Consolidated Financial Statements

 

Consolidated Financial Statements

(Expressed in Canadian dollars)

 

LINGO MEDIA INC.

December 31, 2004 and 2003

 

 

 

 

 

 

 

 

 

LINGO MEDIA INC.

December 31, 2004 and 2003

(Expressed in Canadian dollars)

 

 

 

 

CONTENTS

 

 

 

 

Auditor’s Report

 

Consolidated Balance Sheets

 

Consolidated Statements of Deficit

 

Consolidated Statements of Operations

 

Consolidated Statements of Cash Flows

 

Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

AUDITORS' REPORT

 

To the Directors of

 

Lingo Media Inc.

 

We have audited the consolidated balance sheets of Lingo Media Inc. as at December 31, 2004 and 2003, 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 audit.

 

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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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, 2004 and 2003, and the results of operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

 

 

 

Toronto, Ontario

 

“Mintz & Partners LLP”

April 26, 2005                                                                                              CHARTERED ACCOUNTANTS

 

 

 

 

 

Lingo Media Inc.

Consolidated Balance Sheets

(Expressed in Canadian dollars)

 

 

 

See accompanying notes to consolidated financial statements.

 

Approved on behalf of the Board:

 

“Richard Boxer”

_______________________________ Director

 

 

“Khurram Qureshi”

_______________________________ Director

 

 

 

 

LINGO MEDIA INC.

Consolidated Statements of Deficit

(Expressed in Canadian dollars)

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

LINGO MEDIA INC.

Consolidated Statements of Operations

(Expressed in Canadian dollars)

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

LINGO MEDIA INC.

Consolidated Statements of Cash Flows

(Expressed in Canadian dollars)

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

LINGO MEDIA INC.

Notes to Consolidated Financial Statements

(Expressed in Canadian dollars)

December 31, 2004 and 2003

______________________________________

 

 

Lingo Media Inc. (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 and retail bookstore market in China and for the educational school market in Canada.  

 

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. 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 ”EnglishLingo, Inc.”)  All significant inter-company transactions and balances have been eliminated.

 

(b)

Change in accounting policy

 

Effective January 1, 2004, the CICA handbook, Section 3870, "Stock-Based Compensation and Other Stock-Based Payments" was amended to require expense treatment of all stock-based compensation and payments for options granted beginning on or after January 1, 2002. As permitted by this standard, this change in accounting policy has been applied retroactively without restatement of the prior years' financial statements. In 2004, this change resulted in an increase of $8,842 to the opening deficit as at January 1, 2004 and an increase of $8,842 to contributed surplus. As a result of the change in accounting policy the previously recognized deferred stock-based compensation of $3,500 and $50,000 in 2003 and 2002 respectively has been reversed resulting in a decrease in share capital of $53,500 in 2003.

 

(c)

Revenue recognition:

 

Royalty revenue from finished products is recognized based on confirmation of finished products produced by its licensees and 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.

 

(d)

Accounts receivable:

 

In 2003, the Company factored certain of its accounts receivables. The company reported accounts receivable net of factoring amount once the risk of collection of factored accounts receivable, due to non-payment from the customer, was covered under the insurance policy. The factored accounts receivable were insured through an insurance policy provided by the Export Development Corporation.

 

In 2004, the Company discontinued its practice of factoring of its accounts receivables.

 

(e)

Inventory:

 

Inventory is recorded at the lower of cost and net realizable value.

 

(f)

Property and equipment:

 

Property and equipment are recorded at cost and are amortized over their respective estimated useful life on a declining-balance basis at 20% per annum. 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.  

 

(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 supports 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 estimated fair value is charged to the consolidated statement of operations.

 

(i)

Software development costs:

 

The Company has deferred software development costs incurred in connection with a computer software program to be used by children in reading and writing that promote and facilitate the development of communication skills in the English language.  Software development costs are deferred once technological feasibility for a product is established.  

 

Software development costs are amortized on a straight-line basis over a maximum of three years. Technological feasibility is established when the Company has completed all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications, including functions, features and technical performance requirements.

 

The Company regularly reviews the carrying values of its software development costs.  The Company supports 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 estimated fair value is charged to the consolidated statements of operations.

 

(j)

Government grants:

 

The Company receives government grants based on certain eligibility criteria for project 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 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.

 

(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, 2004 and December 31, 2003 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 capital assets, development costs, acquired publishing content and software development costs.

 

(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.

 

(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.  Before January 1, 2004, for the options issued and vested to employees the Company did not recognize a compensation expense but provided proforma disclosure

 

Employees

 

For stock-based compensation issued to employees, the company recognizes an asset or expense based on the fair value of the equity instrument issued. In 2003, the company recognized no compensation when stock options were granted to employees and directors under stock option plans with no cash settlement features. Pro-forma net income and earning per share, as if the fair value based accounting method had been used to account for stock-based compensation cost, were provided.

 

Non-employees

 

For stock-based compensation issued to non-employees, the company recognizes an asset or expense based on the fair value of the equity instrument issued .

 

 

2.

Accounts and grants receivable:

 

Accounts and grants receivable consist of:

 

 

(i)

In 2003, the Company factored certain of its receivables with its bank. The factoring agreement was supported by an insurance policy through the Export Development Corporation to minimize any exposure that the company may face in case of the non-payment from the customer.

 

 

3.

Prepaid and sundry assets:

 

Included in prepaid and sundry assets is a loan receivable of $2,925 (2003 - $17,315) due from a non-related party. This loan is due on demand, bears interest at 8.5% per annum, and is secured by a personal guarantee from the non-related party.

 

 

4.

Property and equipment:

 

Property and equipment consists of the following:

 

 

 

 

5.

Development costs:

 

Development costs con