ENGINEERING.COM INCORPORATED 2002 FINANCIAL STATEMENTS

Transcription

1 ENGINEERING.COM INCORPORATED 2002 FINANCIAL STATEMENTS

2 2 MANAGEMENT S RESPONSIBILITY FOR FINANCIAL REPORTING To the Shareholders of ENGINEERING.com Incorporated: The consolidated financial statements and other financial information in this Annual Report were prepared by the management of ENGINEERING.com Incorporated (the Company ), reviewed by the Audit Committee and approved by the Board of Directors. Management is responsible for the consolidated financial statements and believes that they present fairly the Company s financial condition and results of operations in conformity with generally accepted accounting principles. Management has included in the Company s consolidated financial statements amounts based on estimates and judgments that it believes are reasonable under the circumstances. To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control which provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. Management further assures the quality of the financial records through careful selection and training of personnel, and through the adoption and communication of financial and other relevant policies. The shareholders have appointed Deloitte & Touche LLP to audit the consolidated financial statements. Their report outlines the scope of their examination and their opinion. John Hayes Chief Operating Officer and CFO Brian Semkiw, P. Eng. CHAIRMAN OF THE BOARD

3 3 AUDITORS REPORT To the Shareholders of ENGINEERING.com Incorporated: We have audited the consolidated balance sheet of ENGINEERING.com Incorporated (the Company ) as at December 31, 2002 and the consolidated statements of operations and deficit and cash flows for the year 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 audit. 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2002, and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. The consolidated financial statements as at December 31, 2001 and for the year then ended were audited by other auditors who expressed an opinion without reservation on those statements in their report dated February 15, 2002, except for Note 17, which was dated March 6, April 25, 2003, except for Note 17, which is dated May 9, 2003 Toronto, Canada.

4 4 CONSOLIDATED BALANCE SHEET As at December 31, 2002 (with comparative balances as at December 31, 2001) $ $ ASSETS CURRENT ASSETS Cash and short-term investments (Note 3) 1,046,822 2,973,745 Accounts receivable 1,896,056 2,473,992 GST receivable 108,722 8,263 Prepaid expenses and deposits (Note 2) 278,387 43,882 Due from related parties (Note 12) 252, ,594 3,582,862 5,843,476 CAPITAL ASSETS (Notes 4 and 12) 2,573,227 3,043,955 INTANGIBLE ASSETS (Notes 5 and 12) 400,565 1,778,803 6,556,654 10,666,234 LIABILITIES AND SHAREHOLDERS EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities 1,267,369 1,104,790 Due to related parties (Note 12) 1,500,430 1,238,086 Income taxes payable -- 56,326 Deferred revenue (Note 2) 382, ,474 Note payable (Note 14) -- 31,608 3,150,135 2,881,284 SHAREHOLDERS EQUITY Share capital (Note 6) 12,583,901 13,108,230 Deficit (9,177,382) (5,323,280) TOTAL SHAREHOLDERS EQUITY 3,406,519 7,784,950 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 6,556,654 10,666,234 Approved on behalf of the Board of Directors: Ron Baldesarra, P. Eng. DIRECTOR Brian Semkiw, P. Eng. CHAIRMAN OF THE BOARD The accompanying notes are an integral part of this consolidated financial statement.

5 5 CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT For the year ended December 31, 2002 (with comparative balances for the preceding year) $ $ GROSS BILLINGS 13,915,027 8,200,823 NET REVENUE (Note 2 and 12) 5,581,145 5,235,969 COST OF SALES (Note 12) 1,530,193 1,459,620 GROSS PROFIT 4,050,952 3,776,349 OPERATING EXPENSES Salaries and benefits 2,689,945 2,322,164 Management fees (Note 12) 27, ,144 Marketing 126, ,044 Website development 140, ,342 General and administrative (Note 12) 1,885,305 1,443,318 4,870,318 4,548,012 LOSS BEFORE UNDERNOTED ITEMS: (819,366) (771,663) Writedown of capital assets (Note 5) 255, Depreciation and amortization expense 1,348, ,703 Writedown of intangible assets (Notes 2 and 5) 1,434, Goodwill amortization ,900 Interest income (4,624) (245,020) 3,034, ,583 NET LOSS BEFORE INCOME TAXES (3,854,102) (1,569,246) PROVISION FOR INCOME TAXES -- 35,499 NET LOSS (3,854,102) (1,604,745) NET LOSS PER COMMON SHARE (Note 11) (0.20) (0.08) WEIGHTED AVERAGE NUMBER OF COMMON SHARES (basic) 19,201,418 18,891,645 DEFICIT, beginning of year (5,323,280) (3,718,535) DEFICIT, end of year (9,177,382) (5,323,280) The accompanying notes are an integral part of this consolidated financial statement.

6 6 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended December 31, 2002 (with comparative balances for the preceding year) OPERATING ACTIVITIES $ $ Net loss (3,854,102) (1,604,745) Add items not affecting cash: Depreciation and amortization 1,348,614 1,042,603 Writedown of Capital Assets (Note 5) 255, Writedown of Intangible Assets (Note 5) 1,434, Changes in operating assets and liabilities other than cash (Note 9) 634,150 (433,250) CASH USED IN OPERATING ACTIVITIES (180,592) (995,392) FINANCING ACTIVITIES Current portion of lease payments -- (13,833) Issuance of share capital -- 30,000 Note payable (31,608) (316,404) CASH USED IN FINANCING ACTIVITIES (31,608) (300,237) INVESTING ACTIVITIES Additions to capital assets, net (1,630,528) (2,232,015) Additions to intangible assets (84,195) (261,007) CASH USED IN INVESTING ACTIVITIES (1,714,723) (2,493,022) DECREASE IN CASH AND SHORT-TERM INVESTMENTS (1,926,923) (3,788,651) CASH AND SHORT-TERM INVESTMENTS, beginning of year 2,973,745 6,762,396 CASH AND SHORT-TERM INVESTMENTS, end of year 1,046,822 2,973,745 SUPPLEMENTARY CASH FLOW DISCLOSURE Cash paid for income taxes ,751 The accompanying notes are an integral part of this consolidated financial statement.

7 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES The primary business activity of the Company is the development of a business-to-business internet marketplace for engineering products and services targeted at the engineering community. The continuance of the Company s operations is dependent upon the commercialization and development of the ENGINEERING.com website. Principles of consolidation These consolidated financial statements include the accounts of ENGINEERING.com and its subsidiaries (collectively the Company ). All significant intercompany accounts and transactions have been eliminated. Use of estimates The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue recognition The Company s revenue consists of fees for listings on the Company s website, software and software support sales, hardware sales and service-related activities. Listing fee revenues are recognized over the term of the agreement, which is typically 12 months. Hardware sales are recognized when title passes, which coincides with shipment to and acceptance by the customer. Revenue from the licensing of software products is recognized when the Company has delivered the software and satisfied all contractual obligations. Revenue from software support contracts, which includes product updates, telephone hotline support, local on-site engineering support and revision loading are recognized on a straight-line basis over the life of the contract. These contracts are normally one year in duration. Revenue from other service-related activities, including training, custom programming, networking, integration, engineering and consulting services are recognized as the services are performed. Transactions with limited margins where the product or service has been sourced from a related party where the Company was determined to have acted as an agent in the transactions are presented on a net basis. Capital assets Capital assets are recorded at cost and depreciated on a declining balance method at the following rates or on a straight-line basis over the following term: Computer hardware and software 30% Office furniture & equipment 20% Website development 3 years Leasehold improvements are amortized on a straight-line basis over the term of the lease. Intangible assets Intangible assets consist of the domain name, ENGINEERING.com, goodwill, and reseller agreements. Goodwill represents the excess of purchase consideration over the fair value of net

8 8 identifiable assets acquired in a business combination. The Company s policy with respect to the potential impairment of goodwill is determined by comparison of the carrying value of unamortized goodwill with the estimated future cash flows of the related entity. Goodwill is only written down when it has been determined that there has been a permanent impairment in value of the unamortized goodwill. Reseller agreements are amortized on a straight-line basis over the term of the agreement (see Note 2 Changes in Accounting Policy). Research and website development costs Research costs are expensed as incurred. Development costs are expensed as incurred unless a development project meets specified criteria under Canadian generally accepted accounting principles for capitalization and amortization including, but not limited to, technical feasibility and reasonable assurance of recoverability. Foreign currency translation Monetary assets and liabilities denominated in foreign currencies are recorded in Canadian dollars at the exchange rate in effect at the balance sheet date. Exchange gains and losses arising on translation are included in earnings. Revenues and expenses are recorded using exchange rates that approximate those in effect when the transactions occur. Income taxes The Company follows the asset and liability method of accounting for income taxes. The Company provides a valuation allowance to reduce future tax assets when it appears more likely than not that the asset will not be realized. Stock-based compensation plans The Company has an Employee Stock Option Plan (the Plan ), which is described in Note 7. Under the Plan, options are to be granted at market value as determined by the board of directors, by reference to a quoted trading price, if available, and accordingly, no compensation expense is recognized when stock options are issued to employees. Any consideration paid by employees on exercise of stock options or purchase of Common Shares is credited to share capital. If Common Shares or stock options are repurchased from employees, the excess of the consideration paid over the carrying amount of the Common Shares or stock options is charged to retained earnings. Financial instruments The Company s financial instruments consist of cash and short-term investments, accounts receivable, GST receivable, accounts payable and accrued liabilities, and amounts due to related parties. The carrying value of cash and short-term investments, accounts receivable, GST receivable, accounts payable and accrued liabilities, and amount due to related parties approximates their fair values due to the immediate or short-term maturity of these financial instruments. 2. CHANGES IN ACCOUNTING POLICY Goodwill and Intangible Assets Commencing January 1, 2002, the new recommendations of the Canadian Institute of Chartered Accountants for intangible assets and goodwill apply to the Company (CICA Handbook Section 3062). The Company s domain name is an intangible asset with an indefinite life. This asset was tested for impairment as at January 1, 2002, and again at December 31, 2002 and found to have no impairment at either time. In adopting the new accounting policy for 2002 the Company has ceased amortization of this asset. Similarly, goodwill was also tested for impairment as at January 1, 2002 and the Company determined there was no goodwill transitional impairment amount. The Company conducted another impairment test as at December 31, 2002 and determined that the asset had been

9 9 impaired due to the option right granted in respect of the asset underlying the goodwill (see note 5 Intangible Assets) Revenue Recognition The Canadian Institute of Chartered Accountants issued EIC 123 in December 2001, delineating the standard for when companies should report revenue Gross as a principal versus Net as an agent. This new accounting standard applies to years beginning on or after December 6, The Company has applied this change in accounting policy for the year ended December 31, 2002 and has also applied this change retroactively to the 2001 financial statements. Previous to the adoption of this policy, all sales by the Company were recorded as revenue. Gross billings includes all transactions at their gross amount, while net revenues includes only the margin on those transactions where the Company was determined to have acted as an agent. Net revenue also includes the entire proceeds for transactions where the Company was determined to have acted as a principle. The result is that the amounts formerly reported as Revenues are now identified as Gross Billings. The impact of this change in accounting policy was a reduction in reported net revenue for the year ended December of $8,333,882 ( $2,964,854) and a reduction in prepaid expenses and deferred revenue as at December 31, 2002 of $316,309 ( $392,000). There was no change in the reported gross profit or net income of the Company associated with the adoption of this accounting policy. Stock Based Compensation Effective January 1, 2002, the Company adopted the Canadian Institute of Chartered Accountants revised Handbook Section 3870, Stock Based Compensation and Other Stock Based Payments. As permitted by the new recommendations, no compensation cost is recorded upon issuance of stock options under the Company s Stock Option Plan. Under the new recommendations, the Company is required to disclose the pro-forma net earnings (loss) and earnings (loss) per share using the fair market value method of accounting for stock based compensations. (See Note 7 Stock Options) 3. CASH AND SHORT TERM INVESTMENTS In 2001, short-term investments were placed in short-term treasury bills and guaranteed investment certificates for periods ranging from 30 to 90 days $ $ Short-term investments -- 1,004,521 Cash 1,046,822 1,969,224 1,046,822 2,973,745

10 10 4. CAPITAL ASSETS 2002 Accumulated Net Book Cost Amortization Value $ $ $ Computer hardware and software 1,192, , ,507 Office furniture and equipment 150,786 83,988 66,798 Leasehold improvements 175, ,897 29,604 Website development 3,338,463 1,417,145 1,921,318 4,856,958 2,283,731 2,573, Accumulated Net Book Cost Amortization Value $ $ $ Computer hardware and software 990, , ,279 Office furniture and equipment 92,627 27,061 65,566 Leasehold improvements 163,636 38, ,163 Website development 2,504, ,691 2,097,947 3,751, ,930 3,043, INTANGIBLE ASSETS The Company acquired The Brand Factory Inc. and The ebrand Factory Inc. (collectively The Brand Factory) in July The initial purchase price less the net book value of assets on hand at the time of the purchase and subsequent additional consideration resulted in goodwill of $1,899,056 at the end of Accumulated amortization on this goodwill was $548,400 as at December 31, Additional purchase consideration during the current year of $84,195 was recorded as an increase in goodwill. The purchase agreement and subsequent amendments thereto provide for the expiration of certain non-competition and non-solicitation obligations of the vendors of The Brand Factory (the Vendors ) and title to the business name The Brand Factory to revert to the Vendors at the end of In addition, the Vendors have the right to acquire the business of The Brand Factory from the Company at a price approximating the net amount of current assets less current liabilities at the end of Accordingly, the Company has recognized an impairment loss associated with the goodwill related to this acquisition of $1,434,852 in 2002 (see Note 2 Changes in Accounting Policies). The Company has also reduced the carrying value of fixed assets associated with this acquisition through a charge to earnings of $255, Accumulated Net Book Cost Amortization Value $ $ $ Domain name 370,613 61, ,847 Reseller agreements 141,105 49,387 91,718 Goodwill 1,983,251 1,983, ,494,969 2,094, ,565

11 Accumulated Net Book Cost Amortization Value $ $ $ Domain name 370,613 61, ,847 Reseller agreements 141,105 21, ,300 Goodwill 1,899, ,400 1,350,656 2,410, ,971 1,778, SHARE CAPITAL Authorized An unlimited number of Common Shares An unlimited number of Non-Voting Special Shares, issuable in series Issued and outstanding: Outstanding Common Shares # of Shares $ # of Shares $ Beginning of year 19,389,140 13,108,230 17,675,000 11,832,982 Shares issued (i) ,000 68,534 Shares issued (ii) , ,105 Shares issued on acquisitions (Note 12) (iii) ,400,000 1,022,560 Shares issued (iv) ,140 13,049 Exercise of options (v) ,000 30,000 Shares cancelled (iv) (14,140) (13,049) Shares cancelled (iii) (700,000) (511,280) End of period 18,675,000 12,583,901 19,389,140 13,108,230 i ) On March 5, 2001, the Company entered into a Consultant Agreement with Yolles Group Inc. ( Yolles ), a related party, whereby Yolles would provide certain consulting services for a total purchase price of 50,000 Common Shares. These amounts are included in website development costs (Note 4). ii) On March 23, 2001, the Company entered into a Reseller Agreement with CADsoft Corporation ( CADsoft ), a related party, whereby the Company would be an authorized exclusive reseller of certain CADsoft-related licensed products and services for a total of 150,000 Common Shares. These amounts are included in intangible assets (Note 12). iii) On March 30, 2001, the Company issued 1,400,000 Common Shares in connection with its acquisition of IQtraders.com Inc. (Note 13). On September 30, 2002, 700,000 Common Shares were cancelled in connection with an amendment to the share purchase agreement for the acquisition of IQTraders.com Inc. iv) In 2000 the Company acquired the rights to the domain name ENGINEERING.com. The terms of sale allowed for the purchase price to be satisfied by the issuance of Common Shares, contingent on the share price appreciating in value to satisfy the purchase price. On July 12, 2001, the Company issued 14,140 Common Shares to Creative Engineering in consideration for the purchase price. However, the share price did not attain the price required to satisfy the purchase price. Accordingly, on March 6, 2002 the Company paid US$250,000 as full and final consideration for the domain name in exchange for the 14,140 Common Shares issued in 2001.

12 12 v) On December 21, 2001, 100,000 Common Shares were issued upon the exercise of 100,000 Agent Options for proceeds of $30,000. Warrants As at December 31, 2002, the Company had the following common share purchase warrants issued and outstanding: (See Note 13) Exercise Number Expiry Price of Warrants Date $ , Apr STOCK OPTIONS A summary of the options outstanding under the Plan as of December 31, 2002 and 2001, and changes during the years ended on those dates, are presented below: Weighted-Avg. Weighted-Avg. Options Exercise Price Options Exercise Price Outstanding, beginning of year 1,908,200 $ ,494,000 $ 1.89 Granted 431, , Exercised (100,000) 0.30 Forfeited (53,000) 0.88 (44,800) 0.84 Outstanding, end of year 2,286,200 $ ,908,200 $ 1.67 Exercisable, end of year 1,613,600 $ ,401,975 $ 1.89 The following table summarizes stock option information outstanding at December 31, 2002: Options Outstanding Options Exercisable Range of Number Weighted Avg. Weighted Number Weighted Exercise Outstanding Remaining Avg. Exercisable Avg. Prices at 12/31/02 Contractual Life Exercise Price at 12/31/02 Exercise Price $ $ , yrs $ ,500 $ 0.61 $ $2.00 1,450, yrs ,303, $ $2.00 2,286, yrs $ ,613,600 $ 1.74 As at December 31, 2002, under the Plan, the Company may grant options to its employees, directors and officers to purchase up to 3,500,000 Common Shares. As at December 31, 2002, a total of 2,286,200 options were outstanding. The total proceeds that would be generated upon exercise of these options is $3,334,000. Fair value has been estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: Expected dividend yield 0% Risk free interest rate 3% Expected life 4 years Expected volatility over expected life - 63% For the twelve months ended December 31, 2002, the Company issued 431,000 stock options under the Company s Stock Option Plan at exercise prices ranging from $0.40 to $0.61 per Common Share.

13 13 Had the Company determined compensation cost based on the fair value at the grant date for its stock options granted after December 31, 2001, the Company s net loss for the twelve months ended December 31, 2002 would have changed to the pro forma amounts as follows: 2002 Net loss $3,854,102 Compensation expense $ 23,209 Pro Forma net loss $3,877,311 Pro Forma net loss per share $ (0.20) 8. INCOME TAXES The provision for income taxes differs from the amount computed by applying the statutory income tax rate to the loss before income taxes. The sources and tax effects of the differences are as follows: $ $ Combined basic Canadian federal and provincial rates 39.0% 42.1% Basic rate applied to loss before provision for income taxes (1,503,000) (690,543) Adjustment resulting from: Share issue costs (116,000) (120,000) Other (18,000) (15,956) (1,637,000) (826,499) Valuation allowance 1,637, , ,499 Significant components of the Company s future income tax assets and liabilities are as follows: Future income tax assets Share issue costs 258, ,000 Capital assets 916, ,000 Accounts receivable -- 80,000 Tax loss carry forward 1,588,000 1,345,000 2,762,000 2,700,000 Future income tax liabilities Intangible assets (48,000) (616,000) 2,714,000 2,084,000 Valuation allowance (2,714,000) (2,084,000) The Company has tax loss carry forwards, which have not been tax benefited in these financial statements, which expire as follows: Expiry Year $ ,263, , ,273,000 4,071,000

14 14 9. CONSOLIDATED CASH FLOW Changes in operating assets and liabilities other than cash: $ $ Accounts receivable 577,936 (1,688,987) GST receivable (100,459) 108,767 Prepaid expenses and deposits (234,505) 14,424 Net related parties 353, ,019 Accounts payable and accrued liabilities 162,579 40,944 Income taxes payable (56,326) (204,751) Deferred revenue (68,138) 383, ,150 (433,250) 10. SEGMENTED INFORMATION The Company operates in Canada in two different markets. The parent company, ENGINEERING.com Incorporated, derives its revenue from listing fees, software and software support sales, hardware sales and website development related services. The Brand Factory is engaged primarily in marketing, consulting, production and media services for traditional and E- commerce related businesses. Results of operations for these two segments are as follows: 2002 ENGINEERING.com The Brand Incorporated Factory Total $ $ $ Net Revenue 1,418,017 4,163,128 5,581,145 Income (Loss) before undernoted items: (997,377) 178,011 (819,366) Depreciation and amortization expense and writedown of capital assets 1,436, ,680 1,604,508 Writedown of intangible assets - 1,434,852 1,434,852 Interest expense (income) (5,136) 512 (4,624) (1,431,692) (1,603,044) (3,034,736) Net loss before income taxes (2,429,069) (1,425,033) (3,854,102) Provision for income taxes Net Loss (2,429,069) (1,425,033) (3,854,102) Total Assets 4,693,234 1,863,420 6,556, ENGINEERING.com The Brand Incorporated Factory Total $ $ $ Net Revenue 1,808,790 3,427,179 5,235,969 Loss before undernoted items: (721,038) (50,625) (771,663) Depreciation and amortization expense 607,755 48, ,703 Interest and foreign exchange (245,020) -- (245,020) 362,735 48, ,683 Net loss before income taxes and goodwill amortization (1,083,773) (99,573) (1,183,346) Provision for income taxes 35, ,499 Net loss before goodwill amortization (1,119,272) (99,573) (1,218,845) Goodwill amortization 385, ,900 Net Loss (1,505,172) (99,573) (1,604,745) Total Assets 9,046,875 1,619,359 10,666,234

15 LOSS PER SHARE Due to the loss incurred in 2002, all potential common shares outstanding are considered antidilutive and are excluded from the calculation of diluted loss per share. The basic weighted average number of shares outstanding for the year ended December 31, 2002 is 19,201,418 ( ,891,645). 12. RELATED PARTY TRANSACTIONS During the year, the Company had the following significant related party transactions: i) In 2001 the Company purchased accounting software with a value of $236,000 from Rand A Technology Corporation ( RAND Worldwide ), the Company s largest shareholder. In 2002 the Company determined that this software was not appropriate for its requirements and so returned the software for a full refund. The Company has recorded a reduction in fixed assets and a corresponding reduction in its payable to RAND Worldwide. ii) The Company provided certain consulting and website development services to related parties, primarily RAND Worldwide, and accordingly has recognized net revenue of approximately $917,000 ( $1,083,000). Additionally, the Company was reimbursed for approximately $142,000 of costs associated with certain personnel who provided services to Rand Worldwide. These reimbursements have been recorded as a reduction in reported salaries and benefits expense. iii) The terms and conditions of the Reseller Agreement with CADsoft, a director of which is also a director of the Company, indicate that the Company is to earn a 20% margin on these sales. In 2002, the Company has recognized related gross billings of approximately $213,000 ( $190,000). Only the gross margin earned on these sales is included in reported net revenue. (See note 2 Change in Accounting Policies) iv) The Company is a reseller of software, hardware, maintenance and training products for RAND Worldwide and its affiliates. During the year, the Company recognized gross billings of approximately $8,439,000 relating to these transactions (2001 $1,600,000). These transactions are included in gross billings. The related gross margin on these transactions are included in reported net revenues. v) The Company has provided certain marketing and design services to other related parties. The Company has recognized revenue related to these services of approximately $119,000. vi) The Company received services from RAND Worldwide in 2001 that were included in capital assets. During 2002 the Company and RAND Worldwide agreed that certain services with a value of $208,000 had not met the specifications for performance as agreed between the parties and that these services would not be accepted. Accordingly, the Company has recorded a reduction in capital assets and a corresponding reduction in its payable to RAND Worldwide. vii) The Company has a management services agreement (the Services Agreement ) with RAND Worldwide. Under the terms of the Services Agreement, RAND Worldwide provides support and assistance to the Company in connection with the management, administration and operation of the Company s business. The Company has agreed to pay RAND Worldwide a fee for such services, based on time and materials. RAND Worldwide charged the Company a total of $28,000 ( $210,144) for services delivered during the year ended December 31, 2002.

16 16 viii) On March 31, 2002 the Company finalized an agreement with Waterloo Maple Inc. ( WMI ), a director of which is also a director of the Company, to develop the website Mathematics.com. The agreement provided that in consideration of work done by the Company, WMI would pay $300,000 to the Company in kind as follows i) $200,000 of the balance to be offset against past and future rent and related services provided to the Company in connection with its occupancy of subleased space from WMI, ii) $80,000 to be provided in software upgrades for online calculators that are used on the Engineering.com web site and iii) $20,000 to be provided in software for resale. The Company recorded $195,000 of net revenue in 2002 ( $105,000) in connection with this transaction. ix) On September 1, 2002 the Company entered into a lease agreement for office premises with Randvest, a company owned in part by certain directors of the Company. The amount of rent expense recognized in the financial statements of the Company for rent to this related party was $10, BUSINESS COMBINATIONS IQtraders.com Inc. On March 30, 2001, the Company acquired 100% of the outstanding shares of IQtraders.com Inc. ( IQT ) from WMI and executed a Web Reseller Agreement with WMI. IQT develops software to solve complex mathematical problems. This acquisition has been accounted for using the purchase method and has been included in these financial statements from the date of acquisition. Total consideration paid consisted of 1,400,000 Common Shares of ENGINEERING.com and 400,000 warrants with a strike price of $2.00 exercisable at any time up to and including two years plus 15 days from March 30, These warrants will be convertible on a one-for-one basis if the market price of the Common Shares is greater than $10 per Common Share before the date that is the second anniversary of the closing of the transaction, or on a two-for-one basis if the share price is less than or equal to $10 per Common Share and certain sales volumes, pursuant to the Web Reseller Agreement, are achieved. One-half of the Common Shares issued on closing were to be held in escrow until the earlier of (i) the achievement of certain sales volumes pursuant to the Web Reseller Agreement and (ii) three years from March 30, On March 31, 2002 the Company and WMI entered into a share purchase amending agreement. Therein the parties agreed that WMI had not achieved the sales volumes pursuant to the Web Reseller Agreement and that the Company would no longer be the exclusive internet and web distributor of certain WMI products. As a result 700,000 shares were released from escrow and returned to the Company, and the terms of the related warrants were modified such that the warrants are convertible on a two-for-one basis if the share price is less than or equal to $5 per share and that they will remain outstanding for the balance of their term regardless of the achievement of the sales targets set out in the Web Reseller Agreement. $ Net assets acquired: Capital assets 1,022,560 Less value of shares cancelled (511,280) Net Capital assets acquired 511,280 Consideration: Common Shares 1,022,560 Less value of shares cancelled (511,280) Net Common Share consideration 511,280

17 NOTE PAYABLE In connection with the acquisition of The Brand Factory, at December 31, 2001, the Company had outstanding amounts payable to former shareholders of the acquired companies of $31,608. These notes were repaid during the year. 15. CLAIMS AND LITIGATION The Company is subject to claims and litigation arising in the ordinary course of business. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company s financial position. 16. LEASE COMMITMENTS The Company operates from leased premises and has other obligations under operating leases requiring annual rental payments as follows: $ , , , , , SUBSEQUENT EVENTS Effective January 1, 2002 the Company entered into an agreement with RAND Worldwide whereby RAND Worldwide i) transferred certain sales employees to the Company, ii) provided the Company with access to certain customers of RAND Worldwide, and iii) provided ongoing sourcing of products to the Company at RAND Worldwide s supplier prices. In consideration, the Company agreed to share future gross and net profits associated with the sales of these employees with RAND Worldwide. On May 9, 2003 the Company received two offers from directors to lend an aggregate amount of up to $1 million to the Company with interest at prime plus 2% and a repayment date of February 1, 2004 or later. These offers may be accepted by the Company at any time in its sole discretion until i) the earlier of a financing that results in net cash proceeds to the Company of $1,000,000 and ii) January 31, The board of directors has authorized management to draw down funds under these instruments as management deems necessary.