SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
For Annual and Transition Reports pursuant to Sections 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27343
INFOCAST CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 84-1460887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 E. Ft. Lowell,
Suite 106,
Tucson, AZ
85719
(Address and zip code of principal executive offices)
520-577-5728
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 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 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
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As of May 31, 2001, the aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant was $37,223,624, which
value, solely for the purposes of this calculation excludes shares held by the
Registrant's officers, directors, and their affiliates. Such exclusion should
not be deemed a determination or an admission by the Registrant that all such
individuals are, in fact, affiliates of the Registrant. The number of shares of
the Registrant's Common Stock issued and outstanding as of May 31, 2001 was
47,077,216.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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INFOCAST CORPORATION
TABLE OF CONTENTS
PART I Page No.
Item 1. Business......................................................4
Item 2. Properties...................................................21
Item 3. Legal Proceedings............................................21
Item 4. Submission of Matters to a Vote of Security Holders..........22
PART II
Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters......................................22
Item 6. Selected Financial Data......................................24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...38
Item 8. Financial Statements and Supplementary Data..................38
Item 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure.......................38
PART III
Item 10. Directors and Executive Officers of the Registrant...........39
Item 11. Executive Compensation.......................................40
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................................47
Item 13. Certain Relationships and Related Transactions...............48
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K......................................49
Signatures.................................................................49
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PART I
ITEM 1. BUSINESS
General
We are an emerging company that has developed application solutions
and the infrastructure to enable us to host our customized software application
solutions that can be accessed remotely by businesses, their customers and
employees. We have developed the following software solutions:
o InfoCast Contact ("Contact") - This virtual call center application
solution permits businesses to service inbound and outbound customer
calls at any time through a customer service representative who can
be located anywhere.
o InfoCast e-Learning ("e-Learning") - This e-Learning application
permits corporate and academic learners to access training on-line,
from anywhere, at any time.
These applications became commercially available by the end of the
fiscal year ending March 31, 2000. We have agreements with AT&T Corporation
("AT&T Corp"), effective December 1, 2000, and AT&T Canada ("AT&T Canada"),
effective April 1, 2001, to distribute our Contact solution to their U.S. and
Canadian customers via access to AT&T's North American telecommunications
network to connect our customers to our data centers.
The infrastructure consists of computer hardware purchased from
third parties; software applications; and communication connections over private
and public networks, including the Internet. We are now entering the
commercialization phase and plan to provide our customers with access to our
infrastructure and hosted Contact and e-Learning solutions on a per use basis.
Companies providing such services have recently come to be known as virtual
service providers or "VSPs."
Traditionally, businesses have had to purchase their own computing
systems, including hardware and software, as well as hire, train and retain
highly skilled employees to operate and maintain these systems, all of which
require significant capital and ongoing operating expenditures. By outsourcing
these functions to a VSP, an enterprise will be able to:
o Reduce upfront and ongoing capital expenditures;
o Reduce its investment in information technology personnel;
o Access up-to-date, highly scalable, reliable and flexible
technology;
o Focus its resources on its core business by outsourcing a non-core
function; and
o Potentially shorten implementation time for new computer systems.
In order to host our customized software applications, we have
established a strategically placed data center, located in Toronto, Ontario, and
are completing the installation of a second data center in Chicago, Illinois.
Our Toronto data center became commercially operational in December 1999 and our
Chicago data center is expected to be commercially available in the second
quarter of Fiscal 2002. We expect to expand these data centers and/or install
additional ones across North America as needed. These data centers will deliver
information to information users, including businesses and their employees and
customers worldwide, in real-time, in any format - data, voice or animation,
through satellite, cable or private or public telecommunications networks,
including the Internet.
The Company entered into an agreement with AT&T Corp. on December 1,
2000 and with AT&T Canada on April 1, 2001. Under the agreements, AT&T Corp.,
AT&T Canada and the Company will cooperate to make the Company's Contact
Solution, a state-of-the-art web-enabled call center solution, available to
AT&T's US and Canadian-based customers. The solution is being offered on a flat
monthly rate per call center agent or on a pay-
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per-minute rate alternative, which makes it an affordable solution for contact
centers of all sizes. In its role under the agreement, the Company will provide
sales and technical support to AT&T.
We are a development stage company. Since the inception of our
predecessor, Virtual Performance Systems Inc., in July 1997 and as at March 31,
2001, we have had limited sales of products and services on a commercial basis
and have had limited revenues. We incurred losses of $96,161 for the period from
July 29, 1997 (inception) to December 31, 1997, $423,872 for the year ended
December 31, 1998, $3,083,921 for the three month period ended March 31, 1999,
$31,151,184 for year ended March 31, 2000 and $99,167,767 for the year ended
March 31, 2001, resulting in an accumulated deficit of $133,922,905 at March 31,
2001. Losses are continuing through the date of this Report and we anticipate
that losses will continue for the foreseeable future. In addition, the market
for our expected products and services is highly competitive and subject to
rapid technological change. We expect to face significant competition in the
future. As an emerging company in a new and rapidly evolving market, we face
risks and uncertainties relating to our ability to successfully implement our
business plan, which includes the ability to raise sufficient financing. We may
not successfully address all of these issues.
History of the Company
We were incorporated on December 23, 1997. Prior to 1999, our sole
business was mining and we held certain mineral interests in the United States.
Due to changes in the United States regulatory environment, our management
determined that it would be appropriate for us to sell all of our mining assets,
which represented substantially, all of our assets. We completed the sale of our
mining assets in the fourth quarter of 1998. During 1998, we changed our name
from Grant Reserve Corporation to InfoCast Corporation. Prior to changing our
name and subsequent to the sale of our mining assets, we were a publicly traded
company whose common stock was quoted on the OTC Bulletin Board under the symbol
"GNRS" without any ongoing business operations.
On January 29, 1999, we consummated the acquisition of all of the
voting capital stock of Virtual Performance Systems, Inc., a Canadian
corporation, for 1,500,000 shares of InfoCast Canada Corporation, our
wholly-owned subsidiary ("InfoCast Canada"), which are exchangeable on a
one-for-one basis for shares of our Common Stock. Virtual Performance Systems,
Inc. was a development stage company that was developing solutions to permit
businesses to service inbound and outbound customer calls at any time through a
customer service representative who can be located anywhere and to permit
corporate and academic learners to access training on-line, from anywhere, at
any time. The consolidated financial statements of the Company are the
continuing financial statements of Virtual Performance Systems, Inc.
Pursuant to an agreement dated December 15, 1998, as amended by a
letter agreement dated March 12, 1999, between us and ITC Learning Corporation,
we purchased from ITC Learning Corporation the distribution rights for all
current and future ITC Learning Corporation education and training products in
consideration for $975,000 in respect of the first 150,000 user licenses and
based on a shared revenue formula for user licenses in excess of 150,000. We
paid the first $500,000 of the initial $975,000 purchase price in March 1999 and
the final $475,000 of the initial $975,000 purchase price in April 1999.
On May 13, 1999, we acquired all of the outstanding common shares of
HomeBase Work Solutions Ltd. HomeBase Work Solutions, headquartered in Calgary,
Alberta, Canada, was developing a solution to permit businesses to enable their
employees to work from remote locations via computers. The purchase price was
satisfied by the issuance of 3,400,000 shares of InfoCast Canada, our
subsidiary. The InfoCast Canada shares are exchangeable on a one-for-one basis
for shares of our Common Stock.
In June 1999, we entered into an agreement with ITC Learning
Corporation pursuant to which we became ITC Learning Corporation's exclusive
distance learning technology distributor for the delivery of educational
material for the State of California for consideration of $2,000,000. We paid
this amount in three installments in August, September and October 1999.
Pursuant to an amendment to the ITC learning Corporation agreements,
dated June 5, 2000, the Company agreed, in exchange for an additional 100,000
single user licenses of the ITC courseware content, to forgo any and all product
conversion rights to all existing and future ITC products related to ITC's
industrial training products. The Company retains duplication rights for the
Call Centre suite of products and PC Skills suite of
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products. Also, pursuant to the June 5, 2000 amendment to the distribution
agreement of March 1999, the Company agreed to forego any and all rights into
perpetuity, including but not limited to intellectual property rights, and
distribution for the delivery of educational material for the State of
California referenced in the contract dated June 29, 1999 pursuant to which a
payment of $2,000,000 was made in the fiscal year ending March 31, 2000 in
exchange for an additional 300,300 prepaid single user license copies of ITC's
Call Centre and PC Skills courseware content.
On August 15, 2000, i360, inc. ("i360") merged with and into the
Company pursuant to the definitive Agreement and Plan of Merger (the "Merger
Agreement") dated as of May 3, 2000, as amended, providing for the acquisition
by the Company of all of the outstanding shares of common stock of i360. The
holders of i360's issued and outstanding common stock received 0.30 shares of
the Company's common stock per share of i360 common stock which resulted in an
aggregate of 7,583,976 shares of the Company's common stock being issued. In
addition, all outstanding warrants and stock options to purchase shares of i360
common stock converted into stock options and warrants to purchase shares of the
Company's common stock at a 1:0.3 exchange ratio. As a result, an aggregate of
4,416,000 warrants of the Company and 1,127,476 stock options of the Company
were issued as of August 15, 2000.
On September 14, 2000, the Company entered into an agreement with
Sun Microsystems Inc. ("Sun"), pursuant to which Sun purchased 320,674 shares of
the Company's common stock at $3.12 per share for total proceeds of $1,000,000
and the Company issued warrants to Sun to purchase 397,957 shares of common
stock of the Company at the exercise price of $3.67 per share. The warrants are
exercisable over time, expiring on September 14, 2005, upon Sun's approval of
lease financing credit lines totaling $7.3 million. Also pursuant to the
September 14, 2000 agreement, Sun is obligated to purchase a further $1 million
of the Company's common stock in September 2001 contingent upon (i) the Company
meeting or exceeding certain revenue and pre-tax income targets; (ii) the market
value of the Company's common stock exceeding 1.5 times the price of the initial
closing at the time of the second closing; and (iii) the Company purchasing at
least $5 million of Sun's products or services prior to the closing, including
any purchases made pursuant to the lease line. As a condition of the investment
of the initial $1 million by Sun, the Company commits to purchase $20 million
worth of Sun products and technologies, including purchases made pursuant to the
lease line. Should Sun not invest the second $1 million contemplated above, the
Company's obligation shall be reduced to $10 million. On May 4, 2001, the
Company entered into a Termination Agreement with Sun Microsystems to (i) cancel
the $7.3 million Lease financing Line, (ii) cancel 288,928 unexercisable
warrants related to $5.3 million Lease financing credits not approved at May 4,
2001, (iii) cancel the Company's $20,000,000 purchase obligation, and (iv)
release Sun from any obligation to further investment in the Company.
On April 25, 2001, the Company sold substantially all operating
assets of its wholly owned subsidiary, Homebase Works solutions in consideration
for the buyer assuming $80,500 (Cdn$124,769) of indebtedness.
BACKGROUND
The ability to deliver information to anyone, anywhere and at any
time, remains the cornerstone objective of today's communications systems. This
is the case whether that information is transmitted over a private or public
network (including the Internet), via computers, telephone and/or satellite.
We believe that rapid growth of the Internet, electronic commerce
and corporate intranets is an indication that companies and individuals are
continuing to increase their use of corporate and home-based systems to send and
receive ever more complex information.
The technological dilemma facing suppliers of information, and those
wanting to receive it, is the inability of the various networks, operating
systems, communication protocols and communications systems to interface
seamlessly. This situation is analogous to people from different countries with
different languages all trying to communicate at once without benefit of
translation.
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The Company believes a business opportunity exists in the near term
for the deployment of technology that links different network infrastructures so
that information can be either: (i) accessed remotely in near real-time across
dedicated networks; or (ii) reduced with regard to the fidelity and resolution
of its content and then accessed through the Internet.
As an emerging virtual service provider, our focus is on developing
the infrastructure to enable customers to access the best Contact and e-Learning
software application solutions via a standard web browser and Internet access
without regard to geographical point of origin, underlying network architecture
or personal computer make or model.
OUR CUSTOMIZED SOFTWARE APPLICATIONS
INFOCAST CONTACT APPLICATION
The traditional method of providing customer support has been to
establish a call center whereby customer service representatives, located in a
central "brick and mortar" facility, respond to incoming client inquiries or
make outgoing calls via telephone banks. Typically, call centers are used for
help desk functions, telemarketing, catalog order taking and debt collection.
Traditional call centers are generally limited by the following:
o physical limitations with respect to the number of customer service
agents able to work based on the telephone lines and desks
available, which in turn limits the volume of calls that can be
handled;
o employee dissatisfaction and high turnover;
o high operational costs; and
o difficult to staff for cycles in call frequency.
We believe that outsourcing of call centers is gaining popularity in
North America and Europe and there is emerging a number of firms offering call
center outsourcing and management.
The Contact application (a virtual call center application) we have
developed enables customer service representatives to be located anywhere,
without having to be present at a central "brick and mortar" facility, and would
allow a caller or customer to reach a trained customer service representative at
any time, from almost anywhere. The customer service representative would also
be able, if necessary, to have secure access to a merchant's in-house database.
Customer data is protected by a dedicated (non-shared) network that uses
password access and firewalls to provide security, yet would be fully accessible
via a computer network or through a toll-free dial up service.
Our concept of a virtual call center is predicated on the ability to
provide the communication software that allows the customer service
representative, the buyer and the vendor to be linked together in real-time via
computers. The Contact application that we have developed enables a high volume
of inbound customer calls to be routed (without the caller knowing where the
call is going) to a customer service representative who could be located
anywhere, and who would answer and service the call. The customer service
representative is able to accept calls, immediately access the merchant's
database, locate the appropriate product/service and process the caller's
request immediately. The Contact application is expected to provide the
necessary communications linkage and speed to allow all three parties to
interact in real-time.
Our Contact application provides the technology that: (i) converts a
call from analog (voice) to digital (information) so it can be transported over
a data line; (ii) routes a call from the caller to the appropriate customer
service representative based on the needs of the caller and skills and
availability of the customer service representative (for example, a caller may
indicate his or her preference for a customer service representative that speaks
a certain language and if such a representative is available, the call will be
routed to such a representative); (iii) provides the customer service
representative with access to the business' database, including both product and
caller specific information; and (iv) converts the call back into analog so the
caller can communicate with the customer service representative, all of which
would take place in a secure, supervised environment. We use Voice Over-IP
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technology to convert calls from analog to digital and back again. While we did
not develop and do not intend to develop the Voice-Over-IP software itself, we
believe we have successfully selected appropriate vendors to implement such
technology. The application that we have developed would also support automated
call distribution (routing) and interactive voice response (choosing options by
pressing touch tone numbers on a phone), as well as forward-looking call center
technologies such as unified messaging (combining voice mail, e-mail and
facsimile) and web-based help desks.
The essential elements of the Contact application that we have
developed include:
o skills-based routing, which routes calls to the appropriate customer
service representative based on predetermined parameters, such as
language;
o secure access to a business' database, including both customer
specific and product information;
o conversion of the call to and from digital and analog; and
o training and supervision of customer service representatives.
The Contact application that we have developed is expected to result
in the support of multiple customers with a single customer service
representative from any geographical location. This would result in: (i) the
customer service representative not being limited to a traditional
"brick-and-mortar" call center building and (ii) the application enabling a
single customer service representative to service multiple vendors and access
corporate data from each vendor, regardless of any security measures, such as
firewalls, which the vendor may have selected as its corporate standard.
Virtual call centers allow customer service representatives to work
from home, resulting in lower costs and greater employee satisfaction. Using our
technology, we expect that virtual call centers will be able to provide all the
features of a traditional call center, while reducing capital and human resource
overhead. Accordingly, businesses would be able to service existing and new
clients with better cost structures, while both enhancing levels of service and
reducing costly employee turnover.
We have completed the testing and demonstration phase of development
with respect to our Contact application and the application is now commercially
available. There can be no assurance that we will be able to complete the
deployment of our Contact application as scheduled or at all because we may not
be able to (i) raise the additional funds required to complete such deployment
and (ii) attract and retain technologically skilled employees. In addition,
there can be no assurance that a substantial market for our virtual call center
application will develop and grow.
The Company entered into an agreement with AT&T Corp. on December 1,
2000 and with AT&T Canada on April 1, 2001. Under the agreements, AT&T Corp.,
AT&T Canada and the Company will cooperate to make the Company's Contact
Solution, a state-of-the-art web-enabled call center solution, available to
AT&T's US and Canadian-based customers. The solution is being offered on a flat
monthly rate per call center agent or on a pay-per-minute rate alternative,
which makes it an affordable solution for contact centers of all sizes. In its
role under the agreement, the Company will provide sales and technical support
to AT&T.
INFOCAST E-LEARNING APPLICATION
Traditionally, in order for a business to provide training to its
employees, the business would bring an on-site instructor to the business'
offices and hold instructor-led classes. The drawbacks of holding such classes
include the difficulty and cost of assembling employees in a physical space and
the loss of productive work time. More recently, instructor-led training has
been augmented through the use of video conferencing, which has saved the
expense of physically assembling trainees, but still has many of the same
drawbacks as live on-site classes.
The factors driving people and businesses to seek training include:
o business requirements for staff to be certified in certain
technologies in order to assure performance and productivity;
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o corporate downsizing, resulting in increased training
requirements for ex-staff as well as for employees who perform
multiple job tasks that require knowledge of various jobs;
o the proliferation of computers and networks throughout all
levels of organizations, increasing the number of employees
who need training; and the continuous introduction and
evolution of new technologies, contributing to the need for
continuing education.
During the multimedia-training boom of the early 1990's, CD-ROM became the
de-facto standard for content delivery. Businesses would purchase sufficient
software licenses to cover the number of employees to be trained. Each trainee
would then install a CD-ROM containing the course material on his or her
computer and commence the training on an individual basis. One problem with
CD-ROMs is that they do not permit the customization required by large,
technologically sophisticated and globally oriented companies. Additionally,
CD-ROM training does not provide the sense of community and shared learning
offered by the conventional classroom environment. While CD-ROMs increase
flexibility in terms of where and when employees can be trained, CD-ROMs do not
provide any interaction, monitoring or feedback, or the ability to customize
programs. The e-Learning application that we have developed will enable learners
to access digital content through a standard browser interface. Trainees will be
able to interact with subject matter to enhance and support their learning
endeavors. By having the tools to interact with career and instructional
experts, 24 hours a day, seven days a week, through e-mail, chat rooms and other
real-time collaborative tools across the Internet or a dedicated network, we
believe we will be able to offer a higher level of service, compared to our
potential competitors. We believe that through the e-Learning application we
have developed, a business will be able to train its employees with the best
features of live training courses without the associated drawbacks and at a much
lower cost.
An important component of the e-Learning application that we have
developed is the learning management system. The learning management system
consists of proprietary software developed by us that will support multiple
corporations and learning organizations that offer course content on-line. The
software was designed from the ground up with role-based security (different
users have access to different aspects of the network), multiple language
support and multi-enterprise billing and tracking facilities. Acting as a
"security blanket" around the content, the learning management system will
permit other organizations to embed their web-based training content without
fear of losing intellectual property over the Internet and still permit that
organization's employees to remotely access their training.
The e-Learning application that we have developed provides access
to:
o a group of tutors who are expert in their field and who would
give guidance to learners in real time;
o a team that gives learners guidance with career development;
o a library of high quality courses in single units or as part
of curriculum; and
o software tools to help busy faculty members develop or
customize courses rapidly.
Our e-Learning application is expected to deliver skills-based
interactive multimedia content to corporate, academic and retail learners. We
expect the e-Learning application to differentiate itself from other training
methodologies by delivering a complete learning solution over any network,
including the Internet. We expect that the technology we have developed will
provide content vendors with confidence that their intellectual property will
not be compromised and will allow self-paced learning to maximize personal and
career success of learners over their lifetime. We expect the e-Learning
application to support the learner with live on-line telephone coaching within a
standard Internet browser (i.e., Netscape Navigator or Internet Explorer) and
enable the learner to access a browser for interactive learning, producing a
more collaborative learning experience. In addition, we expect the application
to enhance conventional classroom-based and current e-Learning delivery methods.
We have recently completed the testing and demonstration phase of
development with respect to our e-Learning application and such application is
now commercially available. There can be no assurance that we will be able to
complete the deployment of our e-Learning application as scheduled or at all
because we may not be able to (i) raise the additional funds required to
complete such deployment, (ii) enter into agreements with appropriate content
and network providers and (iii) attract and retain technologically skilled
employees. In addition, we cannot assure you that a substantial market for our
e-Learning application will develop and grow. To date we have entered into an
agreement to provide products and services potentially totaling up to $4.0
million to be delivered during the
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next 12 months. Under the terms of this agreement, we will deliver e-Learning
products and services to certain South African school boards through a local
distributor agent for a period of 36 months. There is no assurance that we will
be required to deliver up to the potential $4.0 million of products and services
during the next 12 months, or beyond as the buyer is not commited to purchase
any minimum amount.
OUR DATA CENTERS
In order to host our customized and third party software
applications, we are developing a network of strategically placed data centers.
We expect each installation to be implemented on the latest technology servers,
and Java related technologies, which we believe will provide a high level of
reliability, scalability and performance. To date, we have completed the
installation of one data center, and are completing the installation of a second
data center.
The Toronto data center was established in December 1999. We are
currently completing the installation of our Chicago data center and expect it
to be commercially available during the second quarter of fiscal 2002. We expect
to expand these data centers and/or install additional ones across North America
as needed.
In addition to the hosting servers, each data center will provide
customers with the following:
o physical security;
o uninterruptable power supply with optional generator backup;
o disaster recovery plan;
o guaranteed quality of service levels;
o help desk support;
o highly reliable Internet access; and
o network monitoring and supervision.
To execute our strategy, we have consummated agreements with AT&T
Corp and AT&T Canada to distribute our Contact solution to their U.S. and
Canadian-based customers via access to AT&T's North American telecommunications
network to connect these data centers to customers. We believe that such
agreements will provide us with:
o a relationship with a recognized global telecommunications
provider;
o connectivity between our information hubs and the information
users;
o a marketing channel to access potential customers; and access
to North American and international call center markets.
MARKETING STRATEGY
Our focus over the past year has been on the formation of
distribution alliances with AT&T Corp. and AT&T Canada, with whom we have
recently entered into sales and marketing relationships, for the purpose of
distributing our products. Through each of the distribution agreements, our
products will be co-branded and marketed through their established channels. The
strength of each company's brand within the call center marketplace will serve
to provide an endorsement of our products.
To further support the co-branded marketing initiatives outlined
through our alliances with AT&T Corp and AT&T Canada, we plan to place an
emphasis on establishing the InfoCast brand. As part of our brand awareness
campaign, we plan to produce collateral materials, market our services through
attendance at tradeshows, create a targeted advertising campaign, pursue the
commission of articles in industry periodicals, and update/rebuild our corporate
Web site.
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SALES STRATEGY
A major component of our marketing and sales strategy is the pricing
structure for our services, which will be offered to customers on a per-use
basis. This structure will provide customers with the ability to pay only for
what they use, thus converting a fixed cost into a variable one. This flexible
pricing strategy should be very attractive to potential customers.
We believe we have gained a sales advantage through the alliances we
have established with AT&T Corp. and AT&T Canada, and the access to their
existing customer base. Additionally, InfoCast will employ a small direct sales
force with both selling and technical expertise, to support the initiatives of
these alliances as well as to focus on a limited number of targeted
customers/niche markets.
COMPETITION
The market for our products and services is highly competitive and
subject to rapid technological change. Our management does not know of any other
company that currently offers a Contact and e-Learning applications solution set
similar to that offered by the Company.
With respect to the e-Learning application that we have developed,
competition currently consists of many companies offering learning via CD-ROM
and the Internet, including SmartForce, DigitalThink, Inc. and click2learn.com,
inc.
With respect to the Contact application that we have developed,
competition currently consists of Cisco's IPCC, White Pajamas,
WorldCom/Telephony@Work, Sprint - Echopass and Avaya. Competition may also exist
within many traditional "bricks-and-mortar" call centers, including Convergis
Corp. and APAC Customer Services Inc.
Our ability to compete will depend on many factors both within and
beyond our control. Some of the factors that could potentially affect our
ability to compete are marketing initiatives, sales efforts, pricing structure,
technical reliability, timing, and market acceptance of our products and
services. Competitors may quickly deploy products and e-commerce technology that
could limit our expansion. We expect our competition to increase in the future.
Many of our potential competitors have substantially greater financial,
technical and marketing resources than we do. Increased competition could
materially and adversely affect our business, financial condition and results of
operations. We cannot guarantee that we will be able to compete successfully.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our success is dependent in part on intellectual property rights,
including information technology, some of which is proprietary to us such as our
software that comprises the learning management system and various software
integration tools. We rely on a combination of nondisclosure agreements,
technical measures, trade secret and trademark laws to protect our proprietary
rights. We do not presently hold any patents for our existing products or
services and presently have no patent applications pending. We have entered into
confidentiality agreements with most of our employees, and anticipate that any
future employees will also enter into such agreements. We also attempt to limit
access to and distribution of proprietary information. There can be no assurance
that the steps taken by us in this regard will be adequate to deter
misappropriation of proprietary information or that we will be able to detect
unauthorized use or take appropriate steps to enforce intellectual property
rights. In addition, there can be no assurance that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology. Further, the laws of many foreign countries do not protect
our intellectual property rights to the same extent as the laws of the United
States. Our failure to protect our proprietary information could have a material
adverse effect on our business, financial condition and results of operations.
From time to time, third parties may assert exclusive patent,
copyright, trademark and other intellectual property rights to technologies that
are used by us. We may need to take legal action to defend ourselves against
claimed infringements of the rights of others or to determine the scope and
validity of the proprietary rights of others. We may also need to take legal
action to enforce and protect our trade secrets and our other intellectual
property rights. Any such litigation could be costly and cause diversion of
management's attention, either of which could have a material adverse effect on
our business, financial condition and results of operations. Adverse
determinations in such litigation could result in the loss of our proprietary
rights, subject us to significant liabilities
11
(including possible indemnification of our customers), require us to secure
licenses from third parties or prevent us from manufacturing or selling our
products or services, any one of which could have a material adverse effect on
our business, financial condition and results of operations. We have not been a
party to any such litigation to date. We have not conducted a formal patent
search relating generally to the technology used in our products or services. In
addition, since patent applications in the United States are not publicly
disclosed until the patent issues and foreign patent applications generally are
not publicly disclosed for at least a portion of the time that they are pending,
applications may have been filed which, if issued as patents, would relate to
our products or services. Software comprises a substantial portion of the
technology in our products. The scope of protection accorded to patents covering
software-related inventions is evolving and is subject to a degree of
uncertainty that may increase the risk and cost to us if we discover the
existence of third-party patents related to our software products or if such
patents are asserted against us in the future. Patents have been granted
recently on fundamental technologies in software, and patents may issue which
relate to fundamental technologies incorporated into our products or services.
While we employ proprietary software technology and algorithms, and
conduct ongoing research and development, our future success will depend in part
upon our ability to keep pace with advancing technology, evolving industry and
changing customer requirements in a cost-effective manner. There can be no
assurance that our proprietary software technology and algorithms will not be
rendered obsolete by other technology incorporating technological advances
designed by competitors that we are unable to incorporate into our products or
services in a timely manner.
The market for our products and services is characterized by rapidly
changing technologies. The rapid development of new technologies increases the
risk that current or new competitors could develop products or services that
would reduce the competitiveness of our products or services. Our success will
depend to a substantial degree upon our ability to respond to changes in
technology and customer requirements. This will require the timely selection,
development and marketing of new products or services and enhancements on a
cost-effective basis. The development of new, technologically advanced products
or services is a complex and uncertain process, requiring high levels of
innovation. The introduction of new and enhanced products or services also
requires that we manage transitions from older products or services in order to
minimize disruptions. There can be no assurance that we will be successful in
developing, introducing or managing the transition to new or enhanced products
or services or that any such products or services will be responsive to
technological changes or will gain market acceptance. Our business, financial
condition and results of operations would be materially adversely affected if we
were to be unsuccessful, or to incur significant delays, in developing and
introducing such new products, services or enhancements.
EMPLOYEES
At June 30, 2001, we had 25 full-time employees. None of our
employees is represented by a collective bargaining agreement nor have we
experienced any work stoppage. We consider our relations with our employees to
be good.
GLOSSARY
ARCHITECTURE: In the context of computers, servers and networks, architecture is
a term applied to both the process and the outcome of thinking out and
specifying the overall structure, logical components, and the logical
interrelationships of a computer, a server, their operating systems, and a
network.
AUTOMATED CALL DISTRIBUTION: Automated Call Distribution involves the use of a
telephone facility that manages incoming calls and handles them based on the
number called and an associated database of handling instructions. Companies
offering sales and service support use this function to validate callers, make
outgoing responses or calls, forward calls to the right party, allow callers to
record messages, gather usage statistics, balance the use of phone lines, and
provide other services.
BROWSER: A program that allows a person to read hypertext. A browser gives some
means of viewing the contents of nodes (or "pages") and navigating from one node
to another. Netscape Navigator is an example of a browser for the World Wide
Web.
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CALL CENTER: A call center is a central place where customer and other telephone
calls are handled by an organization, usually with some amount of computer
automation. Typically, a call center has the ability to handle a considerable
volume of calls at the same time, to screen calls and forward them to someone
qualified to handle them, and to log calls. Call centers tend to be used by
large organizations that use the telephone to sell or service products and
services.
CD-ROM: CD-ROM technology is a format and system for recording, storing, and
retrieving electronic information on a compact disk that is read using a laser
optical drive.
E-LEARNING: A type of education where students work on their own at home or at
the office and communicate with faculty and other students via e-mail,
electronic forums, videoconferencing and other forms of computer-based
communication.
FIREWALL: A firewall is a set of related programs, located on the server
functioning as an entry point into a network, that protects the resources of
that network from users from other networks.
INFORMATION TECHNOLOGY (IT): Information Technology is an umbrella term used to
describe all forms of technology used to create, store, exchange, and use
information in its various forms.
INTERACTIVE VOICE RESPONSE: Interactive voice response "gives data a voice." By
using the touch-tones on a telephone keypad, or in some cases, the spoken voice,
a caller can request, manipulate, and in some cases modify data that resides on
a "host" database somewhere. Typical applications include: banking by phone,
checking airline reservations by phone, checking credit card balance by phone
and registering for college courses by phone. The technology is "interactive"
because the user is prompted for information by the system. For example, in
banking by phone application, the system will ask a caller to enter its account
number from the telephone keypad. After the caller enters its number, the system
interacts with the caller further by giving the caller additional options.
INTERFACE: A boundary across which two systems communicate. An interface might
be a hardware connector used to link to other devices or it might be a
convention used to allow communication between two software systems. Often there
is some intermediate component between the two systems that connects their
interfaces together.
JAVA: Java is a programming language expressly designed for use on the Internet.
Java can be used to create complete applications that may run on a single
computer or be distributed among servers and clients in a network. It can also
be used to build small application modules, or applets, for use as part of a web
page. Applets make it possible for a web page user to interact with the page.
NETWORK: Any system designed to provide one or more access paths for
communications between users at different geographic locations. Communications
networks may be designed for voice, text, data, facsimile image and/or video.
They may feature limited access (private networks) or open access (public
networks) and will employ whatever switching and transmission technologies are
appropriate.
OPERATING SYSTEM (OS): An operating system is the program that, after being
initially loaded onto the computer, manages all the other programs in a
computer. Examples of operating systems include DOS and Windows.
SERVER: A server is a computer program that provides services to other computer
programs in the same or other computers. The computer that a server program runs
in is frequently referred to as a server (though it may contain a number of
server and client programs).
UNIFIED MESSAGING: The communication application that combines e-mail, voicemail
and facsimile.
VIRTUAL: The term virtual means the quality of effecting something without
actually being that something.
VIRTUAL PRIVATE NETWORK (VPN): A virtual private network is a private data
network that makes use of the public telecommunication infrastructure,
maintaining privacy through the use of various security procedures such as data
encryption.
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VIRTUAL SERVICE PROVIDER (VSP): A virtual service provider is a company that
offers individuals or enterprises electronic access to application programs and
related services that would otherwise have to be located in their own personal
or enterprise computers.
VOICE OVER-IP (VOIP): Voice Over Internet Protocol is a term used for a set of
facilities and programs that manage the delivery of voice information, such as
telephone calls, over the Internet.
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK IS HIGHLY SPECULATIVE, INVOLVES A
HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY THOSE PERSONS WHO ARE ABLE
TO AFFORD A LOSS OF THEIR ENTIRE INVESTMENT. IN EVALUATING OUR BUSINESS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN
ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS REPORT.
RISKS RELATING TO OUR FINANCIAL CONDITION
REPORT OF INDEPENDENT AUDITORS CONTAINING AN EXPLANATORY PARAGRAPH THAT
INDICATES GOING CONCERN UNCERTAINTIES.
Our independent auditors have included an explanatory paragraph in
their report on our financial statements contained in this Report stating that
the financial statements have been prepared based on the assumption that we will
continue as a going concern and that our losses from operations since inception
and our negative working capital raise substantial doubt about our ability to
continue as a going concern. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this Report.
WE MAY NOT SUCCESSFULLY RESTRUCTURE OUR BUSINESS.
We recently restructured our business activities in light of the
current business climate and capital markets in order to reduce costs and focus
on Contact and e-Learning. We have recently ceased all of our Community
operations. We also recently sold our Hosting operations. We are also
considering additional staff reductions in order to reduce costs. No assurance
can be made that we will be successful in our efforts to restructure our
business to focus on Contact and e-Learning. There may be ongoing costs and
liabilities associated with our restructuring.
WE ARE A NEWLY FORMED COMPANY WITH A LIMITED OPERATING HISTORY AND VERY LIMITED
REVENUES.
InfoCast Corporation was organized in December 1997. We have a very
limited operating history upon which you can evaluate us, our future performance
and our prospects. We have only recently developed several products and
services. We have just begun to offer these products or services on a commercial
basis. You must consider our prospects in light of the risks, expenses, delays,
problems and difficulties frequently encountered by new businesses in an
emerging and evolving industry. One of these risks is that we may not
successfully implement our business plans, which are described in more detail
elsewhere in this Report. We may not be able to successfully deal with these
risks, expenses, delays and problems.
WE HAVE A HISTORY OF CONTINUING LOSSES AND CANNOT GUARANTEE THAT WE WILL BE
PROFITABLE.
Since our founding, we have generated very limited revenues and
incurred losses as follows:
o $96,161 for the period from July 29, 1997 (inception) to
December 31, 1997;
o $423,872 for the year ended December 31, 1998;
o $3,083,921 for the three-month period ended March 31, 1999;
o $31,657,184 for the year ended March 31, 2000; and
14
o $99,167,767 for the year ended March 31, 2001.
As a result of these losses, we had an accumulated deficit of
$133,922,905 at March 31, 2001. We continue to have losses. Since we will
continue to have a high level of operating expenses and will be required to make
significant up-front expenditures in connection with the proposed development of
our business, we will continue to incur losses for at least the foreseeable
future. Additionally, we may continue to incur losses until such time, if ever,
as we are able to generate sufficient revenues to finance our operations. We
cannot assure you that we will ever be able to generate significant revenues or
achieve profitable operations. For further information, see the financial
statements and the notes thereto included as elsewhere in this Report.
WE NEED ADDITIONAL FINANCING.
We believe we will need approximately $8 million to fund our
development plans over the next twelve months. Our current cash is expected to
fund our cash requirements until September 30, 2001. Thereafter, if we are
unable to raise additional financing, we may not be able to continue as a going
concern. There can be no assurance that we will be able to achieve our current
development plans due to the risks, expenses, delays, problems and difficulties
encountered by new businesses in an emerging and evolving industry. Thus, we may
need additional financing as a result of unexpected expenses, delays, problems
and difficulties in developing our business. Such financing may be debt or
equity financing. If we incur indebtedness or issue debt securities, we will
face risks associated with incurring substantial indebtedness, including the
risks that (i) interest rates may fluctuate and (ii) cash flow may be
insufficient to pay principal and interest on any such indebtedness.
Furthermore, we cannot assure you that we will be able to obtain additional
financing on commercially reasonable terms. We may not be able to obtain
additional financing at all. If we were to need additional financing and are
unable to obtain additional financing, our ability to meet our current plans for
development and expansion would be materially adversely affected.
WE FACE POTENTIALLY LARGE ENVIRONMENTAL LIABILITIES DUE TO OUR PAST MINING
ACTIVITIES.
Prior to 1999, our sole business was mining exploration and
development. We owned 100% of Madison Mining Corporation ("Madison") and 94% of
Gold King Mines Corporation ("Gold King"). Madison controlled 1,500 acres in the
Adler Gulch mining district in Montana, owned mining and milling equipment and
certain patented and unpatented mineral claims. The Madison property contained
several mines which had been productive in the past, including the Cornucopia,
El Fleeda, U.S. Grant, Bamboo Chief, St. Lawrence and Silver Bell.
Gold King owned 82% of three properties including the Gold King
Mines and the Minnehaha Mine in the mining district near Silverton, Colorado.
The Gold King properties included a lease of 212 acres of patented mineral
claims, ownership of 11 unpatented mineral claims covering 29 acres and
ownership of 219 acres of fee land.
In November 1998, the voters in the State of Montana approved an
initiative to ban cyanide leach processing in that State for all new open pit
gold and silver mines and to prohibit expansion of existing mines using cyanide
leaching. In our opinion, these initiatives seriously affected our future
planned operations at our mines. In late 1998, we sold our mining-related
assets.
The mining and mineral processing industries are subject to
extensive governmental regulations for the protection of the environment. These
include regulations relating to:
o air and water quality;
o mine reclamation;
o solid and hazardous waste handling and disposal; and
o the promotion of occupational safety.
15
Neither our current management team nor our prior management team is
aware of any environmental liabilities faced by us. However, we could be held
responsible for any environmental liabilities relating to the mining businesses
that we sold. These liabilities could be large and could have a material adverse
effect on our business, financial condition and results of operations.
RISKS RELATING TO OUR BUSINESS
THE INDUSTRY WHICH WE ARE INVOLVED IN IS A NEW ONE, AND WE DO NOT KNOW IF OUR
PRODUCTS OR SERVICES WILL GAIN ACCEPTANCE.
As is typically the case in an emerging industry, we face high
levels of uncertainty related to demand and market acceptance for our
newly-introduced services and products. Achieving such acceptance will require
us to create awareness and demand for our services and products, and through
this to attract customers for our products and services. We cannot assure you
that we will be able to generate such awareness or demand, or that we will be
able to attract customers. Our failure to do either will have a material adverse
effect on our business, financial condition and results of operations.
WE FACE SIGNIFICANT RISKS ASSOCIATED WITH OUR GROWTH STRATEGY AND EXPANSION AND
OUR BUSINESS PLANS MAY CHANGE.
We are a newly-formed company and are still in the process of
deploying our products and services. We have just begun to offer products or
services on a commercial basis. Our ability to implement our business plan will
substantially depend on, among other things, our ability to:
o hire and retain skilled management, financial, marketing and
other personnel;
o successfully manage growth;
o monitor our operations,
o control our costs; and
o maintain effective quality controls.
We expect to hire an additional 20 employees over the next 12 months
for the development of our Contact application. We cannot assure you that we
will be able to hire and retain such personnel or that we will be able to expand
such capacity. If we are unable to do so, our growth strategy will be negatively
affected. Our plans are also subject to change as a result of a number of
factors, including:
o progress or delays in the deployment of our technologies;
o the availability of funding on commercially reasonable terms;
o changes in market conditions relating to our products and
services; and
o competitive factors relating to our products and services.
We cannot assure you that we will be able to successfully implement
our business strategy or otherwise expand our operations. We also cannot assure
you that, if our plans do change, that we will be able to successfully implement
any new plans which we may devise.
WE MAY NOT SUCCESSFULLY MANAGE THE IMPLEMENTATION OF OUR RECENT PRODUCT
DISTRIBUTION CHANNEL AGREEMENTS.
We recently entered into product distribution channel agreements
with AT&T Corp.and AT&T Canada for our Contact solution and with a
number of smaller distributors for our e-Learning solution. We expect to hire an
additional 20 employees over the next 12 months to assist in the business
expected to be generated in the Contact
16
solution as a result of the AT&T distribution channel agreements. There can be
no assurance that we will successfully manage the deployment of these products.
If we are not successful in managing such deployment, our business, financial
condition and results of operations will be materially adversely affected.
WE FACE A GREAT DEAL OF COMPETITION FOR OUR PRODUCTS AND OUR SERVICES.
The market for our products and services is highly competitive and
the technology involved changes very rapidly. There are many companies that act
as virtual service providers, offering third-party application hosting to their
customers. We do not know of any other company currently offering the Contact
and e-Learning applications developed by us.
With respect to our e-Learning application, our competition
currently consists of many companies offering learning via CD-ROM and the
Internet. With respect to the Contact application, our competition currently
consists of companies offering traditional telephony call center solutions and
the many Internet Service Providers.
We believe that our ability to compete depends on many factors both
within and beyond our control. These include:
o the success of our marketing and sales efforts, and those of
our competitors;
o the price and reliability of our products and services, and
those of our competitors; and
o the timing and market acceptance of the products and services
being developed by us and by our competitors.
Our competitors may quickly deploy products and e-commerce
technology that could limit our expansion. Furthermore, we expect competition in
the markets which we seek to serve to increase in the future. Many of our
potential competitors have substantially greater financial, technical and
marketing resources than we do. Increased competition could materially and
adversely affect our business, financial condition and results of operations. We
cannot assure you that we will be able to compete successfully.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
Our ability to continue to develop and market our services and
products depends, in large part, on our ability to attract and retain qualified
personnel. Competition for such personnel is intense and we cannot assure you
that we will be able to retain and attract such personnel.
WE HAVE LIMITED INTELLECTUAL PROPERTY PROTECTION.
Our success is dependent in part on intellectual property rights,
including rights having to do with information technology. Some of this
information technology is proprietary to us. This includes:
o software developed by us that comprises the learning
management system;
o a filtering engine;
o a corporate hosted e-mail service that integrates our
filtering engine with industry standard e-mail and directory
servers from Netscape and Sun Microsystems;
o contact center methodology software which incorporates third
party domain application solutions;
o Community software application; and
o various software integration tools.
17
We rely on a combination of nondisclosure agreements, technical
measures, trade secret and trademark laws to protect our proprietary rights. We
do not presently hold any patents for our existing products or services and
presently have no patent applications pending. We have entered into
confidentiality agreements with our employees and anticipate that any future
employees will also enter into such agreements. We also attempt to limit access
to and distribution of proprietary information.
We cannot assure you that the steps taken by us in this regard will
be adequate to deter misappropriation of proprietary information or that we will
be able to detect unauthorized use or take appropriate steps to enforce
intellectual property rights. We cannot assure you that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology. Further, the laws of many foreign countries do not protect
our intellectual property rights to the same extent as the laws of the United
States. If we fail to protect our proprietary information, such a failure could
have a material adverse effect on our business, financial condition and results
of operations.
WE FACE THE RISK OF OTHER PARTIES CLAIMING THAT WE INFRINGE ON THEIR
INTELLECTUAL PROPERTY.
From time to time, other parties may assert exclusive patent,
copyright, trademark and other intellectual property rights to technologies that
we use. We may need to take legal action to defend ourselves against claimed
infringements of the rights of others or to determine the scope and validity of
the proprietary rights of others. We may also need to take legal action in the
future to enforce and protect trade secrets and other intellectual property
rights which we own. Any such legal action could be costly and cause diversion
of our management's attention, either of which could have a material adverse
effect on our business, financial condition and results of operations.
Furthermore, adverse determinations in the course of such legal
action could result in several negative consequences to us, including:
o the loss of our proprietary rights;
o the imposition of significant liabilities on us (including the
possible indemnification of our customers);
o requiring us to secure licenses from other parties; or
o preventing us from manufacturing or selling our products or
services.
Any one of these consequences could have a material adverse effect
on our business, financial condition and results of operations. We have not been
a party to any such litigation to date.
We have not conducted a formal patent search relating generally to
the technology used in our products or services. In addition, since patent
applications in the United States are not publicly disclosed until the patent
issues and foreign patent applications generally are not publicly disclosed for
at least a portion of the time that they are pending, applications may have been
filed by other parties which, if issued as patents, would relate to our products
or services.
Software comprises a substantial portion of the technology in our
products. The scope of protection accorded to patents covering software-related
inventions is evolving and is subject to a degree of uncertainty that may
increase our risk and cost if we discover the existence of patents issued to
other parties which are related to our software products, or if other parties
assert such patents against us in the future. Patents have been granted recently
on fundamental technologies in software, and patents may issue which relate to
fundamental technologies incorporated into our products or services.
WE MAY NOT BE ABLE TO KEEP UP WITH CHANGING TECHNOLOGY.
While we employ proprietary software technology and algorithms and
conduct ongoing research and development, our future success will depend in part
upon our ability to keep pace with advancing technology and evolving industry
and changing customer requirements in a cost-effective manner. We cannot assure
you that our proprietary software technology and algorithms will not be rendered
obsolete by other technology incorporating
18
technological advances designed by competitors that we are unable to incorporate
into our products or services in a timely manner.
The market for our products and services is characterized by rapidly
changing technologies. The rapid development of new technologies increases the
risk that current or new competitors could develop products or services that
would reduce the competitiveness of the Company's products or services. Our
success will depend to a substantial degree upon our ability to respond to
changes in technology and customer requirements. This will require us to timely
select, develop and market new products or services and enhancements on a
cost-effective basis. The development of new, technologically advanced products
or services is a complex and uncertain process, requiring high levels of
innovation.
The introduction of new and enhanced products or services also
require that we manage transitions from older products or services in order to
minimize disruptions to our customers and within our business. We cannot assure
you that we will be successful in developing, introducing or managing the
transition to new or enhanced products or services. We cannot assure you that
any such products or services will be responsive to technological changes or
will gain market acceptance. Our business, financial condition and results of
operations would be materially adversely affected if we are unsuccessful, or
incur significant delays, in developing and introducing such new products,
services or enhancements.
OTHER RISKS
WE HAVE A SUBSTANTIAL NUMBER OF SHARES SUBJECT TO REGISTRATION RIGHTS
We have an obligation to register for resale a substantial number of
shares of Common Stock pursuant to previously granted registration rights. Given
the limited market to date for our Common Stock, our ability to register for
resale on a timely basis all of the shares of Common Stock that we are obligated
to register pursuant to registration rights may be restricted.
WE HAVE NOT AND DO NOT EXPECT TO PAY DIVIDENDS.
We have not paid cash dividends on our Common Stock since our
inception. We do not intend to pay cash dividends on our Common Stock in the
foreseeable future. We intend to reinvest earnings, if any, in the development
of our business.
WE HAVE A LIMITED TRADING MARKET, AND THE PRICE OF OUR COMMON STOCK MAY BE QUITE
VOLATILE.
There is a limited public trading market for our Common Stock on the
OTC Bulletin Board. We cannot assure you that a regular trading market for our
Common Stock will ever develop or that, if developed, it will be sustained. As
is the case with the securities of many emerging companies, the market price of
our Common Stock may also be highly volatile. Factors such as (i) our operating
results and (ii) announcements by us or our competitors of new products or
services, may significantly impact the market price of our securities.
In addition, in recent years, the stock market has experienced a
high level of price and volume volatility and market prices for the securities
of many companies have experienced wide fluctuations not necessarily related to
the operating performance of such companies. Our Common Stock may also
experience such volatility.
WE ARE SUBJECT TO FOREIGN EXCHANGE RISK ON CONVERSION OF FUNDS FROM U.S. TO
CANADIAN DOLLARS, AND VICE VERSA.
We receive the proceeds from our private placements in U.S. dollars.
It is our practice to maintain all excess cash in U.S. dollars and to invest
these funds in short term, interest bearing, U.S. dollar deposits. We convert
U.S. dollars to Canadian dollars on an as-needed basis to meet Canadian dollar
expenses. We incur a portion of our expenses in Canadian dollars and therefore
we are exposed to fluctuations in the foreign exchange rate between the Canadian
and U.S. dollar.
19
CORPORATE GOVERNANCE RISKS
YOU MAY BE SUBJECT TO SUBSTANTIAL DILUTION IF THE MANY SHARES OF OUR COMMON
STOCK WHICH ARE RESERVED FOR ISSUANCE PURSUANT TO OPTIONS AND WARRANTS ARE
EXERCISED, AND WE MAY FACE DIFFICULTY OBTAINING FINANCING IN THE FUTURE AS A
RESULT OF THESE OPTIONS AND WARRANTS.
We have reserved 2,250,000 shares of Common Stock for issuance
pursuant to our 1998 Stock Option Plan, pursuant to which options to purchase
1,650,000 shares of our Common Stock at an exercise price of $1.00 per share are
outstanding.
We have also reserved 2,000,000 shares of our Common Stock for
issuance pursuant to our 1999 Stock Option Plan, pursuant to which options to
purchase 1,595,000 shares of our Common Stock at an exercise price of $4.00 per
share are outstanding
We have also reserved 2,000,000 shares of our Common Stock for
issuance pursuant to our 2000 Stock Option Plan, pursuant to which options to
purchase 334,000 shares of our Common Stock at an exercise price of $4.00 per
share, options to purchase 50,000 shares of our Common Stock at an exercise
price of $2.00 per share and options to purchase 886,670 of our Common Stock at
an exercise price of $1.00 per share are outstanding.
We also have options outstanding that were issued outside such plans
to purchase 1,025,100 shares of our Common Stock at an exercise price of $4.00
per share.
Since March 31, 2001, we have granted options to purchase 1,317,000
shares of our Common Stock at an exercise price of $1.00.
We have issued warrants to purchase an additional (i) 576,000 shares
of our Common Stock at exercise prices ranging from $5.00 to $8.75 per share,
(ii) 500,000 shares of our Common Stock at an exercise price of $4.00 per share
(viii) 6,398,841 shares of our Common Stock at an exercise price of $0.75 per
share. There are an additional 1,160,000 shares of Common Stock reserved for
issuance upon the conversion of our 7% Convertible Subordinated Debentures
(assuming a conversion price of $6.00 per share for the debentures).
We have issued warrants to purchase (i) 1,084,167 shares of Common
Stock at an exercise price of $7.50 per share and (ii) 192,500 shares of Common
Stock at an exercise price of $2.00 per share in connection with the issuance of
our convertible subordinated debentures. We have issued warrants to purchase
475,800 shares of Common Stock at an exercise price of $2.50 per share in
connection with several private placements.
We have issued, in connection with the i360 acquisition, options to
purchase 245,100 shares of our Common Stock at an exercise price of $4.00 and
common stock purchase warrants to purchase an additional 2,067,875 shares of our
Common Stock at exercise prices ranging from $0.33 to $3.18 per share.
We have also issued common stock purchase warrants to purchase
397,957 shares of our Common Stock at an exercise price of $3.6687 per share to
Sun Microsystems Inc. in connection with a private placement. Of these warrants,
288,928 unexercisable warrants were cancelled pursuant to a termination
agreement in May 2001.
We have also issued warrants to purchase 6,398,841 shares of our
Common Stock, at an exercise price of $0.75 per share, in connection with
several private placements.
In March 2001, we issued warrants to purchase 262,000 shares of
common stock at an exercise price of $0.3333 per share in connection with a
lawsuit settlement.
The existence of the outstanding options, warrants and convertible
debentures may hinder our efforts at obtaining future financings. In addition,
the exercise and/or conversion of any such options, warrants or debentures in
the future could dilute the net tangible book value of our Common Stock.
Further, the holders of such options and warrants may exercise them at a time
when we would otherwise be able to obtain additional equity capital on terms
more favorable to us.
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THE FUTURE ISSUANCE OF SHARES OF OUR PREFERRED STOCK MAY NEGATIVELY EFFECT
HOLDERS OF OUR COMMON STOCK.
We are authorized to issue up to 100,000,000 shares of preferred
stock, $.001 par value per share. Such preferred stock may be issued in one or
more series, on such terms and with such rights, preferences and designations as
our Board of Directors may determine. Such preferred stock may be issued without
action by stockholders.
No shares of preferred stock are currently outstanding. However, any
future issuance of preferred stock could adversely affect the rights of the
holders of Common Stock, and therefore reduce the value of our Common Stock. In
particular, specific rights granted to future holders of preferred stock could
be used to restrict our ability to merge with or sell our assets to a
third-party, thereby preserving control of InfoCast Corporation by its present
owners.
ITEM 2. PROPERTIES
Our corporate headquarters are located in 4,881 square feet of
leased office space in Tucson, Arizona and our operational headquarters are
located in 10,483 square feet of leased office space in Chicago, Illinois. Our
lease in Tucson, Arizona expires in July 2004 and our lease in Chicago, Illinois
expires on October 30, 2002. Along with our subsidiaries, we also lease other
facilities that are not material to our business. As part of the restructuring
of the Company, the Company decided to relocate its executive office to Tucson,
and has taken steps to sub-lease its Toronto facility. We believe that our
existing facilities are adequate for our needs for the foreseeable future and
that if we need additional space, it will be available on favorable terms. The
cost related to the sub-lease of the Toronto is not determinable at this time
and has not been recorded in the accounts for the period ending March 31, 2001.
ITEM 3. LEGAL PROCEEDINGS
In October 2000, a former employee of the Company filed a legal
action against the Company and certain of its directors and officers alleging
wrongful dismissal and negligent misrepresentation. The claimant is seeking
wrongful dismissal damages of Cdn$50,000.00 (approximately US$ 32,000, damages
for "loss of opportunity" Cdn$1,000,000.00 (approximately US$ 640,000, punitive
damages of Cdn$50,000.00 (approximately US$ 32,000, unspecified "special
damages", together with interest and costs. The Plaintiff's employment was
terminated on July 28, 2000 and plaintiff seeks six months' severance. The
Company has not yet prepared a statement of defense. Management believes that it
has a valid defense to the claim and intends to defend it vigorously. By a court
order dated February 19, 2001, the action was dismissed with prejudice as
against some directors and officers of the Company, In addition, management
believes that the results of this matter will not have a material adverse impact
on the Company, although an unfavorable decision could have a material adverse
affect on the Company's business, financial condition and results of operation.
No provision has been made in the accounts in respect of this claim.
In April 2000, i360 inc., an entity acquired by the Company in
August 2000, received a demand from Mr. and Mrs. Joseph Lemoine. Mr. and Mrs.
Lemoine are the principals of an entity called Hope International Outreach. They
have alleged that i360 breached two distinct contracts with them. One of the
contracts is alleged to consist of two letters, dated September and October
1999, respectively, signed by the Lemonies and countersigned by i360 relating to
a potential business arrangement whereby i360 would provide certain Internet
services for Hope International in return for Hope International providing
potential customers for the internet services. The second alleged contract is
not in writing but allegedly relates to a potential business arrangement whereby
i360 would provide certain Internet services to establish on-line e-commerce
website for Hope International in return for certain payments from Hope
International. In June 2000, i360 inc. filed a declaratory action against Hope
International Outreach, Inc. d/b/a Hope International, in the Tucson, Arizona
United States District Court seeking to have the court rule that no enforceable
contracts existed. The lawsuit was served on Hope International Outreach's
registered agent, Joseph Lemoine, Jr., on September 19, 2000.
On or about July 12, 2000, Hope International Outreach and Joseph
and Diane Lemoine, individually, filed a lawsuit against i360 inc. in Colorado
State court with respect to the above-described alleged contract breaches. Such
suit claims an unspecified amount of damages. On September 14, 2000, the
Company's Colorado counsel
21
removed the lawsuit to United States District Court for the District of Colorado
on the basis of diversity. InfoCast has filed motions with the United States
District Court for the District of Colorado requesting a stay and/or transfer of
the Colorado action to Arizona. On or about November 7, 2000, a local magistrate
ordered discovery to begin. InfoCast's Rule 26 disclosures (disclosures to
identify, among other things, relevant witnesses) were filed on November 14,
2000. On November 9, 2000, the court scheduled a hearing on the Company's motion
to stay for February 16, 2001. On November 28, 2000, Hope International Outreach
filed a motion for leave to supplement their response in opposition to the
Company's motion to stay and/or transfer. On December 18, 2000, the Company
filed its response in opposition to Hope International Outreach's motion for
leave to supplement. On December 13, 2000, the Company served on Hope
International its first set of interrogatories, request for admissions, and
request for production of documents. On December 27, 2000, the Lemoines and Hope
International filed a suggestion of mootness and request to vacate hearing on
the Company's motion to stay. On January 10, 2001, Hope International Outreach
filed an unopposed motion for extension of time to January 29, 2001 to respond
to the Company's first set of interrogatories, request for admissions, and
request for production of documents. On January 12, 2001, the Company's Colorado
counsel in this action filed a motion to withdraw from the case. This motion was
granted on January 16, 2001. On January 18, 2001, the Company indicated to Hope
International that the Company would not oppose Hope International's motion to
consolidate the Arizona and Colorado actions.
In March 2001, the Company settled the lawsuits between itself, Hope
International and the Lemoines. The Company paid Hope International and the
Lemoines an aggregate of $50,000 and issued three-year warrants to purchase
262,000 shares of Common Stock at an exercise price of $0.3333 per share in
settlement.
While the Company believes that these matters will not have a
material adverse effect on its financial position, a protracted litigation or an
unfavorable decision could materially affect the Company's operations and
financial condition through the consumption of management time and utilization
of scarce financial resources.
Other than reported above, we are not currently involved in any
material legal proceedings. From time to time, however, we may be subject to
claims and lawsuits arising in the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the holders of the Company's
Common Stock during the fourth quarter of the Company's fiscal year ended March
31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's Common Stock is currently traded on the OTC Bulletin
Board under the symbol "IFCC." Prior to changing its name to InfoCast
Corporation on December 31, 1998, its Common Stock traded on the OTC Bulletin
Board under the symbol "GNRS." The following table sets forth the high and low
bid prices on the OTC Bulletin Board for the periods indicated, as reported by
the OTC Bulletin Board. Such prices represent quotations between broker-dealers,
do not include retail mark-ups, markdowns or commissions, and may not
necessarily reflect prices in actual transactions.
High Low
2000 (April 1, 1999 to March 31, 2000)
- --------------------------------------
First Quarter $10.12 $4.50
Second Quarter $13.00 $7.00
Third Quarter $8.88 $5.56
Fourth Quarter $10.25 $5.81
22
2001 (April 1, 2000 to March 31, 2001)
- --------------------------------------
First Quarter $7.38 $2.63
Second Quarter $6.87 $2.37
Third Quarter $5.41 $0.45
$1.88 $0.34
Fourth Quarter
On July 13, 2001, the last reported sale price of the Common Stock
on the OTC Bulletin Board was $0.44 per share.
HOLDERS
As of May 31, 2001, there were 382 holders of record of the
Company's Common Stock.
DIVIDENDS
The Company has not paid cash dividends on its Common Stock since
its inception and does not intend to pay cash dividends on its Common Stock for
the foreseeable future. The Company intends to reinvest future earnings, if any,
in the development and expansion of its business. The declaration of dividends
in the future will be at the election of the Board of Directors and will depend
upon the Company's earnings, capital requirements and financial position,
general economic conditions and other relevant factors.
SALE OF UNREGISTERED SECURITIES
The following unregistered securities were issued by the Company
during the quarter ended March 31, 2001:
DATE OF DESSCRIPTION OF NUMBER OF SHARES OFFERING/ NOTES
SALE/ISSUANCE SECURITIES ISSUED SOLD/ISSUED/SUBJECT EXERCISE
TO OPTIONS OR WARRANTS PRICE PER SHARE
January 24, 2001 Common shares 112,000 Issued as consideration for
consulting services
January 24, 2001 Common shares 30,000 Issued as consideration in
exchange for $300,000 line of
Credit
January 25, 2001 Options 136,670 $1.00 Granted to various employees
under the 2000 Stock Option
Plan
23
February 8, 2001 Warrants 4,500,885 $0.75 Granted as part of private
placement of common shares
February 8, 2001 Common shares 9,001,770 Issued as part of a private placement
February 15, 2020 Common shares 250,000 Issued as part of lease termination
agreement for Tucson premises
February 20, 2001 Common shares 632,671 Issued upon conversion of
convertible debenture
March 15, 2001 Options 750,000 $1.00 Granted to an employee
under the 2000 Stock Option
Plan
March 22, 2001 Common shares 1,218,636 Exchange of InfoCast Canada
exchangeable shares into
InfoCast common shares
March 23, 2001 Warrants 1,897,956 $0.75 Granted as part of private
placement of common shares
March 15, 2001 Warrants 262,000 $0.33 Issued as part of a lawsuit settlement
March 15, 2001 Warrants 750,000 $1.00 Issued as part of financing services agreement
March 23, 2001 Common shares 3,795,912 $0.50 Issued as part of a private placement
The issuance of these securities is claimed to be exempt from
registration pursuant to either Section 4(2) or Regulation S of the Securities
Act of 1933, as amended, as transactions by an issuer not involving a public
offering. There were no underwriting discounts or commissions paid in connection
with the issuance of any of these securities.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the year ended March 31, 2001 set
forth below are derived from our financial statements included elsewhere in this
Report and are qualified by reference to and should be read in conjunction with
such financial statements, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Report. The financial statements as of and for the
year ended March 31, 2001, the year ended March 31, 2000, the three months ended
March 31, 1999, the year ended December 31, 1998 and the period from July 29,
1997 (inception) to December 31, 1997 have been audited by Ernst & Young LLP,
independent auditors. The information for the three months ended March 31, 1998
is unaudited and, in the opinion of our management contains all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of our financial position and results of operations at such dates
and for such periods. The historical results for the periods ended December 31,
1997 and 1998 and March 31, 1998 are those of Virtual Performance Systems. The
historical results are not necessarily indicative of the results of operations
to be expected in the future.
24
PERIOD FROM
JULY 29, 1997
THREE MONTHS ENDED YEAR ENDED (INCEPTION) TO
YEAR ENDED YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31,
MARCH 31, 2001 MARCH 31, 2000 1999 1998 1998 1997
Statement of Operations Data:
Revenues $ 2,164,751 $ 305,754 $ -- $ 43,446 $ 43,446 $ 3,508
General, administrative and selling
Expense 14,652,558 7,391,128 635,334 42,494 375,302 47,954
Stock option compensation expense 1,200,883 13,351,908 2,256,938 -- -- --
Research and development expense 1,202,223 5,186,265 162,914 19,703 88,180 51,257
Interest and loan fees 2,731,565 1,913,482 23,562 -- -- --
Amortization 10,107,649 4,315,180 4,144 -- -- --
Depreciation 904,900 495,401 5,507 870 3,836 458
Write-down of VCC technology 1,616,567 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 32,416,345 32,653,364 3,088,399 63,067 467,318 99,669
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income
94,377 132,057 4,478 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss for the period (99,167,767) (31,151,184) 3,038,921 19,621 423,872 96,161
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per share 3.19 1.37 0.27 478.56 0.55 2,345.39
AS OF MARCH 31, AS OF DECEMBER 31,
2001 2000 1999 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Cash and cash equivalents $ 2,607,267 $ 3,637,931 $ 3,092,445 $ -- $ 25,595 $ 301
Working capital (4,146,603) 5,823,306 2,840,129 (126,785) (564,601) (106,438)
Total assets 8,326,028 34,569,481 4,025,076 47,510 143,467 28,604
Long term debt and obligations under
capital leases, excluding current
portion 7,935,047 4,302,836 --
Stockholders' equity (deficiency) (6,634,192) 22,295,007 3,493,112 (115,376) (496,667) (94,459)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
historical financial statements and notes thereto included elsewhere in this
Report on Form 10K.
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1936, as amended, which are intended to be covered by
the safe harbors created thereby. Although we believe that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this report will prove to be
accurate. Factors that could cause actual results to differ from the results
discussed in the forward-looking statements include, but are not limited to,
competition, product acceptance, changing technology and the availability of
financing. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
The consolidated financial statements of the Company are the
continuing financial statements of Virtual Performance Systems, Inc., a
development stage company and an Ontario corporation incorporated on July 29,
1997. Virtual Performance Systems had a 100% interest in Cheltenham Technologies
Corporation ("Cheltenham
25
Technologies"), an Ontario corporation and Cheltenham Interactive Corporation
("Cheltenham Interactive"), an inactive Ontario corporation which in turn had a
100% interest in Cheltenham Technologies (Bermuda) Corporation ("Cheltenham
Bermuda"), a Barbados corporation that owns certain intellectual property. On
January 29, 1999, Virtual Performance Systems acquired the net assets of the
Company (formerly known as Grant Reserve Corporation); a United States
non-operating company traded on the NASDAQ OTC Bulletin Board, which had a 100%
interest in InfoCast Canada Corporation ("InfoCast Canada"). After the
acquisition, the accounting entity continued under the name of InfoCast
Corporation. On May 13, 1999, InfoCast Canada acquired a 100% interest in
HomeBase Worksolutions Ltd. ("HomeBase"). Virtual Performance Systems,
Cheltenham Interactive and Cheltenham Technologies were merged into InfoCast
Canada on March 31, 2000. On August 15, 2000, InfoCast acquired a 100% interest
in i360 Inc. ("i360") at which time i360 merged with and into InfoCast and
became the Community division of InfoCast. InfoCast Corporation, InfoCast
Canada, HomeBase and i360 are collectively referred to in this section as the
"Company".
Overview
We are a development stage technology company that has developed an
infrastructure to deliver, on a pay per use basis, a solution that enhances
communication by our customers and their employees and/or customers. The first
of two applications included in the solution is a virtual call center solution
known as InfoCast Contact ("Contact"), which unifies customer contact options in
a single integrated system providing voice, chat and e-mail functionality,
enabling our customers to provide a high level of customer service. The second
application, called InfoCast e-Learning ("e-Learning), is a complete electronic
learning environment which increases productivity and drives down education
costs by giving corporate and academic learners access to up-to-the-minute
training and certification through e-Learning's web-based portal, which provides
access to training and management resources specific to the CRM industry. The
Company included the operation of two other divisions, which supplied the
software service applications until they were wound down in the quarter ending
March 31, 2001. These two divisions were called the Community division, which
was recently closed, and the Hosting division, the assets of which were recently
sold to a third party. These two groups had a relatively high cash burn rate
with little expectation of profitable operations.
THE COMPANY WAS RESTRUCTURED BEGINNING IN JANUARY 2001.
The employee workforce was reduced by approximately 43 in the Community
operations, approximately 23 in the Hosting operations, and by three 3 corporate
officers. As of March 31, 2001, we had closed down our community division and as
at April 25, 2001, we had sold our hosting division's operating assets. We are
in the process of winding down the non-operating assets of Homebase Work
Solutions Ltd.
A NEW MANAGEMENT TEAM OF EXPERIENCED EXECUTIVES HAS BEEN HIRED TO LEAD THE
COMPANY.
WILLIAM C. LOWE was hired as Chairman and CEO in March, 2001. He is regarded as
the "Father of the IBM PC". Mr. Lowe is a pioneer in the information technology
industry, having worked in senior executive positions at Fortune 500 companies,
as well as consulting with start-ups. In addition to leading the group within
IBM that developed the IBM Personal Computer, Mr. Lowe has held senior executive
management positions with IBM, Xerox Corporation, Gulfstream Aerospace and New
England Business Services. As Executive Vice President of Xerox Corporation, he
led all development and manufacturing on a global basis. Mr. Lowe also served as
Chairman and CEO of Gulfstream Aerospace Corporation during the period when the
industry-leading GV aircraft was developed. In recent years, he has helped
Internet-based start-up software companies develop successful business plans and
experience revenue growth.
STEPHEN WILLIAMS was hired as President and COO. A former director of operations
at Hanley-Wood, a leading business-to-business media conglomerate, Mr. Williams
brings to InfoCast more than twenty years of successful experience in strategic
brand-building and a proven track record of exceptional organizational
management including streamlining, exploiting synergies, and driving revenues
and profits. Mr. Williams will play an instrumental role in leading InfoCast
through its next phase of growth and profitability.
26
Previously Mr. Williams held key positions with Hanley-Wood, LLC., a leading
business-to-business media conglomerate with 5 divisions and annual revenues of
$200 million. While at Hanley-Wood, Mr. Williams led strategic initiatives that
helped the company to achieve its growth objectives and he supervised the
integration of advanced call center technology, establishing Hanley-Wood as the
pre-eminent print media center in North America. Prior to joining Hanley-Wood,
he was a partner and Executive Vice-President of Select Media Group in
Vancouver, B.C., and held numerous consulting roles with The CertainTeed
Corporation, ABT Co, and Owens Corning. He holds a degree B.A., Business
Administration from the University of Western Ontario.
TEAMCEO was contracted for a two year period to help energize Infocast's sales
efforts and to develop the AT&T relationship. The team includes Drew VanVooren,
who will assume responsibility for US Sales and Strategic Channel Distribution
of InfoCast products and services, Richard Hawkinson who will provide technology
services and assume responsibility for all product management, development and
technical services, and Malcolm Lotzof who will be responsible for business
development. The new management team brings over 12 years of experience in the
successful building of companies and software billing and integration products.
Together they have achieved large returns to founders, employees, and investors
for numerous other companies.
TODD CALLAHAN was hired as VP of Products to lead the E-learning opportunity.
Most recently, Mr. Callahan held the position of Chief Technology Officer for
Lifestart Inc. located in Chicago, and served as a consultant for Knowledge
Computing Corp. in Tucson, Arizona. Additionally, he has held various
engineering positions with Raytheon Missile Systems located in Tucson, Arizona
and was the Vice President of Operations for Algorithm Test & Evaluation
Services in San Antonio, Texas. As an Engineering Fellow for Raytheon Missile
Systems, Mr. Callahan led the $4.5billion National Missile Defense program.
Throughout his career, Mr. Callahan has gained extensive experience in strategic
execution of product development and delivery. Mr. Callahan attended
Pennsylvania State University where he achieved his Bachelor of Science degree
in Electrical Engineering, and has also pursued Graduate Studies in Computer
Science at Johns Hopkins University in Baltimore, Maryland and Graduate Studies
in Advanced Linear Mathematics and Computer Science at the University of
Southern California.
VIGIC - A wholly owned subsidiary of Golder Rauner agreed to provide financial
consulting, mergers and acquisitions and intellectual property strategy
assistance to InfoCast and Jim Malackowski, its COO joined the Board of
InfoCast. VIGIC Services will be a financial and business advisor, focused on
capital funding, acquisition and intellectual property strategy for InfoCast.
APRIL/MAY, 2001
Since the arrival of TeamCEO, substantial progress has been made in marketing
and customer development with AT&T Corp and AT&T Canada on the Contact
application to capitalize on InfoCast's contracts with AT&T to provide this
capability to AT&T's Solutions Group.
.
APRIL, 2001
InfoCast signed a contract with AT&T Canada to provide its Contact products. The
Company signed a contract with e-Fundi of South Africa to supply vocational
learning courses to government run school systems. The primary objective of this
agreement is to provide an affordable training solution to each of the 32,000
schools throughout South Africa, helping them progress toward outcomes-based
education. To date, one-third of the schools has committed to the InfoCast
e-Learning solution.
The solution will provide students with all of the necessary tools to access
state-of-the-art course content through an advanced and proprietary delivery
system solution developed by InfoCast.
Within the first year of the contract, e-Fundi has committed to a $4 million
purchase of InfoCast's integrated learning solution that includes a full
curriculum for computer fundamentals and Microsoft Office. Information
27
Technology (IT) skills training (including MCSE Windows 2000 and A+ Training
Courseware), will also be part of the first phase of learning for students.
JUNE, 2001
The Company expects to sign an agreement with Bell Canada to become the internet
based provider of call center agent training systems for this leading supplier
of call center solutions.
InfoCast faces a significant opportunity to improve performance and take
advantage of the new management talent that has been brought into the company.
Operations have been streamlined; are directed out of the Chicago, Il and the
Tucson, AZ areas. Under performing operations have been closed and accounted for
and management's focus has been clearly applied to the Contact and e-Learning
solutions.
OUR ABILITY TO CONTINUE AS A GOING CONCERN IS DEPENDENT ON A NUMBER OF FACTORS.
1. We must capitalize on our Contact contracts with AT&T Corp
and AT&T Canada as well as develop a more varied customer set
and non-US distribution.
2. We must capitalize on e-Learning contracts with Bell Canada,
e-Fundi of South Africa and Lambton College as well as
developing other e-Learning revenue opportunities. We must
also exploit the intellectual property in our contact academy
e-Learning solution, which is aimed at call center agents.
3. We are dependant on arranging financing which will allow the
company to develop its market potential and deliver products
including the activities identified in number 1 and 2 above.
4. We have been working through our partnership with VICIC LLC to
identify acquisitions, which will strengthen the company's
intellectual company position and performance potential.
While we have made progress in raising capital through the first
half of the 2001 calendar year, most of these resources have been used to
strengthen the Company and close non-performing assets. The Company is currently
negotiating for an investment of $5 million in equity financing and separate $10
million credit lines from two other potential lenders. While we expect to
finalize these financings in the quarter ending September 30, 2001, there can be
no assurance that the Company will be successful in raising additional
financing. If the Company is unable to raise any additional financing, there is
substantial doubt about the Company's ability to continue as a going concern.
Results of Operations
Year ended March 31, 2001 vs. year ended March 31, 2000
Impairment of Assets and Restructuring Charges
In the quarter ended March 31, 2001, we revised our development
plans and undertook measures to substantially reduce its ongoing operating
budget, including the decision to wind-down our Community Division (previously
known as i360 inc. prior to its acquisition by the Company) and divest or
wind-down our Hosting Division (the Company's wholly owned Homebase Work
Solutions Ltd. subsidiary), and focus specifically on the development of the
Contact and e-Learning application solutions. As at March 31, 2001, we recorded
an impairment of assets and restructuring charge of $95,832,450 for the costs
and impairment charges associated with our decisions.
Subsequent to the latest fiscal year-end, we also decided to
relocate our corporate offices to Tucson, Arizona. The associated relocation
costs were not recorded in the accounts at March 31, 2001, and have not been
determined at this time.
28
As at March 31, 2001, we wrote-down the unamortized carrying value of the
goodwill (Community, $20,950,561; Hosting $3,935,435) and intellectual property
(Community, $55,487,671; Hosting $12,143,037) related to these Divisions
(acquired through the acquisition of Homebase and i360) to our estimated net
realizable value of these assets of nil.
We also wrote-off $116,114 relating to the leasehold improvements and certain of
the furniture and fixtures in the Community Division and $80,544 of Corporate
head office leasehold improvements to their estimated net realizable value.
Furthermore, during the year ending March 31, 2001, Digital Outcry, an Internet
start-up in which the company had invested, became inactive, and we wrote down
its net asset of $84,581 to the estimated net realizable value of nil. We wrote
down $628,118 and $15,482 relating to other assets in the Hosting Division
The restructuring provision also encompasses exit costs and write-downs totaling
$25,517. No provision was made regarding the Hosting Division, as there were no
costs incurred or anticipated beyond March 31, 2001.
As of March 31, 2001, we had closed down the Community division and as at April
25, 2001 we sold the hosting division's operating assets. We are in the process
of winding down the non-operating assets of Homebase Work Solutions Ltd.
The employee workforce was consequently reduced by approximately 43 in the
Community operations, and approximately 23 in the Hosting operations. Associated
employee termination costs of $132,199 were paid out prior to March 31, 2001 and
were recorded as Community division employee termination costs in addition to
$189,394 accrued as of March 1, 2001. There were no employee termination costs
paid with respect to the Hosting division because the employees were provided
with working notice. In addition, $909,388 has been accrued in respect of unpaid
Community division employee and executive termination costs. Furthermore,
employee termination costs of $988,504 in respect of the decision to terminate 3
corporate officers has been recorded in corporate division exit costs of which
the entire amount was payable as at March 31, 2001, and approximately $22,500 of
which has been paid as of June 30, 2001. This amount is payable over 12 to 24
months unless the Company completes a $ 7 million financing at which time it
becomes payable immediately.
On April 25, 2001, the operating assets of the hosting division were sold in
consideration for the buyer assuming certain liabilities of Homebase Work
Solutions existing as at March 31, 2001, including the assignment of the leases
for the Sun Microsystems equipment in its Calgary, Alberta facility recorded at
$1,320,760 as at March 31, 2001, and certain specific liabilities totaling
$80,500 (Cdn$124,769) and the assumption of certain operating commitments as of
April 1, 2001. Subsequent to the sale of the operating assets, the buyer ceased
operations and has filed for bankruptcy protection. Other than the assignment of
the leases for the Sun Microsystems equipment, the specific liabilities of
$80,500, the lease for the office facility in Calgary and other operating costs
had not been assigned to the buyer. The specific liabilities of $80,500 and the
capital lease of $ 1,320,148 are included in the Company's liabilities as at
March 31, 2001. The net assets sold pursuant to this agreement have been valued
at the book value of the capital lease obligation that the Company was released
from subsequent to year-end.
In addition, we wrote down the other Hosting division net operating asset by
$643,593, which included the write-down of the computer systems under capital
lease in Homebase by $168,028 to the Company's estimate of the net realizable
value of $1,320,760, and wrote down the remaining operating assets to their
estimated net realizable value of nil. The net realizable value of $1,320,760 is
equal to the book value of the related capital lease obligations.
As a result of the bankruptcy of the purchaser of the Hosting division net
assets, we will assume responsibility for the $80,500 related to specific
liabilities. In addition, we may incur costs associated with the termination of
the Hosting division office lease for which the amount cannot be determined at
this time and has not been recorded in the accounts as at March 31, 2001. The
continuing obligation for these premises is included in the commitment schedule
below.
The hosting and subscription revenues as well as a significant portion of the
consulting revenues will not continue as a result of these decisions.
As a result, the Company charged $95,832,450 to impairment of assets and
restructuring charge, as follows:
29
Write-off of Community Division intellectual property 55,487,671
Write-off Community Division goodwill 20,950,561
Write-down of Community capital assets 82,427
Write-down of Community Division other assets 83,687
Community Division severance costs 1,041,587
Other Community Division exit costs 10,041
Community Division lease termination (note 9) 300,775
Write-down of Hosting Division capital assets 628,118
Write-down of Hosting Division other assets 15,482
Write-off of Hosting Division intellectual property 12,143,037
Write-off of Hosting Division goodwill 3,935,435
Corporate division severance costs 988,504
Write-off of Investment in Digital Outcry (note 12) 84,581
Write-off of Corporate head office leasehold improvements 80,544
-----------
$95,832,450
===========
Revenues
Revenue increased from $305,754 for the year ended March 31, 2000 to
$2,164,751 for the year ended March 31, 2001 as we began to grow hosting
revenues and hosting related consulting services and started to earn distance
learning revenues during the year ended March 31, 2001. Also, included in the
revenue for the year ended March 31, 2001 is $971,035 for subscription services
and portal development services from our Community Division (formerly i360 inc.)
acquired on August 15, 2000. Subscription revenues were included from August 15,
2000 (date of acquisition) to January 31, 2000. However, as a result of our
decision to shut down our Community and Hosting Divisions, the hosting,
subscription and most of the existing consulting revenue streams will
discontinue. Revenue from our remaining Contact and e-Learning business
generated less than $100,000 during the year ended March 31, 2001.
Consulting revenue increased from $52,403 for the year ended March
31, 2000 to $589,555 for the year ended March 31, 2001 as we continued to grow
the customer base in providing application services provider hosting related
consulting services. Most of these revenues were earned from our hosting
division, which was shut down in April 2001.
Distance Learning revenue was relatively flat from $39,712 for the
year ended March 31, 2000 to $33,509 for the year ended March 31, 2001 as the
Company continued to deliver courses through electronic media.
Hosting revenue increased from $51,360 for the year ended March 31,
2000 to $371,461 for the year ended March 31, 2001 as the Company continued its
growth in providing hosting related services to a larger customer base. All of
these revenues were earned from our hosting division, which was shut down in
April, 2001.
Subscription services revenue and Portal Development services
revenue increased from zero for the year ended March 31, 2000 to $971,035 for
the year ended March 31, 2001 through the activities of our Community division,
performing Internet Service Provider ("ISP") related services. Subscription
revenues were included from August 15, 2000 to January 31, 2001. All of these
revenues were earned from our Community division, which was shut down on January
31, 2001.
Miscellaneous revenue increased from $162,279 for the year ended
March 31, 2000 to $199,191 for the year ended March 31, 2001. This increase is
primarily due to revenue received from a customer related management services
contract.
Interest income decreased from $132,057 for the year ended March 31,
2000 to $94,377 for the year ended March 31, 2001 due to a decrease in average
cash reserves during year ended March 31, 2001 compared year ended March 31,
2000. The proceeds received from the private placements in 2000 and 2001 were
invested in short term
30
deposits which generated interest income for us during the year ended March 31,
2000 and March 31, 2001 respectively, consistent with our investment policy.
Expenses
General, administrative and selling expenses increased from
$7,391,128 for the year ended March 31, 2000 to $14,652,558 for the year ended
March 31, 2001. The Company recorded approximately $3,100,000 as expenses
directly related to revenue in the twelve-month period ended March 31, 2001
compared to approximately $148,000 for the same period ended March 31, 2000. The
balance of the increase in expenses during the twelve-month period ending March
31, 2001 over the same period ending March 31, 2000 was due to the addition of
our Community division (formerly i360 Inc) acquired on August 15, 2000, which
contributed approximately $5,400,000 of expenses, full year of Hosting division
expenses this year compared to partial year expenses last year, which
contributed approximately $2,650,000 to the increase in expenses, and due to the
development of the Company's corporate management and business development team
during 2001. During the last quarter of the year ended March 31, 2001,
management revised its development plans and undertook measures to substantially
reduce its ongoing operating budget, including the decision to wind-down its
Community Division and divest or wind-down its Hosting Division. After taking
into account the exit costs, we expect a significant reduction in the general,
administrative and selling expenses in fiscal 2002. The Company will continue to
evaluate its cost structure and adjust its organization to reflect its changing
business environment. The outcome of these matters cannot be predicted at this
time.
Stock option compensation expense decreased from $13,351,908 for the
year ended March 31, 2000 to $1,200,883 for the year ended March 31, 2001. This
decrease is mainly due to a significantly lower number of unvested stock options
outstanding during the year ended March 31, 2001 compared to the same period
last year and the large intrinsic value resulting from stock options granted
under the Company's 1998 stock option plan that was amortized to income during
the twelve-month period ended March 31, 2000. Most of the expense in the
twelve-month period ending March 31, 2001 pertains to amortization to income of
the unvested portion of stock options outstanding granted to an officer outside
of the stock option plan.
Research and development expenses decreased from $5,186,265 for the
year ended March 31, 2000 to $1,202,233 for the year ended March 31, 2001. The
Company incurred expenses of approximately $768,000 in the twelve-month period
ended March 31, 2000 from the write off of advances made to Applied Courseware
Technology Inc. ("ACT") which had been used to fund development expenses related
to the electronic conversion of courseware. In addition, approximately
$1,045,000 of R&D expenses was incurred by HomeBase for the twelve-month period
ended March 31, 2000 compared to nil in the twelve-month period ended March 31,
2001. The Company expensed approximately $450,000 related to the conversion of
e-Learning course content for the twelve-month period ending March 31, 2001. The
Company has written off approximately $200,000 of technology (purchased
previously) in the twelve-month period ended March 31, 2001 as this technology
was no longer compatible with the Company's technological strategy.
Interest and loan fees increased from $1,913,482 for the year ended
March 31, 2000 to $2,731,565 for the year ended March 31, 2001. The convertible
subordinated debentures that were issued in April 2000, June 2000, November
2000, and December 2000 have a conversion feature that was in-the-money and
exercisable at the dates of issuance resulting in the intrinsic value of the
feature of approximately $2,137,000 being charged to interest expense at the
time the debentures were issued. The balance relates to interest recorded on
capital leases and convertible debt.
Amortization expenses increased from $4,315,180 for the year ended
March 31, 2000 to $10,107,649 for the year ended March 31, 2001. The variance is
due to the amortization of approximately $6,264,000 of the completed technology
and goodwill acquired through the acquisition of i360 on August 15, 2000, over
the subsequent 6.5 months to March 31, 2001. As a result of our decision to
write-off the goodwill and intellectual property acquired through the
acquisition of Homebase and i360, future amortization expense from our remaining
assets is expected to be reduced significantly.
31
Depreciation expenses increased from $495,401 for the year ended
March 31, 2000 to $904,900 for the year ended March 31, 2001. The increase is
due to the increase in the depreciable asset base for the twelve-month period
ended March 31, 2001 compared to the twelve-month period ended March 31, 2000 as
a result of the addition of depreciable asset base of i360 Inc. acquired on
August 15, 2000.
Loss on sale of marketable equity investment was $2,626,297 for the
twelve-month period ended March 31, 2001 compared to nil for the same period
last year due, to the sale of 130,000 common shares of a publicly traded
company. We do not hold any more shares in this company.
Unrealized gain on marketable equity investment and reclassification
adjustment from the sale of marketable equity investment of $287,500 in the
twelve month period ending March 31, 2001, was due to the reclassification of
previous unrealized losses recorded in the comprehensive loss to realized loss
charged to income in respect to the sale of the 130,000 shares of the marketable
equity investment.
The recovery of income taxes relates mainly to the decrease in the
difference between the accounting and tax bases of the intellectual properties
acquired through the acquisitions of Homebase and i360 to NIL as a result of the
write-off of these assets during the year ended March 31, 2001.
Year ended March 31, 2000 vs. year ended March 31, 1999
Revenue increased from zero for the year ended March 31, 1999 to
$305,754 for the year ended March 31, 2000 as we began to earn hosting and
distance learning revenues, received revenue from the sale of computer equipment
and performed miscellaneous consulting services during the period ended March
31, 2000.
Interest income increased from $4,478 for the year ended March 31,
1999 to $132,057 for the year ended March 31, 2000. The proceeds received from
the private placements in 1999 were invested in short term deposits which
generated interest income for us during the year ended March 31, 2000,
consistent with our investment policy.
General, administrative and selling expenses increased from $968,142
for the year ended March 31, 1999 to $7,391,128 for the year ended March 31,
2000. The consolidation of the operations of HomeBase Work Solutions for the
period May 13, 1999 to March 31, 2000 accounted for $382,000 of the increase. We
had seven more employees involved in general, administrative and selling
functions in the year ended March 31, 2000 than for the same period ended March
31, 1999, contributing approximately $540,000 to the increase in expenses. We
paid consulting fees to three additional consultants during the year ended March
31, 2000 compared to the same period ended March 31, 1999 resulting in an
increase in consulting fees of approximately $1,214,000 for the year ended March
31, 2000. Investor relations costs of $1,143,465 were incurred for the year
ended March 31, 2000. Additional rent expenses of $127,000 were incurred for the
two U.S. offices that were not open in September 1998 and the expanded Toronto
office space. We expensed $644,000 for warrants issued for services during the
year ended March 31, 2000 and expensed an additional $439,800 related to common
stock issued for services during the year ended March 31, 2000. We incurred
sales and marketing expenses related to the Call Center Learning Solutions
On-Line Inc. joint venture of $198,000 during the year ended March 31, 2000.
Stock option compensation expense increased from $2,256,938 for the
year ended March 31, 1999 to $13,351,908 for the year ended March 31, 2000. This
increase is due to the amortization of the deferred compensation amount
resulting from the grant of stock options to various individuals involved in the
management and operations of the Company.
Research and development expenses increased from $231,391 for the
year ended March 31, 1999 to $5,186,265 for the year ended March 31, 2000. This
increase is primarily due to continued efforts to develop and expand our product
offerings. We incurred expenses of approximately $607,000 from the write off of
advances made to ACT which had been used to fund development expenses related to
the electronic conversion of courseware in the year ended March 31, 2000. We
also wrote off a $95,000 receivable from ACT to research and development expense
during the year ended March 31, 2000. We also expensed $1,337,500 which was the
value attributed to the 200,000 common shares issued to two ACT shareholders
during the year ended March 31, 2000.
32
The consolidation of the operations of HomeBase Work Solutions for the year
ended March 31, 2000 accounted for $1,639,000 of the increase. We had nine more
employees involved in research and development functions in the year ended March
31, 2000 than for the same period ended March 31, 1999, contributing
approximately $663,000 to the increase in expenses. We paid consulting fees to
the same number of consultants during the year ended March 31, 2000 compared to
the same period ended March 31, 1999 but incurred approximately $71,000 in
additional consulting fees for the year ended March 31, 2000.
Interest and loan fees increased from $23,562 for the year ended
March 31, 1999 to $1,913,482 for the year ended March 31, 2000. The convertible
subordinated debentures that were issued on March 30, 2000 have a conversion
feature that was in-the-money and exercisable at the date of issuance resulting
in the intrinsic value of the feature of $1,913,482 being charged to interest
expense at the time the debentures were issued.
Amortization expenses increased from $4,144 for the year ended March
31, 1999 to $4,315,180 for the year ended March 31, 2000. Amortization of the
acquired intellectual property and goodwill resulting from the acquisition of
HomeBase Work Solutions accounted for the majority of the increase in the
amortization expense for the year.
Depreciation expenses increased from $8,473 for the year ended March
31, 1999 to $495,401 for the year ended March 31, 2000. This increase is a
result of the acquisition of additional capital assets between April 1, 1999 and
March 31, 2000.
Equity in loss of joint venture increased from zero for the year
ended March 31, 1999 to $164,736 for the year ended March 31, 2000. During the
year ended March 31, 2000, we became shareholders in a new company that is
developing a web-enabled trading business model for crude oil and natural gas
liquids and other products. As at March 31, 2000, our ownership in this company
was 34.48% on a fully diluted basis.
Deferred income taxes increased from zero for the year ended March
31, 1999 to $1,229,105 for the year ended March 31, 2000 as a result of the draw
down of the deferred income tax liability created by the purchase of HomeBase
Work Solutions by the Company in respect of the difference in the tax and
accounting basis of various intellectual property assets.
Three months ended March 31, 2001 vs. three months ended March 31, 2000
Revenue increased from $155,969 for the three months ended March 31,
2000 to $598,002 for the three months ended March 31, 2001 as we began to grow
our hosting revenues and hosting related consulting services and started to earn
distance learning revenues during the three month period ended March 31, 2000.
Subscription revenues terminated January 31, 2000 when the subscriber base was
transferred to a third party as we shut down the Community division.
Interest income decreased from $23,695 during the three months ended
March 31, 2000 to $3,598 during the three months ended March 31, 2001. This is
due to the average cash balance being lower in the three-month period ending
March 31, 2001 compared to the same period last year.
General, administrative and selling expenses increased from
$1,813,891 for the three months ended March 31, 2000 to $4,414,846 for the three
months ended March 31, 2001. The increase was due the acquisition of i360 in
August 2000 and the development of the Company's corporate management and
business development team during the year ending March 31, 2001. During the
quarter year ended March 31, 2001, management revised its development plans and
undertook measures to substantially reduce its ongoing operating budget,
including the decision to wind-down its Community Division and divest or
wind-down its Hosting Division. After taking into account the exit costs, we
expect a significant reduction in the general, administrative and selling
expenses in fiscal 2002.
Stock option compensation expense decreased from $1,447,850 for the
three months ended March 31, 2000 to $260,193 for the three months ended March
31, 2001. This decrease is mainly due to a lower number of unvested stock
options outstanding during the three months ended March 31, 2001 compared to the
same period last year and
33
the large intrinsic value resulting from stock options granted under the
Company's 1998 stock option plan that was amortized to income during the
three-month period ended March 31, 2000.
Research and development expenses decreased from $1,583,046 for the
three months ended March 31, 2000 to negative $684,179 for the three months
ended March 31, 2001. Research and development expenses during the three months
ended March 31, 2001 included approximately $160,000 related to the conversion
of e-Learning courses from a disc to an Internet format and reclassification of
$858,711for write-off of technology in the previous quarter to a separate
account in this quarter.
Interest and loan fees decreased from $1,913,482 for the three
months ended March 31, 2000 to $107,354 for the three months ended March 31,
2001, mainly as a result of the intrinsic value of the in-the-money conversion
feature of the convertible debenture issued in March 2000, versus the interest
expense on capital leases and convertible debentures in the three-month period
ended March 31, 2001.
Amortization expenses decreased from $1,240,850 for the three months
ended March 31, 2000 to $117,070 for the three months ended March 31, 2001. The
decrease is due to the write-down of our Hosting division assets in December
2000, which resulted in lower amortization of the goodwill in the three months
ended March 31, 2001.
Depreciation expenses decreased from $284,496 for the three months
ended March 31, 2000 to a negative $55,358 for the three months ended March 31,
2001. The decrease is due to the write-down of our Hosting division's assets in
December 2000 and a further negative adjustment of approximately $256,000 in
depreciation expense related to the quarter ended December 31, 2000.
Unrealized loss on marketable equity investment and reclassification
adjustment of $287,500 in the three month period ending March 31, 2000 was due
to the unrealized loss on revaluation of marketable equity investment. These
investments were sold prior to the quarter ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The ability of us to continue as a going concern is uncertain and is dependent
on a number of factors including our ability to arrange financing in addition to
the financing arranged through to July 13, 2001 (note 16 in the "Notes to
Consolidated Financial Statements"), our ability to manage and defer certain of
its liabilities and the continued support of our management team. In the event
that we are unable to raise financing in addition to the financing raised
through July 13, 2001, we will likely be unable to continue operations beyond
September 2001. We are currently negotiating and evaluating various financing
alternatives, including equity and convertible debenture private placements. In
addition, we have signed distributions agreements that are expected to
accelerate the Company's revenue base for our Contact and e-Learning businesses.
Subsequent to the quarter ended December 31, 2000, we revised our development
plans and undertook measures to substantially reduce our ongoing operating
budget, including the decision to wind-down our Community Division and divest or
wind-down our Hosting Division. As of March 31, 2001, we had closed down our
Community Division and as at April 26, 2001, we sold our Hosting Division
assets. In the event that sufficient financing is not received by the end of
July 2001, we will implement additional expenditure cuts, including employee
termination and the deferment of management salaries, further curtail the
payment of our liabilities, and negotiate the curtailment of the interest
payments on our convertible debentures (note 10). These actions will likely not
extend our operations beyond September 2001 without the benefit of additional
financing. We will continue to evaluate its cost structure and adjust our
organization to reflect our chancing business environment. The outcome of these
matters cannot be predicted at this time.
At March 31, 2001, we had cash and cash equivalents of $2,607,267 and a negative
working capital of $4,146,603. Prior the fiscal year ended March 31, 2001, we
raised cash proceeds of $14,221,231, net of share issue costs, from a series of
private placements of the Company's common stock. During the year ending March
31, 2001, we issued 320,674 shares of Common Stock at $3.12 in a private
placement with Sun Microsystems Inc. (see "Agreement with Sun Microsystems Inc."
below) in September 2000, 12,797,682 shares of Common Stock at $0.50 per share
in a private placement from February 2001 to March 2001. In the year ending
March 31, 2001, we have raised cash proceeds of $6,711,622 from these private
placements, net of share issuance costs.
From our inception through to March 31, 2001, we have used approximately
$25,427,000 for operating activities before changes in non-cash working capital
balances mainly as a result of general, administrative and selling and research
and development expenditures, net of revenues. We used a further approximately
$3,798,000 for the purchase of capital assets, $2,975,000 on the purchase of
distribution rights, approximately $1,612,000 on the acquisition costs of i360
and approximately $172,000 in a joint venture. We funded our uses of cash since
inception though to March 31, 2001 from the cash flow from our financing
activities of approximately $30.3 million, most of which was received from the
sale of common shares, warrants and convertible debentures. From April 1, 2001
to July 13, 2001, we received $1,644,000 from our financing activities.
Sale of marketable securities
In February 2000 we issued 500,000 shares of Common Stock in a
private placement for which we received 150,000 shares of restricted Common
Stock of another publicly traded company as consideration, of which we retained
130,000 shares after commissions. During the twelve-month period ended March 31,
2001, we sold all the shares during the same period for proceeds of $1,561,203.
34
Convertible debentures
Immediately prior to March 31, 2000, we raised cash proceeds of
$3,225,000, net of commissions, from issuance of convertible subordinated
debentures. In April 2000, we issued additional 2,500 units of convertible
subordinated debentures and warrants to purchase common stock at $1,000 per unit
for proceeds of $2,325,000, net of commissions. In June 2000, we issued
additional 960 units of convertible subordinated debentures and warrants to
purchase common stock at $1,000 per unit for proceeds of $808,600 net of
commissions.
On November 7, 2000, we entered into a securities purchase agreement
for the sale of $2,500,000 aggregate principal amount of our convertible
subordinated debentures ("Series II Debentures")due 2003 and warrants to
purchase an aggregate of 250,000 shares of the Company's common stock at an
exercise price of $2.00 per share to one investor for a purchase price of
$2,500,000 (the "November Financing"). We closed on the sale of (i) $1,000,000
aggregate principal amount of such debentures and warrants to purchase 100,000
shares of Common Stock to such investor on November 7, 2000 and received
proceeds of $1,000,000 and (ii) $750,000 aggregate principal amount of such
debentures and warrants to purchase 75,000 shares of Common Stock to such
investor on December 12, 2000 and received proceeds of $631,500 net of agency
commissions of $118,500. We did not close on the final tranche of the financing.
The debentures are convertible into the Company's common stock at a conversion
price equal to the lower of (i) U.S. $1.50 per share of common stock or (ii) 80%
of the average of the three lowest closing bid prices of the Company's common
stock for the 30 days immediately preceding the conversion date, unless at the
conversion date the common stock is not listed and posted for trading on a
recognized stock exchange or quotation system, in which case the conversion
price shall be U.S. $1.50. On November 28, 2000, $300,000 of the convertible
debentures were converted into 384,448 shares of our stock at the conversion
price of $0.7833 per share. On December 4, 2000, another $100,000 of the
convertible debentures were converted to 133,973 shares of our stock at the
conversion price of $0.75 per share. On December 21, 2000, a further $100,000 of
the convertible debentures were converted to 235,299 shares of our stock at the
conversion price of $0.42833 per share. On February 14, 2001, a further $500,000
of the Series II Debentures were converted into 632,671 common shares at a
conversion price of $0.80 per share. On February 14, 2001, we redeemed the
balance of the $750,000 of the principal amount.
Agreement with Sun Microsystems Inc.
On September 14, 2000, we entered into an agreement with Sun
Microsystems Inc. ("Sun"), in which Sun purchased 320,674 shares of our common
stock at $3.12 per share for total proceeds of $1,000,000 on September 14, 2000
and in which we issued warrants to purchase 397,957 shares of common stock at
the exercise price of $3.67 per share to Sun applied proportionately to a total
of $7.3 million of lease financing by Sun. As at the date of the agreement, Sun
had approved $2.0 million lease financing line, resulting in 109,029 warrants of
the 397,957 warrants issued exercisable immediately at $3.67 per share. As a
condition of the investment of the initial $1 million by Sun, we had committed
to purchase $20 million worth of Sun products and technologies. On May 4, 2001,
the Company entered into a Termination Agreement with Sun Microsystems to (i)
cancel the $7.3 million Lease financing Line, (ii) cancel 288,928 unexercisable
warrants related to $5.3 million Lease financing credits not approved at May 4,
2001, (iii) cancel the Company's $20,000,000 purchase obligation, and (iv)
release Sun from any obligation to further investment in the Company. The
initial 109,029 warrants remain outstanding.
Sale of certain assets of Homebase Works Solutions Ltd.
On April 25, 2001, we sold the operating assets of our wholly owned
subsidiary, Homebase Works solutions in consideration for the buyer assuming
certain liabilities of Homebase Work Solutions, including the assignment of the
leases for the Sun Microsystems equipment in its Calgary, Alberta facility
(which had a net value of $1,320,760 at March 31, 2001) , and certain specific
liabilities totaling $80,500 (Cdn$124,769)., We are in the process of winding
down the Homebase non-operating assets. Subsequent to the sale of the operating
assets, the buyer has ceased operations and has filed for bankruptcy protection.
Other than the assignment of the leases for the Sun Microsystems equipment, the
other liabilities including the specific liabilities of $80,500 and the lease
for the office facility in Calgary had not been assigned to the buyer and will
resort back to the Company. The Capital leases obligation, which was part of
this transaction will not resort back to the Company.
35
Advances from Related Parties
In January 2001, a company owned by a Director and Officer of
InfoCast advanced the Company approximately $400,000 to assist us in meeting
certain financial obligations. On February 15, 2001, we repaid the advance.
In March 2001, a company owned in part by some Directors and
Officers of InfoCast advanced the Company $693,000 as a loan. This is a
non-interest bearing loan, payable on demand, and remains unpaid.
Lemoines
On or about July 12, 2001, claims were filed against i360 in a
Colorado Court alleging breach of contract by i360 in connection with two
alleged contracts concerning the distribution of i360's service offering. The
claim was for an indeterminate amount of damages. One of the alleged contracts
consisted of two letters signed by the claimant and countersigned by the
Company, while the second alleged contract was not in writing. In March 2001,
the Company settled the lawsuits between itself, Hope International and the
Lemoines. The Company paid Hope International and the Lemoines an aggregate of
$50,000 and issued three-year warrants to purchase 262,000 shares of Common
Stock at an exercise price of $0.3333 per share in settlement.
Agreement with VIGIC Services LLC
In March 2001, the Company entered into an agreement with VIGIC
Services, LLC, a CTCR Golder Rauner LLC company, to render certain consultant
and advisory services in connection with the Company's efforts to develop
operating strategies, pursue possible acquisitions or other strategic
transactions, and raise financing to March 31, 2004. Under the terms of the
agreement, VIGIC is paid a monthly retainer of $16,666, and will be entitled to
a financing fee of 7% of the gross amount raised in the event of a financing
between the Company and an investor introduced by VIGIC. Under the terms of the
agreement, VIGIC was also granted warrants expiring in March 2005 to purchase
1.5 million shares common stock of the Company, exercisable at $1.00 per share.
Agreement with Team CEO Corporation
Effective April 1, 2001, the Company entered into an agreement with
Team CEO Corporation to develop and implement a sales infrastructure and
distribution channels including the associated practices and processes to
maximize the Company's revenue opportunities. Under the terms of the agreement,
which ends April 1, 2003, Team CEO is to receive a monthly fee of $50,000 and
commissions of 20% of the net revenue for the first three sales and 14% of the
net revenue thereafter on the Company's earned revenue, will be entitled to a
finders fee of 20% of the annual compensation in the event of the hiring of
professional employees introduced by Team CEO, and will be entitled to a
financing fee of 6% of the gross amount raised in the event of a financing
between the Company and an investor introduced by Team CEO. Under the terms of
the agreement, the three principals of Team CEO (Malcolm Lotzoff, Richard
Hawkinson and Drew Van Vooren) will each be granted options to purchase 1.2
million common shares of InfoCast at an option price of $1.00 per share.
Agreement with Small Caps Online
In April 2000, we appointed SmallCaps Online LLC, a registered
broker-dealer focused on identifying emerging growth companies in the healthcare
and information technology sectors, as financial consultant and advisor to the
Company in connection with the Company's general corporate financial advisory
and investor and media relations needs in consideration for a monthly retainer
fee of $9,000 per month. Under the terms of the agreement, we issued warrants,
to purchase 200,000 shares of Common Stock at an exercise price of $6.50 per
share and expiring April 5, 2006.
Contingencies
In October 2000, a former employee filed a legal action against us
and certain of our directors and officers alleging wrongful dismissal and
negligent misrepresentation. The claimant is seeking wrongful dismissal damages
36
of Cdn$50,000 (approximately US$32,000), damages for "loss of opportunity"
Cdn$1,000,000 (approximately US$ 641,500), punitive damages of Cdn$50,000
(approximately US$32,000), unspecified "special damages", interest and costs.
The Plaintiff's employment was terminated on July 28, 2000 and Plaintiff seeks
six months' severance. A statement of defense has not yet been prepared by the
Company. We believe that we have a valid defense to the claim and intend to
defend it vigorously. In addition, we believe that the results of this matter
will not have a material adverse impact on our Company, although an unfavorable
decision could have a material adverse affect on our business, financial
condition and results of operation. No provision has been made in the accounts
in respect of this claim.
On February 1, 2001, we received a demand for payment from an
investment advisor in the amount of approximately $900,000 regarding fees in
connection with alleged advisory services performed in connection with the
acquisition of i360 inc. in 2000. We do not agree that any fee is owed in
connection with these alleged advisory services and intend to contest rigorously
such request for payment. No provision has been made in the accounts in respect
of this request.
As at March 31, 2001, the Company owed approximately $720,000 to a
supplier of telecommunications services to its Community division, which was
closed in February 2001, pursuant to a services agreement dated December 28,
2000. On May 15, 2001, the Company and the supplier terminated the agreement and
agreed to settle all financial matters, including the $720,000 payable as at
March 31, 2001,a cancellation fee of approximately $600,000, conditional on the
payment of $450,000 by June 30, 2001. The Company paid $50,000 during May 2001.
As at March 31, 2001, the Company recorded a liability of $720,000. The Company
renegotiated the payment terms, pursuant to an agreement dated July 9, 2001,
whereby the Company paid $100,000 immediately, $100,000 will be paid on July 31,
2001, $100,000 will be paid on August 15, 2001 and $150,000 will be paid on
August 31, 2001. In the event that the Company does not follow this payment
schedule, the full balance, less payments made to date, becomes payable
immediately.
The Company is not involved in any other legal proceedings and
disputes. While we believe that these matters will not have a material adverse
affect on our financial position, a protracted litigation or an unfavorable
decision could materially affect our operations and financial condition through
the consumption of management time and the utilization of scarce financial
resources.
Outlook
Our ability to continue as a going concern is uncertain and is
dependent on a number of factors including our ability to arrange additional
financing. We believe that our existing cash and expected limited cash
collections from sales of our Contact and e-Learning products and services will
be sufficient to fund our working capital requirements to September 30, 2001.
The Company has had limited sources of revenue, has incurred losses
since inception and expects to incur additional losses until such time as it is
able to sell enough products and/or services where revenues will cover operating
expenses and overhead.
From inception to March 31, 2001, the Company has used cash for
operating activities of approximately $25,426,000. These expenditures have been
offset by net cash provided by financing activities, principally the Company's
private placements of common stock and convertible debentures, aggregating
approximately $30,300,000. Accordingly, as of March 31, 2001, the Company had a
negative working capital position of $4,146,603.
Inasmuch as the Company will continue to have a high level of
operating expenses and will be required to make significant up-front
expenditures in connection with the development of its business, the Company
anticipates that losses will continue for at least the foreseeable future and
until such time, if ever, as the Company is able to generate significant
revenues or achieve profitable operations. As a result, in their report on the
Company's Financial Statements as of March 31, 2001, the Company's independent
public accountants have included an explanatory paragraph that describes factors
raising substantial doubt about the Company's ability to continue as a going
concern.
37
We are dependent on the proceeds of additional financings to manage
our working capital deficiency and implement our revised business plan. We are
currently negotiating with several investor groups for potential financing.
There can be no assurance that additional financing will be available to us on
commercially reasoable terms or at all. If we are unable to raise any additional
financing, there is substantial doubt about our ability to continue as a going
concern.
Inflation has not been a major factor in our business. There can be
no assurances that this will continue.
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement on
Financial Accounting Standards (SFAS) No.133, Accounting for Derivatives
Instruments and Hedging Activities in 1998. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period of change. The Company must adopt SFAS
No. 133 for the year ended March 31, 2002. The Company does not believe the
adoption of SFAS No. 133 will have a material effect on the financial position
or results of operations of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to immaterial levels of market risks with
respect to changes in foreign currency exchange rates and interest rates. Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as foreign currency exchange and interest rates. To the extent that
the Company consummates financings outside of Canada, the Company receives
proceeds in currency other than the Canadian dollar. Most of the Company's
operating expenses are incurred in Canadian dollars. Thus, the Company's results
of operations will tend to be adversely affected if there is a strong Canadian
dollar. The Company does not enter into derivatives or other financial
instruments for trading or speculative purposes, nor does it enter into
financial instruments to manage and reduce the impact of changes in foreign
currency exchange rates.
If the Canadian dollar was 10% stronger as at March 31, 2001, the
company's working capital deficiency would have been higher by approximately
$33,000.00
The Company issued convertible subordinated debentures in March,
April, June, November and December 2000, in the amount of $8.71 million, which
pay interest at a fixed rate of 7%. Of this amount, $1.0 million of the
convertible subordinated debentures was converted to common stock. and another
$0.75 million of the convertible subordinated debentures was redeemed, leaving a
balance of $6.96 million of convertible subordinated debentures as at March 31,
2001. The Company is exposed to changes in interest rates as it affects the
value of the debt and the Company's relative cost of capital.
While the Company seeks to place its cash and cash equivalents with
high credit-quality financial institutions, the Company is still exposed to
credit risk for uninsured amounts held by such institutions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Company's Financial Statements listed in the accompanying
Index to Financial Statements on Page F-1 herein. Information required for
financial schedules under Regulation S-X is either not applicable or is included
in the financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company, and their ages and
positions with the Company are as follows:
Name Age Position
---- --- --------
William C. Lowe 60 Chairman of the Board, CEO, and Director
A. Thomas Griffis 59 Vice Chairman of the Board, Director
Stephen Williams 47 President, COO, and Director
Herve Seguin 50 Chief Financial Officer and Secretary
George Shafran 75 Director
James E. Malackowski 37 Director
The officers of the Company are elected by the Board of Directors at
the first meeting after each annual meeting of the Company's stockholders, and
hold office until their death, until they resign or until they have been removed
from office. The Board of Directors has established an audit committee
consisting of James E. Malackowski and George Shafran, and a compensation
committee consisting of James E. Malackowski and A. Thomas Griffis.
The following is a brief summary of the background of each director
and executive officer of the Company:
Mr. Lowe has been a Director since February 4, 2001 and the Chairman
of the Board and CEO of the Company since March 5, 2001. Since January 1, 2001,
Mr. Lowe has been the Chief Executive Officer of Evince Corporation. Mr. Lowe
provided strategic management consulting services to a variety of corporations
between 1998 and 2000. Mr. Lowe was Executive Vice President and President of
North American Operation of Moore Corporation Limited from December 1996 to July
1997. Mr. Lowe was President and Chief Executive Officer of New England Business
Services Inc, from 1994 to 1995. From 1991 to 1993, Mr. Lowe was Chairman,
President and Chief Executive Officer of Gulfstream Aerospace. Previously, Mr.
Lowe was Executive Vice President, Development & Manufacturing of Xerox from
1988 to 1991. From 1962 to 1988, Mr. Lowe worked for IBM Corporation in various
position which included being Corporate Vice President and President of Entry
Systems Division at IBM Corporation and known as the "Father of the IBM PC".
Mr. Griffis has been a director of the Company since January 12,
1999, the Vice-Chairman of the Board of the Company from January 12, 1999 to May
13, 1999, a Co-Chairman from May 13, 1999 to March 5, 2001, and Vice Chairman
since March 5, 2001. Since 1986, Mr. Griffis has been the founder and sole owner
of Griffis International Limited, a management consulting and business
development firm. Griffis International Limited has focused its activities on
the structuring, financing and management of emerging companies, particularly in
the natural resource and high-tech sectors.
Mr. Williams has been the President & Chief Operating Officer of the
Company since April 1, 2001 and a director since May 17, 2001. From October 1997
to March 2001, Mr. Williams was Director of Operations (consumer Products
Division) at Hanley-Wood, LLC. From 1991 to September 1997, Mr. Williams was
Executive Vice President at Select Media Group.
Mr. Seguin has been the Chief Financial Officer of the Company since
January 4, 2000, and Secretary since May 17, 2000. From 1993 to 1999, Mr. Seguin
was the Vice President, Finance and the Chief Financial Officer of Promis
Systems Corporation Ltd. (now PRI Automation, Inc.), a software development
company, where he assisted in several rounds of public equity financing.
39
Mr. Shafran has been a director of the Company since February 8,
1999. Mr. Shafran has been the President of Geo. P. Shafran & Associates, Inc.,
a management, marketing and investment consulting firm, for at least the last
five years. Mr. Shafran serves as Senior Consultant for the High Performance
Group and serves as a consultant to various other companies. Mr. Shafran is
vice-chairman of the Board of Cardinal Financial Corporation, Chairman of the
Advisory Board of AAA Potomac, and a director of NVR Mortgage, Missing Kids
International, is chairman of the Advisory Board of the AAA Potomac, and on the
Board of the National Capital Chapter of the American Red Cross. Mr. Shafran is
also a director of I-Mark and Novecon Technologies.
Mr. Malackowski has been a director of the Company since March 5,
2001. Mr. Malakowski is a founding Principal of VIGIC Services, LLC, a GTCR
Golder Rauner, LLC company, since July 2000. Previously, Mr. Malackowski was the
Principal and co-Founder of IPC Group LLC from August 1988 to June 2000. From
1995 to 1999, Mr. Malackowski was Chairman and CEO of JEMAN Technologies, Inc.
Mr. Malackowski is a recognized expert in the field of intellectual property
economics, including the subject of business valuation and has on occasions
served as an expert in Federal Court on related matters. Mr. Malackowski is a
director of e-wireless, Inc., Insignis, Inc., Evince, LLC, and Solutionary, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the Company's 2000 fiscal year,
all compensation awarded to, earned by or paid to the chief executive officer
("CEO") and the four most highly compensated executive officers of the Company
other than the CEO who were executive officers of the Company during the fiscal
year ended March 31, 2001 and whose salary and bonus exceeded $100,000 with
respect to the fiscal year ended March 31, 2001.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Other Annual Securities All Other
Name and Principal Fiscal Compensation Underlying Compensation
Position Year Salary ($) Bonus($) ($)(1) Options ($)
- --------------------------- ---- ---------- -------- ------------ ----------- -------------
William C. Lowe, 2001 $ -- $ -- 750,000 30,000(2)
Chairman & Chief 2000 $ -- $ -- -- -- --
Executive Officer (1) 1999 $ -- $ -- -- -- --
James Leech, President 2001 $219,417 $ 9,974 -- 40,313 --
and Chief Executive 2000 $130,846 $ 10,196 -- 750,000 --
Officer (1) 1999 $ -- $ -- -- -- --
Herve Seguin, Chief 2001 $132,980 $ -- -- 11,458 --
Financial Officer 2000 $ 33,985 $ -- -- 350,000 --
1999 $ -- $ -- -- -- --
Carl Stevens, President, 2001 $ 225,000 $ -- -- 8,253 --
Virtual Call Centers and 2000 $ 76,875 $ 50,000 -- 250,000 --
e-learning 1999 $ -- $ -- -- -- --
40
(1) Mr. Leech was the Company's Chief Executive Officer from January 12,1999 to
March 5, 2001. Mr. Lowe became the Company's Chief Executive Officer on March 5,
2001 and was paid through a management services agreement with Evince
Corporation, a company controlled by Mr. Lowe.
See "Management Agreement with Evince Corporation" and "Employment Agreements."
(2) Represents fees paid to Evince Corporation, a company controlled by Mr.
Lowe, pursuant to a management services agreement with the Company.
Stock Option Plans
In 1998, the Company adopted a stock option plan (the "1998 Stock
Option Plan") pursuant to which 2,250,000 shares of Common Stock have been
reserved for issuance upon the exercise of options designated as either (i)
options intended to constitute incentive stock options under the Code, or (ii)
nonqualified stock options. Incentive stock options and nonqualified stock
options may be granted to employees of the Company.
The purpose of the 1998 Stock Option Plan is to encourage stock
ownership by officers and other key employees and consultants and advisors of
the Company. The 1998 Stock Option Plan is administered by the Board of
Directors of the Company. The Board, within the limitations of the 1998 Stock
Option Plan, determines the persons to whom options will be granted, the number
of shares to be covered by each option, the option purchase price per share and
the manner of exercise, and the time, manner and form of payment upon exercise
of an option.
The Company granted no stock options in the year ended March 31,
2001 and there were no options exercised under the 1998 Stock Option Plan in the
year ended March 31, 2001. As of May 31, 2001, 1,650,000 options were
outstanding under the 1998 Stock Option Plan at an exercise price of $1.00 per
share.
The Company's 1999 Stock Option Plan (the "1999 Stock Option Plan")
was approved by the Board of Directors of the Company on April 1, 1999 and by
the stockholders of the Company on July 29, 1999. The purpose of the 1999 Stock
Option Plan is to create additional incentives for the Company's employees,
directors and others who perform substantial services to the Company by
providing an opportunity to purchase shares of the Common Stock pursuant to the
exercise of options granted under the 1999 Stock Option Plan. The Company may
grant options that qualify as incentive stock options under Section 422 of the
Code, and non-qualified stock options. Incentive stock options may be granted to
employees (including officers and directors who are employees). Non-qualified
stock options may be granted to employees, officers, directors, independent
contractors and consultants of the Company. As of March 31, 2001, 2,000,000
shares were reserved for issuance under the 1999 Stock Option Plan. As of March
31, 2001, 1,595,000 options were outstanding under the 1999 Stock Option Plan at
an exercise price of $4.00. There were no options exercises under the 1999 Stock
Option Plan in the year ended March 31, 2001.
The maximum number of shares that may be subject to options granted
under the 1999 Stock Option Plan to any individual in any calendar year may not
exceed 800,000 and the method of counting such shares shall conform to any
requirements applicable to "performance-based" compensation under Section 162(m)
of the Code. It is intended that compensation realized upon the exercise of an
option granted under the 1999 Stock Option plan will thereupon be regarded as
"performance-based" under Section 162(m) of the Code and that such compensation
may be deductible without regard to the limits of Section 162(m) of the Code.
The Board of Directors or the Compensation Committee thereof
composed of two or more non-management directors that are "non-employee
directors" within the meaning of Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended, and "outside directors" within the meaning of
Section 162(m) of the Code, is authorized to administer the 1999 Stock Option
Plan in a manner that complies with Rule 16b-3 under the Securities Exchange Act
of 1934, as amended. The Board of Directors or Compensation Committee determines
which eligible individuals are granted options and the terms of such options
including the exercise price, number of shares subject to the option and the
vesting and exercisability thereof; provided, the maximum term of an incentive
stock option granted under the 1999 Stock Option Plan may not exceed five years.
41
The exercise price of an incentive stock option granted under the
1999 Stock Option plan must equal at least 100% of the fair market value of the
subject stock on the date of grant and the exercise price of all non-qualified
stock options must equal at least 80% of the fair market value of the subject
stock on the date of grant; provided, however, that if an option granted to the
Company's Chief Executive Officer or to any of the Company's other four most
highly compensated officers is intended to qualify as "performance-based"
compensation under Section 162(m) of the Code, the exercise price must equal at
least 100% of the fair market value of the subject stock on the date of grant.
With respect to any participant who owns more than 10% of the voting power of
the Common Stock of the Company, the exercise price of any option granted must
equal at least 110% of the fair market value on the date of grant. The aggregate
fair market value on the date of grant of the stock for which incentive stock
options are exercisable for the first time by an employee of the Company during
any calendar year may not exceed $100,000.
Options shall become exercisable at such times and in such
installments as the Board of Directors or Compensation Committee shall provide.
Non-qualified and incentive stock options granted under the 1999 Stock Option
Plan are not transferable other than by will or the laws of descent or
distribution, and each option that has not yet expired is exercisable only by
the recipient during such person's lifetime, or for 12 months thereafter by the
person or persons to whom the option passes by will or the laws of descent or
distribution. The 1999 Stock Option Plan may be amended at any time by the Board
of Directors, although certain amendments require stockholder approval. The 1999
Stock Option Plan will terminate on April 8, 2009, unless earlier terminated by
the Board of Directors.
The Company's 2000 Stock Option Plan (the `2000 Stock Option Plan")
was approved by the Board of directors of the Company on June 14, 2000 and by
the stockholders of the Company on August 14, 2000. The purpose of the 2000
Stock Option Plan is to create additional incentives for the Company's
employees, directors and others who perform substantial services to the Company
by providing an opportunity to purchase shares of the Common Stock pursuant to
the exercise of options granted under the 2000 Stock Option Plan. The Company
may grant options that qualify as incentive stock options under Section 422 of
the Code, and non-qualified stock options. Incentive stock options may be
granted to employees (including officers and directors who are employees).
Non-qualified stock options may be granted to employees, officers, directors,
independent contractors and consultants of the Company. As of March 31, 2001,
2,000,000 shares were reserved for issuance under the 2000 Stock Option Plan and
334,000 options had been granted at an exercise price of $4.00 per share, 50,000
options had been granted at an exercise price of $2.00 per share and 886,670
options had been granted at an exercise price of $1.00 per share. As of March
31, 2001, all of the options granted were outstanding. There were no option
exercises under the 2000 Stock Option Plan in the year ended March 31, 2001.
The maximum number of shares that may be subject to options granted
under the 2000 Stock Option Plan to any individual in any calendar year may not
exceed 800,000 and the method of counting such shares shall conform to any
requirements applicable to "performance-based" compensation under Section 162(m)
of the Code. It is intended that compensation realized upon the exercise of an
option granted under the 2000 Stock Option plan will thereupon be regarded as
"performance-based" under Section 162(m) of the Code and that such compensation
may be deductible without regard to the limits of Section 162(m) of the Code.
The Board of Directors or the Compensation Committee thereof
composed of two or more non-management directors that are "non-employee
directors" within the meaning of Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended, and "outside directors" within the meaning of
Section 162(m) of the Code, is authorized to administer the 1999 Stock Option
Plan in a manner that complies with Rule 16b-3 under the Securities Exchange Act
of 1934, as amended. The Board of Directors or Compensation Committee determines
which eligible individuals are granted options and the terms of such options
including the exercise price, number of shares subject to the option and the
vesting and exercisability thereof; provided, the maximum term of an incentive
stock option granted under the 1999 Stock Option Plan may not exceed five years.
The exercise price of an incentive stock option granted under the
1999 Stock Option plan must equal at least 100% of the fair market value of the
subject stock on the date of grant and the exercise price of all non-qualified
stock options must equal at least 80% of the fair market value of the subject
stock on the date of grant; provided, however, that if an option granted to the
Company's Chief Executive Officer or to any of the Company's other four most
highly compensated officers is intended to qualify as "performance-based"
compensation
42
under Section 162(m) of the Code, the exercise price must equal at least 100% of
the fair market value of the subject stock on the date of grant. With respect to
any participant who owns more than 10% of the voting power of the Common Stock
of the Company, the exercise price of any option granted must equal at least
110% of the fair market value on the date of grant. The aggregate fair market
value on the date of grant of the stock for which incentive stock options are
exercisable for the first time by an employee of the Company during any calendar
year may not exceed $100,000.
Options shall become exercisable at such times and in such
installments as the Board of Directors or Compensation Committee shall provide.
Non-qualified and incentive stock options granted under the 2000 Stock Option
Plan are not transferable other than by will or the laws of descent or
distribution, and each option that has not yet expired is exercisable only by
the recipient during such person's lifetime, or for 12 months thereafter by the
person or persons to whom the option passes by will or the laws of descent or
distribution. The 1999 Stock Option Plan may be amended at any time by the Board
of Directors, although certain amendments require stockholder approval. The 2000
Stock Option Plan will terminate on June 13, 2010, unless earlier terminated by
the Board of Directors.
OPTION GRANTS DURING FISCAL YEAR ENDED MARCH 31, 2001
The following table provides information related to options to
purchase Common Stock granted to the CEO and the named executive officers during
the fiscal year ended March 31, 2001. The Company currently does not have any
plans providing for the grant of stock appreciation rights.
43
- -----------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
RATES OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- -----------------------------------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL 5% 10%
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE PRICE
GRANTED (#) FISCAL YEAR ($/SH) (1) EXPIRATION DATE
- -----------------------------------------------------------------------------------------------------------------------------
William C. Lowe 750,000 47% $1.00 March 5, 2005 $207,211 $457,883
- -----------------------------------------------------------------------------------------------------------------------------
James Leech 40,313 3% $1.00 January 25, 2004 $11,138 $24,611
- -----------------------------------------------------------------------------------------------------------------------------
Herve Seguin 11,458 1% $1.00 January 25, 2004 $3,166 $6,995
- -----------------------------------------------------------------------------------------------------------------------------
Carl Stevens 8,253 1% $1.00 January 25, 2004 $2,280 $5,039
- -----------------------------------------------------------------------------------------------------------------------------
(1) The exercise price is equal to or greater than the fair market value of the
Common Stock on the date of grant. The options were granted for terms of five
years.
(2) The potential realizable value portion of the foregoing table illustrates
values that might be realized upon exercise of the option immediately prior to
the expiration of their term, assuming the specified compounded rates of
appreciation on the Company's Common Stock over the term of the options. These
numbers do not take into account provisions of certain options providing for
termination of the option following termination of employment,
non-transferability or differences in vesting periods. Regardless of the
theoretical value of an option, its ultimate value will depend upon the market
value of the Common Stock at a future date, and that value will depend on a
variety of factors, including the overall condition of the stock market and the
Company's results of operations and financial condition. There can be no
assurance that the values reflected in this table will be achieved.
Fiscal Year End Option Values
The following table provides information related to the number and
value of options held by the CEO and the named executive officers at fiscal year
end. No options were exercised in the fiscal year ended March 31, 2001.
- ---------------------------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised
Unexercised Options at FY-End In-the-Money options
Name at FY-end (1)
- ---------------------------------------------------------------------------------------------------------------------
Shares
Acquired Value Realized
on
Exercise Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------
William C. Lowe -- -- 250,000 500,000 $31,250 $62,500
- ---------------------------------------------------------------------------------------------------------------------
James Leech -- -- 540,313 250,000 $5,039 --
- ---------------------------------------------------------------------------------------------------------------------
Herve Seguin -- -- 244,792 116,666 $1,432 --
- ---------------------------------------------------------------------------------------------------------------------
Carl Stevens -- -- 174,920 83,333 $1,238 --
- ---------------------------------------------------------------------------------------------------------------------
(1) Based on the closing price of a share of Common Stock on March 30, 2001 of
$1.12 as reported on the OTC Bulletin Board.
44
Management Agreement with Evince Corporation
Pursuant to a management services agreement, effective March 15,
2001, Evince Corporation, a company controlled by Mr. Lowe, the Chairman and CEO
of the Company, provides financial management, advisory and consulting services
to the Company. The agreement provided for an initial monthly management
services fee to Evince of $30,000 due on March 15, 2001, $40,000 due April 15,
2001 and $50,000 per month thereafter. The Company extended credit to Mr. Lowe
in the form of an 18 month $200,000 non-interest bearing loan, the proceeds of
which were utilized to purchase common shares of the Company. On March 5, 2001,
Mr. Lowe was granted options to purchase 750,000 shares of the Company's common
stock at an exercise price of $1.00 per share. Such options are currently
exercisable as to 250,000 shares and become exercisable as to an additional
250,000 shares on January 1, 2002 and as to the remaining 250,000 shares on
January 1, 2003.
Pursuant to an agreement dated June 27, 2001, Mr. Lowe became an
employee of the Company effective as of July 1, 2001. (see Employment AGreement
below). As a result, the management services agreement was terminated effective
June 30, 2001.
EMPLOYMENT AGREEMENTS
Pursuant to an agreement dated June 27, 2001, Mr. Lowe became an
employee of the Company effective of July 1, 2001. This agreement, which
replaces the management services agreement between the Company and Evince
Corporation, provides for a salary of $39,500 per month. . The Company extended
credit to Mr. Lowe in the form of an 24 month $200,000 non-interest bearing
loan, the proceeds of which were utilized to purchase common shares of the
Company. Mr. Lowe was granted options to purchase 1,500,000 shares of the
Company's common stock at an exercise price of $1.00 per share. Such options are
currently exercisable as to 500,000 shares and become exercisable as to an
additional 500,000 shares on January 1, 2002 and as to the remaining 500,000
shares on January 1, 2003.
The agreement will remain in force through March 15, 2003, unless
terminated earlier by either party, which termination may occur only upon 30
days notice. In the event of termination by Mr. Lowe, Mr. Lowe will be entitled
to keep all options for the purchase of InfoCast common shares which are vested
and the loan extended to Mr. Lowe shall be immediately due and payable. In the
event of termination by the Company, Mr. Lowe will be entitled to continuing
monthly salary for a period of six months beyond the date of such termination.
Upon such termination by the Company, Mr. Lowe will be entitled to keep all
vested options to purchase InfoCast common stock, and Mr. Lowe will not be
obligated to repay the loan described above until its maturity date.
James Leech was employed by the Company pursuant to an employment
agreement dated as of August 5, 1999. The agreement provides that Mr. Leech's
employment with the Company shall continue unless it is terminated by either
party in accordance with the terms of the agreement. The agreement provides for
an initial base salary of Cdn $330,000 (or $227,040 in U.S. dollars as of March
31, 2000) per annum, a minimum bonus of Cdn $30,000 (or $20,640 in U.S. dollars
as of March 31, 2000) for the period ending March 31, 2000 and a minimum bonus
of Cdn $50,000 (or $34,400 in U.S. dollars as of March 31, 2000) for each
twelve-month period thereafter during the term of the agreement. Mr. Leech's
salary shall be annually reviewed and may be increased at the discretion of the
Board of Directors.
The agreement also provides that if Mr. Leech is terminated other
than for "cause," he shall receive the base salary provided for under the
agreement through the date of termination, plus a lump sum payment equal to
twice his annual base salary and a bonus equal to the higher of his (i) base
salary or (ii) the percentage used to determine his last bonus multiplied by
twice his base salary. He will also receive his accrued bonus, continue to
participate in certain benefit plans for the 24 months following such
termination and any options issued to Mr. Leech will immediately vest. If Mr.
Leech's employment is terminated due to death or "disability," he shall be paid
the base salary under the agreement until the date of termination and receive a
pro rata payment for all bonuses (calculated as the greater of the bonus which
would be paid under the Company's bonus plan on the basis that targets were met
and 50% of Mr. Leech's base salary), as well as any benefits accrued until the
date of termination and any options issued to Mr. Leech will immediately vest.
"Cause" is defined as a willful refusal on the part of Mr. Leech to perform the
services required of him under the agreement (including the willful and
intentional withholding of services thereunder), any breach of Mr. Leech's
fiduciary duties to the Company likely to cause material harm to the Company,
fraud or any conviction for a felony or indictable offense or any crime
involving moral turpitude or any of theft or dishonesty relating to a matter
material to the Company, provided that a willful refusal to perform the services
required under the agreement will constitute cause only if Mr. Leech fails to
terminate the relevant actions or cure the relevant failure to act and remedy
any harm therefrom within 10 business days after receipt of written notice of
such wrongful act, failure
45
to act or harm from the Company. "Disability" is defined as the eligibility of
Mr. Leech for long term disability benefits under the disability insurance
provided by the Company.
In the event Mr. Leech is terminated within 24 months of a "change
of control" of the Company, Mr. Leech shall receive a payment equal to three
times his annual base salary and bonus. He will also receive his accrued bonus,
continue to participate in certain benefit plans for 36 months following such
termination and any options issued to Mr. Leech will immediately vest. "Change
of control" is defined as (i) the direct or indirect sale, lease, exchange or
other transfer of all or substantially all (50% or more) of the assets of the
Company to any person or entity or group of persons or entities acting jointly
or in concert as a partnership or other group (a "Group of Persons"); (ii) the
merger, consolidation or other business combination of the Company with or into
another corporation with the effect that the shareholders of the Company
immediately following the merger, consolidation or other business combination,
hold 50% or less of the combined voting power of the then outstanding securities
of the surviving corporation of such merger, consolidation or other business
combination ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors; (iii) the
replacement of a majority of the Board of Directors of the Company or of any
committee of the Board of Directors of the Company in any given year as compared
to the directors who constituted the Board of Directors of the Company or such
committee at the beginning of such year, and such replacement shall not have
been approved by the Board of Directors of the Company, as the case may be, as
constituted at the beginning of such year; (iv) a person or Group of Persons
shall, as a result of a tender or exchange offer, open market purchases,
privately negotiated purchases, merger, consolidation or other business
combination, or otherwise, have become the beneficial owner (within the meaning
of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of
securities of the Company representing 20% or more of the combined voting power
of the then outstanding securities of such corporation ordinarily (and apart
from rights accruing under special circumstances) having the right to vote in
the election of Directors; or (v) the voluntary liquidation, dissolution or
winding-up of the Company in connection with which a distribution is made to the
holders if the Company's common shares.
In addition, on June 1, 1999, Mr. Leech was granted options to
purchase 750,000 shares of Common Stock at an exercise price of $7.00 per share.
Such options were repriced in June 2000 to $4.00 per share. Such options are
currently exercisable as to 250,000 shares and become exercisable as to an
additional 250,000 shares on September 4, 2000 and as to the remaining 250,000
shares on September 4, 2001.
Pursuant to an agreement dated May 15, 2001, Mr. Leech's employment
was terminated on May 31, 2001. Under the terms of this agreement, Mr. Leech is
entitled to severance payments of Cdn$20,000 (approximately US$12,800) per month
for 24 months starting June 30, 2001. On July 1, 2003, Mr. Leech will be paid
the balance of the severance payment of Cdn$510,000 (approximately US $326,400).
The agreement also provides for the balance of the total severance payments
payable in lump sum within 10 business days if the Company raises the aggregate
of at least $7.0 million through issuance of equity or debt securities after to
May 31, 2001.
Herve Seguin is employed by the Company pursuant to an employment
agreement dated as of December 6, 1999. The agreement provides that Mr. Seguin's
employment with the Company shall continue unless it is terminated by either
party in accordance with the terms of the agreement. The agreement provides for
an initial base salary of Cdn $200,000 (or $137,600 in U.S.dollars as of March
31, 2000) per annum as well as a bonus of not less than 50% of Mr. Seguin's
annual base salary. Mr. Seguin's salary shall be annually reviewed and may be
increased at the discretion of the Board of Directors.
The agreement also provides that if Mr. Seguin is terminated other
than for "cause," he shall receive the base salary provided for under the
agreement through the date of termination, plus a lump sum payment equal to his
annual base salary. Further, any options issued to Mr. Seguin will immediately
vest. If Mr. Seguin's employment is terminated due to death or "disability," he
shall be paid the base salary under the agreement until the date of termination
and receive a pro rata payment for all bonuses (calculated at 50% of Mr.
Seguin's base salary) and incentive plans to the date of termination, as well as
any benefits accrued until the date of termination and any rights pursuant to a
share option plan governing options issued to Mr. Seguin, which options shall
immediately accelerate and vest. "Cause" is defined as any act which constitutes
"cause" at law, any violation by Mr. Seguin of any material instructions, rules
or practices of the Company, a failure to comply with any provisions of his
Employment agreement (including the withholding of services thereunder), any
breach of Mr. Seguin's fiduciary duties to the Company likely to cause harm to
the Company, fraud or any conviction for a felony or indictable offense or any
crime involving moral turpitude or any of theft or dishonesty relating to a
matter material to the Company. "Disability" is defined as the eligibility of
Mr. Seguin for long term disability benefits under the disability insurance
provided by the Company.
46
In the event Mr. Seguin is terminated within 24 months of a "change
of control" of the Company, Mr. Seguin shall receive his base salary through the
date of termination as well as a lump sum amount equal to 1.5 times his annual
base salary. Further, any options issued to Mr. Seguin will immediately
accelerate and vest. "Change of control" is defined as (i) the acquisition by
any person, entity or group of persons or entities acting jointly or in concert,
of voting securities of the Company or rights or options to acquire voting
securities of the Company or securities convertible into or exchangeable for
voting securities of the Company or any combination thereof such that after the
completion of the acquisition such person, entity or group would be entitled to
exercise 50.1% or more of the total number of votes entitled to be cast at a
meeting of shareholders of the Company; or (ii) the sale by the Company of all
or substantially all of the property or assets of the Company; or (iii) a
reorganization, plan of arrangement or merger resulting in the circumstances set
out in (i) or (ii) above.
In addition, on December 8, 1999, Mr. Seguin was granted options to
purchase 350,000 shares of Common Stock at an exercise price of $7.05 per share.
Such options were repriced in June 2000 to $4.00 per share. Such options are
currently exercisable as to 116,667 shares and become exercisable as to an
additional 116,667 shares on January 4, 2001 and as to the remaining 116,666
shares on January 4, 2002.
Pursuant to an agreement dated June 13, 2001, Mr. Seguin's
employment was terminated effective July 17, 2001. Under the terms of this
agreement, Mr. Seguin is entitled to severance payments of Cdn$16,667
(approximately US$10,667) per month for 12 months starting July 31, 2001. The
agreement also provides for the balance of the total severance payments payable
in lump sum within 10 business days if the Company raises the aggregate of at
least $7.0 million through issuance of equity or debt securities after to May
31, 2001.
COMPENSATION OF DIRECTORS
On May 17, 2000, the Company adopted a Director Compensation policy
which provides independent members of the Board with annual directors fees of
$50,000 to be paid by granting options to purchase shares of the Company. All
directors are reimbursed for their reasonable out-of-pocket expenses incurred in
connection with their duties to the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 15, 2001 with
respect to the beneficial ownership of Common Stock by (i) each person known by
the Company to own beneficially more than 5% of the Common Stock, (ii) each
executive officer of the Company, (iii) each Director of the Company and (iv)
all Directors and executive officers as a group.
Name and Address of Beneficial Number of Shares Percentage
Owner(1) Beneficially Owned of Class(2)
- ------------------------------ ------------------- ----------
A. Thomas Griffis 1,826,547(3) 3.88%
George Shafran 899,899(4) 1.91%
Herve Seguin 361,458(5) 0.77%
William C. Lowe 650,000(6) 1.38%
Stephen Williams 216,000(7) 0.46%
James Malackowski 766,666(8) 1.63%
RoyTor & Company 5,322,000(9) 11.30%
c/o Griffis International
1 Richmond Street West,
Suite 901, Toronto,
Ontario M5H3W4
All officers and 4,206,420 8.94%
directors as a group
(6 persons)
47
(1) Except as otherwise indicated, the address for each of the named individuals
is c/o InfoCast Corporation, 1 Richmond Street West, Suite 902, Toronto,
Ontario, Canada M5H 3W4.
(2) Except as otherwise indicated, the stockholders listed in the table have
sole voting and investment power with respect to all shares of Common Stock
beneficially owned by them. Pursuant to the rules and regulations of the
Securities and Exchange Commission, shares of Common Stock that an individual or
group has a right to acquire within sixty (60) days pursuant to the exercise of
warrants or options are deemed to be outstanding for the purposes of computing
the percentage ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person shown in the table.
(3)Represents (i) 1,012,397 shares of Common Stock held by Griffis International
Limited, of which Mr. Griffis, the Chairman of the Board of the Company, owns
100%, (ii) 100,000 shares issuable upon exercise of options granted to Mr.
Griffis under the 1998 Stock Option Plan, (iii) 200,000 shares issuable upon
exercise of warrants granted to Mr. Griffis, and (iv) 514,150 shares held by
Treetop Capital Inc. ("Treetop"), of which Griffis International Limited is a
shareholder. Mr. Griffis and Griffis International Limited have no control over
Treetop or power to direct Treetop's voting or disposition of its interest in
the Company other than with respect to 132,600 shares of which Griffis
International Limited is the beneficial owner. Thus, Mr Griffis disclaims
beneficial ownership with respect to 381,550 of the shares of the Company's
Common Stock owned by Treetop.
(4) Represents (i) 100,000 shares issuable upon exercise of options granted to
Mr. Shafran under the 1998 Stock Option Plan, (ii) 31,666 shares issuable upon
exercise of options granted to Mr. Shafran under the 2000 Stock Option Plan,
(ii) 254,083 shares of Stock held by Mr. Shafran and (iii) 514,150 shares held
by Treetop, of which Mr. Shafran is a shareholder. Mr. Shafran has no control
over Treetop or power to direct Treetop's voting or disposition of its interest
in the Company other than with respect to 39,000 shares of which he is the
beneficial owner. Thus, Mr. Shafran disclaims beneficial ownership with respect
to 475,150 of the shares the Company's Common Stock owned by Treetop.
(5) Represents (i) 350,000 shares issuable upon exercise of options granted to
Mr. Seguin under the 1999 Stock Option Plan and, (ii) 11,458 shares issuable
upon exercise of options granted to Mr. Seguin under the 2000 Stock Option Plan.
(6) Represents (i) 400,000 shares of Common Stock held by Mr. Lowe, and (ii)
250,000 shares issuable upon exercise of options granted to Mr. Lowe under the
2000 Stock Option Plan.
(7) Represents (i) 16,000 shares of Common Stock held by Mr. Williams and (ii)
200,000 shares issuable upon exercise of options granted to Mr. Williams under
the 2000 Stock Option Plan.
(8) Represents (i) 16,666 shares issuable upon exercise of options granted to
Mr. Malackowski under the 2000 Stock Option Plan and, (ii) 750,000 shares
issuable upon exercise of warrants granted to VIGIC Services, LLC, of which Mr.
Malackowski is a Principal.
(9) Represents (i) 3,548,000 Common Stock held by RoyTor & Company, and (ii)
1,774,000 shares issuable upon exercise of warrants granted to RoyTor &
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During year ended March 31, 2001, the Company paid consulting fees
to Griffis International Limited, a company controlled by A. Thomas Griffis, the
Vice Chairman of the Company. Fees were paid in the amount of Cdn $180,000 (or
approximately $117,000 in U.S. dollars as of March 31, 2001) for financial and
management consulting services rendered. The Company will continue to pay a
monthly consulting fee of Cdn $15,000 (or approximately $10,000 in U.S. dollars
as of March 31, 2001) while services are being rendered.
During the year ended March 31, 2001, the Company paid consulting
fees totaling $80,000 to George Shafran, a director of the Company, for
consulting services related to business development and advice on potential
acquisitions, including introducing the Company to an acquisition candidate and
attending numerous sales calls with potential customers. The Company has
terminated these consulting services.
48
During the year ended March 31, 2001, the Company paid incentive
compensation fees to Darcy Galvon, its former Co-Chairman of the Board, of Cdn
$140,000 (or $95,160 in U.S. dollars as of March 31, 2000) in connection with
the Company's acquisition of HomeBase Work Solutions. Mr. Galvon resigned from
the Company effective of February 28, 2001.
Darcy Galvon, former Co-Chairman of the Board of the Company, is a
Director of Facet Petroleum Solutions, Inc. Pursuant to a licensing and
distribution agreement dated March 30, 1999 between HomeBase Work Solutions and
Facet Petroleum Solutions Inc., HomeBase Work Solutions acquired the exclusive
right in the telework market to distribute Facet Petroleum's Telework
Operational Data Store software for a period of two years in consideration for
6,910 common shares of HomeBase valued at Cdn $200,678 (or $139,000 in U.S.
dollars as of December 31, 1999). Facet Petroleum received 25,000 shares of
Common Stock of the Company in exchange for the 6,910 HomeBase Work Solutions
shares as a result of the acquisition of HomeBase Work Solutions by the Company
on May 13, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements.
See index to financial statements which appears on page F-1 herein.
(2) Exhibits.
See exhibit index immediately following the signature page hereto.
(b) Reports on Form 8-K filed in the fourth quarter of the period covered
by this Report: NONE.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
InfoCast Corporation
By: /s/ William C. Lowe
-----------------------------------
William C. Lowe,
Chief Executive Officer (Principal
Executive Officer)
By: /s/ Herve Seguin
-----------------------------------
Herve Seguin,
Chief Financial Officer (Principal
Financial Officer)
July 16, 2001
-------------
Date
49
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below hereby constitutes and appoints William C. Lowe and Herve Seguin,
and each of them singly, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Form
10-K and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or either of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Date: July 16, 2001
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
By: /s/ William C. Lowe July 16, 2001
- ----------------------------------------------- -------------
William C. Lowe, Date
Chairman and Chief Executive Officer
and Director (Principal Executive Officer)
By: /s/ Herve Seguin July 16, 2001
- ---------------------------------------------- -------------
Herve Seguin, Date
Chief Financial Officer (Principal Financial Officer)
By: /s/ A. Thomas Griffis July 16, 2001
- ----------------------------------------------- -------------
A. Thomas Griffis, Date
Vice-Chairman of the Board and Director
By: /s/ Stephen Williams July 16, 2001
- ----------------------------------------------- -------------
Stephen Williams, Date
President & Chief Operating Officer and Director
50
By: /s/ James E. Malakowski July 16, 2001
- ----------------------------------------------- -------------
James E. Malakowski, Date
Director
By: /s/ George Shafran July 16, 2001
- ----------------------------------------------- -------------
George Shafran Date
Director
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
2.1 Agreement and Plan of Merger dated May 3, 2000 by and between the
Company and i360 Inc. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 2000
File No. 0-27343)
3.1 Articles of Incorporation, as amended, of the Company (Incorporated
by reference to the Company's Registration Statement on Form 10,
File No. 0-27343).
3.2 Amended and Restated Bylaws of the Company (Incorporated by
reference to the Company's Registration Statement on Form 10, File
No. 0-27343).
4.1 Specimen Certificate of the Company's Common Stock (Incorporated by
reference to the Company's Registration Statement on Form 10, File
No. 0-27343).
4.2 Form of 1998 Stock Option Plan ("1998 Plan") (Incorporated by
reference to the Company's Registration Statement on Form 10, File
No. 0-27343).
4.3 Form of Option Grant Letter under 1998 Plan (Incorporated by
reference to the Company's Registration Statement on Form 10, File
No. 0-27343).
4.4 Form of 1999 Stock Option Plan ("1999 Plan") (Incorporated by
reference to the Company's Registration Statement on Form 10, File
No. 0-27343).
4.5 Form of Option Grant Letter under 1999 Plan (Incorporated by
reference to the Company's Registration Statement on Form 10, File
No. 0-27343).
4.6 Option Agreement dated June 1, 1999, by and between the Company and
James William Leech (Incorporated by reference to the Company's
Registration Statement on Form 10, File No. 0-27343).
51
4.7 Warrant to Purchase 50,000 shares of Common Stock dated June 24,
1999, issued to Thomson Kernaghan and Co. Ltd. (Incorporated by
reference to the Company's Registration Statement on Form 10, File
No. 0-27343).
4.8 Warrant to Purchase 20,000 shares of Common Stock dated June 24,
1999, issued to Thomson Kernaghan and Co. Ltd. (Incorporated by
reference to the Company's Registration Statement on Form 10, File
No. 0-27343).
4.9 Warrant to Purchase 25,000 shares of Common Stock dated May 31,
1999 issued to the Poretz Group (Incorporated by reference to the
Company's Registration Statement on Form 10, File No. 0-27343).
4.10 Provisions Attaching to Common Shares of InfoCast Canada
Corporation (Incorporated by reference to the Company's
Registration Statement on Form 10, File No. 0-27343).
4.11 Exchange Agreement dated as of May 13, 1999 by and among the
Company, InfoCast Canada Corporation, HomeBase Work Solutions Ltd.
and the Shareholders (Incorporated by reference to the Company's
Registration Statement on Form 10, File No. 0-27343).
4.12 Support Agreement dated as of May 13, 1999 by and among the
Company, InfoCast Canada Corporation, HomeBase Work Solutions Ltd.,
and the Shareholders (Incorporated by reference to the Company's
Registration Statement on Form 10, File No. 0-27343).
4.13 Warrant to Purchase 12,500 shares of Common Stock dated October 6,
1999 issued to the Poretz Group (Incorporated by reference to the
Company's Registration Statement on Form 10, File No. 0- 27343).
4.14 Warrant to Purchase 12,500 shares of Common Stock dated January 1,
2000 issued to The Poretz Group (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the Fiscal Quarter
ended December 31, 1999).
4.15 Warrant to Purchase 56,000 shares of Common Stock dated February
10, 2002 issued to The Cuttyhunk Fund Limited.
4.16 Form of 7% Convertible Subordinated Debenture issued under
Confidential Private Placement Memorandum dated June 1, 2000.
4.17 Warrant to Purchase 200,000 shares of Common Stock dated April 7,
2000 issued to SmallCaps Online Group LLC.
10.1 Letter Agreement dated March 17, 1999, from the Company to Sandy
Walsh (Incorporated by reference to the Company's Registration
Statement on Form 10, File No. 0-27343).
10.2 Employment Agreement dated August 5, 1999, by and between the
Company and James William Leech (Incorporated by reference to the
Company's Registration Statement on Form 10, File No. 0- 27343).
53
10.3 Consulting Agreement dated December 1, 1998, by and between the
Company and Three Hundred & Sixty Degrees, Inc. (Incorporated by
reference to the Company's Registration Statement on Form 10, File
No. 0-27343).
10.4 Consulting Agreement dated March 22, 1999, by and between the
Company and Thomson Kernaghan & Co. Ltd. (Incorporated by reference
to the Company's Registration Statement on Form 10, File No.
0-27343).
10.5 Consulting Agreement dated April 15, 1999, by and between the
Company and Michael Baybak and Company, Inc. (Incorporated by
reference to the Company's Registration Statement on Form 10, File
No. 0-27343).
10.6 Letter Agreement dated June 15, 1999, by and between the Company
and Lasso Communications Inc. (Incorporated by reference to the
Company's Registration Statement on Form 10, File No. 0-27343).
10.7 Advertising Services Agreement dated July 1, 1999, by and between
the Company and Lasso Communications Inc. (Incorporated by
reference to the Company's Registration Statement on Form 10, File
No. 0-27343).
10.8 Release dated July 14, 1999, by and among the Company, Lasso
Communications Inc., James Hines and Michael Gruber. (Incorporated
by reference to the Company's Registration Statement on Form 10,
File No. 0-27343).
10.9 Memorandum of Understanding dated June 7, 1999, by and between the
Company and Willow CSN. (Incorporated by reference to the Company's
Registration Statement on Form 10, File No. 0-27343).
10.10 Summary of Terms and Conditions dated April 21, 1999, by and
between the Company and CosmoCom, Inc. (Incorporated by reference
to the Company's Registration Statement on Form 10, File No.
0-27343).
10.11 Agreement of Purchase and Sale dated as of November 17, 1998, by
and between Advanced Systems Computer Consultants, Inc. and
Cheltenham Technologies (Bermuda) Corporation (Incorporated by
reference to the Company's Registration Statement on Form 10, File
No. 0-27343).
10.12 Asset Sale Agreement dated as of November 23, 1998, by and between
Grant Reserve Corporation and Cherokee Mining Company (Incorporated
by reference to the Company's Registration Statement on Form 10,
File No. 0-27343).
10.13 Pledge Agreement dated as of November 25, 1998, by and between
Grant Reserve Corporation and Cherokee Mining Company (Incorporated
by reference to the Company's Registration Statement on Form 10,
File No. 0-27343).
53
10.14 Agreement dated as of May 18, 1999, by and between the Company and
Call Center Learning Solutions, Inc. (Incorporated by reference to
the Company's Registration Statement on Form 10, File No. 0-27343).
10.15 Distribution Agreement dated as of March 12, 1999, by and between
the Company and ITC Learning Corporation (Incorporated by reference
to the Company's Registration Statement on Form 10, File No.
0-27343).
10.16 License Agreement dated June 29, 1999, by and between the Company
and ITC Learning Corporation (Incorporated by reference to the
Company's Registration Statement on Form 10, File No. 0-27343).
10.17 Letter Agreement dated March 24, 1999, by and between the Company
and Applied Courseware Technology, Inc. (Incorporated by reference
to the Company's Registration Statement on Form 10, File No.
0-27343).
10.18 General Security Agreement dated March 25, 1999, by and between
InfoCast Canada Corporation and Applied Courseware Technology, Inc.
(Incorporated by reference to the Company's Registration Statement
on Form 10, File No. 0-27343).
10.19 Memorandum of Understanding dated August 28, 1998, by and between
Home Base Work Solutions Ltd. and Shaw Fiberlink Ltd. (Incorporated
by reference to the Company's Registration Statement on Form 10,
File No. 0-27343).
10.20 Licensing and Distribution Agreement dated March 7, 1999, by and
between HomeBase Work Solutions Ltd. and Facet Decision Systems,
Inc. (Incorporated by reference to the Company's Registration
Statement on Form 10, File No. 0-27343).
10.21 Licensing and Distribution Agreement dated March 30, 1999, by and
between HomeBase Work Solutions Ltd. and Facet Petroleum Solutions,
Inc.(Incorporated by reference to the Company's Registration
Statement on Form 10, File No. 0-27343).
10.22 Share Purchase Agreement dated as of May 13, 1999, by and among the
Company, InfoCast Canada Corporation, HomeBase Work Solutions Ltd.
and the Shareholders named therein (Incorporated by reference to
the Company's Registration Statement on Form 10, File No. 0-27343).
10.23 General Security Agreement dated March 25, 1999, by and between
InfoCast Canada Corporation and HomeBase Work Solutions, Ltd.
(Incorporated by reference to the Company's Registration Statement
on Form 10, File No. 0-27343).
10.24 Letter Agreement dated May 1999 (date unspecified), by and among
the Company and Darcy Galvon, Ken MacLean and Sean Fleming
(Incorporated by reference to the Company's Registration Statement
on Form 10, File No. 0-27343).
10.25 Master Lease Agreement dated June 25, 1998, by and between HomeBase
Work Solutions, Ltd. and Sun MicroSystems (Incorporated by
reference to the Company's Registration Statement on Form 10, File
No. 0-27343).
54
10.26 Memorandum of Agreement dated July 31, 1997, by and between Virtual
Performance Systems Inc. (Incorporated by reference to the
Company's Registration Statement on Form 10, File No. 0-27343).
10.27 Letter Agreement dated November 27, 1998, by and among Grant
Reserve Corporation, Sheridan Reserve Corporation and Virtual
Performance Systems Inc. (Incorporated by reference to the
Company's Registration Statement on Form 10, File No. 0-27343).
10.28 Share Purchase Agreement dated as of January 29, 1999, by and among
InfoCast Canada Limited, Virtual Performance Systems Inc. and the
Selling Shareholders named therein. (Incorporated by reference to
the Company's Registration Statement on Form 10, File No. 0-27343.
10.29 Letter Agreement dated May 18, 1999, by and between the Company and
Satish Kumeta (Incorporated by reference to the Company's
Registration Statement on Form 10, File No. 0-27343).
10.30 Letter of Engagement dated October 21, 1999, by and among the
company, N.M. Rothschild & Sons Canada Limited and N.M. Rothschild
& Sons (Washington) LLC (Incorporated by reference to the Company's
Registration Statement on Form 10, File No. 0-27343).
10.31 Letter of Understanding by and between the Company and AT&T Canada
Long Distance Services Company (Incorporated by reference to the
Company's Registration Statement on Form 10, File No. 0-27343).
10.32 Memorandum of Engagement dated December 10, 1998 by and between the
Company and College Boreal D'Arts Appliques et de Technologie
(Incorporated by reference to the Company's Registration Statement
on Form 10, File No. 0-27343).
10.33 Assignment of Contract and Assumption of Liability dated October
19, 1999 by and between the Company and High Performance Group,
Inc. (Incorporated by reference to the Company's Registration
Statement on Form 10, File No. 0-27343).
10.34 Employment Agreement dated December 6, 1999 by and between the
Company and Herve Seguin (Incorporated by reference to the
Company's Registration Statement on Form S-1 No. 333-94201).
10.35 Employment Agreement dated October 1, 1999 by and between InfoCast
Canada Corporation and Christopher Rouse (Incorporated by reference
to the Company's Registration Statement on Form S-1 No. 333-94201).
10.36 Employment Agreement dated September 1999 by and between the
Company and Carl Steven (Incorporated by reference to the Company's
Registration Statement on Form S-1 No. 333-94201).
10.37 Strategic Alliance Agreement dated November 29, 1999 by between the
Company and TManage, Inc.(Incorporated by reference to the
Company's Registration Statement on Form S-1 No. 333-94201).
10.38 Service Provider Agreement dated as of December 9, 1999 by and
between the Company and Sun Microsystems of Canada, Inc.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the Fiscal Quarter ended December 31, 1999).
55
10.39 Heads of Agreement dated December 17, 1999 by and between the
Company and InfoCast (Australia) Limited (Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the Fiscal
Quarter ended December 31, 1999).
10.40 Minutes of Settlement Agreement dated January 7, 2000 between
Applied Courseware Technology Inc., Gerard Costello, Faye Costello,
Joseph Costello, InfoCast Canada Corporation and the Company
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the Fiscal Quarter ended December 31, 1999).
10.41 Full and Final Release dated January 6, 2000 by and among the
Company, InfoCast Canada Corporation and Stephen Headford
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the Fiscal Quarter ended December 31, 1999).
10.42 Release dated January 7, 2000 by and among the Company, InfoCast
Canada Corporation, Applied Courseware Technology, Inc., Gerard
Costello, Faye Costello and Joseph Costello (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
Fiscal Quarter ended December 31, 1999).
10.43 Release dated January 7, 2000 by and among the Company, InfoCast
Canada Corporation, Applied Courseware Technology, Inc., Gerard
Costello, Faye Costello and Joseph Costello (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
Fiscal Quarter ended December 31, 1999).
10.44 Termination Agreement dated July 29, 1999 between the Company and
Cherokee Mining Company Inc. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the Fiscal Quarter
ended December 31, 1999).
10.45 Assignment of Promissory Note dated July 29, 1999 by and between
the Company and Cherokee Mining Company, Inc. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
Fiscal Quarter ended December 31, 1999).
10.46 Employment Agreement dated March 27, 2001 between the Company and
William C. Lowe
10.47 Agreement dated March 26, 2001 between the Company and VIGIC.
10.48 Consulting Services Term Sheet between the Company and Team CEO
Corporation.
16.1 Letter from Jackson & Rhodes, P.C. relating to change of
accountants, dated September 3, 1999 (Incorporated by reference to
the Company's Registration Statement on Form 10, File No. 0-27343).
21.1 List of Subsidiaries (Incorporated by reference to the Company's
Registration Statement on Form 10, File No. 0-27343).
24 Power of attorney (included on the signature page hereto).
56
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheets as of March 31, 2001 and 2000....................F-3
Consolidated Statement of Operations and Comprehensive Loss for
the years ended March 31, 2001, March 31, 2000 and
December 31, 1998 and the three months ended March 31,
1999 and 1998............................................................F-4
Consolidated Statements of Cash Flows for the years ended
March 31, 2001, March 31, 2000 and December 31, 1998
and the three months ended March 31, 1999 and 1998......................F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended March 31, 2001, March 31, 2000 and
December 31, 1998 and the three months ended March 31, 1999.............F-7
Notes to Consolidated Financial Statements..................................F-13
F-1
AUDITORS' REPORT
To the Stockholders of
INFOCAST CORPORATION
We have audited the consolidated balance sheets of INFOCAST CORPORATION [a
development stage company] as of March 31, 2001 and March 31, 2000 and the
related consolidated statements of operations and comprehensive loss, cash flows
and changes in stockholders' equity (deficiency) for the years then ended, the
three month period ended March 31, 1999, the year ended December 31, 1998, the
156 day period ended December 31, 1997 and the period from July 29, 1997 to
March 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of INFOCAST CORPORATION as of March 31, 2001 and March 31, 2000 and the
results of its operations and its cash flows for the years then ended, the three
month period ended March 31, 1999, the year ended December 31, 1998, the 156 day
period ended December 31, 1997 and the period from July 29, 1997 to March 31,
2001 in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that InfoCast
Corporation will continue as a going concern. The Company as more fully
described in note 1, has incurred continuing operating losses, had a working
capital deficiency as at March 31, 2001 and July 13, 2001 and has earned only
marginal revenue from its continuing business. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
Toronto, Canada, ERNST & YOUNG LLP
June 1, 2001 (Except note 16 which is as /s/ ERNST & YOUNG LLP
of July 13, 2001). Chartered Accountants
F-2
INFOCAST CORPORATION
[a development stage company]
CONSOLIDATED BALANCE SHEETS
[U.S. dollars, U.S. GAAP]
(see Note 1 - Basis of Presentation)
As of March 31
2001 2000
$ $
- ----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents 2,607,267 3,637,931
Marketable equity investment [NOTE 3] - 3,900,000
Accounts receivable 172,254 275,283
Prepaid expenses and other [NOTE 15] 99,049 324,835
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,878,570 8,138,049
- ----------------------------------------------------------------------------------------------------------
Convertible debt issuance costs, net [NOTE 10] 1,132,159 604,583
Capital assets, net [NOTE 6] 1,836,132 3,152,983
Goodwill, net - 4,812,380
Distribution and licensing rights, net [NOTE 5] 2,479,167 2,975,000
Intellectual property, net [NOTE 4] - 14,886,486
- ----------------------------------------------------------------------------------------------------------
8,326,028 34,569,481
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable and accrued liabilities 4,027,658 1,814,538
Accrued restructuring charges 1,950,458 -
Current portion of obligations under capital leases [NOTE 8] 346,807 479,813
Deferred tenant inducement 7,250 -
Due to related parties [NOTE 7] 693,000 20,392
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,025,173 2,314,743
- ----------------------------------------------------------------------------------------------------------
LONG-TERM
Convertible debentures [NOTE 10] 6,960,000 3,500,000
Obligations under capital leases [NOTE 8] 975,047 802,836
Deferred income taxes - 5,656,895
- ----------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 7,935,047 9,959,731
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 14,960,220 12,274,474
- ----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock
[100,000,000 authorized and 47,052,059
issued and outstanding at
March 31, 2001, 2000 - 24,571,336] 45,551 23,071
Additional paid-in capital 124,302,960 57,933,723
Deferred compensation (1,233,753) (1,677,491)
Warrants 4,010,825 1,007,875
Accumulated other comprehensive income (loss) 163,130 (237,033)
Accumulated development stage deficit (133,922,905) (34,755,138)
- -----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (6,634,192) 22,295,007
- -----------------------------------------------------------------------------------------------------------
8,326,028 34,569,481
==========================================================================================================
SEE ACCOMPANYING NOTES
F-3
INFOCAST CORPORATION
[a development stage company]
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
[U.S. dollars, U.S. GAAP]
PERIOD FROM CUMULATIVE
THREE MONTHS THREE MONTHS JULY 29, 1997 FROM
YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED [INCEPTION] TO INCEPTION TO
MARCH 31, MARCH 31, MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31,
2001 2000 1999 1998 1998 1997 2001
$ $ $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------------------
[UNAUDITED]
REVENUE
Subscriptions 963,831 -- -- -- -- 963,831
Consulting 589,555 52,403 43,446 43,446 3,508 688,912
Hosting 371,461 51,360 422,821
Miscellaneous 199,191 162,279 -- -- -- 361,470
Distance learning 33,509 39,712 -- -- -- 73,221
Portal development 7,204 -- -- -- 7,204
- -----------------------------------------------------------------------------------------------------------------------------------
2,164,751 305,754 -- 43,446 43,446 3,508 2,517,459
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
General, administrative
and selling, excluding
stock option compensation 14,156,725 7,391,128 635,334 42,494 375,302 47,954 22,605,443
Stock option compensation
[NOTE 9] 1,200,883 13,351,908 2,256,938 -- -- -- 16,809,729
Research and development,
excluding stock option
compensation 1,202,223 5,186,265 162,914 19,703 88,180 51,257 6,690,839
Write-down of Virtual
Call Centre technology 1,616,567 -- -- -- 1,616,567
Amortization and depreciation 11,508,382 4,810,581 9,651 870 3,836 458 16,333,778
- -----------------------------------------------------------------------------------------------------------------------------------
29,684,780 30,739,882 3,064,837 63,067 467,318 99,669 64,056,486
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from operations before
restructuring and
impairment charges: (27,520,029) (30,434,128) (3,064,837) (19,621) (423,872) (96,161) (61,539,027)
Restructuring and impairment
charges [NOTE 1} 95,832,450 95,832,450
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from operations
before the following: (123,352,479) (30,434,128) (3,064,837) (19,621) (423,872) (96,161) (157,371,477)
Interest income 94,377 132,057 4,478 -- -- --
Interest and loan fees
[NOTE 10] (2,731,565) (1,913,482) (23,562) -- -- -- (4,668,609)
Loss on sale of marketable
equity ivestment (2,626,297) -- -- -- (2,626,297)
Equity in loss of joint
venture (164,736) -- -- -- -- (164,736)
- -----------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes
and extraordinary items (128,615,964) (32,386,289) (3,083,921) (19,621) (423,872) (96,162) (164,600,207)
Preferred Income taxes
LOSS FOR THE PERIOD
BEFORE EXTRAORDINARY ITEMS (128,615,964) (32,380,289) (3,083,921) (19,621) (423,872) (96,161) (164,600,207)
Loss on redemption of
convertible debentures
[NOTE 10] (208,698) (208,698)
- -----------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes
and extraordinary items (128,824,662) (32,380,289) (3,083,921) (19,621) (423,872) (96,161) (164,808,905)
Deferred income taxes (29,656,895) (1,229,105) -- -- -- -- (30,886,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss before extraordinay
item (98,959,069) (31,151,189) (2,082,921) (19,621) (423,872) (96,162) (133,714,207)
Loss on redemption of
convertible debentures
(NOTE 10) (208,698) -- -- -- -- -- (208,698)
NET LOSS FOR THE PERIOD (99,167,767) (31,151,184) (3,083,921) (19,621) (423,872) (96,161) (133,922,905)
Unrealized loss on
short-term equity
investment 287,500 (287,500) -- -- -- -- --
Translation adjustment 112,663 36,158 (6,614) (1,227) 19,291 1,632 163,130
- ----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS FOR
THE PERIOD (98,767,604) (31,402,526) (3,090,535) (20,848) (404,581) (94,529) (133,759,775)
===================================================================================================================================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 30,953,490 22,655,810 11,583,995 41 768,301 41 16,007,224
===================================================================================================================================
BASIC AND DILUTED
LOSS PER SHARE (3.19) (1.37) (0.27) (478.56) (0.55) (2,345.39) (8.37)
===================================================================================================================================
STOCK OPTION COMPENSATION
EXPENSE RELATED TO
General, administrative
and selling 1,200,883 9,594,046 1,452,549 -- -- -- 12,247,478
Research and development -- 3,757,861 804,389 -- -- -- 4,562,250
===================================================================================================================================
SEE ACCOMPANYING NOTES
F-4
INFOCAST CORPORATION
[a development stage company]
CONSOLIDATED STATEMENTS OF CASH FLOWS
[U.S. dollars, U.S. GAAP]
PERIOD FROM CUMULATIVE
THREE MONTHS THREE MONTHS JULY 29, 1997 FROM
YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED [INCEPTION] TO INCEPTION TO
MARCH 31, MARCH 31, MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31,
2001 2000 1999 1998 1998 1997 2001
$ $ $ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
[UNAUDITED]
OPERATING ACTIVITIES
Net loss for the period (99,167,767) (31,151,184) (3,083,921) (19,621) (423,872) (96,161) (133,922,905)
Add (deduct) items not
affecting cash
Stock option compensation 1,200,883 13,351,908 2,256,938 -- -- -- 16,809,729
Common stock issued for services 434,372 439,820 10,180 -- -- -- 884,372
Warrants issued for services 1,096,031 781,075 -- -- -- -- 1,877,106
Common stock issued to Applied
Courseware Technology (A.C.T.) Inc. 1,337,500 -- -- -- -- 1,337,500
Write-off of in-process research
and development 19,000 -- -- -- -- 19,000
Write-off of Applied Courseware
Technology (A.C.T.) Inc. loan 98,685 -- -- -- -- 98,685
Non-cash interest expense (note 10) 2,136,974 1,913,482 -- -- -- -- 4,050,456
Equity in loss of joint venture 164,736 -- -- -- -- 164,736
Deferred income taxes (29,656,895) -- -- -- -- 4,427,790 (30,886,000)
Deferred tenant inducement 7,250 -- -- -- -- 7,250
Deferred Revenue -- -- -- --
Loss on sale of marketable
equity investment 2,626,297 -- -- -- -- 2,626,297
Loss on write-down of
joint venture -- -- -- -- --
Loss from write-down of
capital assets 2,407,745 -- -- -- -- 2,407,745
Loss from write-off of
Homebase goodwill 3,935,435 -- -- -- -- 3,935,435
Loss from write-off of
i360 goodwill 20,950,561 -- -- -- -- 20,950,561
Loss from write-off of
intellectual property 67,630,708 -- -- -- -- 67,630,708
Loss on redemption of debenture 208,698 -- -- -- -- 208,698
Amortization 10,644,327 4,315,180 4,144 -- -- -- 14,963,651
Depreciation 904,900 495,401 5,507 870 3,836 458 1,410,102
- ------------------------------------------------------------------------------------------------------------------------------------
(14,640,571) (9,463,502) (807,152) (18,751) (420,036) (95,703) (25,426,964)
Changes in non-cash working capital
balances
Accounts receivable 541,081 (197,371) (9,723) (19,501) 6,593 (16,286) 324,294
Prepaid expenses and other 733,179 (301,964) (6,179) (61) (15,187) (38) 409,811
Bank overdraft 37,950 -- -- 9,263 -- -- 37,950
Accounts payable and accrued
liabilities 531,103 1,298,048 173,306 10,999 103,591 13,518 2,119,566
Accrued restructuring charges 1,950,458 1,950,458
Deferred Revenue (85,112) (85,112)
Due from InfoCast [the acquired
entity] prior to acquisition -- -- -- (25,020) -- (25,020)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash used in operating activities (10,931,912) (8,664,789) (649,748) (18,051) (350,059) (98,509) (20,695,017)
- ------------------------------------------------------------------------------------------------------------------------------------
F-5
InfoCast Corporation
[a development stage company]
CONSOLIDATED STATEMENTS OF CASH FLOWS CONT'D
[U.S. dollars, U.S. GAAP]
PERIOD FROM CUMULATIVE
THREE MONTHS THREE MONTHS JULY 29, 1997 FROM
YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED [INCEPTION] TO INCEPTION TO
MARCH 31, MARCH 31, MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31,
2001 2000 1999 1998 1998 1997 2001
$ $ $ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
[UNAUDITED]
INVESTING ACTIVITIES
Purchase of capital assets (1,656,172) (2,024,070) (93,659) (325) (11,644) (12,412) (3,797,957)
Purchase of intellectual
property --
Distribution rights (2,475,000) (500,000) -- -- -- (2,975,000)
Purchase of other assets -- -- --
Due from Homebase
Work Solutions Ltd. -- (99,529) -- -- -- (99,529)
Acquisition of Homebase
Work Solutions Ltd. 50,667 -- -- -- -- 50,667
Acquisition of costs i360 (480,865) -- -- -- -- (480,865)
Investment in joint venture (171,720) -- -- -- -- (171,720)
Due from Applied Courseware
Technology (A.C.T.) Inc. -- (139,299) -- -- -- (139,299)
Cash advance to i360 (1,131,682) -- -- -- -- (1,131,682)
Cash proceeds from sale of
marketable equity investments 1,561,203 -- -- -- -- 1,561,203
Acquisition of
InfoCast Corporation -- -- 87 -- -- -- 87
- ------------------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING
ACTIVITIES (1,707,514) (4,620,123) (832,400) (325) (11,644) (12,412) (7,184,093)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in note payable
to InfoCast
[the acquired entity] -- -- -- 250,000 -- 250,000
Increase (decrease) in
due to related parties 693,000 (177,270) (95,755) 19,346 114,476 109,545 643,996
Net repayment of capital
lease obligations (39,205) (213,808) -- -- -- -- (174,603)
Receipt of short-term
unsecured loan -- 400,000 -- 70,000 -- 470,000
Payment of short-term
unsecured loan -- (400,000) -- (70,000) -- (470,000)
Cash advance from InfoCast
[the acquired entity]
prior to acquisition -- 146,900 -- -- -- 146,900
Cash proceeds from
convertible debentures, net 4,754,789 3,225,000 -- -- -- -- 7,979,889
Redemption of convertible
debenture (902,618) -- -- -- -- (902,618)
Cash proceeds from issuance
of share capital, net 6,911,623 10,970,537 4,505,508 -- 2,373 45 22,390,086
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY
FINANCING ACTIVITIES 11,496,099 13,804,459 4,556,653 19,346 366,849 109,590 30,333,650
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN CASH DURING THE PERIOD (1,143,327) 519,547 3,074,505 970 5,146 (1,331) 2,454,540
Effects of foreign
exchange rate changes
on cash balances 112,663 25,939 (7,655) (1,271) 20,148 1,632 152,727
Cash and cash equivalents,
beginning of period 3,637,931 3,092,445 25,595 301 301 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD 2,607,267 3,637,931 3,092,445 -- 25,595 301 2,607,267
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest and lending
fees paid during
the period 1,092,993 -- 23,562 -- -- -- 1,116,555
Capital lease obligations
assumed during the period 622,315 1,496,466 -- -- -- -- 2,118,781
Fair value of acquisitions
acquired through share
Issuances during the period 34,482,443 17,000,000 307,688 -- -- -- 74,307,688
- ------------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-6
INFOCAST CORPORATION
[a development stage company]
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY)
[U.S. dollars, U.S. GAAP]
COMMON STOCK ADDITIONAL
COMMON ISSUED AND PAID-IN DEFERRED
SHARES OUTSTANDING CAPITAL COMPENSATION
# $ $ $
- ---------------------------------------------------------------------------------------------------------------
Deemed common shares issued for
intellectual properties [NOTE 1] 14 -- 25 --
Deemed common shares issued
for cash [NOTE 1] 27 -- 45 --
Net loss for the period -- -- -- --
Translation adjustment -- -- -- --
- ---------------------------------------------------------------------------------------------------------------
BALANCE AS OF
DECEMBER 31, 1997 41 -- 70 --
Common shares issued
for cash [NOTE 1] 1,499,959 -- 2,373 --
Net loss for the period -- -- -- --
Translation adjustment -- -- -- --
- ---------------------------------------------------------------------------------------------------------------
BALANCE AS OF
DECEMBER 31, 1998 1,500,000 -- 2,443 --
Acquisition of InfoCast by
VPS [NOTE 1] 13,580,000 13,580 294,108 --
Common shares issued for cash 3,032,336 3,032 4,545,468 --
Share issuance costs -- -- (42,992) --
Common shares issued for
consulting services 60,000 60 337,740 (337,800)
Granting of stock options -- -- 11,788,250 (11,788,250)
Amortization of deferred
compensation -- -- -- 2,267,118
Net loss for the period -- -- -- --
Translation adjustment -- -- -- --
- ---------------------------------------------------------------------------------------------------------------
BALANCE AS OF MARCH 31, 1999 18,172,336 16,672 16,925,017 (9,858,932)
- ---------------------------------------------------------------------------------------------------------------
F-7
INFOCAST CORPORATION
[a development stage company]
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY) CONT'D
[U.S. dollars, U.S. GAAP]
ACCUMULATED
OTHER ACCUMULATED TOTAL
COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
WARRANTS LOSS STAGE DEFICIT EQUITY
$ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Deemed common shares issued for
intellectual properties [NOTE 1] -- -- -- 25
Deemed common shares issued
for cash [NOTE 1] -- -- -- 45
Net loss for the period -- -- (96,161) (96,161)
Translation adjustment -- 1,632 -- 1,632
- ------------------------------------------------------------------------------------------------------------------
BALANCE AS OF
DECEMBER 31, 1997 -- 1,632 (96,161) (94,459)
Common shares issued
for cash [NOTE 1] -- -- -- 2,373
Net loss for the period -- -- (423,872) (423,872)
Translation adjustment -- 19,291 -- 19,291
- ------------------------------------------------------------------------------------------------------------------
BALANCE AS OF
DECEMBER 31, 1998 -- 20,923 (520,033) (496,667)
Acquisition of InfoCast by
VPS [NOTE 1] -- -- -- 307,688
Common shares issued for cash -- -- -- 4,548,500
Share issuance costs -- -- -- (42,992)
Common shares issued for
consulting services -- -- -- --
Granting of stock options -- -- -- --
Amortization of deferred
compensation -- -- -- 2,267,118
Net loss for the period -- -- (3,083,921) (3,083,921)
Translation adjustment -- (6,614) -- (6,614)
- ------------------------------------------------------------------------------------------------------------------
BALANCE AS OF MARCH 31, 1999 -- 14,309 (3,603,954) 3,493,112
- ------------------------------------------------------------------------------------------------------------------
F-8
INFOCAST CORPORATION
[a development stage company]
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY) CONT'D
[U.S. dollars, U.S. GAAP]
COMMON STOCK ADDITIONAL
COMMON ISSUED AND PAID-IN DEFERRED
SHARES OUTSTANDING CAPITAL COMPENSATION
# $ $ $
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 1999 18,172,336 16,672 16,925,017 (9,858,932)
Common shares issued for acquisition
of Homebase Work Solutions Ltd. 3,400,000 3,400 16,996,600 --
Common shares issued for cash and
marketable equity investment 2,999,000 2,999 17,956,501 --
Share issuance costs - cash -- -- (1,563,963) --
Share issuance costs - warrants -- -- (226,800) --
Issuance of convertible debentures
with warrants -- -- 2,243,065 --
Warrants issued for consulting services -- -- -- --
Warrants issued to stockholders -- -- -- --
Adjustments resulting from revaluation
of stock options granted to
consultants in previous periods -- -- 963,557 --
Adjustments resulting from revaluation
of common shares granted to
consultants in previous periods -- -- 112,200 --
Adjustment to joint venture investment
to reflect dilution of ownership
interest -- -- (6,984) --
Granting of stock options -- -- 4,803,780 --
Cancellation of stock options -- -- (269,250) --
Amortization of deferred compensation -- -- -- 8,181,441
Net loss for the period -- -- -- --
Unrealized loss on short-term equity
investment -- -- -- --
Translation adjustment -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF MARCH 31, 2000 24,571,336 23,071 57,933,723 (1,677,491)
=============================================================================================================================
F-9
INFOCAST CORPORATION
[a development stage company]
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY) CONT'D
[U.S. dollars, U.S. GAAP]
ACCUMULATED
OTHER ACCUMULATED TOTAL
COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
WARRANTS LOSS STAGE DEFICIT EQUITY
$ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 1999 -- 14,309 (3,603,954) 3,493,112
Common shares issued for acquisition
of Homebase Work Solutions Ltd. -- -- -- 17,000,000
Common shares issued for cash and
marketable equity investment -- -- -- 17,959,500
Share issuance costs - cash -- -- -- (1,563,963)
Share issuance costs - warrants 226,800 -- -- --
Issuance of convertible debentures
with warrants -- -- -- 2,243,065
Warrants issued for consulting services 643,875 -- -- 643,875
Warrants issued to stockholder 137,200 -- -- 137,200
Adjustments resulting from revaluation
of stock options granted to
consultants in previous periods -- -- -- 963,557
Adjustments resulting from revaluation
of common shares granted to
consultants in previous periods -- -- -- 112,200
Adjustment to joint venture investment
to reflect dilution of ownership
interest -- -- -- (6,984)
Granting of stock options -- -- -- 4,803,780
Cancellation of stock options -- -- -- (269,250)
Amortization of deferred compensation -- -- -- 8,181,441
Net loss for the period -- -- (31,151,184) (31,151,184)
Unrealized loss on short-term equity
investment -- (287,500) -- (287,500)
Translation adjustment -- 36,158 -- 36,158
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF MARCH 31, 2000 1,007,875 (237,033) (34,755,138) 22,295,007
==============================================================================================================================
The accumulated other comprehensive loss balance as of March 31, 2000 includes a
net accumulated translation adjustment loss of $50,467 and an accumulated
unrealized loss on short-term equity securities of $287,500.
F-10
INFOCAST CORPORATION
[a development stage company]
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY) CONT'D
[U.S. dollars, U.S. GAAP]
COMMON STOCK ADDITIONAL
COMMON ISSUED AND PAID-IN DEFERRED
SHARES OUTSTANDING CAPITAL COMPENSATION
# $ $ $
- --------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2000 24,571,336 23,071 57,933,723 (1,677,491)
Deemed common shares issued for
acquisition of i360 Inc. 7,583,976 7,584 34,474,859 --
Stock options and merger warrants
issued for acquistion of i360 Inc. -- -- 21,528,772 --
Common shares issued for cash 13,118,356 13,119 7,385,722 --
Subscriptions receivable -- -- (200,000) --
Conversion of debenture 1,386,391 1,385 932,395
Common shares issued for services 392,000 392 453,568 (19,588)
Share issuance costs - cash -- -- (487,218) --
Share issuance costs - warrants -- -- -- (205,139)
Intrinstic value of merger warrants
issued for acquistion of i360 Inc. -- -- 209,314 (209,314)
Issuance of convertible debentures -- -- 2,424,690 --
Warrants issued for consulting services -- -- -- (675,969)
Adjustments resulting from revaluation of
stock options granted to
consultants in previous periods -- -- (700,990) 700,990
Adjustments resulting from repricing of
of stock options granted to
consultants in previous periods -- -- 81,200 (81,200)
Granting of stock options -- -- 330,525 (330,525)
Cancellation of stock options -- -- (63,600) 63,600
Amortization of deferred compensation -- -- -- 1,200,883
Net loss for the period -- -- -- --
Unrealized loss on marketable equity
investment -- -- -- --
Translation adjustment
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF MARCH 31, 2001 47,052,059 45,551 124,302,960 (1,233,753)
================================================================================================================================
F-11
INFOCAST CORPORATION
[a development stage company]
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY) CONT'D
[U.S. dollars, U.S. GAAP]
ACCUMULATED
OTHER ACCUMULATED TOTAL
COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
WARRANTS LOSS STAGE DEFICIT EQUITY
$ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2000 1,007,875 (237,033) (34,755,138) 22,295,007
Deemed common shares issued for
acquisition of i360 Inc. -- -- -- 34,482,443
Stock options and merger warrants
issue for acquistion of i360 Inc. -- -- -- 21,528,772
Common shares issued for cash -- -- -- 7,398,841
Subscriptions receivable -- -- -- (200,000)
Conversion of debenture -- -- -- 933,780
Common shares issued for services -- -- -- 434,372
Share issuance costs - cash -- -- -- (487,218)
Share issuance costs - warrants 1,230,950 -- -- 1,025,811
Intrinstic value of merger warrants
issued for acquistion of i360 Inc.
Issuance of convertible debentures -- -- 2,424,690
Warrants issued for consulting services 1,772,000 -- -- 1,096,031
Adjustments resulting from revaluation of
stock options granted to
consultants in previous periods -- -- -- --
Adjustments resulting from repricing of
of stock options granted to
consultants in previous periods -- -- -- --
Granting of stock options -- -- -- --
Cancellation of stock options -- -- -- --
Amortization of deferred compensation -- -- -- 1,200,883
Net loss for the period -- -- (99,167,767) (99,167,767)
Unrealized loss on marketable
equity investment -- 287,500 -- 287,500
Translation adjustment -- 112,663 -- 112,663
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF MARCH 31, 2001 4,010,825 (163,130) (133,922,905) (6,634,192)
==============================================================================================================================
The accumulated other comprehensive loss balance as of March 31, 2001 includes a
net accumulated translation adjustment loss of $163,130 and an accumulated
unrealized loss on short-term equity securities of nil.
F-12
INFOCAST CORPORATION
[formerly Virtual Performance Systems Inc.] [a development stage company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[U.S. dollars except where otherwise noted]
March 31, 2001
1. BASIS OF ACCOUNTING
Going Concern
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.
The Company has incurred losses since its incorporation, had a working capital
deficiency of $4,146,603 as of March 31, 2001 and a stockholders' deficiency of
$6,634,192 as of March 31, 2001. As of July 13, 2001, the Company continues to
have a significant working capital deficiency. In addition, the Company has not
yet earned any revenue from its continuing Contact business and has only earned
marginal revenue from its e-Learning business. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern is uncertain and is
dependent on a number of factors including the Company's ability to arrange
financing in addition to the financing arranged through to July 13, 2001 (note
16), the Company's ability to manage and defer certain of its liabilities and
the continued support of its management team. In the event that the Company is
unable to raise financing in addition to the financing raised through July 13,
2001, the Company will likely be unable to continue operations beyond September
2001. Management is currently negotiating and evaluating various financing
alternatives, including equity and convertible debenture private placements. In
addition, the Company has signed distribution agreements that are expected to
accelerate the Company's revenue base for its Contact and e-Learning businesses.
Subsequent to the quarter ended December 31, 2000, management revised its
development plans and undertook measures to substantially reduce its ongoing
operating budget, including the decision to wind-down its Community Division and
divest or wind-down its Hosting Division. As of March 31, 2001, the Company had
closed down its Community division and as at April 26, 2001, the Company sold
its Hosting division assets. In the event that sufficient financing is not
received by the end of July 2001, the Company will implement additional
expenditure cuts, including employee terminations and the deferment of
management salaries, further curtail the payment of its liabilities, and
negotiate the curtailment of the interest payments on its convertible debentures
(note 10). These actions will likely not extend the Company's operations beyond
September 2001 without the benefit of additional financing. The Company will
continue to evaluate its cost structure and adjust its organization to reflect
its changing business environment. The outcome of these matters cannot be
predicted at this time.
These consolidated financial statements do not include adjustments to the
carrying values and classification of assets and liabilities should the Company
be unable to continue as a going concern.
Nature of operations and continuing entity
These consolidated financial statements are the continuing financial tatements
of Virtual Performance Systems Inc. ["VPS"] [a development stage company], an
Ontario corporation which was incorporated on July 29, 1997. VPS had a 100%
interest in, and subsequently amalgamated with, Cheltenham Technologies
Corporation, an Ontario corporation. VPS has a 100% interest in Cheltenham
Interactive Corporation ["Cheltenham Interactive"], an inactive Ontario
corporation, and Cheltenham Technologies (Bermuda) Corporation ["Cheltenham
Bermuda"], a Barbados corporation which owns certain intellectual properties. On
January 29, 1999, VPS acquired the net assets of InfoCast Corporation [formerly
Grant Reserve Corporation] ["InfoCast"], a United States non-operating company
traded on the NASDAQ OTC Bulletin Board which had a 100% interest in InfoCast
Canada Corporation ["InfoCast Canada"]. After the acquisition, VPS continued
under the name of InfoCast Corporation. On May 13, 1999, InfoCast Canada
purchased Homebase Work Solutions Ltd. and on August 15, 2000, InfoCast merged
with i360 Inc.
InfoCast, i360, InfoCast Canada, Homebase, VPS, Cheltenham Interactive and
Cheltenham Bermuda are collectively referred to as the "Company".
Nature of continuing operations
The Company is a development stage technology company that has developed an
infrastructure to deliver, on a pay per use basis, a solution that enhances
communication by its customers and their employees and/or customers. The first
of two applications included in the solution is a virtual call center solution
known as InfoCast Contact, which provides companies with a complete contact
solution enabling them to provide a high level of customer service. InfoCast
Contact unifies customer contact options in a single integrated system providing
voice, chat and e-mail functionality. The second application, called InfoCast
e-Learning, is a complete electronic learning environment which increases
productivity and drives down education costs by giving corporate and academic
learners access to up-to-the-minute training and certification through access to
InfoCast e-Learning's web-based portal, which provides access to training and
management resources specific to the call center industry. During January and
February 2001, the Company decided to wind-down its Community Division and
divest or wind-down its Hosting Division. The Hosting division was in the
business of providing hosting of third-party applications and support e-commerce
initiatives. The Community division was a provider of privately-branded portal
and virtual community systems bundling internet access with content, targeted
business products, e-commerce and customer support.
F-13
The Company's primary operational focus as outlined in its revised business plan
still entails significant investment in developing, deploying and marketing
electronic commerce enabling application solutions.
The aggregate future capital requirements to support this investment are
expected to be substantially funded from external resources including issuing
equity and or debt. There can be no assurance that any financing will be
available on terms acceptable to the Company or at all.
The functional currency of VPS, Homebase, Cheltenham Interactive, Cheltenham
Bermuda and InfoCast Canada is the Canadian dollar. However, for reporting
purposes, the Company has adopted the United States dollar as its reporting
currency. Accordingly, the Canadian dollar balance sheets of these companies
have been translated into United States dollars at the rates of exchange at the
respective period ends, while transactions during the periods and share capital
amounts have been translated at the weighted average rates of exchange for the
respective periods and the exchange rate at the date of the transaction
respectively. Gains and losses arising from these translation adjustments are
included in comprehensive loss.
Reverse acquisition of InfoCast Corporation
Pursuant to a share purchase agreement dated January 29, 1999, the shareholders
of VPS sold their 100% interest in VPS to InfoCast in consideration for
1,500,000 exchangeable shares of InfoCast Canada, a wholly-owned subsidiary of
InfoCast. The InfoCast Canada exchangeable shares are convertible at any time
into common shares of InfoCast at no additional consideration. In addition, the
shareholders of VPS also purchased a further 9 million common shares of InfoCast
from InfoCast's former controlling shareholder, Sheridan Reserve Incorporated,
in consideration for a nominal cash amount. As a result of these two
transactions, the shareholders of VPS effectively acquired 10,500,000 common
shares of InfoCast which represented a controlling interest of approximately 70%
[60% excluding the exchangeable shares]. This transaction is considered an
acquisition of InfoCast [the accounting subsidiary/legal parent] by VPS [the
accounting parent/legal subsidiary] and has been accounted for as a purchase of
the net assets of InfoCast by VPS in these consolidated financial statements
because InfoCast had no business operations or operating assets at the time of
the acquisition.
These consolidated financial statements are issued under the name of InfoCast,
but are a continuation of the financial statements of the accounting acquirer,
VPS. VPS's assets and liabilities are included in the consolidated financial
statements at their historical carrying amounts. Figures presented to January
29, 1999 are those of VPS. For purposes of the acquisition, the fair value of
the net assets of InfoCast of $307,688 is ascribed to the 13,580,000 previously
outstanding common shares of InfoCast deemed to be issued in the acquisition as
follows:
$
- --------------------------------------------------------------------------------
Cash 87
Note receivable from VPS 396,900
Payable to VPS (25,020)
Accounts payable (64,279)
- --------------------------------------------------------------------------------
Purchase price 307,688
- --------------------------------------------------------------------------------
Prior to the acquisition on January 29, 1999, the deemed number of outstanding
shares of InfoCast is equal to the 1,500,000 exchangeable shares of InfoCast
Canada that were issued to the shareholders of VPS in the acquisition. These
shares have been allocated to the changes in the combined issued and outstanding
and additional paid-in-capital common stock of VPS to January 29, 1999 as
follows:
Deemed
InfoCast VPS
shares shares Amount
# # $
- -----------------------------------------------------------------------------------------
Issued for intellectual properties [note 4] 14 35 25
Issued for cash 27 65 45
- -----------------------------------------------------------------------------------------
Outstanding as of December 31, 1997 41 100 70
Issued for cash 1,499,959 3,624,000 2,373
- -----------------------------------------------------------------------------------------
Outstanding as of December 31, 1998
and January 29, 1999 prior to acquisition 1,500,000 3,624,100 2,443
- -----------------------------------------------------------------------------------------
F-14
The combined issued and outstanding and additional paid-in-capital common stock
of the continuing consolidated entity as of January 29, 1999 is computed as
follows:
$
- --------------------------------------------------------------------------------------
Existing share capital of VPS as of January 29, 1999 prior to acquisition 2,443
Ascribed value of the acquired common shares of InfoCast 307,688
- --------------------------------------------------------------------------------------
Share capital of InfoCast [formerly VPS] as of January 29, 1999 310,131
- --------------------------------------------------------------------------------------
The number of outstanding shares of InfoCast [formerly VPS] as of January 29,
1999 is computed as follows:
Number
of shares
#
- --------------------------------------------------------------------------------------
Deemed share capital of InfoCast [formerly VPS] as of
January 29, 1999 prior to acquisition 1,500,000
Shares of InfoCast deemed issued by VPS 13,580,000
- --------------------------------------------------------------------------------------
Shares of InfoCast [formerly VPS] as of January 29, 1999 15,080,000
- --------------------------------------------------------------------------------------
Acquisition of Homebase Work Solutions Ltd.
Pursuant to a share purchase agreement dated May 13, 1999, Homebase Work
Solutions Ltd. ["Homebase"] was acquired by the Company in consideration for
3,400,000 exchangeable shares of InfoCast Canada. The InfoCast Canada
exchangeable shares are convertible into InfoCast common stock at any time on a
one-for-one basis at no additional consideration.
As a condition of the closing of the share purchase agreement, the Company paid
$285,480 [Cdn.$420,000] to officers of Homebase during the fiscal year ended
March 31, 2000.
The acquisition has been accounted for using the purchase method. The value of
the acquisition was $17,077,000, which included $77,000 of expenses directly
attributable to the acquisition. For accounting purposes the exchangeable shares
of InfoCast Canada have been valued at $5.00, which is equal to the price per
share received from the June 1999 private placement of the Company's common
stock. The total purchase price of $17,077,000 has been allocated as follows:
$
- --------------------------------------------------------------------------
Cash 127,667
Other current assets 13,565
Capital assets 20,465
Completed technology 17,015,000
In-process research and development 19,000
Trademarks 853,000
Workforce-in-place 253,000
Goodwill 5,846,293
Deferred income taxes (6,886,000)
Accounts payable and accrued liabilities (82,145)
Due to the Company (102,845)
- --------------------------------------------------------------------------
Purchase price 17,077,000
- --------------------------------------------------------------------------
The completed technology, trademarks, workforce-in-place and goodwill were being
amortized over their respective useful lives of 5 years, 5 years, 3 years and 5
years. The in-process research and development was charged to income immediately
subsequent to the acquisition. The completed technology, trademarks and
workforce-in-place had been classified as intellectual property on the
consolidated balance sheets. The deferred income tax liability was created in
respect of the difference between the accounting and tax basis of the completed
technology, trademarks and workforce-in-place. The identification and the fair
values of the completed technology, in-process research and development,
trademarks and workforce-in-place were determined by management with the
assistance of an independent valuator.
The completed technology is comprised of Homebase's information hub, telework
and web-enabling technologies, together with the benefits of Homebase's
association with the National Environmental Policy Institute ["NEPI"]. NEPI is a
United States based non-profit environmental lobbyist group that promotes
telework policies in the United States.
The results of operations of Homebase during the post-acquisition 324-day period
ended March 31, 2000 and the year ended March 31, 2001 have been consolidated
with those of the Company.
The following pro-forma consolidated financial information presents certain
statement of operations data of the Company as if the Company had acquired
Homebase as of April 1, 1998. This pro-forma financial information is not
necessarily indicative of the results that actually would have occurred had the
Company acquired Homebase on the date indicated or which would be obtained in
the future.
Year ended Year ended
March 31, March 31,
2000 1999
$ $
- --------------------------------------------------------------------------------
[unaudited] [unaudited]
Revenue 305,754 5,153
Net loss for the period (31,622,119) (7,253,830)
Basic and diluted loss per share (1.37) (1.03)
- --------------------------------------------------------------------------------
The balance of the goodwill, completed technology, trade-marks,
workforce-in-place and the related deferred income tax liability have been
written down to nil as at December 31, 2000 due to management's subsequent
decision to close down the Hosting operations in Calgary, Alberta, formerly
Homebase.
F-15
On April 25, 2001, the Company divested itself of Homebase's operating assets
(see Impairment of Assets and Restructuruing Charges below).
Acquisition of i360 Inc.
On August 15, 2000, i360 merged with and into the Company pursuant to the
definitive Agreement and Plan of Merger (the "Merger Agreement") dated May
3, 2000, as amended, providing for the acquisition by the Company of all of the
outstanding shares of common stock of i360. The Merger Agreement provided for a
statutory merger of i360 into the Company. As of August 15, 2000, the holders of
i360's issued and outstanding common stock received 0.30 shares of the Company's
common stock per share of i360 common stock which resulted in an aggregate of
7,583,976 shares of the Company's common stock being issued. In addition, all
outstanding warrants and stock options to purchase shares of i360 common stock
converted into stock options and merger warrants to purchase shares of the
Company's common stock at a 1:0.3 exchange ratio. As a result, an aggregate of
4,416,000 merger warrants of the Company (4,324,500 with an exercise price of
$0.33 per share, 87,375 with an exercise price of $3.18 per share and 4,125 with
an exercise price of $4.00 per share) and 1,127,476 stock options of the Company
with an exercise price of $4.00 per share were issued as of August 15, 2000.
The acquisition was accounted for by the purchase method whereby the purchase
price is equal to the sum of (i) the fair value of the 7,583,976 common shares
of the Company on the date the revised terms of the acquisition were announced;
(ii) the fair value of the 4,324,500 merger warrants of the Company with an
exercise price of $0.33 per share; (iii) the fair value of the 87,375 merger
warrants of the Company with an exercise price of $3.18 per share; (iv) the fair
value of 4,125 merger warrants of the Company with an exercise price of $4.00
per share; (v) the fair value of the 1,127,476 stock options of the Company,
(vi) the acquisition costs of $1,236,684 recorded by the Company in respect of
the acquisition of i360; less (vii) the portion of the intrinsic value of the
unvested merger warrants of the Company with an exercise of $0.33 per share
related to the vesting periods remaining after the August 15, 2000 acquisition
date for those merger warrants granted to individuals that are required to
continue providing service to the Company after the acquisition in consideration
for the merger warrants. There was no intrinsic value for the merger warrants of
the Company with an exercise price of $3.18 per share and $4.00 per share or for
the stock options as of August 15, 2000. The fair value of common shares of the
Company is assumed to be equal to the average of the closing share price of the
Company's common shares from May 2, 2000 to May 5, 2000. The fair value of the
merger warrants with an exercise price of $0.33 per share is $4.33 per merger
warrant, the fair value of the merger warrants with an exercise price of $3.18
per share is $2.74 per merger warrant and the fair value of the stock options
with an exercise price of $4.00 is $2.46 per stock option as determined using a
Black- Scholes valuation model based on a May 3, 2000 assumed grant date, a
volatility factor of 0.873, a risk-free interest rate of 5.95% and an expected
life of 2 years. As a result, the total pro-forma purchase price is $57,247,898
and has been allocated as follows:
$
Cash 45,419
Accounts receivable 438,052
Prepaid expenses and other 147,085
Inventory 37,950
Capital assets 444,154
Deposits and other assets 360,308
Completed technology 60,000,000
Goodwill 22,653,348
Accounts payable and accrued liabilities (1,661,625)
Deferred revenue (85,111)
Due to the Company (1,131,682)
Deferred income tax liability (24,000,000)
- ----------------------------------------------------------------------------
Purchase Price 57,247,898
- ----------------------------------------------------------------------------
The goodwill and completed technology were being amortized over a period of 5
years. The deferred income tax liability was created in respect of the
difference between the accounting and tax basis of the completed technology.
The balance of the goodwill, completed technology and the related deferred
income tax liability have been written down to nil as at December 31, 2000 due
to management's subsequent decision to close down the Community Division
operations in Tucson, Arizona, (formerly i360 Inc.) (See Impairment of Assets
and Restructuring Charges below).
The results of operations of i360 during the post-acquisition 229-day period
ended March 31, 2001 have been consolidated with those of the Company.
IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGES
In the quarter ended March 31, 2001, management revised its development plans
and undertook measures to substantially reduce its ongoing operating budget,
including the decision to wind-down its Community Division (previously known as
i360 inc. prior to its acquisition by the Company) and divest or wind-down its
Hosting Division (the Company's wholly-owned Homebase Work Solutions Ltd.
subsidiary), and focus specifically on the development of the Contact and
e-Learning application solutions.
Subsequent to March 31, 2001 the Company also decided to relocate its corporate
offices to Chicago, Illinois. The associated costs were not recorded in the
accounts as of March 31, 2001, and have not been determined at this time.
As of March 31, 2001, the Company recorded an impairment of assets and
restructuring charge of $95,832,450 for the exit costs and impairment charges
associated with its decisions.
As of March 31, 2001, the Company wrote-down the unamortized carrying value of
the goodwill (Community, $20,950,561; Hosting $3,935,435) and intellectual
property (Community, $55,487,671; Hosting $12,143,037) related to these
Divisions (acquired through the acquisition of Homebase and i360) to the
Company's estimate of the net realizable value of these assets of nil.
The Company also wrote-off $166,114 relating to the leasehold improvements and
certain of the furniture and fixtures in its Community Division to the estimated
net realizable value of nil.
Furthermore, during the year ending March 31, 2001, Digital Outcry, an Internet
start-up in which the Company had invested (note 12), became inactive, and the
Company wrote down its net investment of $84,581 to the estimated net realizable
value of nil.
F-16
As of March 31, 2001, the Company had closed down its Community division and as
at April 25, 2001, the Company sold its hosting division's operating assets (see
below). The Company is in the process of winding down the non-operating assets
of Homebase.
The employee workforce was consequently reduced by approximately 43 in the
Community operations, and approximately 23 in the Hosting operations. Associated
employee termination costs were recorded as Community Division employee
termination costs of which $132,199 were paid out prior to March 31, 2001 and
$189,394 was accrued as at March 31, 2001. There were no employee termination
costs paid with respect to the Hosting division because the employees were
provided with working notice. In addition, $720,000 has been accrued in respect
of unpaid Community division executive termination costs. Furthermore, employee
termination costs of $988,504 in respect of the decision to terminate 3
corporate officers has been recorded in corporate division restructuring costs
of which the entire amount was payable as of March 31, 2001. This amount is
payable over 12 to 24 months unless the Company completes a $7 million financing
at which time it becomes payable immediately.
On April 25, 2001, the operating assets of the Hosting division were sold in
consideration for the buyer assuming certain liabilities of Homebase existing as
of March 31, 2001, including the assignment of the leases for the Sun
Microsystems equipment in its Calgary, Alberta facility recorded for $1,320,760
as of March 31, 2001, and certain specific liabilities totaling $80,500
(Cdn$124,769) and the assumption of certain operating commitments as of April 1,
2001. Subsequent to the sale of the operating assets, the buyer ceased
operations and has filed for bankruptcy protection. Other than the assignment of
the leases for the Sun Microsystems equipment, the specific liabilities of
$80,500, the lease for the office facility in Calgary (see note 11) and other
operating costs had not been assigned to the buyer and resorted back to the
Company. The specific liabilities of $80,500 and the capital lease of $
1,320,148 (see note 8) are included in the Company's liabilities as at March 31,
2001. The net assets sold pursuant to this agreement have been valued at the
book value of the capital lease obligations that the Company was released from
subsequent to year-end.
As a result, the Company wrote down the Hosting Division net operating assets
(other than the intellectual property and goodwill discussed above) by $643,593,
which included the write-down of the computer systems under capital lease in
Homebase by $168,028 to the Company's estimate of the net realizable value of
$1,320,760, and the write-down of the remaining operating assets to their
estimated net realizable value of nil.
As a result of the bankruptcy of the purchaser of the Hosting Division net
assets, the Company will assume responsibility for the $80,500 related to
specific liabilities. In addition, the Company may incur costs associated with
the termination of the Hosting Division office lease for which the amount cannot
be determined at this time and has not been recorded in the accounts as at March
31, 2001. The continuing obligation for theses premises is included in the
commitments table (note 11).
The restructuring provision also encompasses other exit costs and write-downs
totaling $25,517. No provision was made regarding the Hosting Division, as there
were no costs incurred or anticipated beyond March 31, 2001.
The hosting and subscription revenues, as well as a significant portion of the
consulting revenues will not continue as a result of these decisions.
As a result, the Company charged $95,832,450 to impairment of assets and
restructuring charge, as follows:
Write-off of Community Division intellectual property 55,487,671
Write-off Community Division goodwill 20,950,561
Write-down of Community Division capital assets 82,427
Write-down of Community Division other assets 83,687
Community Division severance costs 1,041,587
Other Community Division exit costs 10,041
Community Division lease termination (note 9) 300,775
Write-down of Hosting Division capital assets 628,118
Write-down of Hosting Division other assets 15,482
Write-off of Hosting Division intellectual property 12,143,037
Write-off of Hosting Division goodwill 3,935,435
Corporate division severance costs 988,504
Write-off of Investment in Digital Outcry (note 12) 84,581
Write-off of Corporate head office leasehold improvements 80,544
-----------
$95,832,450
As a result of certain of the employee termination arrangements, $2,871,259 of
the merger warrants issued upon the acquisition of i360 were cancelled.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are summarized as follows:
[a] Principles of consolidation
These consolidated financial statements include the accounts of InfoCast and its
subsidiaries, all of which are wholly-owned. Intercompany accounts and
transactions have been eliminated upon consolidation.
Cash and cash equivalents
Cash and cash equivalents represent cash and short-term investments with a
maturity date of less than three months when acquired.
F-17
[b] Capital assets
Capital assets are recorded at cost less accumulated depreciation. If it is
determined that a capital asset is not recoverable over its estimated useful
life, the capital asset will be written down to its fair value. Maintenance and
repairs are charged to expenses as incurred. Gains and losses on the disposition
of capital assets are included in income. Depreciation is provided using the
following annual rates and bases which are expected to amortize the cost of the
capital assets over their estimated useful lives:
Computer hardware and software 30% declining balance
Office equipment 20% declining balance
Leasehold improvements 20% declining balance
Virtual Call Centre Solution 5 years straight-line
Assets under capital lease straight-line over the term of the lease
[c] Intellectual property
Acquired intellectual property is recorded at cost and represents proprietary
rights to certain information delivery technologies. The capitalized costs of
the intellectual property is amortized on a straight-line basis over its
estimated useful life. If it is determined that an investment in intellectual
property is not recoverable over its estimated useful life, the intellectual
property will be written down to its fair value.
[d] Distribution and licensing rights
Acquired distribution and licensing rights are recorded at cost. The capitalized
costs of the distribution and licensing rights will be amortized each period,
commencing when the electronically converted products and educational material
are available for distribution and license, at the greater of [i] the amount
calculated based on the straight-line method over the estimated useful life of 5
years or [ii] the amount calculated based on the ratio of current gross revenues
received from the licensing of the electronically converted products and the
hosting and delivery of educational material over the sum of the current and
future gross revenues anticipated to be received by licensing the electronically
converted products and hosting and delivering the educational material. If it is
determined that the investment in distribution and licensing rights is not
recoverable from estimated sales, the distribution and licensing rights will be
written down to their fair value.
[e] Goodwill
Goodwill is being amortized over its estimated useful life of five years. The
Company assesses each quarter whether there is an other than temporary
impairment of the carrying value of the goodwill based on undiscounted expected
future cash flows. If the Company determines that there is a permanent
impairment of the carrying value of the goodwill, a write-down will occur in
that period.
[f] Revenue recognition
The Company generated revenue from hosting services, subscription services,
consulting services and the sale of computer hardware and e-learning products.
Revenue from hosting and subscription services is recognized when the service is
delivered, or over the term of the applicable hosting services contract.
Consulting revenue is recognized at the time such consulting services are
rendered. Revenue generated from the resale of computer hardware and e-learning
products is recognized upon shipment.
[g] Research and development costs
Research and development costs are expensed in the year incurred.
[h] Foreign currency measurement
In preparing the Company's Canadian dollar functional currency financial
statements, United States dollar monetary assets and liabilities are remeasured
in the Company's Canadian dollar functional currency at the period end rate of
exchange. The statements are then translated into the Company's United States
dollar reporting currency. Transactions in foreign currency are remeasured at
the actual rates of exchange. Foreign currency remeasurement differences are
included in general and administrative expenses, while translation differences
are included in other comprehensive loss.
[i] Stock options
As permitted by FASB Statement No. 123 ["FASB 123"], "Accounting for Stock-Based
Compensation", the Company has adopted the intrinsic value method of APB 25,
"Accounting for Stock Issued to Employees" in respect of stock options granted
to its employees and directors and FASB 123 in respect of stock options granted
to its consultants. The measurement date of options granted to consultants is
the date the services are completed. For purposes of recognition of the cost
of the options prior to the measurement date such options are measured at their
then current fair value at each interim financial reporting date.
[j] Income taxes
The Company follows the liability method of providing for income taxes in
accordance with FASB Statement No. 109, "Accounting for Income Taxes".
[k] Basic and diluted loss per common share
Basic per share amounts have been computed based on the weighted average number
of common shares outstanding each period. Diluted loss per share is calculated
by adjusting outstanding shares, assuming any dilutive effects of options,
warrants and convertible securities. For all of the periods presented, the
effect of stock options, warrants, and convertible securities were not included
as the results would be anti-dilutive. Consequently, there is no difference
between the basic and dilutive net loss per share. The weighted average number
potential of common shares from options, warrants and convertible securities for
the year ended March 31, 2001 was 9,798,849 [March 31, 2000 - 4,042,217; three
months ended March 31, 1999 - 1,175,833; three months ended March 31, 1998 -
nil; year ended December 31, 1998 - nil; 156-day period ended December 31, 1997
- - nil].
F-18
[l] Use of estimates
Management uses estimates and assumptions in preparing consolidated financial
statements in accordance with accounting principles generally accepted in the
United States. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities and
the reported amounts of revenue and expenses. Actual results could vary from the
estimates that are used.
[m] Change in year end
Effective for the period ended March 31, 1999, the Company changed its year end
from December 31 to March 31.
[n] New accounting pronouncement
The Financial Accounting Standards Board issued Statement on Financial
Accounting Standards (SFAS) No.133, Accounting for Derivatives Instruments and
Hedging Activities in 1998. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The Company must adopt SFAS No. 133 for the
year ended March 31, 2002. The Company does not believe the adoption of SFAS No.
133 will have a material effect on the financial position or results of
operations of the Company.
[o] Unaudited financial information
The information for the three months ended March 31, 1998 is unaudited and, in
the opinion of our management contains all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of our financial
position and results of operations at such dates and for such periods.
3. MARKETABLE EQUITY INVESTMENTS
In February 2000, the Company received 150,000 shares of the common stock of
another publicly traded corporation in consideration for 500,000 shares of
common stock of the Company issued by way of private placement. The Company
recorded the issuance of its shares of common stock at the $8.375 per share fair
value of the Company's common stock on the date of the transaction. The shares
of the common stock of the other public company received as consideration, net
of 20,000 of the shares payable as commission to the agents, had been recorded
as short-term equity investment and classified as "available for sale". The
carrying value of the short-term investment was adjusted to its market value as
at March 31, 2000, resulting in an unrealized loss of $287,500 included in the
comprehensive loss for the period. In addition to the tranfer of ownership of
20,000 shares of common stock of the short-term investment ot the agents, the
Company paid a $100,000 cash commission to the agents of this private placement.
During the year ended March 31, 2001, the remaining 130,000 shares were sold,
resulting in a net realized loss of $2,624,211 including a reclassification
adjustment of $287,500 netted from a comprehensive loss related to the reversal
of previous unrealized loss market-to-market adjustments.
4. INTELLECTUAL PROPERTY
The Company executed a Memorandum of Agreement dated July 31, 1997, whereby the
Company acquired certain intellectual property owned by an officer of the
Company in consideration for 35 VPS common shares issued at Cdn.$1 per share.
The Company is not using this electronic information delivery algorithm and does
not plan to use it in the future, therefore, this intellectual property was
written down to nil during the year ended March 31, 2000.
On November 17, 1998, the Company entered into a Purchase and Sale Agreement
with Advanced Systems Computer Consultants Inc., a company owned by the officer
of the Company noted above, pursuant to which the Company acquired certain
additional intellectual property rights. The intellectual property purchased
pursuant to this agreement is completed technology and relates to remote banking
software. The Company purchased the intellectual property rights for
consideration as follows:
[i] $51,601 [Cdn.$75,000] if the Company becomes a public corporation and has
completed a minimum financing of $2,000,000; and
[ii] $223,600 [Cdn.$325,000] if the purchased remote banking software generates
revenue.
The Company accrued the first installment in its accounts as at March 31, 1999
[$49,712 less accumulated amortization of $4,144] and paid this amount during
the year ended March 31, 2000. The Company is not using this remote banking
software and does not plan to use it in the future, therefore, this intellectual
property was written down to nil during the year ended March 31, 2000.
F-19
Acquired intellectual property as at March 31, 2001 consists of:
- ------------------------------------------------------------------------------------------------------------------------------------
Cost Additions Additions Additions Cost Accumulated Net Book Value
Beginning of Hombase i360 Other End of Year Amortization End of Year
Year Acquisition Acquisition And Write-offs
- ------------------------------------------------------------------------------------------------------------------------------------
Completed 17,066,624 60,000,000 77,066,624 77,066,624 0
Technology
- ------------------------------------------------------------------------------------------------------------------------------------
Trademarks 853,000 853,000 853,000 0
- ------------------------------------------------------------------------------------------------------------------------------------
Workforce-
in-place 253,000 253,000 253,000 0
- ------------------------------------------------------------------------------------------------------------------------------------
18,172,624 60,000,000 78,172,624 78,172,624 0
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Amortization Amortization Amortization Write-offs Write-offs Write-offs Accumulated
Amortization Hombase i360 Other Homebase i360 Other Amortization
And write-offs Acquisition Acquisition Acquisition Acquisition And write-offs
Opening Closing
- ------------------------------------------------------------------------------------------------------------------------------------
Completed 3,060,715 2,604,102 4,512,239 11,401,897 55,487,671 77,066,624
Technology
- ------------------------------------------------------------------------------------------------------------------------------------
Trademarks 150,853 130,544 571,603 853,000
- ------------------------------------------------------------------------------------------------------------------------------------
Workforce-
in-place 74,570 8,893 169,537 253,000
- ------------------------------------------------------------------------------------------------------------------------------------
3,286,138 2,743,539 4,512,239 12,143,037 55,487,671 78,172,624
- ------------------------------------------------------------------------------------------------------------------------------------
Acquired intellectual property as at March 31, 2000 consists of:
- -----------------------------------------------------------------------------------------------------------------------------------
Cost Additions Additions Additions Cost Accumulated Net book value
Beginning of Hombase i360 Other End of Year Amortization End of Year
Year Acquisition Acquisition And Write-offs
- -----------------------------------------------------------------------------------------------------------------------------------
Completed 49,735 17,015,000 1,889 17,066,624 3,060,715 14,005,909
Technology
- -----------------------------------------------------------------------------------------------------------------------------------
Trademarks 853,000 853,000 150,853 702,147
- -----------------------------------------------------------------------------------------------------------------------------------
Workforce-
in-place 253,000 253,000 74,570 178,430
- -----------------------------------------------------------------------------------------------------------------------------------
49,735 18,121,000 1,889 18,172,624 3,286,138 14,886,486
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated Amortization Amortization Amortization Write-offs Write-offs Write-offs Accumulated
Amortization Hombase i360 Other Homebase i360 Other Amortization
And write-downs Acquisition Acquisition Acquisition Acquisition And write-offs
Opening Closing
- -----------------------------------------------------------------------------------------------------------------------------------
Completed 4,144 3,013,145 47,570 3,060,715
Technology
- -----------------------------------------------------------------------------------------------------------------------------------
Trademarks 150,853 150,853
- -----------------------------------------------------------------------------------------------------------------------------------
Workforce-
in-place 74,570 74,570
- -----------------------------------------------------------------------------------------------------------------------------------
4,144 3,238,568 3,286,138
- -----------------------------------------------------------------------------------------------------------------------------------
5. ACQUIRED DISTRIBUTION AND LICENSING RIGHTS
The Company entered into a distribution agreement with ITC Learning Corporation
("ITC") in March 1999, which provided the Company with the perpetual
non-exclusive right to market, sell and electronically convert all existing and
future ITC products in consideration for $975,000 in respect of electronic
distribution to the first 150,000 licensed purchasers.
Pursuant to an amendment to this agreement, dated June 5, 2000, the Company
agreed, in exchange for an additional 100,000 single user licenses of the ITC
courseware content, to forego any and all product conversion rights to all
existing and future ITC products related to ITC's industrial training products.
The Company retains duplication rights for the Call Centre suite of products and
PC Skills suite of products.
Also, pursuant to the June 5, 2000 amendment to the distribution agreement of
March 1999, the Company agreed to forego any and all rights into perpetuity,
including but not limited to intellectual property rights and distribution
rights in the ASTAR Workforce Development product referenced in the contract
dated June 9, 1999 (pursuant to which a payment of $2,000,000 was made in the
fiscal year ending March 31, 2000) in exchange for an additional 300,300 prepaid
single user license copies of ITC's Call Centre and PC Skills courseware
content.
Total payments of $2,975,000 previously made by the Company to ITC now represent
a total of 550,300 units of single user licenses. During the year ended March
31, 2001, the Company amortized $495,833 (commencing June 1, 2000) of this
amount.
F-20
6. CAPITAL ASSETS
Capital assets as at: March 31, 2001 consists of:
- -------------------------------------------------------------------------------------------------------------
Cost - Additions Write-offs Cost - Accumulated Net book value
beginning of and end of amortization
year Write-Downs year write-offs and
write-downs
- -------------------------------------------------------------------------------------------------------------
Computer 568,301 517,664 (553,550) 532,415 182,503 349,912
equipment and
software
- -------------------------------------------------------------------------------------------------------------
Office
equipment 266,439 141,161 (202,743) 204,857 39,397 165,460
- -------------------------------------------------------------------------------------------------------------
Leasehold
improvements 17,285 92,794 (100,290) 9,789 9,789 --
- -------------------------------------------------------------------------------------------------------------
Virtual Call 858,711 757,856 (1,616,567) -- -- --
Centre Solution
- -------------------------------------------------------------------------------------------------------------
Computer 1,923,911 590,851 (168,028) 2,346,734 1,054,116 1,292,618
equipment nder
capital lease
- -------------------------------------------------------------------------------------------------------------
Other assets 30,700 30,700 2,558 28,142
under capital
lease
- -------------------------------------------------------------------------------------------------------------
3,665,347 2,100,326 (2,641,178) 3,124,495 1,288,363 1,836,132
- -------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Accumulated Amortization Write-offs Accumulated
amortization and amortization
write-offs - and write-offs -
beginning end of year
of year
- ----------------------------------------------------------------------------------------------------------
Computer equipment and 140,789 212,053 (170,339) 182,503
software
- ----------------------------------------------------------------------------------------------------------
Office equipment 52,685 39,174 (52,462) 39,397
- ----------------------------------------------------------------------------------------------------------
Leasehold improvements 3,569 16,942 (10,722) 9,789
- ----------------------------------------------------------------------------------------------------------
Virtual Call Centre
Solution
- ----------------------------------------------------------------------------------------------------------
Computer equipment under 312,763 741,353 1,054,116
capital lease
- ----------------------------------------------------------------------------------------------------------
Other assets under capital 2,558 2,558
lease
- ----------------------------------------------------------------------------------------------------------
512,364 1,009,522 233,523) 1,288,363
- ----------------------------------------------------------------------------------------------------------
Capital assets as at March 31, 2000 consists of:
- -------------------------------------------------------------------------------------------------------------
Cost - Additions Cost - Accumulated Net book value
beginning of end of year amortization
year and write-offs
- -------------------------------------------------------------------------------------------------------------
Computer 64,899 503,402 568,301 140,789 427,512
equipment and
software
- -------------------------------------------------------------------------------------------------------------
Office equipment 49,220 217,219 266,439 52,685 213,754
- -------------------------------------------------------------------------------------------------------------
Leasehold
improvements 2,979 14,306 17,285 3,569 13,716
- -------------------------------------------------------------------------------------------------------------
Virtual Call
Centre 858,711 858,711 858,711
Solution
- -------------------------------------------------------------------------------------------------------------
Computer equipment 1,923,911 1,923,911 312,763 1,611,148
under capital lease
- -------------------------------------------------------------------------------------------------------------
Other assets under 30,700 30,700 2,558 28,142
capital lease
- -------------------------------------------------------------------------------------------------------------
117,098 3,548,249 3,665,347 512,364 3,152,983
- -------------------------------------------------------------------------------------------------------------
F-21
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated Amortization Write-offs Accumulated
amortization and amortization and
write-offs - beginning write-offs - end
beginning of year
of year
- --------------------------------------------------------------------------------------------------------------------------------
Computer equipment and 7,684 133,105 140,789
software
- --------------------------------------------------------------------------------------------------------------------------------
Office equipment 1,887 50,798 52,685
- --------------------------------------------------------------------------------------------------------------------------------
Leasehold improvements 135 3,434 3,569
- --------------------------------------------------------------------------------------------------------------------------------
Virtual Call Centre
Solution
- --------------------------------------------------------------------------------------------------------------------------------
Computer equipment under 312,763 312,763
capital lease
- --------------------------------------------------------------------------------------------------------------------------------
Other assets under capital 2,558 2,558
lease
- --------------------------------------------------------------------------------------------------------------------------------
9,706 502,658 512,364
- --------------------------------------------------------------------------------------------------------------------------------
During the year ended March 31, 2001, the Company wrote off capital assets with
a cost of $766,039 and accumulated amortization of $233,523 and wrote-down other
capital assets by $248,572 in connection with its decision to wind down its
Community division and sell its Hosting divisions {note 1}.
Capital assets includes assets with a net book value of approximately 1,950,000
in respect of Homebase assets sold after year end. F-22
During the year, the Company wrote down $858,711 in relation to technology
licenses for our Contact application purchased in the previous periods, and an
additional amount of $757,856 related to hardware purchased in the 2001 fiscal
year, due to a series of decisions to alter the technology platform under which
the Contact services are to be provided.
7. RELATED PARTY TRANSACTIONS
The amount due to related parties consists of amounts due to current and past
officers of the Company. The amounts are non-interest bearing and payable on
demand. The balances relate to expenditures incurred and services performed on
behalf of the Company, except for Cdn.$25,000 of the amount due as at March 31,
1999 which relates to cash advances provided to the Company.
During the year ended March 31, 2001, the Company incurred expenses of $119,681
[ Cdn.$336,175] March 31, 2000 - $142,740; March 31, 1999 - $26,981; December 31,
1998 - $16,178; December 31, 1997 - nil] for consulting services provided by a
company owned by a shareholder and the Co-Chairman of the Company. The Company
will continue to pay a monthly consulting fee of $10,195 [Cdn.$15,000] while
services are being rendered.
During the year ended March 31, 2001, general, administration and selling
expenses include $119,681223,521 from the above related party transactions
[March 31, 2000 - $214,110; March 31, 1999 - $26,981; December 31, 1998 -
$106,023; December 31, 1997 - $42,119].
Revenues for the year ended March 31, 2001 include $254,383 of hosting services
provided to a company that has a director that is an officer of the Company
[March 31, 2000 - $15,633, March 31, 1999 - nil; December 31, 1998 - nil;
December 31, 1997 - nil].
8. OBLIGATIONS UNDER CAPITAL LEASE
The Company entered into a lease agreement on June 25, 1999 for the lease of a
Sun Microsystems Enterprise 10000 computer. Future minimum annual lease payments
under this and other smaller capital leases mainly with Sun originally expiring
at various dates to March 2004 are as follows:
$
- ----------------------------------------------------------------------
2002 881,796
2003 555,381
2004 10,692
- ----------------------------------------------------------------------
Total minimum lease payments 1,447,869
Less amount representing interest at 9.75% to 10.75% 126,015
- ----------------------------------------------------------------------
Balance of obligations 1,321,854
Less current portion 346,807
- ----------------------------------------------------------------------
975,047
===============================================================================
Of the $1,321,854 in outstanding lease obligations, $1,320,148 pertain to
various capital leases with Sun Microsystems. During the year the Company
defaulted on various lease agreements for computers and equipment provided by
Sun Microsystems Inc.(Sun). On April 20, 2001, the Company paid all outstanding
lease payments in arrears. On May 10, 2001, the Company successfully negotiated
the termination of these agreements and Sun has released the Company from any
further obligations (See note 1 Impairment of Assets and Restructuring Charges).
9. SHARE CAPITAL
Authorized
The Company has 100,000,000 shares of preferred stock authorized at a par value
of $0.001 per share and has 100,000,000 shares of common stock authorized at a
par value of $0.001 per share.
Exchangeable shares
The number of shares of common stock outstanding as of March 31, 2001 includes
1,266,526 exchangeable shares of InfoCast Canada which have been deemed as
shares of common stock of the Company for accounting purposes and in respect of
the loss per share calculations because the exchangeable shares are the economic
equivalent of shares of common stock of the Company.
Agreement with Market Pathways Financial Relations Incorporated
On November 1, 2000, the Company entered into an agreement with Market Pathways
Financial Relations Incorporated ("MP"), to provide services to expand investor
awareness of the Company's activities through shareholder communication,
stockbroker support, investor lead generation and media relations. For these
services, the Company will (i) pay $6,000 a month in cash and (ii) issue 112,000
shares of common stock of the Company in 4 equal installments of 28,000 shares
each vesting on November 1, 2000, February 1, 2001, May 1, 2001 and August 1,
2001 respectively. The Company recorded $106,413 of expense and $19,587 of
deferred compensation related to the 112,000 shares during the year ended March
31, 2001. The Company will amortize the deferred compensation of the shares over
the respective vesting periods and will revalue all of the shares each reporting
period over the life of the agreement with MP. The Company terminated the
agreement on May 14, 2001 and issued the last 28,000-share installment in final
settlement of obligations totaling $36,000 owing as at the date of termination.
F-23
Securities Purchase Agreement
Pursuant to a Securities Purchase Agreement dated June 24, 1999, the Company
issued, by way of a private placement, 420,000 shares of common stock to the
agent at $5.00 per share for gross proceeds of $2,100,000, net of commissions of
$210,000.
Also pursuant to the Securities Purchase Agreement, the Company issued warrants
to purchase 70,000 shares of common stock on June 24, 1999 to the placement
agent. Each warrant has an exercise price of $7.00, expires June 23, 2001 and
has been valued at $3.24 in the accounts based on an expected volatility factor
of 0.715 and a risk-free interest rate of 5.1%. As a result, $226,800 was
charged to share issuance costs during the year ended March 31, 2000.
Private Placement
From July to November 1999, the Company completed the private placement of
1,879,000 shares of common stock at $5.50 per share for gross proceeds of
$10,334,500 excluding an agent's fee of $1,033,329. During February and March
2001, the Company consummated a private placement financing whereby the Company
issued 12,797,682 common stock and granted warrants to purchase 6,398,841 common
stock at an exercise price of $0.75 per share for an aggregate offering price of
$6,398,841 pursuant to Regulation S of the Securities Act of 1933, as amended.
In accordance with the terms of the February and March private placements
referred to above, if a registration statement covering the Registrable
Securities required to be filed by the Company is not declared effective by the
Securities Exchange Commission on or prior to October 31, 2001, then the Company
shall issue to the Purchaser one Warrant to purchase 0.50 shares of common stock
for each Unit purchased by the purchaser in the offering.
Issuance of Shares
On January 25, 2001, the Company issued 30,000 shares of the Company's common
stock to a firm in which a former director is a partner and which is a
significant supplier of the Company in exchange for extended credit terms for
accounts payable due to the firm.
On January 18, 2001, the Company entered into an agreement with the Landlord of
its Tucson facilities to vacate the premises before February 28, 2001 as part of
the Company's decision to wind down its Community Division. As part of the
settlement, the Company paid in February 2001 $237,435 for rents in arrears and
issued 250,000 shares of the Company's common stock valued at $1.20 per share.
The cost of the shares was recorded as a restructuring charge (see note 1).
Subscription Receivable
On March 15, 2001, the Company issued to the Chairman and Chief Executive
Officer, 400,000 common shares and granted warrants to purchase 200,000 common
shares of the Company at a price of $0.75 per share, in consideration for a
$200,000 non-interest bearing loan repayable by October 15, 2002. The warrants
expire on January 31, 2004. The loan receivable was netted from share capital
and additional paid in capital.
Stock options
1998 Stock Option Plan
Pursuant to the Company's 1998 Stock Option Plan as amended on January 29, 1999,
2,250,000 shares of common stock are eligible for grant. As of March 31, 2001,
the Company had 1,650,000 shares of common stock reserved for the exercise of
stock options granted to various individuals involved in the management of the
Company, of which 2,075,000 were originally granted on February 8, 1999 from
which 600,000 were later cancelled during the year ended March 31, 2001 and
175,000 of which were granted on February 1, 2000. As of March 31, 2001,
consultants hold 500,000 of the options, while employees and directors hold
1,150,000 of the options.
The options granted on February 8, 1999 expire three years from the date of
grant, are exercisable at $1.00 per share and were fully vested as of March 31,
2000.
The 175,000 options granted on February 1, 2000 expire two years from the date
of grant, were fully vested on July 12, 2000, are exercisable at $1.00 per share
and were granted to a consultant of the Company. The deferred compensation
attributable to these stock options granted to a consultant was valued as of
July 14, 2000 to the then current fair value of $2.29 per stock option (based on
an expected dividend rate of 0%, an expected life of one year, a risk-free
interest rate of 6.65%, an expected volatility factor of 1.239 and the July 14,
2000 closing market price of $3.06 per share of common stock). As a result, as
of July 12, 2000 (vesting date), these options were valued at $400,750, of which
$386,273 was previously recognized as a stock option compensation expense during
the year ended March 31, 2000 and of which $14,477 has been recognized as a
stock option compensation expense during the year ended March 31, 2001.
1999 Stock Option Plan
Pursuant to the 1999 Stock Option Plan an additional 2,000,000 stock options are
eligible for grant. As of March 31, 2001, 1,595,000 of the eligible stock
options were granted to various employees, officers, consultants and advisors
pursuant to this plan.
On June 14, 2000, the Board of Directors approved the repricing of 1,605,000
stock options previously granted through to February 29, 2000 with original
exercise prices ranging from $7.00 to $8.625 per share to the new exercise price
of $4.00 per share, which resulted in incremental stock option compensation
expense of $63,800 in respect of 110,000 repriced stock options held by
consultants and nil in respect of the 1,508,335 repriced stock options held by
employees and directors as the fair value of the Company's stock closed at $1.13
per share as of March 31, 2001. The repriced stock options will be accounted for
as variable options until they are exercised, forfeited or expired.
F-24
During the year ended March 31, 2001, 566,669 options were cancelled. Also
during the period, 385,000 options were granted to employees and directors and
15,000 options were granted to a consultant, with exercise prices of $4.00 per
share.
As at March 31, 2001, 1,107,921 stock options have vested. The remaining will
vest on various dates between April 2001 and February 2003 and expire on various
dates between November 2004 and June 2005.
The deferred compensation in respect of the 385,000 stock options granted to
employees during the year ended March 31, 2001 was nil because the exercise
price of the options was equal to the market price of the shares of common stock
on the date of grant. The remaining 15,000 stock options granted during the year
ended March 31, 2001, have been valued at $13,400 of which $13,170 has been
recognized as a stock option compensation expense, and of which the balance of
$230 has been recorded as deferred compensation in stockholders' equity. Stock
option compensation expense of $48,578 was charged during the year ended March
31, 2001 in respect of the amortization of deferred compensation previously
recorded in respect of 233,333 stock options of the 350,000 stock options
granted on December 8, 1999.
2000 Stock Option Plan
On June 14, 2000 and August 14, 2000 respectively, the Board of Directors and
the stockholders of the Company approved the 2000 Stock Option Plan under which
an additional 2,000,000 stock options are eligible for grant. As of March 31,
2001, the Company had outstanding stock options to various employees, officers,
consultants and advisors pursuant to the 2000 Stock Option Plan as follows:
Option price Expiry
Grant date Options per share date
# $
- -----------------------------------------------------------------------------
June 14, 2000 334,000 4.00 June 13, 2005
November 8, 2000 50,000 2.00 November 7, 2005
January 25, 2001 136,670 1.00 January 24, 2006
March 5, 2001 750,000 1.00 March 5, 2006
- -----------------------------------------------------------------------------
1,270,670
=============================================================================
The 334,000 options exercisable at $4.00 per share vest as follows: 111,339 on
the date of grant, 111,336 at June 14, 2001 and 111,325 on June 14, 2002. The
50,000 options exercisable at $2.00 was vested on the grant date of November 8,
2000. The 136,670 options exercisable at $1.00 vested on the grant date. The
balance of the options exercisable at $1.00 vest as follows: 250,000 on the
grant date, 250,000 on Jan. 1, 2002 and 250,000 on Jan. 1, 2003.
Of the 334,000 options exercisable at $4.00, 20,000 were granted to consultants
and advisors and have been valued at $20,067, based on a weighted average
expected dividend rate of 0%, weighted average expected life of 2 years,
weighted average risk-free interest rate 6.65% and a weighted average expected
volatility factor of 1.268, of which $16,747 has been recognized as a stock
option compensation expense during the year ended March 31, 2001 and of which
the balance is recorded as deferred compensation.
Of the 136,670 options granted on January 25, 2001; 16,441 were granted to a
consultant and valued at $10,851 which was recognized as a stock option
compensations expense during the year ended March 31, 2001. The stock option
compensation expense and deferred compensation in respect of the 1,234,229 stock
options granted to employees and directors was nil because the exercise price of
the options was greater than the market price of the shares of common stock on
the date of grant.
Other stock options
On June 1, 1999, the directors of the Company approved the grant of 750,000
stock options outside of the 1999 Stock Option Plan to an individual who became
an officer of the Company on September 4, 1999. The stock options were
originally exercisable at a price of $7.00 per share, expire five years from the
date of grant and vest as follows: 250,000 on September 4, 1999 upon the
acceptance by the individual of formal employment with the Company, 250,000 on
September 4, 2000 and 250,000 on September 4, 2001. These outstanding options
have been valued at $2,437,500 of which $1,523,437 and $846,169 has been
recognized as a stock option compensation expense during the year ended March
31, 2000, and the year ended March 31, 2001, respectively, and of which the
balance of $67,894 has been recorded as deferred compensation as of March 31,
2001 in stockholders' equity (deficiency). On June 14, 2000, the Board of
Directors approved the repricing of these stock options to the new exercise
price of $4.00 per share, which resulted in incremental stock option
compensation expense of nil because the fair value of the Company's stock closed
at $1.13 per share as of March 31, 2001. These repriced stock options will be
accounted for as variable options until they are exercised, forfeited or
expired.
On October 18, 1999, the directors of the Company approved the grant of 60,000
stock options outside of the 1999 Stock Option Plan to an individual who was to
provide financial and investor relations consulting services to the Company. The
agreement with this individual was terminated in May 2000 resulting in the
cancellation of unvested options to purchase 30,000 shares of common stock
previously granted resulting in a credit to stockholders' compensation expense
of $37,763. Also, on June 14, 2000 the remaining 30,000 stock options were
repriced from $8.25 per share to $4.00 per share resulting in incremental stock
option compensation expense of $17,400 during year ended March 31, 2001. The
remaining 30,000 stock options are fully vested and expire two years from the
date of grant.
F-25
A summary of the Company's stock option activty, including stock options granted
to the former employees and directors of i360 upon the acquisition of i360, is
as follows:
Weighted Average Weighted Average
Number of Options Exercise Price
#
------------------------------------
Outstanding as of January 1, 1999 -- --
Granted 2,250,000 1.00
Exercised -- --
Forfeited -- --
Cancelled (175,000) 1.00
- ----------------------------------
Outstanding as of March 31, 1999 2,075,000 1.00
Granted 3,060,500 6.74
Exercised -- --
Cancelled - not vested (75,000) 7.00
Cancelled - vested (195,500) 7.00
- ------------------------------------
Outstanding as of March 31, 2000 4,865,000 4.28
------------------------------------
Repricing of all options with exercise prices greater than 4,865,000 2.72
$4.00 to $4.00
Granted 2,832,147 3.03
Exercised - -
Cancelled - not vested 83,996 4.00
Cancelled - Vested 1,172,001 2.46
Cancelled - i360 900,379 4.00
------------------------------------
Outstanding as of March 31, 2001 5,540,771 2.70
------------------------------------
Exercisable as of March 31, 2001 3,875,932 2.40
------------------------------------
Exercisable as of March 31, 2000 3,628,336 2.40
Exercisable as of March 31, 1999 - -
If the Company had adopted FASB Statement No. 123 ("FASB 123") in respect of
stock options granted to its employees and directors, the Company would have
recorded a higher stock option compensation expense for the year ended March 31,
2001 of $3,363,386 [2000 - $2,990,493, 3 months ended March 31, 1999 - $69,556]
in respect of the amortization of the estimated value of the Company's stock
options to employees over the vesting periods of the options, which results in a
pro-forma net loss of $102,531,153[2000 - $34,141,677, three months ended March
31, 1999 - $3,153,487) and a pro-forma basic and diluted loss per share of $3.31
[2000 - $1.51, three months ended March 31, 1999 - $0.27] in respect of the nine
month period ended December 31, 2000.
The Company assumed the following expected dividend rates, expected lives,
risk-free interest rate and expected volatility factors in respect of the
valuation of stock options granted to employees and directors in accordance with
FASB 123:
- ----------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
March 31, 2001 March 31, 2000 March 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------
Expected dividend rate 0% 0% 0%
- ----------------------------------------------------------------------------------------------------------------------------
Expected life 2 yrs 2 yrs 2 yrs
- ----------------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 6.65% 5.30% 5.08%
- ----------------------------------------------------------------------------------------------------------------------------
Expected volatility 1.268 0.8087 0.838
- ----------------------------------------------------------------------------------------------------------------------------
On April 2, 2001 the Company granted an additional 1,067,000 stock options to
employees with an exercise price of $1.00 per share. The stock options expire on
April 1 and April 2, 2006 and vest as follows; i) 389,000 upon grant; ii)
339,000 on April 1 and April 2, 2002; and iii) 339,000 on April 1 and April 2,
2003.
On May 17, 2001 the Company granted an additional 250,000 stock options to an
employee with an exercise price of $1.00 per share. The stock options expire on
May 17, 2006 and vest as follows; i) 83,333 upon grant; ii) 83,334 on May 17,
2002; and iii) 83,333 on May 17, 2003.
The weighted average fair value of the stock options granted to employees and
directors during the year ended March 31, 2001 was $1.50 per option (2000 -
$2.00, three months ended March 31, 1999 - $6.50.)
F-26
Other warrants
Pursuant to a letter agreement dated April 7, 2000, the Company paid $9,000 per
month plus expenses, and issued warrants to purchase 200,000 common shares to a
financial advisor in consideration for general corporate, financial advisory and
investor media relations consulting services over the one year term of the
agreement. In addition, the financial advisor will be entitled to a commission
on certain corporate financing transactions in which the advisor is involved.
These warrants have an exercise price of $6.50 and expire April 7, 2005. These
warrants have been valued as of December 31, 2000 at $26,000 in the accounts
(based on a volatility factor of 1.452, an expected life of two years, an
expected dividend rate of 0% and a risk-free interest rate of 6.57%) of which
$19,090 has been recorded as general and administrative expenses and of which
the balance of $6,910 has been recorded as deferred compensation. These warrants
will be revalued each interim period until the final April 7, 2001 measurement
date.
On June 14, 2000, 200,000 warrants were granted to the Co-Chairman as
compensation for various services, including his role in negotiating the
convertible debenture financing (note 10) and i360 acquisition (note 1). The
$384,000 value of these warrants was allocated as follows: $192,000 to deferred
convertible debt issuance costs and $192,000 to the i360 acquisition costs. Also
on June 14, 2000, 300,000 warrants were issued to a stockholder as compensation
for various services, including his role in negotiating the i360 acquisition and
investor relations' services. The $576,000 value of these warrants was allocated
as follows: $518,400 to the i360 acquisition costs and $57,600 to general and
administrative expenses. The value of these warrants was determined by a Black
Scholes model based on a volatility factor of 1.268, an expected life of
one-year, an expected dividend rate of 0% and a risk-free interest rate of
6.65%. The i360 acquisition costs of $710,400 recorded in respect of these
warrants plus additional cash i360 acquisition costs of $480,865 has been
included in the i360 purchase price. These warrants have an exercise price of
$4.00 per share and expire on January 25, 2004.
On November 1, 2000, the Company granted warrants to purchase 475,800 shares of
the Company's stock to certain existing stockholders for no consideration. These
warrants have an exercise price of $2.50 per share and expire on November 1,
2002. The $385,398 value of these warrants was charged to general and
administrative expenses and was determined by a Black- Scholes model based on a
volatility factor of 1.449, an expected life of 1 years, an expected dividend
rate of 0% and a risk-free interest rate of 6.55%.
In March 2001, the Company issued three-year warrants to purchase 262,000 shares
of common stock at an exercise price of $0.3333 per share as part of a
settlement on a claim (see "Lemoines settlement in note 14). $327,500 of these
warrants was charged to general and administrative expenses and was determined
by a Black-Scholes model based on a volatility factor of 1.694, an expected life
of 2 years, an expected dividend rate of 0% and a risk-free interest rate of
4.92%.
Pursuant to a letter agreement dated May 20, 1999 with an investor relations
company and subsequent negotiations in October 1999, the Company was obligated
to pay a total of $75,000 and issue warrants to purchase 75,000 shares of common
stock in consideration for consulting services during the period from June 1,
1999 to May 31, 2000. The payments were to be made and warrants issued for
services in advance. The following payments have been made and the following
warrants have been issued: $25,000 and 25,000 warrants on June 1, 1999 and
$12,500 and 12,500 warrants on each of October 6, 1999 and January 1, 2000. The
Company terminated the agreement in March 2000 and does not intend to make any
additional payments or issue additional warrants. Based on an expected dividend
rate of 0%, a volatility factor of 0.963 and a risk-free interest rate of 5.10%,
the Company valued the 25,000 warrants issued on June 1, 1999 with a purchase
price of $7.00 per share, at $149,750 which is the fair market value as of the
August 31, 1999 measurement date. Based on a volatility factor of 0.914, an
expected dividend rate of 0% and a risk-free interest rate of 6.10%, the Company
valued the 12,500 warrants issued on October 6, 1999 with a purchase price of
$8.75 per share, at $33,250 which is the fair market value as of the November
30, 1999 measurement date. Based on an expected dividend rate of 0%, a
volatility factor of 0.873 and a risk-free interest rate of 6.18%, the Company
valued the 12,500 warrants issued on January 1, 2000 with a purchase price of
$7.62 per share, at $28,875 which is the fair market value as of the March 31,
2000 measurement date. All warrants issued under this agreement will be
exercisable on or after June 1, 2000 and expire May 31, 2001. The Company
charged $211,875 to general and administrative expenses in respect of these
warrants during the year ended March 31, 2000.
On June 1, 1999, the Company issued warrants to purchase 200,000 shares of
common stock to parties in consideration for past consulting services to the
Company. These warrants have a purchase price of $7.00, are exercisable on or
after June 1, 2000 and expire May 31, 2001. These warrants have been valued at
$432,000 based on a volatility factor of 0.744, an expected dividend rate of 0%
and a risk-free interest rate of 5.10% and were charged to general and
administrative expenses during the year ended March 31, 2000.
On February 11, 2000, the Company issued warrants to purchase 56,000 shares of
common stock to a stockholder of the Company for no consideration. These
warrants have a purchase price of $5.00, are exercisable on or after February
11, 2000 and expire February 10, 2002. These warrants have been valued at
$137,200 based on a volatility factor of 0.840 and a risk-free interest rate of
5.95% and were charged to general and administrative expenses during the year
ended March 31, 2000.
In addition, to the above noted warrants, there are warrants outstanding to
former i360 shareholders (note 1) and Sun (note 11).
F-27
10. CONVERTIBLE DEBENTURES
Debenture - Series I
On April 4, 2000, the Company issued 2,500 units by way of a private placement
at $1,000 per unit and on June 15, 2000 the Company issued an additional 960
units by way of a private placement at $1,000 per unit for total gross proceeds
of $3,460,000. The Company had also issued 3,500 units at $1,000 per unit in
March 2000, which in total results in $6,960,000 of convertible debt outstanding
as of March 31, 2001. Each unit consists of $1,000 principal of convertible
subordinated debentures and warrants. The convertible debentures bear interest
accruing from the date of issue at 7% per annum, payable semi-annually on
September 30 and March 31 and mature on March 31, 2005. The debentures are
convertible at the option of the holders at a conversion price of $6.00 per
share.
The conversion price is subject to adjustment under certain events pursuant to
the agreement. The Company has the right to require the holder to convert all or
a portion of these debentures if (i) at any time after March 31, 2003 the
closing bid price of the Company's common stock exceeds $18.00 for 15
consecutive trading days or (ii) the Company completes a $50 million financing
within one year at a price in excess of $12 per share. Each of the 773,334
warrants are exercisable at $7.50 per share, expire on March 31, 2003 and cannot
be exercised within the first year without also converting the convertible
debentures.
The intrinsic value of the beneficial conversion option of convertible
debentures issued in April and June 2000 has been valued at $1,455,933 and has
been included in interest expense during the year ended March 31, 2001.
F-28
The intrinsic value of the beneficial conversion option of the debenture issued
in March 2000 has been valued at $1,913,482 and has been included in interest
expense in the year ended March 31, 2000 as the option was exercisable upon
issuance.
Cash commission and other cash costs of $328,351 paid relating to the debentures
issued in April and June 2000 in addition to $275,000 paid in March 2000 were
recorded as a deferred convertible debenture issuance cost. In addition, the
Company issued to the agent common stock purchase warrants to purchase 96,111
shares of common stock at $7.50 per share to the agents as a placement fee for
the convertible debentures issued in April and June 2000 in addition to 97,222
warrants issued to the agent in respect of the March 2000 issuance. Based on a
Black-Scholes valuation, the warrants issued in April and June 2000 have been
valued at $271,666 (based on a weighted average volatility factor of 0.895, a
weighted average expected life of 2 years, an expected dividend rate of 0% and a
weighted average risk-free interest rate of 6.26%) and the warrants issued in
March 2000 were valued at $329,583 and have been recorded as a deferred
convertible debenture issuance cost. In addition, in June 2000, 100,000 warrants
valued at $192,000 were issued to the Chairman as compensation for his role in
negotiating the convertible debenture financing (note 9) and were recorded as a
deferred convertible debt issuance cost. The deferred charges related to these
placements are being amortized on a straight-line basis over the 5-year life of
the debentures.
In the event that the Company defaults on the interest payments, the debenture
becomes due within 30 days at the option of the debenture holder.
Debenture - Series II
On November 7, 2000, the Company entered into a securities purchase agreement
for the sale of $2,500,000 aggregate principal amount of the Company's
convertible subordinated debentures due 2003 and warrants to purchase an
aggregate of 250,000 shares of the Company's common stock at an exercise price
of $2.00 per share to one investor for a purchase price of $2,500,000 (the
"November Financing"). The Company closed on the sale of (i) $1,000,000
aggregate principal amount of such debentures and warrants to purchase 100,000
shares of common stock to such investor on November 7, 2000 and received
proceeds of $1,000,000 and (ii) $750,000 aggregate principal amount of such
debentures and warrants to purchase 75,000 shares of common stock to such
investor on December 12, 2000 and received net proceeds of $631,500 less agency
commissions of $118,500. The closing of the final tranche of the November
Financing was conditional on the closing bid price of the Company's common stock
not being below $0.50 for three consecutive days on which the NASDAQ stock
market is open for trading subsequent to November 7, 2000. This condition was
not met and, as a result, the final tranche did not close. The debentures are
convertible into the Company's common stock, at any time, at a conversion price
equal to the lower of (i) U.S. $1.50 per share of common stock or (ii) 80% of
the average of the three lowest closing bid prices of the Company's common stock
for the 30 days immediately preceding the conversion date, unless at the
conversion date the common stock is not listed and posted for trading on a
recognized stock exchange or quotation system, in which case the conversion
price shall be U.S. $1.50.
The intrinsic value of the beneficial conversion option of convertible
debentures issued pursuant to the November Financing has been valued at $681,041
and has been included in interest expense during the year ended March 31, 2001.
The cash commission costs of $122,500 relating to the debentures issued in
November and December 2000 was recorded as a deferred convertible debenture
issuance cost. In addition, the Company issued to the agent, common stock
purchase warrants to purchase 17,500 shares of common stock at $2.00 per share
as a placement fee for the convertible debentures issued in November and
December 2000. Based on a Black-Scholes valuation, the warrants issued in
November and December 2000 have been valued at $16,050, (based on a weighted
average volatility factor of 1.440-1.453, a weighted average expected life of 2
years, an expected dividend rate of 0% and a weighted average risk-free interest
rate of 6.42-6.59%) and have been recorded as a deferred convertible debenture
issuance cost. The deferred charges related to these placements are being
amortized on a straight-line basis over the 3-year life of the debentures.
Conversion of Series II Debenture
On November 28, 2000, $300,000 of the convertible debentures was converted into
384,448 shares of the Company's common stock at the conversion price of $0.7833
per share. On December 4, 2000, another $100,000 of the convertible debentures
were converted to 133,973 shares of the Company's common stock at the conversion
price of $0.75 per share. On December 21, 2000, a further $100,000 of the
convertible debentures were converted into 235,299 shares of the Company's stock
at the conversion price of $0.42833 per share. On February 14, 2001, a further
$500,000 of the Series II Debentures were converted into 632,671 common shares
at a conversion price of $0.80 per share. As a result of these conversions, the
Company credited the $1,000,000 principal amount plus interest owing of $8,553,
net of the related unamortized deferred convertible debenture issuance cost of
$74,773 to common stock and additional paid-in-capital.
Redemption of Series II Debenture
On February 14, 2001, the Company paid the balance of the $750,000 of principal
amount, $13,089 of accrued interest and a $152,618 redemption fee relating to
the Series II Debentures. As a result, a loss from retirement of debt was
charged against income during the three months ended March 31, 2001 in the
amount of the $152,618 redemption fee plus the related unamortized deferred
convertible debenture issuance cost of $56,080.
F-29
11. COMMITMENTS
[a] Lease commitments
The Company leased premises and equipment under non-cancelable operating leases,
which require future minimum annual lease payments as follows:
$
- -----------------------------------------------------------------------
2002 253,353
2003 179,124
2004 163,308
2005 82,387
- -----------------------------------------------------------------------
678,172
=======================================================================
The rental payments for the premises are exclusive of taxes and operating costs.
During the year ended March 31, 2001, the Company incurred rent expense of
$882,412 [March 31, 2000 - $384,334; March 31, 1999 - $38,382; March 31, 1998 -
$4,044; December 31, 1998 - $16,701; December 31, 1997 - $5,711].
[b] Agreement with Sun Microsystems Inc.
On September 14, 2000, the Company entered into an agreement with Sun
Microsystems Inc. ("Sun"), pursuant to which Sun purchased 320,674 shares of the
Company's common stock at $3.12 per share for total proceeds of $1,000,000 and
the Company issued warrants to Sun to purchase 397,957 shares of common stock of
the Company at an exercise price of $3.67 per share. The warrants are
exercisable upon Sun's approval of lease financing credit lines as follows: (i)
109,029 immediately upon Sun granting a $2 million lease line; (ii) 109,029 upon
Sun extending the lease line to $4 million; (iii) 109,029 upon Sun extending the
lease line to $6 million; and (iv) 70,870 upon Sun extending the lease line to
$7.3 million. On September 14, 2000, Sun had approved the initial $2 million
lease financing line, resulting in the first 109,029 warrants being exercisable.
The Company has drawn approximately $300,000 on this lease credit line.
Alternatively to exercising the warrants, Sun may have converted the outstanding
warrants into the number of shares of common stock of the Company equal to the
intrinsic value of the converted warrants (the difference between the market
value of the Company's common stock at the time of conversion less the $3.67
warrant exercise price multiplied by the number of converted warrants) divided
by the market value of one share of the Company's common stock at the time of
conversion. The warrants would have expired on September 14, 2005.
The initial 109,029 vested warrants were valued at $312,913 using a Black
Scholes valuation and expensed in the accounts. As at March 31, 2001, the
unvested warrants have been valued in the accounts at $205,139 (based on a
volatility factor of 1.701, an expected life of two years, an expected dividend
rate of 0% and a risk-free interest rate of 4.74%) and have been recorded as
deferred compensation, which will be revalued each reporting period until the
approval of the lease lines by Sun at which time the value of the vested
warrants will be expensed, or the termination of the agreement.
Also pursuant to the September 14, 2000 agreement, Sun was obligated to purchase
a further $1 million of the Company's common stock in September 2001 at a price
equal to 85% of the lessor of the market value of the Company's common stock on
the date prior to the closing and the average market price of the Company's
common stock on the 10 days preceding the closing. Pursuant to the agreement,
the closing of this placement was contingent upon (i) the Company meeting or
exceeding certain revenue and pre-tax income targets; (ii) the market value of
the Company's common stock exceeding 1.5 times the price of the initial closing
at the time of the second closing; and (iii) the Company purchasing at least $5
million of Sun's products or services prior to the closing, including any
purchases made pursuant to the lease line. These conditions will not be met.
As a condition of the investment of the initial $1 million by Sun, the Company
was committed to purchase $20 million worth of Sun products and technologies,
including purchases made pursuant to the lease line, and was not to purchase
products and technologies that are available from Sun from other companies over
the ensuing two year period or over any extended period, if applicable, until
the purchase commitment was met. Should Sun not have invested the second $1
million contemplated above, the Company's obligation was to be reduced to $10
million.
On May 4, 2001, the Company entered into a Termination Agreement with Sun to (i)
cancel the $7.3 million lease financing line, (ii) cancel 288,928 unexercisable
warrants related to $5.3 million Lease financing credits not approved at May 4,
2001, (iii) cancel the Company's $20 million purchase obligation, and (iv)
release Sun from any obligation to further investment in the Company. The
initial 109,029 warrants remain outstanding.
[c] Agreement with Team CEO Corporation
Effective April 1, 2001, the Company entered into an agreement with Team CEO
Corporation ["Team CEO"] to develop and implement a sales infrastructure and
distribution channels, including the associated practices and processes, to
maximize the Company's revenue opportunities. Under the terms of the agreement,
which ends April 1, 2003, Team CEO receives a monthly fee of $50,000 and
commissions on the Company's earned revenue and will be entitled to a finder's
fee in the event of the hiring of professional employees introduced by Team CEO.
Under the terms of the agreement, the three principals of Team CEO will each be
granted options each to purchase 1.2 million common shares of InfoCast at an
option price of $1.00 per share.
In addition, on May 17, 2001 the Company granted 1,500,000 stock options to Team
CEO. The options vest and expire based on the achievement of the performance
criteria provided for in an agreement between the Company and Team CEO.
F-30
[d] Agreement with VIGIC Services, LLC
In March 2001, the Company entered into an agreement with VIGIC Services, LLC, a
GTCR Golder Rauner, LLC company, to render certain consultant and advisory
services in connection with the Company's efforts to develop operating
strategies, pursue possible acquisitions or other strategic transactions, and
raise financing to March 31, 2004. Pursuant the agreement, the Company issued
warrants to purchase 750,000 of common stock at $1.00. Of these warrants to
purchase the Common Stock, 375,000 vested immediately and the remaining balance
of 375,000 vest on March 15, 2002. These warrants have been valued at $690,000
in the accounts based on a volatility factor of 0.744, an expected dividend rate
of 0% and a risk-free interest rate of 5.10% of which $16,369 has been charged
to general and administrative expenses and of which the balance of $673,631 is
included in deferred compensation. The unvested half of the warrants, which have
been valued at $0.89 each as at March 31, 2001, will be revalued each reporting
period until the vesting date. The value of the warrants will be amortized over
the 1 year term of the agreement.
Subsequent to March 31, 2001, the agreement was amended to increase the number
of warrants to 1,500,000 and to provide VIGIC with a monthly retainer of $16,666
per month. In addition, VIGIC will be entitled to a commission in the event of a
financing with an investor introduced by VIGIC.
12. JOINT VENTURE INVESTMENT IN DIGITAL OUTCRY
Pursuant to a shareholder agreement executed on November 25, 1999 between the
Company, 813040 Alberta Ltd. ("Newco") and Canpet Energy Group Inc. ("Canpet"),
the Company and Canpet agreed to become shareholders of Newco, with each party
initially becoming a 50% owner of Newco. Newco has developed a web-enabled
trading business model for crude oil and natural gas liquids and other products.
Newco later became known as Digital Outcry.
As of December 31, 2000, the Company had advanced a total of $249,418
(Cdn.$375,000) to Newco; $3,326 (Cdn.$5,000) for the initial purchase of common
shares and $246,092 (Cdn.$370,000) in the form of shareholder loans which have a
conversion feature attached allowing the Company to convert the advances into
additional shares of Newco.
Since its inception, Newco has issued additional common shares resulting in the
dilution of the Company's ownership in Newco from 50% to 1.19% (27.4% on a fully
diluted basis) as of December 31, 2000.
As a result of the dilution, commencing April 1, 2000, the Company has accounted
for this investment using the cost method, which resulted in recording the final
$84,699 advanced during the six months ended September 30, 2000 at cost. The
prior equity and shareholder loans provided by the Company were reduced to nil
during the year ended March 31, 2000 when the Company was accounting for this
investment using the equity method. As at March 31, 2001, the Company
wrote-off the advances of $84,707 that had been accounted for using the cost
method because Newco became an inactive company during the last two quarters.
13. INCOME TAXES
As of March 31, 2001, the Company has accumulated non-capital losses of
approximately Cdn. $19,018,000 [approximately $12,200,000] for Canadian income
tax purposes which are available to reduce future years' taxable income. The
future income tax benefits associated with these non-capital losses have not yet
been recognized in the accounts. These non-capital losses will expire as
follows:
Cdn. $
- ----------------------------------------------------------------------------
2002 125,000
2003 625,000
2004 126,000
2005 325,000
2006 120,000
2007 8,709,000
2008 8,988,000
- ----------------------------------------------------------------------------
19,018,000
============================================================================
The Company has recorded no United States current federal income tax expense or
benefit. As of March 31, 2001, the Company has accumulated net operating losses
of approximately $23,135,000 for United States income tax purposes which are
available to reduce future years' taxable income. The future income tax benefits
associated with these net operating losses have not yet been recognized in the
accounts. These net operating losses will expire as follows:
$
- ---------------------------------------------------------------------------
2018 568,000
2019 3,633,000
2020 8,224,000
2021 10,710,000
- ---------------------------------------------------------------------------
23,135,000
===========================================================================
F-31
The Company has a United States capital loss carryforward of approximately
$6,019,000. A capital loss carryforward may only be used to reduce capital gains
and cannot be applied against taxable ordinary income that might be earned by
the Company. These capital loss carryforwards will expire as follows:
$
- ----------------------------------------------------------------
2003 5,419,000
2004 600,000
- ----------------------------------------------------------------
6,019,000
- ----------------------------------------------------------------
Utilization of the United States net operating loss carryforwards and the
capital loss carryforwards are subject to the loss limitations rules of Internal
Revenue Code Sections 382 and 383 which may substantially limit the
annualization of these losses due to the ownership change that occurred on
January 29, 1999 [note 1]. Such annual limitations may result in the expiration
of all or a portion of the loss carryovers before utilization.
Following are the components of the Company's deferred tax liability balances:
March 31, March 31,
2001 2000
$ $
- -----------------------------------------------------------------------------------------
Homebase acquisition [note 1] - (5,656,895)
Future tax benefit of Canadian loss carryforwards 5,321,690 3,082,986
Canadian book depreciation in excess of
tax depreciation 338,447 63,902
Canadian valuation allowance (5,659,637) (3,146,078)
Future tax benefit of United States
net operating loss carryforwards 7,866,000 1,354,000
Future tax benefit of United States
capital loss carryforwards 2,046,000 2,257,000
Other United States amounts 2,651,000 1,711,000
United States valuation allowance (12,563,000) (5,322,000)
- -----------------------------------------------------------------------------------------
- (5,656,895)
=========================================================================================
14. CONTINGENCIES
[a] Alleged wrongful dismissal and negligent misrepresentation
In October 2000, a former employee of the Company filed a legal action against
the Company and certain of its directors and officers alleging wrongful
dismissal and negligent misrepresentation. The claimant is seeking wrongful
dismissal damages of Cdn$50,000.00 (approximately $ 32,000 at March 31, 2001),
damages for "loss of opportunity" Cdn$1,000,000.00 (approximately $ 641,500 at
November 13, 2000), punitive damages of Cdn$50,000.00 (approximately US$ 32,000
at March 31, 2001), unspecified "special damages", together with interest and
costs. The Plaintiff's employment was terminated on July 28, 2000 and plaintiff
seeks six months' severance which is included in the amount claimed above. The
Company has not yet prepared a statement of defense. Management believes that it
has a valid defense to the claim and intends to defend it vigorously. In
addition, management believes that the results of this matter will not have a
material adverse impact on the Company, although an unfavorable decision could
have a material adverse affect on the Company's business, financial condition
and results of operation. No provision has been made in the accounts in respect
of this claim.
[b] Alleged Advisory Services
On February 1, 2001, the Company received a demand for payment from an
investment advisor in the amount of approximately $900,000 regarding fees in
connection with alleged advisory services performed in connection with the
acquisition of i360 in 2000 (note 1). The Company does not agree that any fee is
owed in connection with these alleged advisory services and intends to contest
rigorously such request for payment. No provision has been made in the accounts
in respect of this request.
While the Company believes that this matter will not have a material adverse
effect on its financial position, protracted litigation or an unfavorable
decision could materially affect the Company's operations and financial
condition through the consumption of management time and utilization of scarce
financial resources.
F-32
[c] Fair value of financial instruments
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments". The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies.
The fair values of financial instruments classified as current assets or
liabilities including cash and cash equivalents, accounts receivable and
accounts payable and accrued liabilities as of March 31, 2000 approximate their
carrying values due to the short-term maturity of the instruments. It is
impractical to determine the fair values of the convertible debentures.
[d] Concentration of credit risk
The Company invests its cash and cash equivalents primarily with a major
Canadian chartered bank. Certain deposits, at times, are in excess of limits
insured by the Canadian government. The Company believes the financial
institutions holding the Company's deposits are financially sound. Accordingly,
minimal credit risk exists.
[e] Settlement with Applied Courseware Technology (A.C.T.) Inc.
Pursuant to a Letter of Intent dated February 10, 1999, as amended, between the
Company and Applied Courseware Technology (A.C.T.) Inc. ["ACT"], the Company
intended to purchase a 100% interest in ACT.
In September 1999 the Company made the decision not to proceed with the
acquisition of ACT, which ACT contested. On January 7, 2000, the Company reached
a final settlement with the shareholders of ACT whereby the Company paid $68,800
[Cdn.$100,000] in consideration for certain capital assets and the reimbursement
of expenses incurred by ACT relating to the purchase agreement, which amount is
included in the accounts as of March 31, 2000. In addition, the Company forgave
a note for $95,242 [Cdn.$140,000], including interest of $3,443 and as a result
wrote the amount receivable down to nil. The Company also issued 200,000 shares
of common stock of the Company to two shareholders of ACT and recorded an
expense in the accounts at the fair value of the common shares issued at the
date of the settlement. During the year ended March 31, 2000, the Company made
cash advances to ACT totaling $559,873 [Cdn.$823,629] to fund certain
development expenditures incurred by ACT on behalf of the Company. These
advances, in addition to $47,390 [Cdn.$70,000] that was outstanding as of March
31, 1999, have been charged to research and development expenses during the year
ended March 31, 2000.
F-33
[f] Lemoines Settlement
On or about July 12, 2000, claims were filed against i360 in a Colorado Court
alleging breach of contract by i360 in connection with two alleged contracts
concerning the distribution of i360's service offering. The claim was for an
indeterminate amount of damages. One of the alleged contracts consisted of two
letters signed by the claimant and countersigned by i360, while the second
alleged contract was not in writing.
In March 2001, the Company settled the lawsuits between itself, Hope
International and the Lemoines. The Company paid Hope International and the
Lemoines an aggregate of $50,000 and issued three-year warrants to purchase
262,000 shares of common stock at an exercise price of $0.3333 per share in
settlement, which have been valued at $327,500 determined by a Black-Scholes
valuation model based on a volatility factor of 1.694, an expected life of 1
year, an expected dividend rate of 0% and a risk free interest rate of 4.92%.
15. Prepaid Royalties
On February 24, 2000, InfoCast and Innatrex Inc. ["Innatrex"] entered into an
Application Service Provider Agreement which allows InfoCast, among other
things, to incorporate Innatrex's software product into its product offerings
and license the Innatrex software product to third parties. In consideration,
InfoCast was to pay royalties in advance to Innatrex. The prepayments of
$207,857 were recorded as a prepaid expenses and have been written-off during
the year ended March 31, 2001 as the royalties are no longer consistent with the
Company's business plan.
16. SUBSEQUENT EVENTS
[a] Private Placement
From arch 31, 2000 to July 13, 2001 In May, June and July 2001 [to July 13,
2001],the Company consummated a series of private placement financing whereby
the Company issued 3,238,000 common shares and granted warrants to purchase
1,644,000 common shares at an exercise price of $0.75 per share for an aggregate
offering price of $0.50 pursuant to Regulations D and S of the Securities Act of
1933, as amended. The warrants vested on issuance and expire on January 31,
2004.
[b] Liability settlement
As at March 31, 2001, the Company owed approximately $770,000 to a supplier of
telecommunications services to its Community division, which was closed in
February 2000, pursuant to a services agreement dated December 28, 2000. On May
15, 2001, the Company and the supplier terminated the agreement and agreed to
settle all financial matters, including the $720,000 payable as at March 31,
2001 and a cancellation fee of approximately $600,000 conditional on the payment
of $450,000 by June 30, 2001. The Company renegotiated the payments terms,
pursuant to an agreement dated July 9, 2001, whereby the Company paid $100,000
immediately will be paid on July 31, 2001, $100,000 will be paid on August 15,
2001 and $150,000 will be paid on August 31, 2001. In the event that the Company
does not follow this payment schedule, the full balance, less payments made to
date, becomes payable immediately. The Company paid $50,000 of this amount
during May 2001. As of March 31, 2001, the Company recorded a liability of
$670,000.
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