12/31/2006

4,664,553 

0.210 

0.07 

0.165 

12/31/2005

4,884,356 

0.325 

0.11 

0.17 

12/31/2004

10,484,526 

0.29 

0.27 

0.28 

12/31/2003

4,048,806 

0.32 

0.08 

0.29 

12/31/2002

832,800 

0.15 

0.04 

0.10 





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The Company's shares became quoted for trading on the NASD OTC Bulletin Board on January 22, 2004.


The table No.10 lists the volume of trading and high, low and closing sales prices on the NASD OTC Bulletin Board for the Company's common shares for the last 12 months, the last twelve fiscal quarters; and since commencement of trading.

Table No. 10

NASD OTC Bulletin Board

 Common Shares Trading Activity


Period

Sales -- Canadian Dollars

Ended

Volume

High

Low

Close

Monthly

 

 

 

 

May 2007

257,243 

0.15 

0.10 

0.150 

April 2007

164,680 

0.154 

0.95 

0.11 

March 2007

115,200 

0.126 

0.05 

0.12 

February 2007

119,350 

0.127 

0.051 

0.116 

January 2007

99,277 

3.30 

0.097 

0.10 

December 2005

264,385 

3.80 

0.090 

0.168 

November 2006

55,227 

4.80 

0.121 

1.25 

October 2006

216,776 

5.80 

0.09 

0.17 

September 2006

133,362 

3.80 

0.09 

0.184 

August 2006

199,895 

2.35 

0.099 

0.15 

July 2006

565,691 

1.90 

0.10 

0.15 

June 2006

200,650 

0.145 

0.058 

0.144 

May 2006

301,825 

0.17 

0.09 

0.135 

 

 

 

 

 

Quarterly

 

 

 

 

3/31/2007

333,827 

3.30 

0.05 

0.12 

12/31/2006

536,388 

5.80 

0.09 

0.168 

9/30/2006

898,948 

3.80 

0.09 

0.184 

6/30/2006

1,006,185 

0.17 

0.058 

0.144 

3/31/2006

1,008,937 

0.19 

0.10 

0.130 

12/31/2005

384,742 

0.199 

0.08 

0.115 

9/30/2005

252,322 

0.24 

0.075 

0.18 

6/30/2005

457,285 

0.182 

0.105 

0.14 

3/31/2005

440,900 

0.27 

0.14 

0.18 

12/31/2004

379,622 

0.36 

0.125 

0.23 

9/30/2004

265,106 

0.21 

0.12 

0.16 

6/30/2004

1,165,962 

0.35 

0.13 

0.18 

3/31/2004

2,312,682 

0.51 

0.205 

0.30 

 

 

 

 

 

Yearly

 

 

 

 

12/31/2006

3,450,458 

5.80 

0.058 

0.168 

12/31/2005

1,535,249 

0.27 

0.075 

0.115 

12/31/2004

5,446,562 

0.51 

0.12 

0.23 





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The Company's common shares became quoted for trading on the Berlin-Bremen Stock Exchange on August 20, 2003.  No trades of the Company's common shares have taken place on the Berlin-Bremen Stock Exchange to this date.


9.A.5.  Common Share Description


Registrar/Common Shares Outstanding/Shareholders


The Company's common shares are issued in registered form and the following information is taken from the records of Computershare Trust Company of Canada (located in Calgary, Alberta, Canada), the registrar and transfer agent for the common shares.


On June 15, 2007, the registered shareholders' list for the Company's common shares showed 37 registered shareholders and 32,628,170 shares issued and outstanding. Nine of these registered shareholders were U.S. residents owning 191,199 shares representing less than one percent of the issued and outstanding common shares.


Common Share Description

All of the authorized common shares of the Company are of the same class and, once issued, rank equally as to dividends, voting powers, and participation in assets.  Holders of common shares are entitled to one vote for each share held of record on all matters to be acted upon by the shareholders.  Holders of common shares are entitled to receive such dividends as may be declared from time to time by the Board of Directors, in its discretion, out of funds legally available therefore.


Upon liquidation, dissolution or winding up of the Company, holders of common stock are entitled to receive pro rata the assets of Company, if any, remaining after payments of all debts and liabilities.  No shares have been issued subject to call or assessment.  There are no pre-emptive or conversion rights and no provisions for redemption or purchase for cancellation, surrender, or sinking or purchase funds.


Provisions as to the modification, amendment or variation of such shareholder rights or provisions are contained in the Business Corporations Act (Ontario).  Unless the Business Corporations Act or the Company's Articles or Memorandum otherwise provide, any action to be taken by a resolution of the members may be taken by an ordinary resolution or by a vote of a majority or more of the shares represented at the shareholders' meeting.


There are no restrictions on the repurchase or redemption of common shares of the Company while there is any arrearage in the payment of dividends or sinking fund installments.





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Preference Share Description


The Company has not issued any preference shares.  The unlimited number of no-par preference shares designated in the Company's certificate of incorporation is "blank check" preference shares, which authorizes the board of directors to authorize and issue one or more series of preference shares with the designations, rights and preferences as determined, from time to time, by the board of directors.  The board of directors is authorized to make such designations without shareholder approval.


Share Purchase Warrants/Convertible Debenture


As of June 15, 2007, there were no warrants outstanding to purchase common shares of the Company.


9.C.  Stock Exchanges Identified


The common shares trade on the TSX Venture Exchange, NASD OTCBB and are quoted for trading on the Berlin-Bremen Stock Exchange. Refer to ITEM #9.A.4.


ITEM 10.  ADDITIONAL INFORMATION


10.A.  Share Capital


10.A.1.  Authorized/Issued Capital.  As of December 31, 2005, December 31, 2004, and December 31, 2003, the authorized capital of the Company was an unlimited number of common shares without par value and there were 32,578,170, 27,874,773, and 24,109,773 common shares issued and outstanding, respectively.


10.A.4.  Stock Options/Share Purchase Warrants


10.A.5.  Stock Options/Share Purchase Warrants


--- Refer to ITEM #6.E. and Table No. 11. ---





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10.A.6.  History of Share Capital


May 1997; reverse takeover of AC,

6,978,828 

shares,

April 1997; stock option exercise,

70,000 

shares,

$   14,000 

March 1998; acquisition of CSVL,

960,000 

shares,

$  307,200 

March 2000; stock option exercise,

150,000 

shares,

$   30,000 

April 2000; private placement,

5,000,000 

shares,

$1,811,872 

November 2000; stock option exercise,

40,000 

shares,

$    8,000 

May 2001; stock option exercise,

100,000 

shares,

$   20,000 

November 2001; private placement,

1,000,000 

shares,

$  100,000 

March 2002; private placement

3,700,000 

shares,

$  370,000 

March 2003; warrants exercise,

150,000 

shares,

$   15,000 

September 2003; warrants exercise,

18,750 

shares,

$    2,250 

September 2003; stock option exercise,

18,750 

shares,

$    4,900 

October 2003; stock option exercise,

10,000 

shares,

$    1,000 

December 2003; warrants exercise,

2,583,030 

shares,

$  309,964 

March 2004; stock option exercise,

377,666 

shares,

$   59,766 

May 2004; stock option exercise,

37,500 

shares,

$    3,750 

December 2004; stock option exercise,

150,000 

shares,

$   37,500 

September 2005; Private Placement

3,675,000 

shares,

$  735,000 

Fiscal 2006:  Stock option exercise

1,853,897 

shares,

$  461,785 

Fiscal 2007-to-date: Stock option exercise

50,000 

shares,

$    5,000 

    

10.B.  Memorandum and Articles of Association


Objects and Purposes


The Company’s corporation number as assigned by the Ontario Ministry of Consumer and Commercial Relations is 4020-1165.  The Company’s Articles of Incorporation do not contain the Company’s purpose or its objectives, as neither is required under the laws of Ontario.


Disclosure of Interest of Directors


No director of the Company is permitted to vote on any resolution to approve a material contract or transaction in which such director has a material interest.


Subject to the Articles of Incorporation and any unanimous shareholder agreement, the board may fix their remuneration.


Borrowing Powers of Directors, ByLaws - Section 3.10


The board of directors may from time to time:

  (i) borrow money upon the credit of the Corporation;

 (ii) issue, reissue, sell or pledge debt obligations of the

      Corporation;

(iii) subject to the Business Corporations Act (Ontario), give a guarantee on behalf of the





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      Corporation to secure performance of an obligation of any

      person; and

 (iv) mortgage, hypothecate, pledge or otherwise create a

      security interest in all or any property of the

      Corporation, owned or subsequently acquired, to secure any

      debt obligations of the Corporation.


Delegation of Power to Borrow, Bylaws – Section 3.11


The board may by resolution delegate all or any of the powers conferred on them by paragraphs (i) and (iii) of section 3.10 hereof, to any one or more of the directors, the Managing Director, the executive committee, the Chairman of the Board (if any), the President, any Vice-President, the Secretary, the Treasurer, any Assistant Secretary, any Assistant Treasurer or the General Manager.


Director Qualification and Retirement


Neither the Articles of Incorporation nor the Bylaws of the Company discuss the retirement or non-retirement of directors under an age limit requirement, and there is no number of shares required for director qualification.


Description of Rights, Preferences and Restrictions

Attaching to Each Class of Shares


a) Class/Number of Shares.  The Company’s Articles of Incorporation provide that: the Corporation is authorized to issue two classes of shares, namely an unlimited number of Preferred Shares without nominal or par value (“Preferred Shares”) and an unlimited number of Common Shares (“Common Shares”).


b) Common Shares. The holders of Common Shares shall be entitled:

   1) to vote at all meetings of shareholders, except meetings at

which only holders of a specified class of shares are entitled to vote, and on every poll taken at every such meeting, or adjourned meeting, every holder of Common Shares shall be entitled to one vote in respect of each Common Share held; and


   2) subject to the rights of the holders of Preferred Shares,

to receive the remaining property of the Corporation upon a dissolution; and


   3) subject to the rights of the holders of Preferred Shares,

      to receive all other dividends declared by the Corporation.


c) Preferred Shares.  The Preferred Shares as a class shall carry and be subject to the following rights, privileges, restrictions and conditions:





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   1) Directors’ Rights to Issue in One or More Series.       The

Preferred Shares may at any time or from time to time be issued in one or more series, each series to consist of such number of shares as may before the issue thereof be determined by the Directors by resolution; the Directors of the Company may (subject as hereinafter provided) by resolution fix, from time to time before the issued thereof, the designation, rights, privileges, restrictions and conditions attaching to the shares of such series including, without limiting the generality of the foregoing (1) the issue price, (2) the rate, amount or method of calculation of dividends and whether the same are subject to change of dividends and whether the same are subject to change or adjustment, (3) whether such dividends shall be cumulative, non-cumulative or partly cumulative, (4) the dates, manner and currencies of payments of dividends and the dates from which dividends shall accrue, (5) the r edemption and/or purchase prices and terms and conditions of redemption and/or purchase, with or without provision for sinking or similar funds, (6) conversion and/or exchange and/or classification rights, (7) the voting rights if any, and/or (8) other provisions, the whole subject to the following provisions, and to the issue of Certificate(s) of Amendment setting forth such designations, rights, privileges, restrictions and conditions attaching to the shares of each series.


   2) Ranking of Preferred Shares.  The Preferred Shares shall be

entitled to preference over the Common Shares of the Corporation and over any other shares ranking junior to the Preferred Shares with respect to payment of dividends and distribution of assets in the event of liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of the assets of the Corporation among its shareholders for the purpose of winding up its affairs and may also be given such other preferences not inconsistent with paragraphs (1) and (2) hereof over the Common Shares of the Corporation and over any other shares ranking junior to the Preferred Shares as may be determined in the case of each series of Preferred Shares authorized to be issued.


  3)  Amendment with Approval of Holders of Preferred Shares. The

rights, privileges, restrictions and conditions attaching to the Preferred Shares as a class may be repealed, altered, modified, amended or amplified by Certificate(s) of Amendment, but in each case with the approval of the holders of Preferred Shares (only as a class but not as individual series) given as hereinafter specified.


  4)  Approval of Holders of Preferred Shares.     Subject to the

Provisions of the Business Corporations Act, any consent or approval given by the holders of Preferred Shares as a class shall be deemed to have been sufficiently given if it shall have been given in writing by the holders of at least sixty-six and two-thirds percent (66²/³%) of the outstanding Preferred Shares or by a resolution





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passed at a meeting of holders of Preferred Shares duly called and held upon not less than fifteen days’ notice at which the holders of at least a majority of the outstanding Preferred Shares are present or are represented by proxy and carried by the affirmative vote of not less than sixty-six and two-thirds percent of the votes cast at such meetings, in addition to any other consent or approval required by the Business Corporation Act.  If at any such meeting the holders of a majority of the outstanding Preferred Shares are not present or represented by proxy within one-half hour after the time appointed for such meeting, then the meeting shall be adjourned to such date not less than fifteen days thereafter and to such time and place as may be designated by the Chairman, and not less than ten days’ written notice shall be given of such adjourned meeting.  At such adjourned meeting the holders of the Preferred Shares present or represented by proxy may transact the business for which the meeting was originally convened and a resolution passed by the affirmative vote of not less than sixty-six and two-thirds percent of the votes cast at such meeting shall constitute the consent or approval of the holders of Preferred Shares.  On every poll taken at every meeting, every holder of Preferred Shares shall be entitled to one vote in respect of each share held.  Subject to the foregoing, the formalities to be observed in respect of the giving or waiving of notice of any such meeting and the conduct thereof shall be those from time to time prescribed in the Bylaws of the Corporation with respect to meetings of shareholders.  Any consent or approval given by the holders of Preferred Shares or a series as a class shall be deemed to have been sufficiently given if in the same manner as provided herein regarding holders of Preferred Shares as a class.


d) Dividend Rights.  The Company’s Bylaws provide that holders of common shares shall be entitled to receive dividends and the Company shall pay dividends thereon, as and when declared by the board of directors of the Company out of moneys properly applicable to the payment of dividends, in such amount and in such form as the board of directors may from time to time determine and all dividends which the directors may declare on the common shares shall be declared and paid in equal amounts per share on all common shares at the time outstanding, subject to the prior rights of any shares ranking senior to the common shares with respect to priority in the payment of dividends.


e) Voting Rights.  Neither the Company’s Bylaws nor its Articles of Incorporation provide for the election or re-election of directors at staggered intervals.


f) Redemption Provisions.  The Company may purchase any of its issued common shares subject to the provisions of the Ontario Business Corporations Act.


g) Sinking Fund Provisions.  Neither the Company’s Articles of Incorporation nor its Bylaws contain sinking fund provisions.





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h) Liability to Further Capital Calls by the Company.  Neither the Company’s Articles of Incorporation nor its Bylaws contain provisions allowing the Company to make further capital calls with respect to any shareholder of the Company.


i) Discriminatory Provisions Based on Substantial Ownership.  Neither the Company’s Articles of Incorporation nor its Bylaws contain provisions that discriminate against any existing or prospective holders of securities as a result of such shareholder owning a substantial number of shares.


j) Miscellaneous Provisions.  Neither the Articles of Incorporation nor the Bylaws of the Company address the process by which the rights of holders of stock may be changed.  The general provisions of the Ontario Business Corporations Act apply to this process, and require shareholder meetings and independent voting for such changes.


A meeting of shareholders may be called at any time by resolution or by the Chairman of the Board or by the President and the Secretary shall cause notice of a meeting of shareholders to be given when directed so to do by resolution of the board or by the Chairman or the Board or the President.


The board shall call an annual meeting of the shareholders not later than eighteen (18) months after the Corporation comes into existence and subsequently not later than fifteen (15) months after holding the last preceding annual meeting.


A special meeting of shareholders may be called at any time and may be held in conjunction with an annual meeting of shareholders.


Meeting of shareholders shall be held at the place within Canada determined by the board from time to time.  Notwithstanding the above subsection, a meeting of shareholders may be held outside Canada if all the shareholders entitled to vote at that meeting so agree, and a shareholder who attends a meeting of shareholders held outside Canada is deemed to have so agreed except when he attends the meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully held.


Neither the Articles of Incorporation nor the Bylaws of the Company discuss limitations on the rights to own securities or exercise voting rights thereon.


Although not expressly enumerated in the Articles, pursuant to Canadian regulations, shareholder ownership must be disclosed by any shareholder who owns more than 10% of the Company’s common stock.


There is no provision of the Company’s Articles of Incorporation or Bylaws that would delay, defer or prevent a change in control of the Company, and that would operate only with respect to a merger, acquisition, or corporate






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restructuring involving the Company (or any of its subsidiaries). The

Company’s Bylaws do not contain a provision indicating the ownership threshold above which shareholder ownership must be disclosed. With respect

to the matters discussed in this Item 10B, the law applicable to the Company is not significantly different from United States law.  Neither the Articles of Incorporation nor Bylaws contain provisions governing changes in capital that are more stringent than the conditions required by law.


The Ontario Business Corporations Act contains provisions that require a "special resolution" for effecting certain corporate actions.  Such a "special resolution" requires a three-quarters vote of shareholders rather than a simple majority for passage.  The principle corporate actions for which the Company would require a "special resolution" include:


a.  Changing its name;

b.  Changing the place where its registered office is situated;

c.  Adding, changing or removing any restriction on the business

    or businesses that the corporation may carry on;

d.  Certain reorganizations of the corporation and alterations of

    share capital;

e.  Increasing or decreasing the number of directors or the

    minimum or maximum number of directors;

f.  Any amendment to its articles regarding constraining the

    issue or transfer of shares to persons who are not resident

    Canadians; and

g.  Dissolution of the corporation.


10.C.  Material Contracts


a.  Acquisition Agreements with Alpha Corporation, dated May 7, 1997

b.  Acquisition Agreements for CSVL, dated March 5, 1998

c.  Management Agreement with MPK Inc., dated May 1, 1997 and renewed on December 14, 1998 and November 26, 1999 and the renewal of November 26, 1999 amended dated July 3, 2000, July 1, 2001, July 1, 2002 and July 1, 2003

d.  Performance Shares Escrow Agreement,

    dated April 30, 1997 and May 7, 1997


10.D.  Exchange Controls


Except as discussed in ITEM #10.E., the Company is unaware of any Canadian federal or provincial laws, decrees, or regulations that restrict the export or import of capital, including foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-Canadian holders of the common shares.  The Company is unaware of any limitations on the right of non-Canadian owners to hold or vote the common shares imposed by Canadian federal or provincial law or by the charter or other constituent documents of the Company.





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10.E.  Taxation


A brief description of provisions of the tax treaty between Canada and the United States is included below, together with a brief outline of certain taxes, including withholding provisions, to which United States security holders are subject under existing laws and regulations of Canada.  The consequences, if any, of provincial, state and local taxes are not considered.


Security holders should seek the advice of their own tax advisors, tax counsel or accountants with respect to the applicability or effect on their own individual circumstances of the matters referred to herein and of any provincial, state or local taxes.


Material Canadian Federal Income Tax Consequences


The discussion under this heading relates to the principal Canadian federal income tax consequences of acquiring, holding and disposing of shares of common stock of the Company for a shareholder of the Company who is not a resident of Canada but is a resident of the United States and who will acquire and hold shares of common stock of the Company as capital property for the purposes of the Income Tax Act (Canada) (the “Canadian Tax Act”).  This summary does not apply to a shareholder who carries on business in Canada through a “permanent establishment” situated in Canada or performs independent personal services in Canada through a fixed base in Canada if the shareholder’s holding in the Company is effectively connected with such permanent establishment or fixed base.  This information is based on the provisions of the Canadian Tax Act and the regulations thereunder and on an understanding of the administrative practices of Canada Customs and Revenue Agency, and takes into account all specific proposals to amend the Canadian Tax Act or regulations made by the Minister of Finance of Canada as of the date hereof.  This discussion is not a substitute for independent advice from a shareholder’s own Canadian and U.S. tax advisors.


The provisions of the Canadian Tax Act are subject to income tax treaties to which Canada is a party, including the Canada-United States Income Tax Convention (1980), as amended (the “Convention”).


Dividends on Common Shares and Other Income.  Under the Canadian Tax Act, a non-resident of Canada is subject to Canadian withholding tax at the rate of 25 percent on dividends paid or deemed to have been paid to him or her by a corporation resident in Canada.  The Convention limits the rate to 15 percent if the shareholder is a resident of the United States and the dividends are beneficially owned by and paid to such shareholder, and to 5 percent if the shareholder is also a corporation that beneficially owns at least 10 percent of the voting stock of the payor-corporation.


The amount of a stock dividend (for tax purposes) would be equal to the amount by which the paid up or stated capital of the Company had increased because of the payment of such dividend.  The Company will furnish





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additional tax information to shareholders in the event of such a dividend.  Interest paid or deemed to be paid on the Company’s debt securities held by non-Canadian residents may also be subject to Canadian withholding tax, depending upon the terms and provisions of such securities and any applicable tax treaty.


The Convention exempts from Canadian income tax dividends paid to a religious, scientific, literary, educational or charitable organization or to an organization constituted and operated exclusively to administer a pension, retirement or employee benefit fund or plan, if the organization is a resident of the United States and is exempt from income tax under the laws of the United States.


Dispositions of Common Shares.  Under the Canadian Tax Act, a taxpayer’s capital gain or capital loss from a disposition of a share of common stock of the Company is the amount, if any, by which his or her proceeds of disposition exceed (or are exceeded by, respectively) the aggregate of his or her adjusted cost base of the share and reasonable expenses of disposition.  One-half of a capital gain (the “taxable capital gain”) is included in income, and one-half of a capital loss in a year (the “allowable capital loss”) is deductible from taxable capital gains realized in the same year.  The amount by which a shareholder’s allowable capital loss exceeds the taxable capital gain in a year may be deducted from a taxable capital gain realized by the shareholder in the three previous or any subsequent year, subject to adjustment when the capital gains inclusion rate in the year of disposition differs from the inclusion rate in the year the deduction is claimed.


If a share of common stock of the Company is disposed of to the Company other than in the open market in the manner in which shares would normally be purchased by the public, the proceeds of disposition will, in general terms, be considered as limited to the paid-up capital of the share and the balance of the price paid will be deemed to be a dividend.  In the case of a shareholder that is a corporation, the amount of any capital loss otherwise determined may be reduced by the amount of dividends previously received in respect of the shares disposed of, unless the corporation owned the shares for at least 365 days prior to sustaining the loss and (together with corporations, persons and other entities, with whom the corporation was not dealing at arm’s length) did not own more than five percent of the shares of any class of the corporation from which the dividend was received. These loss limitation rules may also apply where a corporation is a member of a partnership or a beneficiary of a trust that owned the shares disposed of.


Under the Canadian Tax Act, a non-resident of Canada is subject to Canadian tax on taxable capital gains, and may deduct allowable capital losses, realized on a disposition of “taxable Canadian property.”  Shares of common stock of the Company will constitute taxable Canadian property of a shareholder at a particular time if the shareholder used the shares in carrying on business in Canada, or if at any time in the five years





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immediately preceding the disposition 25 percent or more of the issued shares of any class or series in the capital stock of the Company belonged to one or more persons in a group comprising the shareholder and persons with whom the shareholder did not deal at arm’s length.


The Convention relieves United States residents from liability for Canadian tax on capital gains derived on a disposition of shares unless (a) the value of the shares is derived principally from “real property” in Canada, including the right to explore for or exploit natural resources and rights to amounts computed by reference to production, (b) the shareholder was resident in Canada for 120 months during any period of 20 consecutive years preceding, and at any time during the 10 years immediately preceding, the disposition and the shares were owned by him when he or she ceased to be resident in Canada, or (c) the shares formed part of the business property of a “permanent establishment” that the holder has or had in Canada within the 12 months preceding the disposition.


Material United States Federal Income Tax Considerations


The following discussion is based upon the sections of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, published Internal Revenue Service ("IRS") rulings, published administrative positions of the IRS and court decisions that are currently applicable.  This discussion does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation that, if enacted, could be applied, possibly on a retroactive basis, at any time.  Holders and prospective holders of shares of the Company should consult their own tax advisors about the Federal; state, local and foreign tax consequences of purchasing, owning and disposing of shares of the Company.


U.S. Holders.  As used herein, a "U.S. Holder" includes a holder of shares of the Company who is a citizen or resident of the United States, a corporation created or organized in or under the laws of the United States or of any political subdivision thereof, any entity that is taxable as a corporation for U.S. tax purposes and any other person or entity whose ownership of shares of the Company is effectively connected with the conduct of a trade or business in the United States.  A U.S. Holder does not include persons subject to special provisions of Federal income tax law, such as tax exempt organizations, qualified retirement plans, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, nonresident alien individuals or foreign corporations whose ownership of shares of the Company is not effectively connected with condu ct of trade or business in the United States, shareholders who acquired their stock through the exercise of employee stock options or otherwise as compensation and shareholders who hold their stock as ordinary assets and not as capital assets.





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Distributions on Shares of the Company.  U.S. Holders receiving dividend distributions (including constructive dividends) with respect to shares of the Company are required to include in gross income for United States Federal income tax purposes the gross amount of such distributions to the extent that the Company has current or accumulated earnings and profits as defined under U.S. Federal tax law, without reduction for any Canadian income tax withheld from such distributions.  Such Canadian tax withheld may be credited against the U.S. Holder's United States Federal income tax liability or, alternatively, may be deducted in computing the U.S. Holder's United States Federal taxable income by those who itemize deductions.  (See discussion that is more detailed at "Foreign Tax Credit" below).  To the extent that distributions exceed current or accumulated earnings and profits of the Com pany, they will be treated first as a return of capital up to the U.S. Holder's adjusted basis in the shares and thereafter as gain from the sale or exchange of the shares.  Preferential tax rates for net capital gains are applicable to a U.S. Holder that is an individual, estate or trust.  There are currently no preferential tax rates for long-term capital gains for a U.S. Holder that is a corporation.


Dividends paid on the shares of the Company are not expected to be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations.  A U.S. Holder that is a corporation may be entitled to a 70% deduction of the United States source portion of dividends received from the Company (unless the Company qualifies as a "foreign personal holding company" or a "passive foreign investment company", as defined below) if such U.S. Holder owns shares representing at least 10% of the voting power and value of the Company.  


In the case of foreign currency received as a dividend that is not converted by the recipient into U.S. Dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S.Dollar value on the date of receipt.  Any gain or loss recognized upon a subsequent sale or other disposition of the foreign currency, including the exchange for U.S. Dollars, will be ordinary income or loss.  However, for tax years after 1997, an individual whose realized foreign exchange gain does not exceed U.S. $200 will not recognize that gain, to the extent that there are not expenses associated with the transaction that meet the requirement for deductibility as a trade or business expense (other than travel expenses in connection with a business trip or as an expense for the production of income).


Foreign Tax Credit.  A U.S. Holder who pays (or has withheld from distributions) Canadian income tax with respect to the ownership of shares of the Company may be entitled, at the option of the U.S. Holder, to either a deduction or a tax credit for such foreign tax paid or withheld.  It will be more advantageous to claim a credit because a credit reduces United States Federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income subject to tax.  This election is made





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on a year-by-year basis and applies to all foreign taxes paid by (or withheld from) the U.S. Holder during that year.  There are significant and complex limitations that apply to the credit, among which is the general limitation that the credit cannot exceed the proportionate share of the U.S. Holder's United States Federal income tax liability that the U.S. Holder's foreign source income bears to his or its worldwide taxable income.  In the determination of the application of this limitation, the various items of income and deduction must be classified into foreign and domestic sources.  Complex rules govern this classification process.  There are further limitations on the foreign tax credit for certain types of income such as "passive income", "high withholding tax interest", "financial services income", and "shipping income". The availability of the fo reign tax credit and the application of the limitations on the credit are fact specific and holders and prospective holders of shares of the Company should consult their own tax advisors regarding their individual circumstances.


In the case of certain U.S. Holders that are corporations (other than corporations subject to Subchapter S of the Code), owning 10% or more of the Company's Common Shares, a portion of the qualifying Canadian income tax paid by the Company will also be available as a foreign tax credit for U.S. federal income tax purposes, at the election of the U.S. Holder.


Disposition of Shares of the Company.  A U.S. Holder will recognize a gain or loss upon the sale of shares of the Company equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received, and (ii) the shareholder's tax basis in the shares of the Company.  This gain or loss will be a capital gain or loss if the shares are a capital asset in the hands of the U.S. Holder, and will be a short-term or long-term capital gain or loss depending upon the holding period of the U.S. Holder.  Gains and losses are netted and combined according to special rules in arriving at the overall capital gain or loss for a particular tax year.  Deductions for net capital losses are subject to significant limitations.  Corporate capital losses (other than losses of corporations electing under Subchapter S or the Code) are deductible to the extent of capital gains.  Non-corporate taxpayers may deduct net capital losses, whether short-term or long-term, up to U.S. $3,000 a year (U.S. $1,500 in the case of a married individual filing separately).  For U.S. Holders that are individuals, any unused portion of such net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted.  For U.S. Holders that are corporations (other than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years from the loss year and carried forward five years from the loss year to be offset against capital gains until such net capital loss is thereby exhausted.





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Other Considerations


In the following circumstances, the above sections of this discussion may not describe the United States Federal income tax consequences resulting from the holding and disposition of shares of the Company:

Foreign Personal Holding Company.  If at any time during a taxable year more than 50% of the total combined voting power or the total value of the Company's outstanding shares is owned, directly or indirectly, by five or fewer individuals who are citizens or residents of the United States and 60% (50% in subsequent years) or more of the Company's gross income for such year was derived from certain passive sources (e.g., from dividends received from its subsidiaries), the Company would be treated as a "foreign personal holding company".  In that event, U.S. Holders that hold shares of the Company (on the earlier of the last day of the Company's tax year or the last date on which the Company was a foreign personal holding company) would be required to include in gross income for such year their allowable portions of such passive income to the extent the Company does not actually distribute such in come.


Foreign Investment Company.  If 50% or more of the combined voting power or total value of the Company's outstanding shares are held, directly or indirectly, by citizens or residents of the United States, United States domestic partnerships or corporations, or estates or trusts other than foreign estates or trusts (as defined by the Code Section 7701 (a)(31)), and the Company is found to be engaged primarily in the business of investing, reinvesting, or trading in securities, commodities, or any interest, it is possible that the Company might be treated as a "foreign investment company" as defined in Section 1246 of the Code, causing all or part of any gain realized by a U.S. Holder selling or exchanging shares of the Company to be treated as ordinary income rather than capital gain.


Passive Foreign Investment Company.  As a foreign corporation with U.S. Holders, the Company will be treated as a passive foreign investment company ("PFIC"), as defined in Section 1297 of the Code, if 75% or more of its gross income in a taxable year is passive income, or the average percentage of the Company’s assets (by value) during the taxable year which produce passive income or which are held for production of same is at least 50%.  Passive income is defined to include gross income in the nature of dividends, interest, royalties, rents and annuities; excess of gains over losses from certain transactions in any commodities not arising inter alia from a PFIC whose business is actively involved in such commodities; certain foreign currency gains; and other similar types of income.  Foreign mining companies that are in the exploration stage may have little or no income from o perations and/or may hold substantial cash and short-term securities that pay interest and dividends while awaiting expenditure in connection with the business.  Given the complexities of determining what expenditures may be deductible and of how assets held for production of active income should be valued, the Company, based on advice from its professional advisers, cannot conclude whether it is a PFIC.






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It is not the intention of the Company to be considered a PFIC and the Company does not consider this to be a material risk.  In the event that it were to become classified as a PFIC, the following should be taken into consideration.  U.S. Holders owning shares of a PFIC are subject to a

special tax and to an interest charge based on the value of deferral of U.S. tax attributable to undistributed earnings of a PFIC for the period during which the shares of the PFIC are owned.  This special tax would apply to any gain realized on the disposition of shares of a PFIC.  In addition, the gain is subject to U.S. federal income tax as ordinary income, taxed at top marginal rates, rather than as capital gain income.  The special tax would also be payable on receipt of excess distributions (any distributions received in the current year that are in excess of 125% of the average distributions received during the 3 preceding years or, if shorter, the shareholder's holding period).  If, however, the U.S. Holder makes a timely election to treat a PFIC as a qualified electing fund ("QEF") with respect to such shareholder's interest and the Company provides an annual information stat ement, the above-described rules will not apply.  The Company will provide such an information statement upon request from a U.S. Holder for current and prior taxable years.  Instead, the electing U.S. Holder would include annually in his gross income his pro rata share of the PFIC's ordinary earnings and any net capital gain regardless of whether such income or gain was actually distributed.  A U.S. Holder of a PFIC treated as a QEF can, however, further elect to defer the payment of United States Federal income tax on such income and gain inclusions, with tax payments ultimately requiring payment of an interest factor.  In addition, with a timely QEF election, the electing U.S. Holder will obtain capital gain treatment on the gain realized on disposition of such U.S. Holder’s interest in the PFIC.  Special rules apply to U.S. Holders who own their interests in a PFIC through intermediate entities or persons.


Effective for tax years of U.S. Holders beginning after December 31, 1997, U.S. Holders who hold, actually or constructively, marketable stock of a foreign corporation that qualifies as a PFIC may elect to mark such stock to the market (a “mark-to-market election”).  If such an election is made, such U.S. Holder will not be subject to the special taxation rules of PFIC described above for the taxable years for which the mark-to-market election is made.  A U.S. Holder who makes such an election will include in income for the taxable year an amount equal to the excess, if any, of the fair market value of the shares of the Company as of the close of such tax year over such U.S. Holder's adjusted basis in such shares.  In addition, the U.S. Holder is allowed a deduction for the lesser of (i) the excess, if any, of such U.S. Holder's adjusted tax basis in the shares over the fair market value of such shares as of the close of the tax year, or (ii) the excess, if any of (A) the mark-to-market gains for the shares in the Company included by such U.S. Holder for prior tax years, including any amount which would have been included for any prior year but for Section 1291 interest on tax deferral rules discussed above with respect to a U.S. Holder, who has not made a timely QEF election during the year





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in which he holds (or is deemed to have held) shares in the Company and the Company is a PFIC (“Non-Electing U.S. Holder”), over (B) the mark-to-market losses for shares that were allowed as deductions for prior tax years.  A U.S. Holder's adjusted tax basis in the shares of the Company will be increased

or decreased to reflect the amount included or deducted as a result of mark-to-market election.  A mark-to-market election will apply to the tax year for which the election is made and to all later tax years, unless the PFIC stock ceases to be marketable or the IRS consents to the revocation of the election.


The IRS has issued proposed regulations that would treat as taxable certain transfers of PFIC stock by a Non-Electing U.S. Holder that are not otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death.  In such cases, the basis of the Company's shares in the hands of the transferee and the basis of any property received in the exchange for those shares would be increased by the amount of gain recognized.  A U.S. Holder who has made a timely QEF election (as discussed herein) will not be taxed on certain transfers of PFIC stock, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death.  The transferee's basis in this case will depend on the manner of the transfer.  The specific tax effect to the U.S. Holder and the transferee may vary based on the manner in which the shares of the Company are transferred.  Each U.S. Holder should consult a tax advisor with respect to how the PFIC rules affect their tax situation.


The PFIC and QEF election rules are complex.  U.S. Holders should consult a tax advisor regarding the availability and procedure for making the QEF election as well as the applicable method for recognizing gains or earnings and profits under the foregoing rules.


Controlled Foreign Corporation.  If more than 50% of the voting power of all classes of stock or the total value of the stock of the Company is owned, directly or indirectly, by citizens or residents of the United States, United States domestic partnerships and corporations or estates or trusts other than foreign estates or trusts, each of whom own 10% or more of the total combined voting power of all classes of stock of the Company ("United States shareholder"), the Company could be treated as a "controlled foreign corporation" under Subpart F of the Code. This classification would effect many complex results including the required inclusion by such United States shareholders in income of their pro rata share of "Subpart F income" (as specially defined by the Code) of the Company.  Subpart F requires current inclusions in the income of United States shareholders to th e extent of a controlled foreign corporation's accumulated earnings invested in "excess passive" assets (as defined by the Code).  In addition, under Section 1248 of the Code, a gain from the sale or exchange of shares by a U.S. Holder who is or was a United States shareholder at any time during the five year period ending with the sale or exchange is treated as ordinary dividend income to the extent of





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earnings and profits of the Company attributable to the stock sold or

exchanged. Because of the complexity of Subpart F, and because it is not clear that Subpart F would apply to the U.S. Holders of shares of the Company, a more detailed review of these rules is outside of the scope of this discussion.


If the Company is both a PFIC and controlled foreign corporation,  the company will not be treated as a PFIC with respect to United States shareholders of the controlled foreign corporation.  This rule will be effective for taxable years of the Company ending with or within such taxable years of United States shareholders.



Summary


Management believes this discussion covers all material tax consequences.  Nevertheless, this is not intended to be, nor should it be construed to be, legal or tax advice to any holder of common shares of the Company Holders and prospective holders are encouraged to consult their own tax advisers with respect to their particular circumstances.


10.F.  Dividends and Paying Agents


The Company has not declared any dividends on its common shares and does not anticipate that it will do so in the foreseeable future.  The present policy of the Company is to retain future earnings for use in its operations and the expansion of its business.


Notwithstanding the aforementioned: the Company is unaware of any dividend restrictions; has no specific procedure for the setting of the date of dividend entitlement; but might expect to set a record date for stock ownership to determine entitlement; has no specific procedures for non-resident holders to claim dividends, but might expect to mail their dividends in the same manner as resident holders.  The Company has not nominated any financial institutions to be the potential paying agents for dividends in the United States.


Item 11


Foreign Currency Risk


We operate one segment of our business in China, and a substantial portion of our operating expenses and development expenditures are in Canadian dollars, whereas our revenue (current and potential) from co-publishing agreements are, and will be, primarily in US dollars.  A significant adverse change in foreign currency exchange rates between the Canadian dollar relative to the US dollar could have a material effect on our consolidated results of operations, financial position or cash flows. We have not hedged exposures denominated in foreign currencies, as they are not material at this time.


Item 12


Not applicable


PART II

Item 13 and 14


Not applicable





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ITEM 15.  CONTROLS AND PROCEDURES


15.A.   Within the 90-day period prior to the filing of this report ("Date of Evaluation"), an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.


The Company did not maintain a complete set of policies and procedures governing decision and  authorization processes. As such, reliance was placed on management’s substantive review of period end balances, transactions recorded in each period, scrutiny of business activity and centralized cash management to detect errors and ensure the financial statements do not contain material misstatements. The Company assigned dedicated staff to formulate a plan, using a generally recognized framework, to document key processes and controls, and initiated the creation of a comprehensive set of policies and procedures. The completion of documentation and implementation of the initiative will continue in 2007.


Segregation of Duties

Due to resource constraints, the Company is reliant on the performance of compensating procedures during  its financial close process in order to ensure that the financial statements are presented fairly and accurately, in all material respects. Additional compensating control procedures have been performed in the preparation of our financial statements to ensure their reliability.


These compensating controls include:

·

Review of all balances and reconciliations;

·

Review of bank registers and disbursement details in risk locations; and

·

Analytical review and analysis of performance against expectations.


During 2006, the Company enhanced internal controls over financial reporting by introducing the following additional changes:

·

Improved budgetary controls; and

·

Strengthened technical expertise in the accounting and finance areas of the organization;



15.B.   There have been no significant changes in the Company's internal controls or the occurrence of events or other factors that could significantly affect these controls, subsequent to the Date of Evaluation.


ITEM 16.  RESERVED


PART III


ITEM 17.  FINANCIAL STATEMENTS


The Company's financial statements are stated in Canadian Dollars (CDN$) and are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP), the application of which, in the case of the Company, conforms in all material respects for the periods presented with United States GAAP, except as discussed in footnotes to the financial statements.


The financial statements as required under ITEM #17 are attached hereto as exhibits.  The audit reports of Mintz & Partners LLP, Chartered Accountants, are included herein immediately preceding the financial statements and schedules.


Audited Financial Statements


  Auditor's Report, dated May 7, 2006


  Consolidated Balance Sheets at December 31, 2006 and December 31, 2005


  Consolidated Statements of Operations and Deficit

   for the years ended December 31, 2006 and December 31, 2005


  Consolidated Statements of Cash Flows

   for the years ended December 31, 2006 and December 31, 2005

  

Notes to Financial Statements





-79-

Unaudited Interim Financial Statements


  Consolidated Interim Balance Sheets at March 31, 2007 and December 31, 2006


  Consolidated Interim Statements of Operations and Deficit

   for the Three Months Ended March 31, 2007 and March 31, 2006


  Consolidated Interim Statements of Cash Flows

   for the Three Months Ended March 31, 2007 and March 31, 2006


  Notes to Consolidated Interim Financial Statements


ITEM 18.  FINANCIAL STATEMENTS


The Company has elected to provide financial statements pursuant to ITEM #17.


ITEM 19.  EXHIBITS


1.  Certificates of Incorporation and Name Changes, By-Laws/Articles, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002.


2.  Instruments defining the rights of holders of equity or debt securities being registered incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002.


4.  Material Contracts:

a.  Acquisition Agreements with Alpha Corporation,(now Lingo Media Ltd.) dated May 7, 1997, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002


b.  Acquisition Agreements for CSVL, dated March 5, 1998, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002


c.

Management Agreement with MPK Inc., dated May 1, 1997, renewed on December 14, 1998 and November 26, 1999, and the renewal of November 26, 1999 amended July 3, 2000, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002

d. Performance Shares Escrow Agreement, dated April 30, 1997 and May 7, 1997, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002





-80-

10. Additional Exhibits:


a. Notice/Information Circular re: Annual General Meeting of Shareholders, July 4, 2001, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002


b.

Stock Option Plan, dated May 22, 2001, incorporated by reference from the Lingo Media Inc. F-1 Registration Statement filed August 20, 2002

c.

Financial statements of A+ Child Development (Canada) Inc. for December 31, 2005 (Audited), December 31, 2004 and September 30, 2006(non-audited)






SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



LINGO MEDIA INC.



By: /s/ “Michael P. Kraft”___________


Michael P. Kraft

President and Chief Executive Officer



By: /s/ “Khurram R. Qureshi”________


Khurram R. Qureshi

Chief Financial Officer



January 8, 2008





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Consolidated Interim Financial Statements

(Expressed in Canadian dollars)


LINGO MEDIA INC.

March 31, 2007 and 2006

(Unaudited)






















The Consolidated Interim Balance Sheet of Lingo Media Inc. as at March 31, 2007 and the Consolidated Interim Statements of Operations, Deficits and Cash Flows for the three months then ended have not been reviewed by the Company’s auditors. These financial statements are the responsibility of the management and have been reviewed and approved by the Company’s Audit Committee.





LINGO MEDIA INC.

March 31, 2007 and 2006

(Expressed in Canadian dollars)

(Unaudited)



CONTENTS

 

Page

 

 

Consolidated Interim Balance Sheets

3

 

 

Consolidated Interim Statements of Deficit

4

 

 

Consolidated Interim Statements of Operations

5

 

 

Consolidated Interim Statements of Cash Flows

6

 

 

Notes to Consolidated Interim Financial Statements

7





2



LINGO MEDIA INC.

Consolidated Interim Balance Sheets

(Expressed in Canadian dollars)

(Unaudited)


 

March 31 2007

December 31 2007

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

Cash

$                 - 

$         73,169 

Short term investment

150,000 

150,000 

Accounts and grants receivable (note 2)

251,805 

304,924 

Inventory

172,631 

154,276 

Prepaid and sundry assets

185,781 

130,573 

 

949,750 

812,942 

 

 

 

Investment and advances (note 3)

182,520 

182,520 

Deferred costs (note 3)

157,419 

157,419 

Property and equipment, net

73,348 

77,304 

Development costs, net

350,037 

343,308 

Future Income Taxes

189,534 

189,534 

Goodwill

1,121,131 

1,121,131 

 

$   2,834,205 

$    2,884,158 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

Bank Indebtness

$        16,701 

$                   - 

Bank loans (note 4)

485,000 

485,000 

Accounts payable

579,598 

526,491 

Accrued liabilities

91,329 

148,578 

Unearned revenue

177,778 

 

1,350,553 

1,160,069 

 

 

 

Loans payable (note 5)

347,541 

347,541 

 

 

 

Shareholders' equity:

 

 

Capital stock (note 6(a))

5,033,656 

5,028,656 

Contributed surplus

342,447 

325,293 

Deficit

(4,287,075)

(3,977,401)

 

1,089,028 

1,376,548 

 

 

 

Commitments

 

 

 

$   2,834,205 

$    2,884,158 

See accompanying notes to consolidated interim financial statements.

Approved on behalf of the Board:


 

Director


 

Director




3



LINGO MEDIA INC.

Consolidated Interim Statements of Deficit

(Expressed in Canadian dollars)

(Unaudited)


For the three months ended March 31

2007

2006

 

 

 

Deficit, beginning of period

$      (3,977,402)

$   (3,228,477)

 

 

 

Net loss for the period

(309,674)

(309,640)

 

 

 

Deficit, end of period

$      (4,287,075)

$   (3,538,117)

See accompanying notes to consolidated interim financial statements.



4



LINGO MEDIA INC.

Consolidated Interim Statements of Operations

(Expressed in Canadian dollars)

(Unaudited)


For the three months ended March 31

2007

2006

Revenue

$          667,533 

$           2,397 

Direct costs

139,573 

1,235 

Margin

527,960 

1,162 

Expenses:

 

 

General and administrative

770,319 

178,927 

Amortization

20,718 

66,268 

Interest and other financial expenses

29,442 

3,282 

Stock-based compensation

17,154 

62,325 

 

 

 

 

837,633 

310,802 

 

 

 

Loss before income taxes and other taxes

(309,674)

(309,640)

 

 

 

Income taxes and other taxes

 

 

 

Net loss for the period

(309,674)

(309,640)

 

 

 

Loss per share

$               (0.01)

$            (0.01)

 

 

 

 

 

 

Weighted average number of

 

 

common shares outstanding

29,590,941 

26,070,589 

 

 

 

See accompanying notes to consolidated interim financial statements.



5



LINGO MEDIA INC.

Consolidated Interim Statements of Cash Flows

(Expressed in Canadian dollars)

(Unaudited)


For the three months ended March 31

2007

2006

 

 

 

Cash flows provided by (used in):

 

 

Operations:

 

 

Net loss for the period

$         (309,674)

$   (309,640)

Items not affecting cash:

 

 

Amortization of property and equipment

4,120 

2,401 

Amortization of development costs

16,598 

46,199 

Amortization of acquired publishing content

17,668 

Stock-based compensation

17,154 

62,325 

Change in non-cash balances related to operations:

 

 

Accounts and grants receivable

52,955 

(45,208)

Inventory

(18,355)

640 

Prepaid and sundry assets

(55,208)

10,469 

Accounts payable

53,107 

83,056 

Accrued liabilities

(84,733)

(22,653)

Unearned revenue

177,778 

123,000 

Cash used by operating activities

(118,773)

(31,743)

 

 

 

Financing:

 

 

Increase in bank loans

20,000 

Increase (decrease) in loans payable

47,230 

(48,937)

Issuance of capital stock

5,000 

2,945 

Cash provided by financing activities

52,230 

(25,992)

 

 

 

Investing:

 

 

Purchase of property and equipment

(1,707)

Deferred costs

(15,620)

Development costs

(23,327)

(54,496)

Cash used in investing activities

(23,327)

(71,823)

 

 

 

Increase / (decrease) in cash

(89,870)

(129,558)

Cash, beginning of period

73,169 

144,337 

(Bank indebtness) cash, end of period

$           (16,701)

$       14,779 



6



Lingo Media Inc. (the "Company or Lingo Media") develops, publishes and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school markets in China.  In addition, through its subsidiary, A+ Child Development (Canada) Ltd., the Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its proprietary curriculum through its four offices in Calgary, Edmonton, Vancouver and Toronto.


1.    Significant accounting policies:

(a)

Basis of presentation:

The disclosures contained in these unaudited interim consolidated financial statements do not include all the requirements of generally accepted accounting principles (GAAP) for annual financial statements. The unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2007.

The unaudited interim consolidated financial statements reflect all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary to present fairly the financial position of the Company as of March 31, 2007 and the results of operations and cash flows for the three months ended March 31, 2007 and 2006.


2.       Accounts and grants receivable:

    Accounts and grants receivable consist of:

 

March 31, 2007

December 31, 2006

Trade receivables

$          214,104 

$                285,141 

Grants receivable (note 12)

37,701 

19,783 

 

$          251,805 

$                304,924 


3.   Deferred costs, investment and advances:

In June 2005, the Company signed a definitive Joint Venture Agreement (“JV Agreement”) with Sanlong Cultural Communication Co. Ltd. (“Sanlong”). The joint venture company will be known as Hebei Jintu Education Book Co. Ltd. (“Jintu”).  Jintu will continue Sanlong’s recently launched direct-to-consumer business of distributing educational newspapers and product extensions located in Shijiazhuang, Hebei Province, China. Under the JV Agreement, Lingo Media will invest approximately $365,000 (¥2,550,000 RMB) for its 51% share of Jintu. The closing is subject to government approval in China.

Pursuant to the June 2005 agreement, as at March 31, 2007 the Company advanced funds for working capital to Sanlong through a trust of $182,520, included in investment and advances, with a view to establishing Jintu and incurred $157,419 in expenditures, included in deferred costs,  related to pre-operating costs.  Upon commencement of the joint venture, the investment and advances will be converted into Lingo Media’s share of registered capital of the joint venture and these advances and investment is non refundable.



4.      Bank loans:

 

 

March 31 2007

December 31 2006

Line of credit of $150,000 bearing interest at prime plus 2.5% per annum, due on demand and secured by the Company’s accounts receivable from customers in China, which in turn are secured by the Export Development Corporation.

 

$    125,000 

$      135,000 

Operating loan of $500,000 bearing interest at prime plus 2% per annum and secured by a charge on all assets including inventory and accounts receivables.

 



360,000 



350,000 

 

 

$    485,000 

$      485,000 

The terms of the operating loan require that certain measurable covenants be met.  As at March 31, 2007, the Company was in violation of certain covenants.  As the operating loan is currently presented as a current liability no additional adjustment is required.

5.      Loans payable:

Loans payable consists of the following:

 

March 31

December 31

 

2007

2006

 

 

 

Loan payable, due to a shareholder, is interest bearing

 

 

at 12% per annum and is due on August 31, 2008

$               51,306 

$                7,541 

 

 

 

Loan payable, due to a non-related party, is interest

 

 

bearing at 12% per annum payable monthly and is

 

 

secured by a general security agreement and is due on

 

 

August 31, 2008

343,465 

340,000 

 

394,771 

347,541 

 

 

 

Less: Current portion

(101,929)

 

 

 

 

$             394,771 

$            347,541 



7



6.       Capital stock:

(a)

Issued

 

Common Shares

 

Number

Amount

Balance, January 1, 2007

32,578,170 

$      5,028,656 

Issued:

 

 

Option exercised

50,000 

5,000 

Balance, March 31, 2007

32,628,170 

$      5,033,656 

(b)

Options

 

Weighted

 

 

Number of

Average

 

Options

Exercise Price

 

 

 

Outstanding, January 1, 2007

1,929,437 

$             0.19 

Exercised

(50,000)

0.10 

Issued

1,650,000 

0.10 

 

 

 

Outstanding, March 31, 2007

3,529,437 

$             0.15 

 

 

 

Options exercisable, March 31, 2007

2,128,933 

$             0.18 


7.    Government grants:

Included as a reduction of general and administrative expenses are government grants of $28,750 (2006 – $35,392), relating to the Company's publishing projects in China and Canada.

Certain government grants are repayable in the event that the Company's annual net income for each of the previous two years exceeds 15% of revenue. During the year, the conditions for the repayment of grants did not arise and no liability was recorded.


8



8.    Segmented information:

The Company operates two distinct reportable business segments as follows:

English Language Learning: The Company develops, publishes, distributes and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school markets in China and in Canada.  

Early Childhood Development: The Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its unique curriculum through its four offices in Calgary, Edmonton, Vancouver and Toronto.


 

English Language Learning

Early Childhood Development


Total

Revenue

$                587 

$       666,946 

$             667,533 

Cost of Sales

235 

139,338 

139,573 

Margin

$                352 

$       527,608 

$             527,960 


The Company's revenue by geographic region based on the region in which the customers are located is as follows:

 

March 31, 2007

December 31, 2006

 

 

 

Canada

$               667,533 

$                       2,397 

China

 

 

 

 

$               667,533 

$                       2,397 


The majority of the Company’s identifiable assets are located as follows:


 

March 31, 2007

December 31, 2006

 

 

 

Canada

$            2,634,984 

$                2,768,399 

 

 

 

China

182,520 

182,520 

 

 

 

 

$            2,817,504 

$                2,950,919 


9.  Reconciliation of Canadian and United States generally accepted accounting principles ("GAAP"):

These consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in Canada. Except as set out below, these financial statements also comply, in all material aspects, with the United States generally accepted accounting principles.

The following tables reconcile results as reported under Canadian GAAP with those that would have been reported under United States GAAP.

Statements of Operations:

 

March 31

March 31

 

2007

2006

 

 

 

Loss for the period - Canadian GAAP

$(309,674)

$(309,640)

Impact of United States GAAP and

 

 

adjustments:

 

 

Amortization of development costs (a)

16,598 

26,310 

Deferred costs (d)

(15,620)

Loss for the period - United States GAAP

$(293,076)

$(298,950)


The cumulative effect of these adjustments on the consolidated shareholders' equity of the Company is as follows:

 

March 31

March 31

 

2007

2006

Shareholders' equity - Canadian GAAP

$1,089,028 

$1,376,548 

Development costs

(121,005)

(121,005)

Compensation expense

(243,250)

(243,250)

Deferred costs

(157,419)

(157,419)

Shareholders' equity - United States GAAP

$567,354 

$963,774 



9



EX-2 6 yearendfinancials.htm CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 AND 2005 Financial Statements of

















Consolidated Financial Statements

(Expressed in Canadian dollars)


              LINGO MEDIA INC.

December 31, 2006 and 2005










LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



LINGO MEDIA INC.

December 31, 2006 and 2005

(Expressed in Canadian dollars)




CONTENTS


                                                                                           

 

Page


Auditors’ Report


3

Consolidated Balance Sheets

4

Consolidated Statements of Deficit

5

Consolidated Statements of Operations

6

Consolidated Statements of Cash Flows

7

Notes to consolidated Financial Statements

8



 


LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005






AUDITORS' REPORT

To the Directors and Shareholders of

Lingo Media Inc.

We have audited the consolidated balance sheets of Lingo Media Inc. as at December 31, 2006 and 2005, and the consolidated statements of operations, deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the Canadian generally accepted auditing standards and with the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2006 and 2005, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.


Toronto, Ontario                                                                                      signed: "Mintz & Partners LLP"

May 4, 2007                                                                                             Mintz & Partners LLP




LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005




LINGO MEDIA INC.

Consolidated Statements of Deficit

(Expressed in Canadian dollars)

 

 

As at December 31

2006

2005

Assets

 

 

Current assets:

 

 

Cash

$          73,169 

$        144,337 

Short term investment (note 8)

150,000 

 

Accounts and grants receivable (note 2)

304,924 

488,303 

Inventory

154,276 

34,084 

Prepaid and sundry assets (note 3

130,573 

134,348 

 

812,942 

801,072 

 

 

 

Investment and advances (note 3)

182,520 

182,520 

Deferred costs (note 3)

157,419 

117,102 

Property and equipment, net (note 4)

77,304 

48,770 

Development costs, net (note 5)

343,308 

408,633 

Acquired publishing content, net (note 6)

53,003 

Future income taxes (note 11)

189,534 

 

Goodwill (note 7)

1,121,131 

 

 

$     2,884,158 

$     1,611,100 

Liabilities and Shareholders’ Equity

 

 

Current liabilities:

 

 

Bank loans (note 8)

$        485,000 

$        110,000 

Accounts payable (note 14)

526,491 

247,547 

Accrued liabilities

148,578 

63,844 

Loans payable (note 9)                           

101,929 

 

1,160,069 

523,320 

 

 

 

Loans payable (note 9)                           

347,541 

 

 

 

 

Shareholders’ equity:

 

 

Capital stock (note 10 (a))

5,028,656 

3,996,971 

Contributed surplus (note 10 (b))

325,293 

288,437 

Warrants (note 10 (f))

30,849 

Deficit

(3,977,401)

(3,228,477)

 

1,376,548 

1,087,780 

Commitments (note 18)

 

 

 

$     2,884,158 

$     1,611,100 

See accompanying notes to consolidated financial statements.

Approved on behalf of the Board:


 

Director


 

Director

  



LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005




LINGO MEDIA INC.

Consolidated Statements of Deficit

(Expressed in Canadian dollars)

 

 

For the years ended December 31

2006

2005

 

 

 

Deficit, beginning of year, as reported

$         (3,228,477)

$       (2,502,745)

Net loss for the year

(748,924)

(725,732)

Deficit, end of year

$         (3,977,401)

$       (3,228,477)

                     See accompanying notes to consolidated financial statements.




LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005




LINGO MEDIA INC.

Consolidated Statements of Operations

(Expressed in Canadian dollars)

 

 

For the years ended December 31

2006

2005

Revenue (note 16 & 17)

$          1,574,337 

$                906,357 

Direct costs

319,277 

123,107 

Margin

1,255,060 

783,250 

 

 

 

Expenses:

 

 

General and administrative

1,417,867 

855,118 

Amortization

222,306 

267,819 

Interest and other financial expenses

57,097 

42,869 

Stock-based compensation

193,819 

214,337 

 

1,891,089 

1,380,143 

 

 

 

Loss before income taxes and other taxes

(636,029)

(596,893)

Income taxes and other taxes (note 11)

112,895 

128,839 

Net loss for the year

(748,924)

(725,732)

Loss per share (note 10 (g))

$                  (0.03)

$                    (0.03)

Weighted average number of
common shares outstanding (note 10 (g))

28,422,317 

24,711,619 


See accompanying notes to consolidated financial statements.




LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005




LINGO MEDIA INC.

Consolidated Statements of Cash Flows

(Expressed in Canadian dollars)

 

 

For the years ended December 31

2006

2005

 

 

 

Cash flows provided by (used in):

 

 

Operations:

 

 

Net loss for the year

$              (748,924)

$              (725,732)

Items not affecting cash:

 

 

Amortization of property and equipment

12,655 

12,278 

Amortization of development costs

156,648 

184,797 

Amortization of acquired publishing content

53,003 

70,670 

Stock-based compensation

193,819 

214,337 

Future income taxes

(17,426)

Inventory write down

36,279 

Change in non-cash balances related to operations:

 

 

Accounts and grants receivable

223,154 

74,255 

Inventory

(11,187)

(10,793)

Prepaid and sundry assets

16,749 

(514)

Accounts payable

285,534 

(5,181)

Accrued liabilities

84,733 

5,845 

Cash provided by (used in) operating activities

285,037 

(180,871)

 

 

 

Financing:

 

 

Increase in bank loan

45,000 

20,000 

Increase in loans payable

711,500 

248,500 

Repayment of loans payable

(465,887)

(223,500)

Issuance of capital stock

66,679 

745,800 

Share issue costs

(85,099)

Cash provided by financing activities

357,292 

705,701 

 

 

 

Investing:

 

 

Short term investment (note 8)

(150,000)

Investment and advances

(182,520)

A Plus acquisition (note 7)

(344,814)

Purchase of property and equipment

(20,785)

(6,556)

Deferred costs

(40,316)

(117,102)

Development costs

(91,325)

(104,106)

Cash used in investing activities

(647,240)

(410,284)

Increase / (decrease) in cash

(4,893)

114,546 

Cash, beginning of year

144,337 

29,791 

Bank indebtedness assumed on acquisition

(66,257)

Cash, end of year

$                 73,169 

$               144,337 

Supplemental cash flow information:

 

 

Income taxes and other taxes paid

$               200,491 

$               157,121 

Interest paid

$                 23,654 

$                   9,838 


Non-cash transactions:


(i)

In 2006, 2,849,500 common shares were issued as consideration for the acquisition of A + Child Development (Canada) Ltd. in the amount of $569,900.  As at December 31, 2006, this amount is included in capital stock.


(ii)

Included in the capital stock is $187,812(2005 - $ nil) representing the fair value of stock options exercised(note 10 (b))


(iii)

In 2005, warrants issued to agents in connection with a private placement (see note 10(a)(ii)) are valued at $30,849.  This amount has been recorded as an increase in warrants amount with a corresponding increase in share issue costs which is charged against share capital.


(iv)

In 2005, the Company issued 150,000 common shares in exchange for services with a fair value of $30,000.



  


 See accompanying notes to consolidated financial statements




LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



Lingo Media Inc. (the "Company” or “Lingo Media") develops, publishes and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school markets in China and in Canada.  In addition, through its subsidiary, A+ Child Development (Canada) Ltd., the Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its proprietary curriculum with four offices in Calgary, Edmonton, Vancouver and Toronto.


1.    Significant accounting policies:

(a)

Basis of presentation:

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles applicable to a going concern, on the basis that the company will continue to generate sufficient capital to fund its operations and commitments described in note 3. The Company has a plan to improve its operations and continue its positive cash flow from operations during 2007. Significant differences between Canadian generally accepted accounting principles and United States generally accepted accounting principles, as they relate to these consolidated financial statements, are explained in note 19.

These consolidated financial statements include the accounts of the Company and its subsidiaries, Lingo Media Ltd., Lingo Media International Inc. and Lingo Group Limited (formerly ”English Lingo, Inc.”) and A+ Child Development (Canada) Ltd. All significant inter-company transactions and balances have been eliminated.

 (b)

Revenue recognition:

Revenues from the sale of educational products in Canada are recognized at the time of delivery and when the risk of ownership is transferred and collectibility is reasonably assured.

Royalty revenue from sales by licensees of finished products in China is recognized based on confirmation of finished products produced by its licensees.  Royalty revenue from audiovisual product is recognized based on the confirmation of sales by its licensees, and when collectibility is reasonably assured.  Royalty revenues are not subject to right of return or product warranties. Amounts received in advance of the confirmation are treated as customer deposits. Revenue from the sale of published and supplemental products is recognized upon delivery and when the risk of ownership is transferred and collectibility is reasonably assured.

(c) Short Term Investments
Short-term investments includes investments that have a duration of longer than 90 days, Short-term investments are accounted for at the lower of cost and net realizable value.

(d)  Inventory:

        Inventory is recorded at the lower of cost and net realizable value and expensed based on the average cost.

(e) Property and equipment:

Property and equipment are initially recorded at cost. Amortization is provided using methods outlined below at rates intended to amortize the cost of assets over their estimated useful lives.



LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



1.

Significant accounting policies (continued):  

 

Method

Rate

Computer equipment

declining balance

25 %

Equipment

declining balance

20 %

Furniture and fixtures

declining balance

20 %

Leasehold improvements

straight-line

5 years

The Company’s policy is to record an impairment loss in the period when it is determined that the carrying amount of the asset may not be recoverable.

            (f)  Deferred costs, investment and advances:

The pre-operating costs relating to establishing a joint venture in China are recorded as deferred costs.  Pre-operating costs are capitalized until the commencement of commercial operations and then amortized on a straight-line basis, over a maximum of five years.  Loans made in trust with a view to establishing a joint venture are recorded as investment and advances.  The carrying value of these deferred costs and advances are assessed on a periodic basis to determine if a write-down is required. Any required write-down is charged to operations in the year such write-down is determined to be necessary.   

            (g)  Development costs:

      The Company has capitalized pre-operating costs relating to establishing a business base in the United States and the development of business in China.  Pre-operating costs are capitalized until the commencement of commercial operations and then amortized on a straight-line basis, over a maximum of five years.  The carrying value is assessed on a periodic basis to determine if a write-down is required. Any required write-down is charged to operations in the year such write-down is determined to be necessary. Technology costs and web development costs included in deferred development costs are capitalized in accordance with Section 3062 ("goodwill and other intangible assets"), of the C.I.C.A. Handbook. Development costs are amortized on a straight-line basis over a maximum of five years.

            (h)  Acquired publishing content:

The costs of obtaining the English as a Foreign Language ("EFL") program entitled "Communications: An Interactive EFL Program" and an international folktale series entitled "Stories Lost and Found: The Universe of Folktale" have been capitalized and are being amortized over a five-year period.  The Company regularly reviews the carrying values of its acquired publishing content.  The Company evaluates the carrying value of these assets based on the undiscounted value of expected future cash flows.  If the carrying value exceeds the amount recoverable, a write-down of the asset to its estimated fair value would be charged to operations in the year such a write-down is determined to be necessary.

(i) Goodwill:

Goodwill represents the excess of the purchase price of acquired companies over the estimated fair value of the tangible and intangible net assets acquired. Goodwill is not amortized. The Corporation



LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



1.     Significant accounting policies (continued):  

currently compares the carrying amount of the goodwill to the fair value, at least annually, and recognizes in net income any impairment in value.

If the Corporation determines that there is permanent impairment in the value of the unamortized portion of the intangible assets, as future earnings will not be realized as projected, an appropriate amount of unamortized balance of intangible assets will be charged to income as an “impairment charge” at that time.

 (j)  Government grants:

The Company receives government grants based on certain eligibility criteria for project support and book publishing industry development in Canada.  These government grants are recorded as a reduction of general and administrative expenses to offset direct costs funded by the grant.  The company records a liability for the repayment of the grants and a charge to operations in the period in which conditions arise that will cause the government grants to be repayable.

  (k)  Future income taxes:

The Company follows the asset and liability method of accounting for income taxes.  Under this method, future income tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for the benefit of losses available to be carried forward to future years for income tax purposes.  Future income tax assets and liabilities are measured using substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse.  Future income tax assets are recorded in the financial statements if realization is considered more likely than not.          

       

(l) Foreign currency translation:

Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rates prevailing at the consolidated balance sheet dates.  Non-monetary assets and liabilities are translated at historical rates.  Transactions in foreign currencies are translated into Canadian dollars at the approximate rates prevailing at the dates of the transactions.  Foreign exchange gains and losses are included in loss or gain for the year.

The Company's integrated foreign operations are translated into Canadian dollars at exchange rates prevailing at the consolidated balance sheet dates for monetary items and at exchange rates prevailing at the transaction dates for non-monetary items.  Revenue and expenses are translated at exchange rates prevailing during the year.  Exchange gains and losses are included in loss or gain for the year

    

(m) Use of estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at December 31, 2006 and December 31, 2005 and the reported amounts of revenue and expenses during the years then ended.  Actual results may differ from those estimates.  Significant areas requiring the use of management estimates related to the useful lives and impairment of property and equipment, development costs and acquired publishing content.




LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



1.     Significant accounting policies (continued):

(n) Earnings (loss) per share:

Earnings (Loss) per share is computed using the weighted average number of common shares that are outstanding during the year.  Diluted earnings per share is computed using the weighted average number of common and potential common shares outstanding during the year.  Potential common shares consist of the incremental common shares issuable upon the exercise of stock options using the treasury stock method.  When the effect of computing diluted loss per share is anti-dilutive, this information is not presented.

 (o) Stock-based compensation plan:

Effective January 1, 2004, the Company adopted the CICA Handbook Section 3870, which requires that a fair value based method of accounting be applied to all stock-based compensation. The fair value of the options issued in the year is determined using the Black-Scholes option pricing model.  The estimated fair value of the options is expensed to income over the vesting period.  For stock-based compensation issued to employees and non-employees, the company recognizes an expense based on the fair value of the equity instrument issued.

 2.     Accounts and grants receivable:

 Accounts and grants receivable consist of:

 

2006

2005

Trade receivables

$               285,141 

$               466,483 

Grants receivable (note 12)

19,783 

21,820 

Total

$               304,924 

$               488,303 


 3.     Deferred costs, investment and advances:

In June 2005, the Company signed a definitive Joint Venture Agreement (“JV Agreement”) with Sanlong Cultural Communication Co. Ltd. (“Sanlong”). The joint venture company will be known as Hebei Jintu Education Book Co. Ltd. (“Jintu”).  Jintu will continue Sanlong’s recently launched direct-to-consumer business of distributing educational newspapers and product extensions located in Shijiazhuang, Hebei Province, China. Under the JV Agreement, Lingo Media will invest approximately $365,000 (¥2,550,000 RMB) for its 51% share of Jintu. The closing is subject to government approval in China.

Pursuant to the June 2005 agreement, as at December 31, 2006 the Company advanced funds for working capital to Sanlong through a trust of $182,520, included in investment and advances, with a view to establishing Jintu and incurred $157,419 (2005: $117,102) in expenditures related to pre-operating costs to date. These expenses are included in deferred costs. Upon commencement of the joint venture, the investment and advances will be converted into Lingo Media’s share of registered capital of the joint venture and these advances and investment is non refundable.




LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



4.     Property and equipment:


Property and equipment consists of the following:



2006

Cost

Accumulated Amortization

Net Carrying Value

Computer and office equipment

$               166,799 

$         98,573 

$   68,226 

Equipment

8,904 

532 

8,372 

Leasehold improvements

706 

706 

 

$               176,409 

$         99,105 

$   77,304 


2005

Cost

Accumulated Amortization

Net Carrying Value

Computer and office equipment

$             135,220 

$            86,450 

$  48,770 

 

$             135,220 

$            86,450 

$  48,770

5.     Development costs:

Development costs consist of the following:

 

2006

2005

Cost

$            1,646,446 

$            1,524,454 

Less: accumulated amortization

(1,303,138)

(1,115,821)

 

$               343,308 

$               408,633 

6.     Acquired publishing content:

Acquired publishing content consists of the following:

 

2006

2005

Cost

$             353,349 

$                 353,349 

Less: accumulated amortization

(353,349)

(300,346)

 

$                         - 

$                   53,003 

7.     Acquisition

In 2006, the Company acquired 62.33% of the issued and outstanding shares of A + Child Development (Canada) Ltd. (“A Plus”) for cash and shares plus 3,000,000 additional shares common of Lingo Media to the selling shareholders of A Plus subject to meeting annual earnings milestones to be held in escrow and released over a three-year period with a maximum of 1,000,000 shares released per year.  The results of operations of A Plus are included in the consolidated results of the Company commencing October 1, 2006.


Under the terms of the acquisition, Lingo Media:


7.  Acquisition (continued):

i.

acquired 50.33% of the outstanding capital stock of A Plus from its shareholders for the purchase price of CAD$730,000 satisfied by issuing 2,650,000 common shares of Lingo Media and paying CAD$200,000 cash;


ii.

invested CAD$150,000 in A Plus for an additional 12% interest;


iii.

invested in March 2007, subsequent to the year-end, a further CAD$100,000 in A Plus for an additional 8% interest; and


iv.

issued an additional 3,000,000 common shares of Lingo Media to the selling shareholders of A Plus subject to meeting annual earnings milestones to be held in escrow and released over a three-year period with a maximum of 1,000,000 shares released per year;

The Company issued 199,500 shares as consulting fees related to this acquisition.  

The allocation of the original purchase price for the acquisition made in 2006 is as follows:

 

A + Child Development (Canada) Ltd.

Net current assets

$                                     186,697 

Property and equipment, net

19,844 

Future income taxes

172,108 

Deposits

11,336 

Goodwill

1,121,131 

Current liabilities

(596,402)

 

$                                     914,714 

Cash consideration

344,814 

Share consideration

569,900 

 

$                                     914,714 

8.      Bank loans:

 

 

2006

2005

Revolving line of credit of $150,000 bearing interest at prime plus 2.5% per annum, due on demand and secured by the Company’s accounts receivable from customers in China, which in turn are secured by the Export Development Corporation.

 

$  135,000 

$      110,000 

Revolving line of credit of $500,000 bearing interest at prime plus 2% per annum and secured by a $150,000 GIC,  bearing interest at 3.2% maturing December 7, 2007,  and a charge on all assets including inventory and accounts receivables.

 



350,000 



 

 

$  485,000 

$      110,000 

The terms of the revolving lines of credit require that certain measurable covenants be met.  As at December 31, 2006, the Company was in violation of certain covenants.  As the lines of credit are currently presented as a current liability no additional adjustment is required.

9.      Loans payable:

Loans payable consists of the following:

 

2006

2005

Loan payable, due to a corporation controlled by a director,

is interest bearing at 12% per annum and is secured by a

general security agreement and is due on demand

(See Note 14 – related party transactions)


$                         - 


$                   51,649 

Loan payable, due to a shareholder, is interest bearing at 12% per annum and is due on January 31, 2008

7,541 

Unsecured loan payable, due to a non-related party, interest bearing at 12% per annum, with no fixed terms of repayment

50,279- 

Loan payable, due to a non-related party, is interest

bearing at 12% per annum payable monthly and is

secured by a general security agreement and is due on January 31, 2008.

340,000 

 

$             347,541 

$                 101,929 

Less: Current portion

(101,929)

 

$             347,541 

$                             - 

The principal repayments required are:

 

 

2007


2008

 

347,541 

 

 

$                 347,541 

10.       Capital stock, warrants and stock options:

(a)

Authorized:

Unlimited preference shares, no par value

Unlimited common shares, no par value

The following details the changes in issued and outstanding common shares for the two years ended December 31, 2006:

 

Common shares

 

Number

Amount

Balance, January 1, 2005

24,109,773 

$              3,367,119 

Issued:

 

 

Private placement (ii)

3,675,000 

735,000 

Option exercised

90,000 

10,800 

Less: Share issue costs

565,166 

115,948 

Balance, December 31, 2005

27,874,773 

$              3,996,971 

Issued:

 

 

Common shares issued for the acquisition of

 

 

A + Child Development (Canada) Ltd.

2,849,500 

569,900 

Options exercised (iii) (note 10 (b))

1,853,897 

461,785 

Balance, December 31, 2006

32,578,170 

$              5,028,656 


10.       Capital stock, warrants and stock options (continued):


(i)

Escrowed Shares:

On April 30, 1997, the Company entered into a performance escrow agreement in Form C of the TSX Venture Exchange (formerly Canadian Venture Exchange) (the “Exchange”) with ComputerShare Investor Services Inc. (formerly “Montreal Trust Company of Canada”) and certain security holders (the “Escrow Agreement”). The Escrow Agreement related to the escrow of certain common shares of the Company issued upon completion of the reverse take over transaction between Lingo Media Ltd. (formerly “Alpha Corporation”) and Lingo Media Inc. (formerly “Alpha Ventures Inc.”) in 1997. At the time of the transaction, 2,860,528 common shares (the “Escrowed Shares”) were subject to a performance escrow agreement (“Performance Escrow Agreement”).

These shares were subject to a new escrow agreement (“Time Release Escrow Agreement”) made as of December 10, 2002 whereby the Escrowed Shares would be released on a timed-release basis rather than the performance based release provisions of the performance Escrow Agreement. Up to December 2005, 2,432,948 shares were released from Escrow.  Under the Time Release Escrow Agreement, the remaining 429,086 Escrowed Shares were released, pro rata to the security holders on February 28, 2006.

(ii)

In September 2005, the Company completed an exempt private placement of 3,675,000 Units of its securities at $0.20 per Unit, for gross proceeds of $735,000. Each Unit was comprised of one common share and one-half of one non-transferable common share purchase warrant (“Warrant”). Each whole Warrant entitles the holder to purchase one additional common share for $0.40 for a term of 12 months expiring on September 20, 2006. These warrants expired during 2006 without exercise. The Warrants are subject to accelerated expiration, at the option of the Company, at any time after January 20, 2006 in the event that the price of the Company’s common shares on the TSX Venture Exchange (“Exchange”) is $0.60 or more for 10 consecutive trading days. In such event, the Company has three business days to give notice of the acceleration of the term to the holders of the Warrant and the Warrant term will be reduced to ten business days from the date of such notice. A fee of 7% was paid to the agent and sub-agents with respect to the sale of 3,675,000 Units. In addition, a total of 118,650 Compensation Warrants were issued to the agent and the sub-agents. Each Compensation Warrant entitles the holder to purchase one common share for $0.40 for a term of 12 months expiring on September 20, 2006. The Compensation Warrants are subject to accelerated expiration on the same terms as the Warrant. These Warrants expired during 2006 without exercise.

(iii)

During 2006, 835,901 options were exercised for cash consideration of $66,679 at an average price of $0.13 per share. In addition, 1,341,004 options were exercised for $207,294 in settlement of accounts payable. Fair value of $187,812 related to options exercised for cash and accounts payable settlement  has been reallocated to capital stock from contributed surplus.




LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



10.      Capital stock warrants and stock options (continued):

  (b)  

Contributed Surplus:

 

Balance, January 1, 2005

$              74,100 

Stock-based compensation

214,337 

Balance, December 31, 2005

$            288,437 

Stock-based compensation

193,819 

Options exercised

(187,812)

Warrants expired

30,849 

Balance, December 31, 2006

$            325,293 

 

(c)   Stock option plan

In November 1996, the Company adopted a stock option plan (the “1996 Plan”).  The 1996 Plan was established to encourage ownership of common shares by directors, senior officers, employees and consultants of the Company.  The maximum number of shares which may be reserved for issuance under the 1996 Plan is limited to 1,078,000 common shares, provided that the board has the right, from time to time, to increase such number subject to shareholder and regulatory approvals.  

The maximum number of common shares that may be reserved for issuance to any one person under the 1996 Plan is 5% of the common shares outstanding at the time of the grant (calculated on a non-diluted basis) less the number of shares reserved for issuance to such person under any option to purchase common shares granted as a compensation or incentive mechanism.  The exercise price of each option cannot be less than the market price of the shares on the day immediately proceeding the day of the grant, less any discount specifically permitted by the TSX Venture Exchange.  The exercise period of the options granted can not exceed five years. The directors of the Company may from time to time amend or revise the terms of the 1996 Plan or may terminate it at any time.


During May 2000, the Company adopted another stock option plan (the “2000 Plan”) for the benefit of the directors, officers, employees and consultants of the Company.


In June, 2005, the Company adopted a new stock option plan (the “2005 Plan “).  The 2005 Plan was established to provide an incentive to employees, officers, directors and consultants of the Company and its subsidiaries.  The maximum number of shares which may be reserved for issuance under the 2005 Plan is limited to 4,821,955 common shares less the number of shares reserved for issuance pursuant to options granted under the 1996 Plan and the 2000 Plan, provided that the Board of Directors of the Company has the right, from time to time, to increase such number subject to the approval of the relevant exchange on which the shares are listed and the approval of the shareholders of the Company.  The maximum number of common shares that may be reserved for issuance to any one person under the 2005 Plan is 5% of the common shares outstanding at the time of the grant (calcul ated on a non-diluted basis) less the number of shares reserved for issuance to such person under any option to purchase common shares of the Company granted as a compensation or incentive mechanism.  The exercise price of each option can not be less than the market price of the shares on the day immediately preceding the day of the grant less any permitted discount.  The exercise period of the options granted can not exceed 5 years.  Options granted under the 2005 Plan vest over an 18 month period with no greater than 16.67% of any options granted to an optionee vesting in any 3 month period or such longer period as the Board may determine. The Board of Directors of the




LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



10.      Capital stock warrants and stock options (continued):

Company may, from time to time, amend or revise the terms of the 2005 Plan or may terminate it at any time.

Changes for the stock option plans during the years ended December 31, 2006 and 2005 are as follows:       

 

2006

2005

 


Number of shares

Weighted average exercise price


Number of shares

Weighted average exercise price

Options outstanding, beginning of year

3,683,334

$                  0.17

2,810,834

$                   0.19

Options granted

100,000

0.20

1,342,500

0.20

Options exercised

(1,853,897)

0.12

(90,000)

0.12

Options expired

-

-

(380,000)

0.49

Options outstanding, end of year

1,929,437

0.19

3,683,334

0.17

Options exercisable, end of year

1,737,267

$                  0.19

2,424,167

$                   0.16

The following table summarizes information about stock options outstanding at December 31, 2006:

 

Options outstanding

Options exercisable

Range of exercise prices


Number outstanding

Weighted average remaining contractual life

Weighted average exercise price


Number outstanding

Weighted average exercise price

$0.10 - $0.15

158,334 

2.67 

$           0.13 

104,167 

$             0.12 

$0.19 - $0.20

1,349,767 

2.82 

0.19 

1,345,600 

0.19 

$0.21 - $0.24

421,336 

3.70 

0.21 

287,500 

0.21 

Total

1,929,437 

1,737,267 

 

All vested options are exercisable as of December 31, 2006.

 (d)      Fair value of options:

The weighted average grant-date fair value of options granted to employees and directors during 2006 has been estimated at $0.12 (2005 - $0.17) using the Black-Scholes option-pricing model. The estimated fair value of the options granted is expensed over the options vesting periods. The pricing model assumes the weighted average risk free interest rates of 2.53% (2005 – 3%) weighted average expected dividend yields of nil (2005 – nil), the weighted average expected common stock price volatility of 157.9% (2005 - 135%) and a weighted average expected life of 5 years.



LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



10.      Capital stock warrants and stock options (continued):

        (e)     Warrants:


                The following summarizes the Class E warrants outstanding:

 

Number of warrants

Weighted average exercise price

Balance, January 1, 2005

$                                - 

Issued

1,837,500 

$                           0.40 

Balance, December 31,2005

1,837,500 

$                           0.40 

Expired

(1,837,500)

$                           0.40 

Balance, December 31, 2006

$                                - 


 

 (f)     Compensation Warrants:


                The following summarizes the compensation warrants outstanding:


 

Number of warrants

Weighted average exercise price

Balance, January 1, 2005

$                                - 

Issued

118,650 

$                           0.40 

Balance, December 31,2005

118,650 

$                           0.40 

Expired (note 10 (b))

(118,650)

$                           0.40 

Balance, December 31, 2006


Fair value of Compensation Warrants:

During 2005, the Company issued 118,650 Compensation Warrants to agents in connection with private placements (see note 10(a) (ii)).  The fair value of these warrants granted to agents was estimated at $0.26 using the Black-Scholes option-pricing model.  The pricing model assumed weighted average risk free interest rates of 2.70%, weighted average expected dividend yields of nil, weighted average expected common stock price volatility of 133% and a weighted average expected life of one year.  No Compensation Warrants were issued during 2006.  



LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



10.      Capital stock warrants and stock options (continued):

 (g)   Loss per share:

 

2006

2005

Numerator:

 

 

Loss of the year

$              (748,924)

$                (725,732)

 

 

 

Denominator:

 

 

Average number of common shares outstanding

28,422,317 

25,140,705 

Escrowed shares (note 10 (a)(i))

(429,086)

Weighted average number of common shares

28,422,317 

24,711,619 


Loss per share

$                    (0.03)

$                      (0.03)


Diluted loss per share is not presented as the effect would be anti-dilutive.   

11.     Income taxes:

The provision for income taxes reflects an effective income tax rate, which differs from the Canadian corporate income tax rate as follows:

 

2006

2005

Combined basic Canadian federal and provincial income tax rate

36.12%

36.12%

Effective income tax charge (recovery) on Income (loss) before income taxes

Increase (decrease) resulting from:

$                     (229,734)

$                     (215,598)

Change in the valuation allowance for future tax assets allocated to income tax expense

359,663 

266,000 

Effect of reduced income taxes in foreign jurisdiction subsidiary with lower tax rate

(172,100)

(114,000)

Withholding tax on sales to China

130,322 

128,839 

Other

24,743 

103,598 

 

$                      112,895 

$                      128,839 




LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



11.     Income taxes ( Continued) :

The tax effect of temporary differences representing future tax assets is as follows:

 

2006

2005

Future tax assets:

 

 

Operating loss carry forwards

$                   2,158,000 

$                  1,595,000 

Share issue costs

33,000 

47,000 

 

2,191,000 

 

Valuation allowance

(2,001,466)

(1,642,000)

Net future tax assets

$                      189,534 

$                                - 

Future tax assets and liabilities will be impacted by changes in future tax laws and rates.  The effects of these changes are not currently determinable. In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized.  The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible.  Management considers projected future taxable income, uncertainties related to the industry in which the Company operates and tax planning strategies in making this assessment. The Company has not recognized any benefit for these losses.

At December 31, 2006, the Company has non-capital losses available for carry forward for Canadian income tax purposes amounting to $5,974,000. These losses expire in the following fiscal years:


2007

$538,000

2008

493,000

2009

291,000

2010

954,000

2014

1,113,000

2015

1,288,000

2026

1,297,000

 

5,974,000

12.    Government grants:

Included as a reduction of general and administrative expenses are government grants of $182,300 (2005 – $219,772), relating to the Company's publishing projects in China and Canada.

Certain government grants are repayable in the event that the Company's annual net income for each of the previous two years exceeds 15% of revenue. During the year, the conditions for the repayment of grants did not arise and no liability was recorded.



LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



13.    Foreign exchange gain or loss

Included in general and administrative expenses is a foreign exchange loss of approximately $7,968 (2005 - 18,373) relating to the changes in currency translation rates in respect of Company's activities denominated in foreign currencies.

14.    Related party balances and transactions:

During the year, the Company had the following transactions with related parties, made in the normal course of operations, and accounted for at an amount of consideration established and agreed to by the Company and related parties. These transactions have not been disclosed elsewhere in the financial statements:

Consulting fees of $122,500 (2005- $123,489) and a success fee of $nil (2005- $36,750) related to the private placement financing (note 10 (a)(ii)) were paid to a company controlled by a director of the Company in the normal course of business.  At December 31, 2006, a balance outstanding of $13,261 (2005 - $14,980) is included in accounts payable.  

During the year, the company had loans payable due to corporations controlled by two directors bearing interest at 12% (2005 - 12%) per annum.  During 2005, the company received $nil (2005-$223,500) and repaid $50,000 (2005-$198,500) of these loans.  Interest expense related to these loans for the year is $5,878 (2005- $11,487).  At December 31, 2006 $nil (2005 - $51,649) was due to those corporations.

During the year, the Company was reimbursed $58,000 (2005 - $48,000) from a corporation with one director in common for rent, administration, office charges and telecommunications.  

15.    Financial instruments and risk management:

(a)

Currency risk:

The Company is subject to currency risk through its activities outside of Canada.  Unfavourable changes in the exchange rate may affect the operating results of the Company.  The Company is also exposed to foreign exchange risk as a substantial amount of its revenue is denominated in U.S. dollars and Chinese Renminbi ("RMB").

There were no derivative instruments outstanding at December 31, 2006 and 2005.

(a)

Financial Instruments:

The significant financial instruments of the company, their carrying values and the exposure to U.S. dollar denominated monetary assets and liabilities, as of December 31, 2006 are as follows:

 

Total

USD

Cash

$84,450

$72,489

Accounts and grants receivable

275,155

236,184

 

359,605

308,673

Accounts payable

108,828

93,415

Net exposure

 

$215,258

US dollars are converted on the prevailing year-end exchange rates.

15.    Financial instruments and risk management (continued):

(b)

Fair market values:

The carrying values of cash, short-term investment, accounts and grants receivable, sundry assets, accounts payable and accrued liabilities, bank loan and loans payable approximate their fair values due to the relatively short periods to maturity.  

 (d)

Concentration of risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable.  Cash and short-term investment consist of deposits with major financial institutions.  With respect to accounts receivable, the Company performs periodic credit evaluations of the financial condition of its customers and typically does not require collateral from them.  Management assesses the need for allowances for potential credit losses by considering the credit risk of specific customers, historical trends and other information.  The majority of the accounts receivable are secured through an insurance policy provided by Export Development Corporation. The Jintu loan receivable (note 3) is secured by a personal guarantee from a non – related party.

(d)

Interest rate risk:

The company manages its exposure to interest rate risk through floating rate borrowings. The floating rate debt is subject to interest rate cash flow risk, as the required cash flows to service the debt will fluctuate as a result of changes in market rates.  

16.       Major customers

The Company has sales to a major customer in 2006 and 2005, a government agency of the People’s Republic of China. The accounts receivable due from this customer are insured up to 90% by the Export Development Corporation. The total percentage of sales to this customer during the years and the total percentage of amount due from the customer, as of December 31, 2006 and 2005, are as follows:


Sales

Accounts receivable

2006

2005

2006

2005

56%

98%

75%

95%


17.

Segmented information:

The Company operates two distinct reportable business segments as follows:

English Language Learning: The Company develops, publishes, distributes and licenses book, audio/video cassette, CD-based product and supplemental product for English language learning for the educational school markets in China and in Canada.  

Early Childhood Development: The Company specializes in early childhood cognitive development programs, through the publishing and distribution of educational materials along with its proprietary curriculum through its four offices in Calgary, Edmonton, Vancouver and Toronto.



LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



17.     Segmented information (continued):


 

English Language Learning

Early Childhood Development


Total

Revenue

$         894,073 

$       680,264 

$          1,574,337 

Cost of sales

132,968 

186,309 

319,277 

Margin

$         761,105 

$       493,955 

$          1,255,060 


The Company's revenue by geographic region based on the region in which the customers are located is as follows:


 

2006

2005

Canada

$           685,521 

$              17,812 

China

888,816 

888,545 

 

$        1,574,337 

$            906,357 


The majority of the Company’s identifiable assets as at December 31, 2006 are located as follows:


 

2006

2005

Canada

$        2,701,638 

$         1,428,580 

China

182,520 

182,520 

 

$        2,884,158 

$         1,611,100 


18.    Commitments:

In addition to the commitments described in note 3, the Company has future minimum lease payments under operating leases for premises and equipment are as follows:

2007

$          304,539 

2008

277,794 

2009

182,937 

2010

128,409 

2011

21,521 


19.    Reconciliation of Canadian and United States generally accepted accounting principles ("GAAP"):

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in Canada. Except as set out below, these financial statements also comply, in all material aspects, with the United States generally accepted accounting principles.

The following tables reconcile results as reported under Canadian GAAP with those that would have been reported under United States GAAP.



LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



19.  Reconciliation of Canadian and United States generally accepted accounting principles

("GAAP") (Continued):

Statements of Operations:

 

2006

2005

Loss for the year – Canadian GAAP

$                     (748,924)

$                    (725,732)

Impact of United States GAAP and adjustments:

 

 

Amortization of development costs (a)

156,648 

133,290 

Deferred costs (d)

(40,316)

(117,102)

Loss for the year – United States GAAP

$                     (632,592)

$                    (709,544)

Statements of cash flows:

 

2006

2005

Cash used in operating activities – Canadian GAAP Impact of United States GAAP and adjustments:

$                      285,055 

$                    (180,871)

Deferred costs (g)

(40,316)

(117,102)- 

Cash (used in) provided by operating activites – United States GAAP

$                      244,739 

$                    (297,973)


The cumulative effect of these adjustments on the consolidated shareholders' equity of the Company is as follows:

 

2006

2005

Shareholders' equity - Canadian GAAP

$                1,376,548 

$                1,087,780 

Development costs (a)

(121,005)

(102,624)

Compensation expense (b)

(243,250)

(243,250)

Deferred costs (d)

(157,419)

(117,102)

Shareholders' equity - United States GAAP

$                   963,774 

$                   624,804 


 (a)   Development costs:

Under Canadian GAAP, the Company defers the incremental costs relating to the development of and the pre-operating phases of new businesses and established business and amortizes these costs on a straight-line basis over periods up to five years.  Under United States GAAP, incremental costs related to development of and the pre-operating plan of a new business are expensed as incurred but the incremental costs incurred for established businesses are capitalized and amortized over on a straight line basis over periods up to five years.  

Under United States GAAP, the amounts shown on the consolidated balance sheets for development costs would be $222,303 (2005: $306,009).



LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



19.  Reconciliation of Canadian and United States generally accepted accounting principles

("GAAP") (Continued):

(b)

Options to consultants:

Starting January 1, 2004 under United States, the Company records compensation expense based on the fair value for stock or stock options granted in exchange for services from consultants and employees.

(c) Statement of comprehensive income:

Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), establishes standards for the reporting and disclosure of comprehensive income and its components in financial statements.  Components of comprehensive income or loss include net income or loss and all other changes in other non-owner changes in equity, such as the change in the cumulative translation adjustment and the unrealized gain or loss for the year on "available-for-sale" securities.  For all periods presented, comprehensive loss is the same as loss for the year under US GAAP.

          (d) Deferred costs:

Under Canadian GAAP, the Company defers the incremental costs relating to the development of and the pre-operating phases of new businesses and established business and amortizes these costs on a straight-line basis over periods up to five years.  Under United States GAAP, incremental costs related to development of and the pre-operating plan of a new business are expensed as incurred but  the incremental costs incurred for established businesses are capitalized and amortized over on a straight line basis over periods up to five years.

          (e)  Recent Accounting Pronouncements:

(i)

In February 2006, FASB issued FASB 155, Accounting for Certain Hybrid Financial Instruments an amendment to FASB 133, Accounting for Derivative Instruments and Hedging Activities, and FASB 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. FASB 155, provides the framework for fair value remeasurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation as well as establishes a requirement to evaluate interests in securitized financial assets to identify interests. FASB 155 further amends FASB 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The FASB 155 guidance also clarifies which interest-only strips and principal-only strips are not subject to the requirement of FASB 133 and concentrations of credit risk in the form of subordination are not embedded derivatives. This statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company does not believe SFAS No. 155 will have a significant impact on its consolidated financial position or results of operations.



LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2006 and 2005



19.  Reconciliation of Canadian and United States generally accepted accounting principles

      ("GAAP") (Continued):

(ii)

In March 2006, FASB issued FASB 156, Accounting for Servicing of Financial Assets--an amendment of FASB Statement No. 140. FASB 156 requires the recognition of a servicing asset or servicing liability under certain circumstances when an obligation to service a financial asset by entering into a servicing contract. FASB 156 also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value utilizing the amortization method or fair market value method. FASB 156 is effective the beginning of the first fiscal year that begins after September 15, 2006. The Company does not believe SFAS No. 156 will have a significant impact on its consolidated financial position or results of operations.

20.   Subsequent event:

In March 2007, the Company acquired an additional 8% of the common shares of A Plus for $100,000 as per the original purchase agreement (note 7).

21.   Comparative figures:

Certain comparative figures have been reclassified to conform with the financial statement presentation adopted in the current year.



EX-3 7 financials3.htm FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006 AND FOR THE YEAR ENDED DECEMBER 31, 2005 5















A+ Child Development (Canada) Ltd.

Financial Statements

For the nine month period ended September 30, 2006

For the year ended December 31, 2005
































 

Page

Management’s responsibility

Auditors’ Report

Financial Statements

 

Balance Sheets

Statement of Loss

Statement of Retained Earnings (Deficit)

Statement of Cash Flows

Notes to the Financial Statements

Schedule

 

Schedule 1 – Cost of sales

14 




To the Shareholders of A+ Child Development (Canada) Ltd.:


Management is responsible for the preparation and presentation of the accompanying financial statements, including responsibility for significant accounting judgments and estimates in accordance with Canadian generally accepted accounting principles. This responsibility includes selecting appropriate accounting principles and methods, and making decisions affecting the measurement of transaction in which objective judgment is required.


In discharging its responsibilities for the integrity and fairness of the financial statements, management designs and maintains the necessary accounting systems and related internal controls to provide reasonable assurance that transactions are authorized, assets are safeguarded and financial records are properly maintained to provide reliable information for the preparation of financial statements.


Meyers Norris Penny LLP, and independent firm of Chartered Accountants, is appointed by the shareholders to audit the financial statements and report directly to them; their report follows. The external auditors have full and free access to, and meet periodically and separately with, both the Board and management to discuss their audit findings.


July 16, 2007





  signed “Terry Pallier”__________

  Terry Pallier



To the Directors of A+ Child Development (Canada) Ltd.:



We have audited the balance sheet of A+ Child Development (Canada) Ltd. as at December 31, 2005 and the statements of loss, retained earnings (deficit) and cash flows for the year then ended. 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 audit.


Except as explained in the following paragraph, we conducted our audit 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 disclosure 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.


Because we were appointed auditors of the Company during the year ended December 31, 2006, we were unable to satisfy ourselves concerning inventory quantities as at December 31, 2004 either through observing the inventory count or by alternative means. Since opening inventories enter into the determination of the results of operations and cash flows, we were unable to determine whether adjustments to cost of sales, incomes taxes, net loss for the year, opening retained earnings and cash provided from operations might be necessary.


In our opinion, except for the effect of adjustments, if any, which we might have determined necessary had we been able to examine opening inventories, as described in the preceding paragraph, these financial statements present fairly, in all materials respects, the financial position of the Company as at December 31, 2005 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.



Calgary, Alberta

July 16, 2007







  signed “Mintz & Partners LLP"

  Mintz & Partners LLP




 

A+ Child Development (Canada) Ltd.

 

Balance Sheets

 

 

 

December 31 2004        Restated (Unaudited)

December 31 2005        Restated

 

September 30 2006        (Unaudited)

Assets

 

 

 

 

 

Current

 

 

 

 

 

Accounts receivable

 

 

97,172 

45,410 

39,775 

Income taxes recoverable

 

 

11,887 

Inventory

 

 

415,448 

179,238 

145,284 

Prepaid expenses

 

 

14,373 

1,638 

 

 

 

 

 

 

 

 

 

524,507 

239,021 

186,697 

Receivable from shareholders (Note 3)

 

 

45,000 

45,000 

Product development costs (Note 4)

 

 

31,100 

92,235 

92,235 

Property and equipment (Note 5)

 

 

30,113 

23,266 

19,844 

Future income taxes (Note 9)

 

 

15,282 

85,845 

142,446 

Deposits

 

 

12,765 

11,336 

11,336 

 

 

 

658,767 

496,703 

452,558 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current

 

 

 

 

 

Bank indebtedness (Note 6)

 

 

344,545 

333,329 

396,257 

Accounts payable and accruals

 

 

171,868 

194,433 

219,430 

 

 

 

516,413 

527,762 

615,687 

 

 

 

 

 

 

Contingencies (Note 13)

 

 

 

 

 

Subsequent event (Note 14)

 

 

 

 

 

 

 

 

 

 

 

Shareholder's Equity (Deficit)

 

 

 

 

 

Share capital (Note 8)

 

 

40,800 

40,800 

40,800 

Retained earnings (deficit)

 

 

101,554 

(71,859)

(203,929)

 

 

 

142,354 

(31,059)

(163,129)

 

 

 

658,767 

49,6703 

452,558 

Approved on behalf of the Board

 

 

 

 

 

signed "Margaret Steele"

 

signed "Terry Pallier"

 

 

President

 

CEO

 

 

 




 

A+ Child Development (Canada) Ltd.

 

Statement of Loss

 

 

 

12 Months Ended December 31

    2004        Restated (Unaudited)

12 Months Ended December 31      2005            Restated

9 Months Ended    September 30                        2006                    (Unaudited)

Sales

 

 

4,744,551 

3,562,033 

2,416,225 

Cost of sales (Schedule 1)

 

 

1,159,456 

863,792 

518,837 

Gross margin

 

 

3,585,095 

2,698,241 

1,897,388 

Expenses

 

 

 

 

 

Advertising and promotion

 

 

2,136 

29,251 

12,155 

Amortization

 

 

8,207 

7,222 

4,132 

Bad debts

 

 

41,904 

4,088 

6,055 

Business taxes and licenses

 

 

6,627 

7,677 

7,101 

Computer

 

 

2,223 

2,604 

736 

Courier and delivery

 

 

8,454 

7,705 

5,779 

Credit card fees

 

 

21,872 

17,375 

12,040 

Equipment rentals

 

 

6,350 

6,550 

4,444 

Insurance

 

 

1,032 

5,270 

3,043 

Interest and bank charges

 

 

69,655 

65,212 

75,665 

Management fees

 

 

243,000 

225,000 

189,000 

Office

 

 

178,898 

108,225 

81,771 

Professional fees

 

 

26,101 

20,236 

21,137 

Rental

 

 

169,746 

165,286 

130,179 

Salaries, wages and benefits

 

 

253,385 

211,132 

135,706 

Selling

 

 

2,036,757 

1,602,312 

1,153,340 

Supplies

 

 

4,619 

121,448 

3,867 

Sub-contracts

 

 

415,181 

111,711 

93,759 

Telephone, fax and internet

 

 

107,446 

129,461 

90,117 

Travel

 

 

92,383 

80,902 

53,247 

Utilities

 

 

2,020 

1,597 

739 

Worker's compensation

 

 

2,597 

3,184 

2,047 

 

 

 

3,710,593 

2,933,448 

2,086,059 

Loss from Operations

 

 

(125,498)

(235,207)

(188,671)

Provision of income taxes (Note 9)

 

 

 

 

 

Current expense (recovery)

 

 

(12,362)

564 

Future recovery

 

 

(20,842)

(62,358)

(56,601)

 

 

 

(33,204)

(61,794)

(56,601)

Net loss

 

 

(92,294)

(173,413)

(132,070)





 

A+ Child Development (Canada) Ltd.

 

Statement of Retained Earnings (Deficit)

 

 

 



12 Months Ended        2004      (Unaudited)

12 Months Ended     2005              

                                               

9 Months Ended          2006      (Unaudited)

Retained earnings, beginning of year, as previously stated

 

 

330,263 

277,514 

325,725 

Correction of errors (Note 10)

 

 

(136,415)

(175,960)

(397,584)

Retained earnings (deficit), beginning of year, as restated

 

 

193,848 

101,554 

(71,859)

Net loss

 

 

(92,294)

(173,413)

(132,070)

Retained earnings (deficit), end of year

 

 

101,554 

(71,859)

(203,929)





 

A+ Child Development (Canada) Ltd.

 

Statement of Cash Flows

 

 

 

12 Months Ended December 31

 2004        Restated

 (Unaudited)

12 Months Ended December 31

  2005          Restated

 

9 Months Ended    September 30            2006           (Unaudited)

Cash provided by (used for) the following activities

 

 

 

 

 

Operating

 

 

 

 

 

Net loss

 

 

(92,294)

(173,413)

(132,070)

Amortization

 

 

8,207 

7,222 

4,132 

Receivable from shareholders expensed with management fees

 

 

45,000 

Security deposits recognized

 

 

13,634 

1,428 

Future income taxes

 

 

(20,842)

(70,563)

(56,601)

 

 

 

(91,295)

              (235,326)

            (139,539)

Changes in working capital accounts

 

 

 

 

 

Accounts receivable

 

 

65,501 

51,762 

5,635 

Income taxes payable

 

 

(12,362)

11,887 

Inventory

 

 

65,436 

236,210 

33,954 

Prepaid expenses and deposits

 

 

51,237 

(14,373)

12,735 

Accounts payable and accruals

 

 

(94,057)

 22,566 

24,997 

 

 

 

(15,450)

72,726 

              (62,218)

Financing

 

 

 

 

 

Operating loan advances

 

 

120,000 

30,000 

Operating loan repayments

 

 

(20,000)

 

 

 

120,000 

                (20,000)

                30,000 

Investing

 

 

 

 

 

Purchases of property and equipment

 

 

(6,301)

(375)

(710)

Advances to shareholders

 

 

(45,000)

Expenditures on product development

 

 

(31,100)

(61,135)

 

 

 

(82,401)

(61,510)

(710)

Increase (decrease) in cash resources

 

 

22,059 

(8,784)

(32,928)

Cash resources, beginning of year

 

 

(46,604)

(24,545)

(33,329)

Cash resources, end of year (Note 6)

 

 

(24,545)

(33,329)

(66,257)

Supplementary cash flow information

 

 

 

 

 

Interest paid

 

 

17,059 

16,478 

18,910 





A+ Child Development (Canada) Ltd.

Notes to Financials Statements

For the nine months ended September 30, 2006

For the year ended December 31, 2005




1.

Incorporation and operations


A+ Child Development (Canada) Ltd. (the “Company”) was incorporated under the Business Corporation Act of the Province of Alberta on February 12, 1999. The Company is primarily involved in the sale and support of educational products to families across Canada.



2.

Significant accounting policies


The financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include the following significant accounting policies:


Inventory


Inventory is valued at the lower of cost and net realizable value. Cost is determined by the weighted average method.


Property and equipment


Property and equipment are initially recorded at cost. Amortization is provided using methods outlined below at rates intended to amortize the cost of assets over their estimated useful lives.



 

Method

Rate

Computer Equipment

declining balance

25%

Equipment

declining balance

20%

Furniture and fixtures

declining balance

20%

Leasehold improvements

straight-line

5 years



Product development costs


Research costs are expensed as incurred. Product development costs are deferred once costs meet the criteria under Canadian generally accepted accounting principles for deferral and amortization. Such deferred costs are amortized, commencing when the product is commercially released over the estimated period of economic viability.


The recoverability of any unamortized product development costs is reviewed on an ongoing basis. The accumulated development costs of any product not considered to be economically viable are considered unrecoverable and included in the current year’s earnings.


Long-lived assets


Long-lived assets consist of property and equipment and product development costs. Long-lived assets held for use are measure and amortized as described in the applicable accounting policies.


The Company performs impairment testing on long-lived assets held for use whenever events or changes in circumstances indicate that the carrying value of an asset, or group of assets, may not be recoverable. Impairment losses are recognized when undiscounted future cash flows from its use and disposal are less than the asset’s carrying amount. Impairment is measured as the amount by which the asset’s carrying value exceeds its fair value. Any impairment is included in earnings, loss for the year.


Prices for similar items and discounted cash flows are used to measure fair value of long-lived assets.


Revenue recognition


Revenues from the sale of educational products are recognized at the time of delivery.


Future income taxes


The Company follows the asset and liability method of accounting for future income taxes. Under this method, future income tax assets and liabilities are recorded based on temporary differences between the carrying amount of balance sheet items and their corresponding tax bases. In addition, the future benefits of income tax assets, including unused tax losses, are recognized, subject to a valuation allowance, to the extent that it is more likely than not that such future benefits will ultimately be realized. Future income tax assets and liabilities are measured using enacted tax rates and laws expected to apply when the tax liabilities or assets are to be either settled or realized.


Foreign currency translation


Transaction amounts denominated in foreign currencies are translated into their Canadian dollar equivalents at exchange rates prevailing at the transaction date. Carrying values of monetary assets and liabilities reflect the exchange rates at the balance sheet date. Gains and losses on translation or settlement are included in the determination of net income for the current period.


Measurement uncertainty


The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accounts receivable are stated after evaluation as to their collectibility and an appropriate obsolete inventory. Amortization is based on the estimated useful lives of property and equipment. Product development costs are stated after evaluation its economic viability.


These estimates and assumptions are reviews periodically and, as adjustments become necessary they are reported in earnings in the periods in which they become know.


3.

Receivables from shareholders


Advances to the shareholders are non-secured, non-interest bearing, and have no set repayment terms.


4.

Product development costs


Product developments costs represents costs incurred in developing a new educational product. During the nine month period ended September 30, 2006 nil (year ended December 31, 2005 - $61,135; December 31, 2004 - $31,100) of expenditures relating to product development were deferred.


As the product under development has not yet reached the stage of commercial production no amortization of costs has occurred.


Included in product development costs are $81,800 of costs paid to a party related through common control. The transactions were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.


5.

Property and equipment


 

 

 

September 30

 

 

 

2006

 

 

 

(Unaudited)

 

 

Accumulated

Net book

 

Cost

amortization

value

 

 

 

 

Computer equipment

31,089 

24,713 

6,376 

Equipment

16,513 

12,655 

3,858 

Furniture and fixtures

40,445 

31,541 

8,904 

Leasehold inprovements

14,215 

13,509 

706 

 

102,262 

82,418 

19,844 

 

 

 

December 31

 

 

 

2005

 

 

 

Restated

 

 

Accumulated

Net book

 

Cost

amortization

value

 

 

 

 

Computer equipment

30,380 

23,342 

7,038 

Equipment

16,513 

11,942 

4,571 

Furniture and fixtures

40,445 

29,964 

10,481 

Leasehold inprovements

14,215 

13,039 

1,176 

 

101,553 

78,287 

23,266 


 

 

 

December 31

 

 

 

2004

 

 

 

Restated

 

 

Accumulated

Net book

 

Cost

amortization

value

 

 

 

 

Computer equipment

30,005 

21,058 

8,947 

Equipment

16,513 

10,799 

5,714 

Furniture and fixtures

40,445 

27,344 

13,101 

Leasehold inprovements

14,215 

11,864 

2,351 

 

101,178 

71,065 

30,113 


6.

Bank indebtedness


Bank indebtedness is comprised of the following:



 

12 Months ended

12 Months ended

9 Months ended

 

December 31

December 31

September 30

 

2004

2005

2006

 

(Unaudited)

 

(Unaudited)

 

 

 

 

Balances with banks

17,280 

8,088 

842 

Cheques issued in excess of bank balance

(41,825)

(41,417)

(67,099)

 

 

 

 

Cash resources, end of year

(24,545)

(33,329)

(66,257)

Operating loan

(320,000)

(300,000)

(330,000)

 

 

 

 

 

(344,545)

(333,329)

(396,257)



Bank indebtedness includes an operating loan with maximum available credit of $500,000 (December 31, 2005 - $500,000, December 31, 2004 - $ 600,000) bearing interest at prime plus 1% (December 31, 2005 and 2004 – prime plus 2%). Assets pledged as collateral are all present and after acquired personal property, all accounts, all inventory and all proceeds. As at September 30, 2006 $330,000(December 31, 2005 - $300,000, December 31. 2004 - $320,000) was drawn.


The terms of the operating loan require that certain measurable covenants be meet. As at September 30, 2006 (December 31, 2005 and 2004), the Company was in violation of certain covenants. As the operating loan is currently presented as current liability no additional adjustments are required.


7.

Credit facility


In addition to the operating loan, the Company also has available a corporate credit card with maximum available credit of $10,000 (December 31, 2005 and 2004 - $10,000), bearing interest at prime plus 2% (December 31, 2005 and 2004 – prime plus 2%). As at September 30, 2006 $9,641 has been drawn on this corporate credit card (December 31, 2005 - $9,794, December 31, 2004 - $4,951) and this amount has been included in accounts payable and accruals.


8.

Share capital


Authorized

        Common shares


Unlimited number of class “A” common shares, voting

Unlimited number of class “B” common shares, voting

Unlimited number of class “C” common shares, non-voting

Unlimited number of class “D” common shares, non-voting

Unlimited number of class “E” common shares, non-voting

Unlimited number of class “F” common shares, non-voting


          Preferred shares


Unlimited number of class “G” preferred shares, non-cumulative, redeemable


 

12 Months ended

12 Months ended

9 Months ended

 

December 31

December 31

September 30

 

2004

2005

2006

 

(Unaudited)

 

(Unaudited)

Issued

 

 

 

 

 

 

 

831 Class “A” common shares, voting

40,800 

40,800 

40,800 



9.

Income taxes


The components of the future income tax asset are as follow:


 

12 Months ended

12 Months ended

9 Months ended

 

December 31

December 31

September 30

 

2004

2005

2006

 

(Unaudited)

 

(Unaudited)

 

 

 

 

Property and equipment

(1,214) 

(941) 

(790)

Product development costs

(9,330)

(27,671)

(27,671)

Non-capital loss carry-forward

25,826

114,457

170,907

 

 

 

 

 

15,282

85,845

142,446



The income tax provision differs from the amount that would be expected by applying the current tax rates for the following reasons:


 

12 Months ended

12 Months ended

9 Months ended

 

December 31

December 31

September 30

 

2004

2005

2006

 

(Unaudited)

 

(Unaudited)

 

 

 

 

Net loss before taxes

(125,498)

(235,207)

(188,671)

 

 

 

 

Expected tax recovery at 17.5%

(21,962)

(41,161)

(33,017)

 

 

 

 

Increase (decrease) in come taxes resulting from:

 

 

 

Effect of difference between current and future tax rates

(11,919)

(20,633)

(23,584)

Non-deductible items and other

677 

 

 

 

 

Provision for income taxes

(33,204)

(61,794)

(56,601)



9.

Correction of errors


The Company has determined that the amounts previously reported for certain accounts were incorrect due to the mis-application of generally accepted accounting principles. The retroactive application of the correction of errors had the following impact on the results of operations and financial position of the Company:


 

As at and for the

As at and for the

 

12 Months ended

12 Months ended

 

December 31

December 31

 

2004

2005

 

 

 

Changes in financial position are as follows:

 

 

Accounts receivable – decrease

(106,125)

(372,116)

Income taxes recoverable – decrease

(5,238)

-

Prepaid expenses – decrease

(93,433)

(122,501)

Inventory – increase (decrease)

13,750

(2,930)

Organization costs – decrease

(11,511) 

(6,842)

Product development costs – increase

3,110

10,655 

Future income tax asset – increase

23,487

85,845

 

 

 

Changes in operations are as follows:

 

 

Sales - decrease (increase)

(75,212)

250,580

Cost of sales – increase

12,078

10,820

Expenses – increase

121,757

32,265

Current income tax expense – increase (decrease)

5,238

(9,683)

Future income tax recovery – increase

(24,316)

(62,358)

 

 

 

Net decrease in earnings

39,545

221,624

 

 

 

Cumulative decrease in opening retained earnings

136,415

175,960



11.

Commitments


The Company has entered into various premises lease agreements with estimated minimum annual payments as follows:


2007

170,940

2008

144,195

2009

53,710



12.

Financial instruments


The Company, as part of its operations, carries a number of financial instruments. It is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments except as otherwise disclosed.


Fair value of financial instruments


Fair value estimates are subjective in nature and involved uncertainties and matters of significant judgment. Changes in the following assumptions could significantly affect the estimates:


The carrying values of accounts receivable, bank indebtedness and accounts payable and accruals approximate their fair values, due to the short-term nature of these instruments.


It is not practicable within the constraints of timeliness or cost to determine the fair value of amounts receivable from shareholders because these instruments are not traded in an organized financial market. The terms and conditions of the receivable from shareholders is disclosed in Note 3.


13.

Contingencies


The Company has been named as defendant in a lawsuit seeking to recover damages allegedly sustained by the plaintiff as a result of breach of contract. The complaint with respect to this action alleges the plaintiff carried out telemarketing services in accordance with an agreement for which they have not yet been paid.


The Company has been named as defendant in another lawsuit filed by a formed employee of the Company, seeking to recover damages allegedly sustained as a result of constructive dismissal. The complaint with respect to this action alleges the employee was unfairly demoted.


These lawsuits remain at an early stage and, as litigation is subject to many uncertainties, it is not possible to predict the ultimate outcome of these lawsuits or to estimate the loss, if any, which may result.


In the normal conduct of operations, there are other pending claims against the Company. Litigation is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. In the opinion of management final determination of these other litigations will not materially affect the Company’s financial position or results of operations.


14.

Subsequent event


Subsequent to the date of the financial statements, an intent to purchase 62.33% of the outstanding shares of the Company was filed with the TSX Venture Exchange and is pending regulatory approval.


15.

Comparative figures


Certain comparative figures have been reclassified to conform with current year presentation.



 

12 Months ended

12 Months ended

9 Months ended

 

December 31

December 31

September 30

 

2004

2005

2006

 

(Unaudited)

(Restated)

(Unaudited)

 

(Restated)

 

 

 

 

 

 

Cost of sales

 

 

 

Freight

136,422 

104,168 

78,526 

Purchases

967,421 

716,219 

415,514 

Warehouse

55,613 

43,405 

24,797 

 

 

 

 

 

1,159,456 

863,792 

518,837 



Endnotes

The accompanying notes are an integral part of these financial statements


The accompanying notes are an integral part of these financial statements


The accompanying notes are an integral part of these financial statements


The accompanying notes are an integral part of these financial statements




EX-31 8 exhibit31.htm EXHIBIT 31 Exhibit 31

Exhibit 31

CERTIFICATION

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Khurram R. Qureshi, certify that:

 

1.

I have reviewed this annual report on Form 20-F/A of Lingo Media Corporation (formerly Lingo Media Inc);

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

 

4.

The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(a) and 15(d)-14(a)) for the company and have:

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(c)

Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

 

5.

The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

 

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

 

Date:   March 11, 2008

  

By:  

/s/  Khurram R. Qureshi

_______________________


Khurram R. Qureshi

Chief Financial Officer





EX-32 9 exhibit32.htm EXHIBIT 32 Exhibit 32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Annual Report on Form 20-F/A of Lingo Media Corporation, formerly Lingo Media Inc. for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Annual Report”), I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.

The Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2.

The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

 

Date:  March 11, 2008

 

By:  

/s/  Michael P. Kraft

_____________________

Michael P. Kraft

President and Chief Executive Officer

 



Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Annual Report on Form 20-F/A of Lingo Media Corporation, formerly Lingo Media Inc. for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Annual Report”), I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.

The Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2.

The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

 

Date:  March 11, 2008

 

  By:  

/s/  Khurram R. Qureshi

_______________________

Khurram R. Qureshi

Chief Financial Officer




CORRESP 10 filename10.htm Converted by EDGARwiz


February 20, 2008



Mr. Joseph A. Foti

Senior Assistant Chief Accountant



Dear Mr. Foti,


In response to your letter of October 27, 2007 please note the following:



Comment #

 


SEC Query

 


Lingo Media Response

20-F

 

 

 

 

1

 

Item 3.A.2

December 31, 2006 – Page 4


·

US GAAP income (loss) amount is not consistent with US GAAP income (loss) amount disclosed in Note 19 to the audited financial statements.

 




Table #3 is corrected and the document will be re-filed.

 

 

 

 

 

 

 

 

 

 

2

 

20-F – Item 5

Operating Results , Page 34


·

Please revise to include a discussion of the results of operations for each year for which the financial statements are required.


·

Financial statements should be revised to include the results of operations for year ended December 31, 2004.

 




Discussion on the operating results for the year ended December 31, 2006 compared with prior year will be included in the document and re-filed.



December 31, 2004 audited financial are included by reference as they filed with earlier annual reports. This information will be included in the audited financial statements on a going forward basis.

 

 

 

 

 

 

 

 

 

 

3

 

Three months ended March 31, 2007

Page 34


·

Revise your disclosure to include a discussion regarding the nature of the changes in both revenues and cost of sales between the current quarter vs. similar period 2006.

 




Discussion on the operating results for the quarter ended March 31, 2007 compared with similar period for prior year has been updated and will be re-filed.

 

 

 

 

 

 

 

 

 

 

4

 

Liquidity and capital resources,

Page 37


·

As of December 31, 2006, the Company was in violation of certain covenants relating to the revolving line of credit.  Please revise the liquidity discussion in MD&A to disclose the nature of the restrictive covenants and their violation at the year end and how management plans to regain compliance of these covenants and also adverse consequences if items remain unresolved.

 




Discussion on the violation of certain covenants relating to the revolving line of credit as at December 31, 2006 has been updated and will be re-filed.


 

 

 

 

 

 

 

 

 

 

5

 

Reconciliation of CDN & US GAAP

Page 40


·

While calculating EPS, amounts presented in the table for calculating numerator and denominator uses income (loss) under CDN GAAP.

 




Table has been updated and the document will be re-filed.

 

 

 

 

 

 

 

 

 

 

6

 

Tabular disclosure of contractual obligations

Page 43


·

Please include all long-term debt obligations and any other contractual obligations.

 




Table has been corrected and the document will be re-filed.

 

 

 

 

 

 

 

 

 

 

7

 

Item 11 - Qualitative and Quantitative Disclosure about market risk

Page 77


·

Please revise this section to include the disclosure relating to the foreign currency exchange risks required by Item 11 of 20-F.

 





The discussion is included in Item 11 and the document will be re-filed.

 

 

 

 

 

 

 

 

 

 

8

 

Item 15 – Controls and Procedures

Page 78


·

Please revise Item 15 to disclose the nature of the internal control weaknesses and revise your conclusion of the effectiveness of disclosure controls as necessary.

 




The discussion is included and the document will be re-filed.

 

 

 

 

 

 

 

 

 

 

AUDITED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

9

 

General


·

Please revise audited financial statements audited comparative financial statements that cover the latest three financial years.

 



December 31, 2004 audited financial are included by reference as they filed with earlier annual reports. This information will be included in the audited financial statements on a going forward basis.

 

 

 

 

 

 

 

 

 

 

10

 

Consolidated Statement of Cash Flow – Development Costs


·

Please explain the nature of the amounts included in the development costs for 2006 and 2005 and explain how you accounted for these costs for US GAAP purposes.  Please explain why these costs are not presented as part of the operating activities.

 




Statement of operations are prepared under Canadian GAAP and a US GAAP reconciliation is provided in note 19. Please note Development costs were expensed as incurred for US GAAP purposes.

 

 

 

 

 

 

 

 

 

 

11

 

Consolidated Statement of Cash Flow – Bank Indebtedness assumed on acquisition


·

Please explain why the amount is appropriately presented in accordance with CDN and US GAAP or IAS 7. Please explain where this amount presented on the balance sheet.

 




The Company acquired A Plus effective October 31, 2006 where as opening balance on the cash flow statements present January 1, 2006 bank balance. This item was included to adjust the opening balance due to acquisition of A Plus

 

 

 

 

 

 

 

 

 

 

12

 

Consolidated Statement of Cash Flow – non-cash transactions


·

Explain the nature of non-cash transaction of $30,000, when the services were performed, and how these services were accounted for and how were the shares valued? Explain “fair value” of Shares.

 




In this case we owed fees to certain vendors who wished to participate in the private placement financing. Instead of obtaining a separate cheque from these vendors we made a book adjustment reducing the A/P and increasing the share capital. Shares were valued based on the private placement pricing.

 

 

 

 

 

 

 

 

 

 

NOTES TO AUDITED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

13

 

Significant accounting policies

Revenue Recognition


·

Explain why the revenue is recognized at the time Finished Products are produced, in accordance with CDN and US GAAP.

 




Lingo Media’s China Revenue is royalty based which is calculated based o production runs not sales. Therefore, revenue is recognized when finished products are produced as our royalty is due at the time of production not sale .

 

 

 

 

 

 

 

 

 

 

14

 

Development Costs


·

Please explain the nature of any technology and web development costs included in development costs as of December 31, 2006 and 2005 and how were they accounted for under US GAAP.

 



These costs were expensed as incurred for US GAAP purposes.

 

 

 

 

 

 

 

 

 

 

15

 

Note 7 – Acquisition


·

How the shares that were issued for the acquisition were valued – for both CDN and US GAAP? Please explain how “fair Value” was determined.

 



Shares were valued based on third party negotiations with the vendors of A Plus using average stock price on Canadian stock exchange (TSX Venture Exchange) for the 90 days before the effective date of acquisition i.e. October 1, 2006 as a reference.

 

 

 

 

 

 

 

 

 

 

16

 

Note 7 – Acquisition


·

Please explain how many of the performance milestone shares have been issued to the selling shareholders.  Also disclose the milestones that are required to be achieved and how Lingo Media will account for these shares under both CDN and US GAAP.

 



Milestone shares are based on Revenue and Net income target for the fiscal years ending December 2007, 2008 and 2009. If these revenue and net income targets are ever achieved the milestones shares issued will be recorded as purchase price adjustment.

 

 

 

 

 

 

 

 

 

 

17

 

Note 7 – Acquisition

Goodwill


·

Explain how Lingo Media considered the guidelines of SFAS No. 141 and EITF 02-07 in connection with purchase price allocation of A+.  Why no allocation to other intangibles?

 




While allocating the purchase price Lingo Media considered other intangible assets such as leases, customer lists and trademarks. We did not have significant information to substantiate an allocation of the purchase price to these assets, hence, it was concluded to allocate any value paid over and above tangible assets to good will.



[responsetoseccomments30oc002.gif]

 

 

 

 

 

 

 

 

 

 

18

 

Note 10 – Capital Stock


·

Please explain nature of the transaction of share issue costs as at December 31, 2005 in the amount of $115,948.

 



This is a typo-graphical error. The error is corrected and the document will be re-filed.

 

 

 

 

 

 

 

 

 

 

19

 

Note 10 – Capital Stock

Stock Options Note


·

Please explain how Lingo Media calculated $187,812 fair value amount reclassified and why reclassifying from contributed surplus to capital stock.



·

Please explain why total options exercised do not agree with Note 10(a).



·

Please explain the nature of transaction where options were exercised in settlement of accounts payable and whether the options were exercised at their stated exercise price or another amount.

 




The value of the options exercised was calculated based on Black-Scholes model. In certain cases the value of the options issued are higher based on Black-Scholes than the exercise price of the options, in this case the additional value is moved from contributed surplus to share capital at the time of the exercise.


We have reviewed and the number agrees.




We owed fees to certain vendors who wished to exercise their stock options. Instead of obtaining a separate cheque from these vendors we made a book adjustment reducing the A/P and increasing the share capital. Stock options were exercised based on the stated exercise price.

 

 

 

 

 

20

 

Note 16 – Major Customer

20-F - Page 12


·

The revenue percentages to a major customer as disclosed on page 12 of 20-F is not consistent with Note 16.

 




This is a typo graphical error. The error is corrected and the document will be re-filed.

 

 

 

 

 

 

 

 

 

 

21

 

Note 18 – Commitments


·

SFAS No. 13 – Accounting policy disclosure should be revised to clarify whether rent expense associated with building and equipment operating leases is recognized on a straight line basis in accordance with paragraph 15 of SFAS No. 13 for US GAAP reconciliation.

 



Rent is charged on a monthly basis adjusted for operating expenses annually. Rent is expensed as incurred in accordance with SFAS No. 13.

 

 

 

 

 

 

 

 

 

 

22

 

Note 19 – US GAAP Reconciliation


·

Please prepare a US GAAP statement in changes in stockholders’ equity.  Many other registrants elect to include these US GAAP reconciliation in notes to financial statements.

 



Noted. We will implement a stockholder’s equity statement in future.

 

 

 

 

 

 

 

 

 

 

23

 

·

Please include disclosure of basic and diluted EPS calculations in accordance with US GAAP.

 

We will include this disclosure in the future filings.

 

 

 

 

 

 

 

 

 

 

24

 

Note 19 – US GAAP Reconciliation

Development Costs


·

Explain the nature of incremental costs that are capitalized for US GAAP purposes and citing relevant US GAAP accounting literature and why is it appropriate to capitalize these costs.

 




Based on the XXXXX any development cost incurred on a revenue generating project can be capitalized. These costs are incurred mainly for the development of new products under the revenue generating projects.  

 

 

 

 

 

 

 

 

 

 

25

 

Note 19 – US GAAP Reconciliation

Options to consultants


·

Explain and disclose in notes to financial statements how the treatment for stock options differs between CDN and US GAAP and explain why there is a difference in stockholders’ equity between US and CDN GAAP.  In addition, please explain how you determined or calculated the amount of the adjustment and please clarify the accounting method used in accounting for stock-based compensation under US GAAP (SFAS No. 123R)

 




Canadian GAAP adopted the US GAAP treatment of expensing stock based compensation when options are issued on January 1, 2004. Before Jan 1, 2004 these costs were only calculated and expensed for US GAAP purposes. Difference in stock option treatment before Jan 1, 2004 and difference in capitalization of development costs create the difference in stock holder equity under CDN GAAP vs. US GAAP

 

 

 

 

 

 

 

 

 

 

UNAUDITED INTERIM FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

26

 

Note 7 - Investment in A+


·

Explain the consideration issued for $100,000 invested in A+ and how was it accounted for in the financial statements as at March 31, 2007.

 



Additional shares from treasury of A+ were issued in consideration of additional capital investment of Lingo Media. Resulting in increase in the investment account on Lingo Media’s balance sheet and share capital on A+’s balance sheet. These two amounts are eliminated for consolidation purposes resulting in no impact on consolidated balance sheet of Lingo Media

 

 

 

 

 

 

 

 

 

 

27

 

Please revise the notes to interim financial statements to give effect to above comments on the audited financial statements, where applicable.

 

No revision required as per above.



Please feel free to contact me at +1 (416) 927 7000 X 25 if you have any questions.



Your truly,

LINGO MEDIA


Khurram Qureshi

Chief Financial Officer



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