Comnetix Inc. - MRRS Decision

Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- application for relief from certain requirements of a business acquisition report to be filed in connection with a significant acquisition -- seeking permission to substitute certain audited and pro forma financial statements for statements that would otherwise be required.

Applicable Rules

National Instrument 51-102 Continuous Disclosure.

September 29, 2005

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ALBERTA, SASKATCHEWAN, MANITOBA,

ONTARIO, QUEBEC, NEW BRUNSWICK,

NOVA SCOTIA AND NEWFOUNDLAND

(the "Jurisdictions")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

COMNETIX INC. (the "Filer")

 

MRRS DECISION DOCUMENT

Background

1. The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filer under the securities legislation of the Jurisdiction (the "Legislation") for an exemption (the "Requested Relief") from certain requirements of National Instrument 51-102 -- Continuous Disclosure ("NI 51-102") with respect to the Business Acquisition Report ("BAR") required to be filed by the Filer in connection with its acquisition (the "Acquisition") of Paragon Total Solutions Inc. ("Paragon") which Acquisition was completed on August 5, 2005. In particular, the Filer is seeking permission to substitute audited financial statements for Paragon as at May 31, 2005 and pro forma financial statements for the Filer as at May 31, 2005 for the financial statements that would otherwise be required under the Legislation.

2. Under the Mutual Reliance Review System for Exemptive Relief Applications ("MRRS"):

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

3. Defined terms contained in National Instrument 14-101 -- Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

4. This Decision is based on the following facts represented by the Filer:

(a) The Filer was formed by Articles of Incorporation under the Canada Business Corporations Act on March 29, 2004;

(b) The Filer is a reporting issuer in each province in Canada and its common shares trade on the Toronto Stock Exchange;

(c) The authorized capital consists of an unlimited number of common shares of which 14,348,627 are issued and outstanding following the completion of the Acquisition;

(d) The Filer's year end is August 31;

(e) Paragon was a corporation formed under the laws of the State of Georgia on July 6, 1998;

(f) Paragon's authorized capital consisted of 1,000,000 shares of common stock of which 100,000 were designated as voting and 900,000 were designated as non-voting. Paragon's outstanding capital at the time of the Acquisition consisted of 5,000 voting shares of common stock held by four shareholders. The principal shareholder (the "PS") held 3,500 common shares representing 70% of the outstanding capital of Paragon;

(g) Paragon had a year end of December 31;

(h) Paragon has never prepared financial statements in accordance with U.S. generally accepted accounting principles. It only prepared internal management statements and calculated net income/loss for tax purposes;

(i) Pursuant to an Agreement and Plan of Merger dated July 25, 2005 as amended on August 4, 2005, Paragon merged with a wholly-owned subsidiary of Comnetix, PTS Acquisition Corp., formed under the laws of the State of Delaware. Articles of Merger were filed in Delaware and Georgia on August 5, 2005 which is being deemed the closing date for the purposes of the Acquisition;

(j) The consideration for the Acquisition was the payment of US$1,548,850 in cash and the issuance of 789,900 common shares of Comnetix priced at $2.31 per share. 650,218 of these common shares are subject to a voluntary escrow for one year with 105,726 of these escrowed shares subject to a further one year escrow;

(k) In addition, Comnetix has the right to reacquire all of the shares issued pursuant to the Acquisition and still held in escrow for $1.00 if the PS ceases to be an employee of Comnetix;

(l) The Acquisition has been determined to be significant in accordance with section 8.3(2)(b) of NI 51-102 at the 20% but not the 40% threshold and continues to be significant at the 20% level but not the 40% level when recalculated in accordance with section 8.3(4)(b);

(m) Under the Legislation, the Filer is required to include in the BAR (i) audited financial statements for Paragon for the year ended December 31, 2004 and unaudited interim financial statements for Paragon for the period ended June 30, 2005, (ii) unaudited interim financial statements for the Filer for the period ended May 31, 2005 and (iii) pro forma financial statements;

(n) The Filer will be conducting an audit of Paragon as at May 31, 2005 which will have a qualification for opening and closing inventory of Paragon, and will prepare audited financial statements for Paragon for the twelve (12) month period ended May 31, 2005, including unaudited 2004 comparative financial information (the "Paragon Audited Statements");

(o) The Filer has prepared audited financial statements for the year ended August 31, 2004 and unaudited interim statements for the period ended May 31, 2005 (the "Filer Interim Statements");

(p) The Filer will prepare pro forma financial statements (the "Pro Formas") based upon the unaudited financial results for the Filer for the twelve (12) month period ending May 31, 2005 and the Paragon Audited Statements; and

(q) Providing the Paragon Audited Statements, the Filer Interim Statements, the Pro Formas and an audited balance sheet for Paragon as at August 5, 2005 with no qualification of opinion relating to inventory as at that date (the "Closing Inventory Balance Sheet") in the BAR instead of the financial statements required under the Legislation would result in more complete and relevant information about the business conducted by Paragon.

Decision

5. Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.

6. The decision of the Decision Makers under the Legislation is that the Requested Relief is granted and the financial statement disclosure requirements of the Legislation will be satisfied provided that the Filer includes the Paragon Audited Statements, the Filer Interim Statements, the Pro Formas and the Closing Inventory Balance Sheet in the BAR required to be filed by the Filer in connection with its acquisition of Paragon.

"Erez Blumberger"
Assistant Manager, Corporate Finance
Ontario Securities Commission