(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement SCHEDULE 14A
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter) Board of
Directors - Pivotal Self-Service Technologies Inc.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box): [ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
Common stock
2) Aggregate number of securities to which transaction applies:
182,410,735
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (the closing market price of the
Registrant's common stock as quoted on the NASD's Over-the-Counter
Bulletin Board on May 28, 2004):
$0.073 per share
4) Proposed maximum aggregate value of transaction:
$13,315,984
5) Total fee paid:
$2,663.20
[X] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
1) Amount previously paid: _____________________________________
2) Form, Schedule or Registration Statement No.: _______________________
3) Filing Party: ____________________________
4) Date Filed: _____________________________
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PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
13980 Jane Street
King City, Ontario, Canada, L7B 1A3
905-833-3838
June 16, 2004
Dear Stockholder:
You are cordially invited to attend our 2004 Annual Meeting of
Stockholders, which will be held on June 28, 2004, at 10:00 a.m., local time at
144 Front Street West, Suite 580, Toronto, Ontario, Canada, M5J 2L7.
The accompanying Notice of Annual Meeting of Stockholders enumerates the
matters to be brought before the meeting and the accompanying proxy statement
discusses these matters in detail. The notice and the proxy statement have been
made a part of this invitation.
Whether or not you intend to be present at the meeting, please mark, date
and sign the enclosed proxy and return it at your earliest convenience in the
enclosed envelope to which no postage need be affixed if mailed in the United
States. If you have any questions or need assistance in completing the proxy,
please call the Company's Chief Financial Officer, Mr. Gary N. Hokkanen, at the
number above.
A copy of our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2003, is also enclosed.
The Board of Directors and Management look forward to seeing you at the
meeting.
Sincerely yours,
John G. Simmonds
Chief Executive Officer
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
13980 Jane Street
King City, Ontario, Canada, L7B 1A3
-----------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
-----------------------------------------------------
The Annual Meeting of Stockholders of Pivotal Self-Service Technologies
Inc., a Delaware corporation (the "Company"), will be held on June 28, 2004, at
144 Front Street West, Suite 580, Toronto, Ontario, Canada, M5J 2L7, at 10:00
a.m., Toronto time, for the following purposes:
1. To elect two directors, each to hold office until the Annual Meeting of
Stockholders in 2005 and until their respective successors are duly
elected and qualified or until the closing of the Company's proposed
acquisition of Phantom Fiber Corporation (the "Closing");
2. To elect four directors (the "Target Nominees"), each to take office
immediately upon the Closing, each to hold such office until the next
Annual Meeting of Stockholders;
3. To consider and vote on the proposed acquisition of Phantom Fiber
Corporation ("Phantom Fiber"), pursuant to which the Company will
acquire Phantom Fiber and its wholly owned subsidiary, Phantom Fiber
Inc. as contemplated by the share exchange agreement dated as of
April 21, 2004 among the Company and Phantom Fiber, Inc. (the "Share
Exchange Agreement"). The Company will issue 137,410,735 shares of
its common stock to the shareholders of Phantom Fiber and 30,000,000
shares of its common stock and warrants to purchase 15,000,000
shares of its common stock to debenture holders of Phantom Fiber.
Upon consummation of the exchange, the shareholders and debenture
holders of Phantom Fiber will receive shares representing
approximately 67% of the Company's post-acquisition outstanding
capital stock. The ratification of the Share Exchange Agreement
will also constitute approval of the transactions contemplated
thereby.
4. To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to change the name of the Company to
Phantom Fiber Corporation and to increase the number of shares that the
Company is authorized to issue from 150,000,000 shares of common stock
to 400,000,000 shares of common stock, par value $0.001;
5. To approve amendments to the Company's 2000 Stock Option Plan to
increase the number of shares of Common Stock issuable in connection
with awards granted thereunder, among other things; and
6. To ratify the appointment of Mintz & Partners LLP as the Company's
independent public auditors for the Company's fiscal year ending
December 31, 2004;
7. To transact such other business as may properly come before the meeting
and any and all adjournments and postponements thereof.
The Board of Directors has fixed the close of business on June 14, 2004 as
the record date for the annual meeting. Only stockholders of record at that time
are entitled to notice of and to vote at the annual meeting or any adjournment
or postponement thereof.
The enclosed proxy is solicited by the Board of Directors of the Company.
Reference is made to the accompanying Proxy Statement for further information
with respect to the business to be transacted at the meeting. The Board of
Directors urges you to date, sign and return the enclosed proxy promptly. The
return of the enclosed proxy will not affect your right to vote in person if you
do attend the meeting.
By Order of the Board of Directors,
Carrie J. Weiler
Corporate Secretary
June 16, 2004
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PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
13980 Jane Street
King City, Ontario, Canada, L7B 1A3
-----------------------------------------------------
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
To be held on June 28, 2004
-----------------------------------------------------
INTRODUCTION
This Proxy Statement is being furnished to stockholders by the Board of
Directors of Pivotal Self-Service Technologies Inc., a Delaware corporation (the
"Company"), in connection with the solicitation of the accompanying form of
proxy (each a "Proxy" and collectively, "Proxies") for use at the Company's
Annual Meeting of Stockholders (the "Meeting") which is scheduled to be held on
June 28, 2004, at 144 Front Street, Suite 580, Toronto, Ontario, Canada, M5J
2L7, at 10:00 a.m., Toronto time, for the purposes set forth in the foregoing
Notice of Annual Meeting of Stockholders (the "Notice") or any adjournment
thereof. This Proxy is being mailed to our stockholders together with our Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2003, our Quarterly
Report on Form 10-QSB for the period ended March 31, 2004 and Amendment Number
Two to our Current Report on Form 8-K which we filed on April 13, 2004, each of
which is incorporated herein by reference.
The mailing address of the principal executive offices of the Company is 13980
Jane Street, King City, Ontario, Canada, L7B 1A3. This Proxy Statement and the
accompanying Proxy along with the Annual Report, containing financial statements
of the Company as of December 31, 2003, and for the year then ended were first
mailed to the stockholders entitled to vote at the Annual Meeting on or about
June 16, 2004.
A list of stockholders entitled to vote at the Meeting will be available for
examination by stockholders during ordinary business hours beginning on June 16,
2004 at 13980 Jane Street, King City, Ontario, L7B 1A3, Canada. A stockholder
list will also be available for examination at the Meeting.
VOTING SECURITIES AND SECURITY OWNERSHIP
Record Date and Voting Securities
At the close of business on June 14, 2004, the record date fixed for the
determination of stockholders entitled to notice of and to vote at the Meeting
(the "Record Date"), there were outstanding 82,704,871 shares of the Company's
common stock, $.001 par value per share (the "Common Stock"). Holders of Common
Stock have one vote per share on each matter to be acted upon. Only holders of
Common Stock (the "Stockholders") of record at the close of business on the
Record Date will be entitled to vote at the
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Meeting and at any adjournment thereof. Each share of Common Stock entitles the
record holder thereof to one vote on all matters properly brought before the
Meeting and any adjournment or postponement thereof, with no cumulative voting.
The presence, in person or by proxy, of Stockholders entitled to cast at least
one-third of the votes that all Stockholders are entitled to cast at the Meeting
shall constitute a quorum for the Meeting.
Voting of Proxies
Shares of Common Stock represented by Proxies, which are properly executed, duly
returned and not revoked, will be voted in accordance with the directions
contained therein. If no direction is given in the Proxy, the shares of Common
Stock represented thereby will be voted: (i) FOR the election of each of the two
nominees of the Board of Directors in the election of directors; (ii) FOR the
election of each of the four Target Nominees of the Board of Directors to take
office immediately following the Closing; (iii) FOR the proposed acquisition of
Phantom Fiber; (iv) FOR the amendment to the Company's Amended and Restated
Certificate of Incorporation changing its name to Phantom Fiber Corporation and
increasing the number of shares of Common Stock authorized to be outstanding;
(v) FOR the amendments to the 2000 Stock Option Plan; and (vi) FOR the
ratification of the appointment of Mintz & Partners LLP as independent public
auditors for the Company's fiscal year ending December 31, 2004.
The Company's Board of Directors has unanimously voted to recommend (i) the
nominees for election to the Board of Directors listed below under the caption
"Election of Directors"; (ii) the Target Nominees for election to the Board of
Directors upon the Closing; (iii) approval of the proposed acquisition of
Phantom Fiber Corporation ("Phantom Fiber"); (iv) the increase in the number of
shares of Common Stock authorized to be outstanding; (v) the amendment to the
Company's Amended and Restated Certificate of Incorporation changing its name to
Phantom Fiber Corporation and increasing the number of shares of Common Stock
authorized to be outstanding; (vi) the amendments to the 2000 Stock Option Plan;
and (vi) the ratification of the appointment of Mintz & Partners LLP as the
independent public auditors for the Company for the fiscal year ending December
31, 2004.
The execution of a Proxy will in no way affect a Stockholder's right to attend
the Meeting and to vote in person. Any Proxy executed and returned by a
Stockholder may be revoked at any time thereafter if written notice of
revocation is given to the Secretary of the Company prior to the vote to be
taken at the Meeting, or by execution of a subsequent proxy that is presented
before the Meeting, or if the Stockholder attends the Meeting and votes by
ballot, except as to any matter or matters upon which a vote shall have been
cast pursuant to the authority conferred by such Proxy prior to such revocation.
The holders of one-third of the outstanding shares entitled to vote, present in
person or represented by proxy, will constitute a quorum for the transaction of
business. Shares represented by proxies that are marked "abstain" will be
counted as shares present for purposes of determining the presence of a quorum
on all matters. Brokers holding shares for beneficial owners in "street name"
must vote those shares according to specific instructions they receive from the
owners of such shares. For purposes of determining the presence of a quorum for
transacting business at the Meeting, broker "non-votes" (that is, proxies from
brokers or nominees indicating that such persons have not received instructions
from the beneficial owner or other persons entitled to vote shares on a
particular matter with respect to which brokers or nominees do not have
discretionary power) will be treated as shares that are present but have not
been voted. Brokers have discretionary authority to vote on the election of
directors, the ratification of the appointment of Mintz & Partners LLP and the
proposal to change the name of the Company. Shares that are voted by brokers on
some but not all of the matters will be treated as shares present for
5
purposes of determining the presence of a quorum on all matters, but will not be
treated as shares entitled to vote at the Meeting on those matters as to which
authority to vote is withheld from the broker.
The election of each nominee for director requires a plurality of votes cast.
Accordingly, abstentions and broker non-votes will not affect the outcome of the
election. The approval of Proposal 3 (to consider and vote on the share
exchange) will require the affirmative vote of the holders of a majority of the
Company's outstanding shares as of the Record Date. The affirmative vote of a
majority of the outstanding shares of Common Stock will be required to approve
the proposed amendment to the Amended and Restated Certificate of Incorporation
of the Company to change the Company's name to "Phantom Fiber Corporation" and
to increase the authorized number of shares of Common Stock to 400,000,000.
Abstentions and broker non-votes will have the same effect as votes against the
proposed amendment to the Amended and Restated Certificate of Incorporation of
the Company.
The affirmative vote of a majority of the shares of Common Stock represented and
voted at the Annual Meeting, is required for approval of the ratification of the
appointment of the independent auditors and the approval of amendments to the
Company's 2000 Stock Option Plan. On these matters, abstentions will have the
same effect as a negative vote. Because broker non-votes will not be treated as
shares that are present and entitled to vote with respect to a specific
proposal, broker non-votes will have no effect on the outcome of this matter.
As of the Record Date, members of the Board of Directors and certain officers of
the Company held an aggregate of 9,256,346 shares of Common Stock, representing
11.1% of the Company's issued and outstanding Common Stock. Each of these
Stockholders has indicated that they intend to vote in favor of each of the
proposals discussed above.
The Company will appoint an inspector to act at the Meeting who will: (1)
ascertain the number of shares outstanding; (2) determine the shares represented
at the Meeting and the validity of the proxies and ballots; (3) count all votes
and ballots; (4) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determinations by such inspector; and
(5) certify his or her determination of the number of shares represented at the
Meeting and his or her count of all votes and ballots.
Solicitation of Proxies
The entire expense of printing, preparing, assembling and mailing proxy
materials and the cost of soliciting Proxies will be borne by the Company. In
addition to the solicitation of Proxies by mail, solicitation may be made by
certain directors, officers and other employees of the Company by personal
interview, telephone, telegram or facsimile. No additional compensation will be
paid to such persons for such solicitation. The Company has not been informed by
any of its directors that they intend to oppose any action intended to be taken
by the Company.
PROPOSED ACQUISITION OF PHANTOM FIBER CORPORATION
SUMMARY TERM SHEET
A number of proposals will be voted on at the annual meeting, and they are
described in detail in this proxy statement. Below is a brief overview of the
terms of the proposed acquisition of Phantom Fiber. Proposal 4 addresses a
changes to our certificate of incorporation that would have to be made in
6
order for us to be able to consummate this transaction. To more fully understand
the transaction, you should read this entire proxy statement.
On April 21, 2004, we entered into a share exchange agreement with Phantom
Fiber. A copy of the share exchange agreement is attached to this proxy
statement as Appendix D. The following are the material terms of the share
exchange agreement.
Transaction structure o We have entered into a share exchange
(page 24) agreement with Phantom Fiber and all of its
shareholders, pursuant to which we will
acquire Phantom Fiber and its wholly owned
subsidiary Phantom Fiber Inc. by issuing
137,410,735 shares of our common stock to the
shareholders of Phantom Fiber and 30,000,000
shares of our common stock and warrants to
purchase 15,000,000 shares of our common stock
to debenture holders of Phantom Fiber.
Share exchange ratio o At the closing of the acquisition, the (page
24) shareholders and debenture holders of
Phantom Fiber will receive shares representing
approximately 67% of our post-acquisition
outstanding capital stock.
Treatment of Phantom Fiber o Each option or warrant to purchase shares of
stock options and warrants Phantom Fiber common stock immediately prior
(page 24) to the effective time of the acquisition will
be converted into an option or warrant to
purchase our common stock. We will adjust the
number of shares issuable upon exercise of the
option or warrant and the exercise price of
the options and warrants to reflect the
acquisition's exchange ratio.
Conditions to the o Our shareholders must approve the proposed
acquisition (page 24) increase in our authorized common stock from
150 million shares to 400 million shares.
o Each of our directors must tender his
resignation and our shareholders must elect
four of Phantom Fiber's nominees to the Board
(such nominees are Jeffrey Halloran, Gordon
Fowler, Graham Simmonds and Stephen Gesner).
o Each of our officers must tender his
resignation effective on or prior to closing
date.
o Our shareholders must approve an increase in
the number of common shares available under
stock options for issuance from 3 million to
20 million.
o Our shareholders must approve a change in our
name from Pivotal Self Service Technologies
Inc. to Phantom Fiber Corporation.
o The share exchange agreement contains other
customary
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closing conditions.
Board of directors and o In this proxy statement we are asking the
executive officers (page shareholders to re-elect the current board of
25) John G. Simmonds and Brian Usher-Jones. If
the acquisition is consummated, however, these
board members will step down effective the
closing of the acquisition.
o We are asking the shareholders to elect
Jeffrey Halloran, Gordon Fowler, Stephen
Gesner and Graham Simmonds to the board, to
take office if and when the Closing occurs.
o If the acquisition is consummated, the new
board of directors will replace our officers
with the officers of Phantom Fiber effective
upon the closing of the acquisition.
Shareholder approvals o Our shareholders must approve the proposed
(page 25) increase in our authorized common stock from
50 million shares to 400 million shares, as
more fully detailed in this proxy statement.
As of March 31, 2004, there were 82,704,871
shares of our common stock outstanding and
11,735,589 shares of our common stock reserved
under options, warrants and other commitments.
Therefore, immediately prior to the
consummation of the acquisition, there will be
approximately 94,440,460 shares of our common
stock outstanding. After the acquisition is
consummated, there will be approximately
250,115,606 shares of our common stock
outstanding and approximately 26,735,589
shares of common stock reserved for options,
warrants and other commitments. These numbers
are approximations based on the number of our
outstanding shares on March 31, 2004. The
actual numbers used in the transaction will be
based on the number of our outstanding shares
immediately prior to the consummation of the
acquisition.
o Our shareholders must elect Jeffrey Halloran,
Gordon Fowler, Graham Simmonds and Stephen
Gesner as directors.
o Our shareholders must approve an increase in
the number of common shares available under
stock options for issuance from 3 million to
20 million.
o Our shareholders must approve a change in
company name from Pivotal Self Service
Technologies Inc. to Phantom Fiber Corporation
Share exchange termination o The Company and Phantom Fiber can agree to
rights (page 25) terminate the share exchange agreement
without completing the transaction.
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o In addition, each party may terminate the
share exchange agreement if the other party's
representations contained in the share
exchange agreement are inaccurate, if the
other party breaches any obligation under the
share exchange agreement, or the other party
fails to satisfy certain conditions.
o The parties may also terminate the share
exchange agreement if the acquisition has not
been completed within 60 days of mailing of
this Proxy.
o We may terminate the share exchange agreement
if our Board determines in good faith that it
must accept a more favorable alternate
transaction in order to avoid breaching the
directors' fiduciary duties.
Tax treatment (page 26) o We and Phantom Fiber intend that the share
exchange transaction qualify as a tax-free
reorganization within the meaning of Section
368(b) of the Internal Revenue Code. If the
transaction qualifies as a tax-free
reorganization, then no gain or loss will be
recognized by us, our shareholders, Phantom
Fiber or its shareholders as a result of the
transaction.
CONTACT INFORMATION
Requests for documents relating to Pivotal should be directed to:
Pivotal Self Service Technologies Inc.
13980 Jane Street
King City, Ontario, Canada, L7B 1A3
Attention: John G. Simmonds
Chief Executive Officer
Telephone: (905) 833-3838
Requests for information relating to Phantom Fiber should be directed to:
Phantom Fiber Corporation
144 Front Street, Suite 580
Toronto, Ontario, Canada, M5J 2L7
Attention: Jeffrey Halloran
Telephone: (416) 703-4007
Copies of this proxy statement can be inspected by anyone without charge
at the public reference room of the SEC, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's Regional Offices located at 233
Broadway, New York, New York 10279, and 500 West Madison Street, Chicago,
Illinois 60601. Please call the SEC at 1-800-SEC-0330 for further information on
the operation of the public reference room. Copies of these materials can be
obtained by mail from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
9
The SEC maintains a Web site (http://www.sec.gov) that contains information
regarding registrants that file electronically with the SEC.
DESCRIPTION OF BUSINESS CONDUCTED BY PIVOTAL
General
We are a company engaged in the business of distributing batteries,
flashlights and other ancillary electronics products. We are entitled to
royalties and other revenues in connection with sublicense agreements to
distribute products obtained overseas from our suppliers.
Corporate Structure
We were incorporated in Delaware on February 25, 2000 and we have a wholly
owned subsidiary, Prime Battery Products Limited incorporated in Ontario. Any
technologies or rights to royalties or other revenues are held either by Pivotal
or Prime Battery Products Limited.
We currently have no direct employees.
Pivotal and Its Subsidiaries
Battery Business Acquisition
On December 31, 2002, we, entered into an Asset Purchase Agreement with
DCS Battery Sales Ltd. to acquire certain assets comprising the battery business
of DCS Battery (the "Battery Business"). The acquisition was done through a
newly incorporated wholly owned subsidiary named Prime Battery Products Limited
("Prime Battery") and the acquisition consisted primarily of certain intangible
assets, representing customer lists and non-contractual customer relationships.
Shenzhen Konnoc Battery Industrial Co. Ltd. Representative/Distribution
Agreement
On April 1, 2003, Prime Battery, entered into a distribution agreement
with Shenzhen Konnoc Battery Industrial Co. Ltd. ("Konnoc Agreement") to
distribute Konnoc branded batteries, flashlights and other ancillary electronics
products in North America. At the time of the Battery Business acquisition the
Konnoc relationship was only a purchasing arrangement. The expiry of the Konnoc
Agreement is April 30, 2005.
Prime Battery products business is distributing directly or through
various sublicense agreements battery products to retailers, wholesalers and
industrial suppliers.
A.C. Simmonds & Sons Sub-License Agreement
On July 1, 2003 we sublicensed A.C. Simmonds & Sons, division of
Wireless Source Distribution Ltd. ("A.C. Simmonds) which in turn is a wholly
owned subsidiary of Wireless Age Communications, Inc. to distribute battery
products in Canada. In exchange we receive a 10% royalty on purchases of
battery products by A.C. Simmonds under the Konnoc Agreement. A.C. Simmonds
is a related party by virtue of common directors and officers to Pivotal.
10
Royalty and Services Agreement with Collectible Concepts Group Inc.
On March 1, 2003, we entered into a joint venture agreement with
Collectible Concepts Group, Inc. (Collectible Concepts) to market batteries and
related products that include various licensed logos, images and brand names.
The joint venture was planned to operate under the name MightyVolt.
On November 10, 2003, we announced we had modified the joint venture with
Collectible Concepts, whereby the business opportunity would be operated
principally by a new wholly owned division of ours to be known as Pivotec. Under
the amended agreement Collectible Concepts will assist Pivotec in obtaining
certain licenses in exchange for a royalty of 1% of net sales. All licenses will
be the property of Pivotec rather than part of the previously proposed joint
venture. Collectible Concepts will receive 500,000 shares of our common stock
for all intellectual property rights associated with the joint venture thus far,
including the trade-name MightyVolt.
Disposal of the Battery Business
In 2003, we made the decision to dispose of the battery business and seek
other business opportunities. The reason for this decision was that we felt that
the Battery Business was going to require substantial working capital financing
when it reached critical mass. Many of the initiatives we have developed will
require substantial amounts of incremental financing. We believe that the type
and level of financing required to make the Battery Business a success is more
easily achieved by a more mature entity, with existing lines of credit and
existing cashflows that can be utilized to offset initial cash operating losses.
This type of financing would likely have had to come from equity financing or
expensive debt instruments, both of which we believe is not in our best
interests or the best interests of our stockholders.
DESCRIPTION OF PROPERTY
Since March 5, 2002, we have maintained executive offices at 13980 Jane
Street, King City, Ontario, Canada, L7B 1A3. We lease this space from an entity
of which our Chief Executive Officer is the sole owner. The lease for this space
is on a month to month basis with a monthly lease payment of $1,079, subject to
cost-of-living adjustments. Prior to that, we leased space at 100 Allstate
Parkway, Suite 500, Markham, Ontario, Canada, L3R 6H3.
With the acquisition of Phantom Fiber, our executive offices will be moved
to Phantom Fiber's existing facilities at 144 Front Street, Toronto, Ontario,
Canada, M5J 2L7. We believe that these facilities will be adequate to meet our
current requirements. We do not own any real property.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which Pivotal or any of its
subsidiaries is a party or to which any of their properties is subject.
FORWARD-LOOKING STATEMENTS
The statements contained in this proxy statement that are not historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, including statements regarding the expectations,
beliefs, intentions or strategies regarding the future. We intend that all
forward-looking
11
statements be subject to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
In particular, the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section and the "Risk Factors" section
include forward-looking statements that reflect our current views with respect
to future events and financial performance. We use words such as we "expect,"
"anticipate," "believe," and "intend" and similar expressions to identify
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties inherent in future events, particularly those risks identified in
the "Risk Factors" section, and should not unduly rely on these forward looking
statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with our financial
statements and notes thereto included with this proxy statement.
Results of Operations
For the three month period ended March 31, 2004 and 2003
We recorded income for the three month period ended March 31, 2004 of
$113,301 ($0.0014 per share) compared to a net loss of $161,656 ($0.0026 per
share) during the comparative period in the prior year. The income from
continuing operations during the three month period ended March 31, 2004 was
$144,406 compared to a net loss of $141,430 in the prior year period. Loss from
discontinued operations was $31,105 during the three month period ended March
31, 2004 compared to a loss of $20,226 in the comparative period a year ago.
The year over year swing from a continuing operations loss a year ago to
earnings in 2004 is primarily the result of the Company recording a gain of
$262,025 on disposal of 130,000 shares of Wireless Age.
We recorded a gain on disposal of marketable securities of $262,025 during
the current quarter and we settled notes payable including principal and accrued
interest totaling $281,200 by transferring 130,000 Wireless Age common shares
(marketable securities) having a cost basis of $19,175.
All of our revenues were from discontinued operations.
Total operating expenses were $116,431 during the quarter ended March 31,
2004 compared to $110,829 in the prior year. The increase is primarily the
result of higher interest expense in 2004. The Company has been preparing for
the proposed Phantom Fiber acquisition and all corporate costs have been pared
to a minimum.
General and administrative expenses during the three month period ended
March 31, 2004 totaling $51,137 consisted of; 1) wages, benefits and consulting
fees of $34,198 (which includes $30,000 in executive management fees accrued to
a related party), 2) professional fees including transfer agent fees of $11,781,
and 3) various miscellaneous costs totaling $5,158. General and administrative
expenses during the three month period ended March 31, 2003 totaling $92,017
consisted of; 1) wages and consulting costs of $71,047, 2) professional fees,
including transfer agent fees of $19,360, and 3) $1,610
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of miscellaneous costs. The reason for the decline in wages, benefits, and
consulting fees was mainly due to the reduced levels of consulting fees incurred
because of the pending Phantom Fiber acquisition.
Occupancy costs consisted of rent of $3,420 paid to a related party during
the three month period ended March 31, 2004 and $2,927 in rent and $4,616 in
utilities during the comparative period in the prior year. Utility costs were
not incurred in 2004 due to other related parties bearing the costs.
Interest expense during the three month period ended March 31, 2004 was
$61,874 compared to $11,269 during the three month period ended March 31, 2003.
The increase in interest expense is the result of revaluing certain related
party notes payable by $52,211 to the value of marketable securities received on
date of repayment.
We also recorded a foreign exchange loss of $1,188 during the three month
period ended March 31, 2004 compared to $19,357 in the comparative period in the
prior year. Foreign exchange losses arise from the translation of our Canadian
dollar denominated debt into US dollars during periods of weakening of the US
dollar vis-a-vis the Canadian dollar. A year ago the US dollar weakened
significantly against the Canadian dollar and therefore a large foreign exchange
loss occurred with was not repeated in the current year. During the three month
period ended March 31, 2004, within other comprehensive income, we recorded a
foreign exchange gain of $4,567 arising from the translation of the Canadian
dollar denominated subsidiary financial statement to US dollars and a $917,025
unrealized holding loss on its available for sale securities. The unrealized
holding loss arose from a decline in the share price of Wireless Age
Communications, Inc. from $2.48 as at December 31, 2003 to $1.49 as at March 31,
2004.
During the three month period ended March 31, 2003, pursuant to certain
loan agreements (one loan agreement with one of directors, another with an
affiliate of ours and a third with an entity controlled by a senior employee of
ours) we issued warrants to purchase 6,000,000 shares of our common stock at
exercise price of $0.01 per share and 1,000,000 at $0.02 per share. We
determined that the non-cash financing expense associated with the issuance of
these warrants was $461,000. In addition we opted to amortize these costs
effectively over four years, reflective of the term to expiry of the warrants
and the share resale restrictions upon exercise of the warrants. Non-cash
financing expense totaled $11,064 during the three month period ended March 31,
2003.
DISCONTINUED OPERATIONS
We have classified the operating results of our subsidiaries, Prime
Wireless and Prime Battery, as discontinued operations in the Consolidated
Statement of Operations. Prime Wireless was disposed of on March 13, 2003 and we
are in the process of disposing of Prime Battery in preparation for our
acquisition of Phantom Fiber.
PRIME WIRELESS
The operating results of Prime Wireless during the three month period
ended March 31, 2003 are summarized as follows:
2003
Revenues:
Commission income $ 26,322
13
Sales 16
------------------
Total revenues 26,338
Less:
Cost of sales -
------------------
Gross profit 26,338
------------------
Operating expenses 11,474
------------------
Operating income 14,864
Depreciation 48
Foreign exchange gain (430)
------------------
Net income from discontinued $ 15,246
operations ==================
Revenues of the Prime Wireless subsidiary were $26,338 during the three
month period ended March 31, 2003 consisting of commissions earned on sales of
Vertex Standard two way radios in Canada.
General and administrative expenses of Prime Wireless during the three
month period ended March 31, 2003 were $11,474. Selling, general and
administrative expenses included salaries and benefits for one sales employee
and other various selling expenses. Depreciation of equipment totaled $48 during
the period and the company recorded a foreign exchange translation gain.
PRIME BATTERY
The operating results of Prime Battery during the three month period ended
March 31, 2004 and 2003 are summarized as follows:
2004 2003
Revenues
Sales $ 2,259 $433,700
Royalties 6,597 -
-------------------------------------
Total revenues 8,856 433,700
Less:
Cost of sales 2,259 368,360
-------------------------------------
Gross profit 6,597 65,340
-------------------------------------
Operating expenses 151 83,614
-------------------------------------
Operating income 6,446 (18,274)
Depreciation 833 40
Interest expense 36,718 23,026
-------------------------------------
Net income from
discontinued operations $(31,105) $(41,340)
=====================================
14
During the three month period ended March 31, 2004 discontinued operations
of Prime Battery resulted in a loss of $31,105 compared to a loss of $41,340 in
the comparative period a year ago. We granted a sublicense, to a related party,
for the Canadian distribution rights of the battery business effective July 1,
2003. Therefore the revenues declined significantly between 2003 and 2004 as did
the operating costs. Post June 30, 2003 Prime Battery earned royalties from the
related party and was not responsible for any appreciable operating costs.
Interest expense continued to be substantial due to Prime Battery's
inability to repay a note payable as originally contemplated and therefore
incurred significant penalties and interest during the first quarter of fiscal
2004.
Financial Condition
Total assets decreased from $2,371,622 at December 31, 2003 to $1,237,087
at March 31, 2004. The decrease is primarily due to a decline in the carrying
value of our marketable securities and a depletion of our cash balances.
At March 31, 2004, we held 620,000 common shares of Wireless Age
Communications, Inc., a publicly traded entity whose share price is quoted on
the NASD's Over-The-Counter Bulletin Board under the symbol "WLSA". The
securities were obtained in the sale of the Prime Wireless subsidiary on March
13, 2003. We have valued these securities at $923,800 ($1.49 per share). On
December 31, 2003 we held 750,000 shares of Wireless Age and during the three
month period ended March 31, 2004 we utilized 130,000 shares to repay $281,200
of notes payable to related parties including principal and accrued interest.
Cash balances declined from $92,192 on December 31, 2003 to $2,120 on
March 31, 2004, primarily due to funding of cash operating losses.
Current assets of discontinued operations decreased from $122,452 at
December 31, 2003 to $55,467 at March 31, 2004. The decrease is attributable to
our transfer of certain intellectual property rights to a related party in
exchange for a promissory note from a related party of $180,000 due on December
31, 2004. The intellectual property rights consisted of Canadian dollar store
customer lists which were recorded as long term intangible assets.
Total liabilities decreased from $1,076,394 at December 31, 2003 to
$696,586 at March 31, 2004. The decrease in liabilities is the result of
retiring notes payable (including principal and accrued interest) of $228,989
with 130,000 shares of our marketable securities during the first quarter and a
reduction in liabilities of discontinued operations from $380,853 to $318,263.
Common stock and additional paid in capital, increased from $8,725,359 at
December 31, 2003 to $8,797,789 at March 31, 2004. The increase was due to; 1)
500,000 common shares issued for intangible assets acquired in 2003 (and
recorded in common stock subscribed at December 31, 2003) valued at $10,000, 2)
a private placement of 343,030 common shares at $0.01 per share, and 3) private
placements for a total of 2,950,000 common shares at $0.02 per share. Common
stock subscribed decreased by $28,000 from $90,200 at December 31, 2003 to
$62,200 at March 31, 2004. The reason for the decrease is the amount of common
stock under private placements for which certificates were issued during the
quarter exceeded the amount of new subscriptions received.
The accumulated deficit decreased by the earnings for the three month
period ended March 31, 2004 of $113,301. We also recorded a foreign exchange
translation gain of $4,567 and a $917,025
15
unrealized holding loss on available for sale securities as a result of a
decline in the market value of the 620,000 shares of Wireless Age stock we hold.
Our financial statements are prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Some of the significant estimates required to be made by
management include the realizable value of intangible assets and the fair value
of common stock and common stock equivalents issued for services or in
settlement of obligations. Actual results could differ from those estimates.
Liquidity and Capital Resources
For the three month period ended March 31, 2004, cash used in operating
activities amounted to $117,061 primarily as a result of operating losses. Cash
provided by financing activities during the three month period ended March 31,
2004 amounted to $26,989 resulting from $17,441 net reduction in notes payable
offset by an increase in common stock issued and/or subscribed of $44,430.
We plan to begin liquidating our investment in Wireless Age
Communications, Inc. common shares. These securities, which have been valued at
$923,800 for balance sheet purposes, have certain resale restrictions. We
believe that it will be in a position to sell all of these securities within the
next twelve months and utilize the proceeds for working capital purposes in the
battery business and settle certain historic liabilities. We also plan to
dispose of the battery business and will rely on the proceeds of disposition to
fund future growth requirements.
In addition we have been successful in raising capital through private
placements of our common shares. Although, this type of financing continues to
be dilutive to the existing common shareholders, it may be necessary to continue
to do so in the interim before certain resale restrictions on its marketable
securities lapse.
We do not have any material sources of liquidity consisting of off balance
sheet arrangements or transactions with unconsolidated entities.
Going Concern and Basis of Presentation
Our condensed unaudited consolidated financial statements as at March 31,
2004 have been prepared on a going concern basis, which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business. We have an accumulated deficit of $9,146,487 at March 31, 2004. As
a result, substantial doubt exists about our ability to continue to fund future
operations using its existing resources. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
In order to ensure the success of the new business, we are dependent upon
the ability to realize substantial value from its investment in available for
sale securities.
Critical Accounting Policies
The discussion and analysis of the results of operations and financial
condition of the Company are based upon the consolidated financial statements,
which have been prepared in accordance with
16
accounting principles generally accepted in the United States of America (GAAP).
The preparation of these consolidated financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. Management evaluates the estimates on an on-going basis,
including those related to bad debts, inventories, investments, customer
accounts, intangible assets, income taxes, and contingencies and litigation.
Management bases its estimates on historical experience and on various other
assumptions that they believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. Note 2 of the "Notes to Consolidated Financial Statements" of the
Company's Annual Audited Consolidated Financial Statements includes a summary of
the significant accounting policies and methods used in the preparation of the
consolidated financial statements. The following is a brief description of the
more significant accounting policies and methods the Company uses.
Investment
The Company's marketable securities are classified as available-for-sale and are
recorded at fair value. Available for sale unrealized gains and losses based on
period end market prices, net of tax are recorded in stockholders' equity.
Realized gains or losses and other than temporary declines in value, if any, are
reported in other income or expense as incurred.
Revenue Recognition
Revenue from product sale is recognized when the rights of ownership of the
product are transferred to the purchaser on shipment or delivery and collection
is reasonably assured.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts based on specifically
identified amounts that management believes to be uncollectible. The criteria
for allowance provision are determined based on historical experience and the
Company's assessment of the general financial conditions affecting its customer
base. If the Company's actual collections experience changes, revisions to the
allowance may be required.
Intangible Assets
Long-lived assets, including intangible assets, are reviewed when facts and
circumstances indicate that the carrying value of the asset may not be
recoverable. When necessary, impaired assets are written down to estimated fair
value based on the best information available. Fair value is determined by
estimated future cash flows and appraised value of the assets.
DESCRIPTION OF PIVOTAL'S SECURITIES
General
Our certificate of incorporation authorizes us to issue 150,000,000 shares
of common stock and 2,000 shares of preferred stock. As of March 31, 2004,
82,704,871 shares of our common stock were issued and outstanding and 11,735,589
shares of our common stock were reserved for options, warrants and other
commitments. As of March 31, 2004, there were no shares of our preferred stock
issued and outstanding. As of March 31, 2004, there were 55,559,540 shares of
our common stock in reserve and
17
2,000 shares of our preferred stock in reserve. For the effects of the
transaction on these numbers, see "Terms of the Transaction--The Share Exchange
Agreement."
Common Stock
Holders of our common stock are entitled to one vote for each share on all
matters to be voted on by our shareholders. Holders of our common stock have no
cumulative voting rights. They are entitled to share ratably any dividends that
may be declared from time to time by the board of directors in its discretion
from funds legally available for dividends. Holders of our common stock have no
preemptive rights to purchase our common stock. There are no conversion rights
or sinking fund provisions for the common stock.
Our common stock is listed on the NASD Over-the-Counter Bulletin Board.
Preferred Stock
We are currently authorized to issue 2,000 shares of preferred stock with
such terms as our Board of Directors may designate from time to time. However,
our Board of Directors has not designated any preferred stock and, if the
proposed amendment to our Certificate of Incorporation to increase the number of
authorized shares of common stock is approved, then we would no longer have any
authorized shares of preferred stock.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is quoted on the NASD Over-the-Counter Bulletin Board
under the symbol "PVSS". The following table sets forth for the periods
indicated the high and low prices for our common stock in U.S. Dollars as quoted
on the NASD Over-the-Counter Bulletin Board during each quarter within the last
two fiscal years. These quotations reflect only inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions.
- --------------------------------------
Quarter Ended High Low
- --------------------------------------
March 31, 2002 $0.06 $0.04
- --------------------------------------
June 30, 2002 $0.05 $0.03
- --------------------------------------
September 30, 2002 $0.07 $0.03
- --------------------------------------
December 31, 2002 $0.10 $0.04
- --------------------------------------
March 31, 2003 $0.05 $0.10
- --------------------------------------
June 30, 2003 $0.08 $0.04
- --------------------------------------
September 30, 2003 $0.05 $0.01
- --------------------------------------
December 31, 2003 $0.04 $0.02
- --------------------------------------
On December 31, 2003, we had approximately 350 shareholders of record. We
believe we have approximately 500 shareholders including holders whose
securities are held in street name or nominee accounts.
18
The Company has not paid or declared any cash dividends on its common
stock and does not expect to pay a cash dividend on its common stock in the
foreseeable future. Payment of dividends in the future will depend on the
Company's earnings and its cash requirements at that time.
19
BUSINESS CONDUCTED BY PHANTOM FIBER
Phantom Fiber Corporation is a privately held, Toronto based, early stage
enterprise software company formed under Ontario law on January 7, 2002. It is
engaged in the business of the sale of proprietary software and integration
services.
Phantom Fiber uses its proprietary data transmission technique to deliver
high speed connectivity to wireless handsets. Information is securely encased
and delivered with end-to-end 128-bit encryption.
Phantom Fiber derives revenue from various licensing and revenue sharing
plans that allow its revenues to grow based its customer adoption. Phantom Fiber
plans to deploy channel strategy to affiliate and partner with existing
application developers and systems integrators, accessing their established
customer bases and offering extensions for applications already in production.
Phantom Fiber has focused its marketing primarily on the E-gaming market,
believing that this industry is a rapid adopter of new enabling technologies.
Phantom Fiber is also seeking to penetrate the enterprise software markets with
its wireless middleware software solution (consisting primarily of high speed
connectivity) believing this market to be another relatively rapid adopter of
new technology. Future market targets may include the banking and brokerage
segments of the financial services market, however Phantom Fiber believes that
the banks and brokerage firms tend to have longer sales cycles and slower
adoption rates, hence its secondary focus on them. Phantom Fiber intends to use
a channel strategy with enterprise software providers for extending their
installed base to the Mobile Internet.
PHANTOM FIBER PLAN OF OPERATIONS
Overview
Since its inception on January 7, 2002 to March 31, 2004, Phantom Fiber
has incurred a cumulative deficit of $1,143,073.
Phantom Fiber's revenue model is based on integration/services fees coupled
with usage-based licensing. Consequently the company's deployment strategy in
E-gaming is to:
o First - integrate Phantom Fiber's technology with existing software
providers' solutions. Phantom Fiber has completed four such projects,
including IQ-Ludorum (a major on-line sportsbook software solutions
providor), Parlay Group Inc. (a large Bingo operator), Real Time Gaming,
and Application Solutions Inc.
o Second - in affiliation with the software partner, rollout Phantom Fiber's
wireless solution to their customers, typically comprising from 10 to 100
operators.
Phantom Fiber approaches the industry with a low implementation cost, rapid
deployment strategy and secures a three-year revenue sharing commitment based on
application usage. As such, Phantom Fiber hopes to lower initial purchase
barriers, and have revenue grow with wireless penetration.
Phantom Fiber believes that this strategy will make its products a common
feature of E-gaming sites and thereby hopes to become a significant wireless
software provider in this industry. In addition, Phantom Fiber believes that if
its technology is shown to be effective in the E-gaming market, it will have the
opportunity to leverage these technologies and skills to enter compatible
segments of the financial services and enterprise markets.
20
Working Capital Requirements
As of October 31, 2003, Phantom Fiber had working capital of $209,385 and
approximately $70,659 in cash. As of March 31, 2004, Phantom Fiber issued
$928,000 (CAD$1,200,000) principal amount of convertible debentures from which
it received aggregate gross proceeds of approximately $542,000. The balance of
$386,000 is recorded as a note receivable from Simmonds Mercantile & Management
Inc. (an entity providing consulting services to Phantom Fiber and in which a
director of Pivotal is also a stockholder, director and officer) and is due June
1, 2004. The Investment tax credit receivable of $379,736 is estimated to be
received by July 1, 2004. In addition, Phantom Fiber borrowed $229,000
(CAD$300,000) from One World Finance under a short term bridge loan which is due
and payable on June 7, 2004. Phantom Fiber anticipates that its current cash on
hand will be sufficient to fund its operations through May 2004. Phantom Fiber's
management believes that actions taken to obtain additional financing and its
business plan to achieve profitable operations will satisfy its cash obligations
to December 31, 2004.
Capital Expenditures; Employees
Phantom Fiber does not anticipate purchasing or selling any significant
equipment during the next twelve months. Phantom Fiber does, however, anticipate
hiring additional employees during the next twelve months. Specifically, Phantom
Fiber intends to hire key members of a management team with the requisite
knowledge and experience to lead Phantom Fiber in its technical development.,
Trends and Uncertainties
Phantom Fiber's future capital requirements will depend on many factors.
These factors include:
o expenses associated with completing this transaction;
o problems, delays, expenses and complications frequently encountered by
development-stage companies;
o the progress of Phantom Fiber's research and development programs;
o the extent and terms of any future collaborative research,
manufacturing, marketing, or other funding arrangements;
o the cost and timing of, and any delays in, seeking and obtaining
regulatory approvals of Phantom Fiber's products;
o its ability to enter into corporate partnerships and collaborations to
in-license, acquire, research, develop, and commercialize Phantom
Fiber's products;
o the success of Phantom Fiber's sales and marketing programs;
o the costs of filing, prosecuting, defending, and enforcing any patent
claims and other intellectual property rights; and
o changes in economic, regulatory, or competitive conditions of Phantom
Fiber's planned business.
21
Estimates of the adequacy of funding for Phantom Fiber's activities are
based on certain assumptions, including the assumption that testing and
regulatory procedures relating to Phantom Fiber's products can be conducted at
projected costs. There can be no assurance that changes in Phantom Fiber's
development plans, acquisitions or other events will not result in accelerated
or unexpected expenditures.
PHANTOM FIBER MARKET FOR COMMON EQUITY
Phantom Fiber's stock is not publicly traded. Phantom Fiber's articles of
amendment authorizes it to issue an unlimited number of common stock and an
unlimited number of preferred shares. As of March 31, 2004, 24,983,770 shares of
Phantom Fiber's common stock were outstanding and no shares of preferred stock
were outstanding. In addition there are $1,200,000 Canadian Dollars aggregate
principal amount of convertible debentures outstanding, plus accrued and unpaid
interest thereon, which are convertible, in the aggregate, into 5,454,545 shares
of Common Stock. There are warrants issuable pursuant to the convertible
debentures upon the conversion thereof on a half warrant for each share of
Phantom Fiber common stock issued basis, exercisable at CAD$0.60 per share.
There are also 2,000,000 shares of Phantom Fiber common stock reserved for
issuance under stock options of which 2,000,000 have been granted and 2,000,000
remain unexercised. At closing the stock options will be cancelled and replaced
by options granted under the proposed our stock option plan.
The number of holders of Phantom Fiber's common stock as of March 31, 2004
was 31. In addition the number of convertible debenture holders as of March 31,
2004 was 26. Phantom Fiber has not paid or declared any dividends on its common
stock and does not anticipate paying any dividends on its common stock in the
near future.
TERMS OF THE TRANSACTION
Background to the Transaction
On April 21, 2004, we entered into a share exchange agreement providing
for the acquisition of Phantom Fiber.
Phantom Fiber during 2003 engaged a financial advisor known as Simmonds
Mercantile and Management Inc. ("SMMI") to assist in financing their business.
SMMI is a private management consulting firm with four officers, John G.
Simmonds, Gary Hokkanen, Carrie Weiler and Mr. Simmonds' son Graham Simmonds.
John Simmonds, Gary Hokkanen and Carrie Weiler are Chief Executive Officer,
Chief Financial Officer and Corporate Secretary, respectively, of Pivotal and
John Simmonds is also a director. The Phantom Fiber project within SMMI was
driven by Graham Simmonds. Graham Simmonds became aware of the opportunity by
becoming acquainted with Jeff Halloran the President and Chief Executive Officer
of Phantom Fiber. Phantom Fiber and SMMI had agreed that Phantom Fiber would be
acquired by a public company listed on the NASD Over-the-Counter Bulletin Board.
SMMI through Graham Simmonds negotiated the terms and conditions of a purchase
and sale of Phantom Fiber by a different public entity prior to approaching the
Company and in fact had placed a deposit with such public entity. In January
2004 the proposed transaction with the public entity was determined to be not in
the best interests of Phantom Fiber and the transaction was terminated. Graham
Simmonds, being aware of the Company's dissatisfaction with its current business
opportunities and after obtaining consent from Jeff Halloran, presented the
Phantom Fiber opportunity to us through his father John Simmonds.
After Pivotal and Phantom Fiber entered into a confidentiality agreement
dated January 12, 2004,
22
Phantom Fiber provided us with confidential information regarding its business
model, market strategy, product overviews, network topology, competitive
analysis and industry description and opportunities.
John Simmonds, after initial due diligence and evaluation of the business
prospects and opportunities of Phantom Fiber felt that the Phantom Fiber
business opportunity was superior to the current business of the Company. John
Simmonds arranged for a meeting between the Company's other director, Brian
Usher-Jones and Jeff Halloran which occurred on January 26, 2004.
Brian Usher-Jones, who is the financial representative on the Board and an
independent director felt that the Phantom Fiber opportunity was worth pursuing,
assuming a reasonable agreement to acquire Phantom Fiber could be negotiated.
Jeffrey Halloran had approached Brian Usher-Jones in December 2003 to become a
director of Phantom Fiber, a position he ultimately declined. However, because
of his prior contact with Phantom Fiber, the Board felt that it was in the best
interests of the Company if Brian Usher-Jones negotiated on behalf of the
Company.
The Board determined that discussions with Jeff Halloran would be centered
on the Company's built in financing mechanism being the Company's marketable
securities consisting of 750,000 common shares of Wireless Age Communications,
Inc. that at the time had a market value of approximately $3,000,000 which
provided a liquid asset that could finance the initial cash requirements of
Phantom Fiber.
As a result of these discussions, our board proposed to Phantom Fiber's
management that Phantom Fiber shareholders and convertible debenture holders be
issued in the acquisition a number of shares of our common stock that would
result in the Phantom Fiber shareholders and convertible debenture holders
owning approximately 60% of Pivotal's capital stock.
In the following days, Brian Usher-Jones discussed this issue further with
Phantom Fiber's management and received a counter proposal that had Phantom
Fiber shareholders and convertible debenture holders owning 75% of the
post-acquisition stock. On February 4, 2004, our board suggested a compromise
that Phantom Fiber's shareholders and convertible debenture holders would own
67% of our capital stock and our shareholders own approximately 33% of Pivotal's
capital stock. On February 4, 2004, both parties agreed to the 67%/33% split and
a letter of intent was drafted.
Pivotal's Reasons for the Acquisition
There are several reasons why our board is recommending that you approve
the proposed acquisition. In 2003, we made the decision to dispose of the
battery business and seek other business opportunities. The reason for this
decision was that we felt that the Battery Business was going to require
substantial working capital financing when it reached critical mass. Many of the
initiatives we have developed will require substantial amounts of incremental
financing. We believe that the type and level of financing required to make the
Battery Business a success is more easily achieved by a more mature entity, with
existing lines of credit and existing cashflows that can be utilized to offset
initial cash operating losses. This type of financing would likely have had to
come from equity financing or expensive debt instruments, both of which we
believe are not in our the best interests.
We are running out of cash to fund our day-to-day operations. Our officers
have advised our board that it would be highly unlikely for us to fund the
working capital requirements and cash operating losses from any other source
other than equity or convertible debt. Our board concluded that the
23
acquisition will likely make it easier for us to raise funds in the future.
Pivotal's post-acquisition business will be devoted primarily to Phantom Fiber's
business. The board considers this to be an area of potential high growth, which
may attract equity investors more easily than our current business would.
Interest of Certain Persons in the Transaction
In considering the discussion of the share exchange agreement and our
recommendations in favor of proposal 4 (which is a prerequisite to consummation
of the acquisition), you should be aware of the interests of certain persons to
the transaction.
John Simmonds and Brian Usher-Jones (who also serves as a member of our
board of directors) each hold CAD$100,000 of Phantom Fiber convertible
debentures and will each receive 2,500,000 shares of our common stock and
warrants to purchase another 1,250,000 shares of our common stock, in exchange
for their Phantom Fiber convertible debentures, if this transaction is
consummated.
Carrie Weiler holds CAD$25,000 of the Phantom Fiber Corporation
convertible debentures and will receive 625,000 shares of our common stock and
warrants to purchase another 312,500 shares of common stock, in exchange for her
Phantom Fiber convertible debenture, if this transaction is consummated.
Our board of directors were aware of these interests and felt that they
did not present a material conflict.
The Share Exchange Agreement
On April 21, 2004, we entered into a share exchange agreement with Phantom
Fiber. The share exchange agreement provides that Pivotal will acquire Phantom
Fiber and its wholly owned subsidiary. The share exchange agreement is attached
as Appendix D to this proxy statement. While the terms of the acquisition are
described in greater detail below, for a more complete understanding of this
transaction you should refer to the complete document.
The acquisition will close within five business days of the Annual
Shareholder Meeting date, subject to an affirmative vote for Proposals 3 and 4.
We also plan to file the certificate of amendment of the amended and restated
certificate of incorporation promptly after closing conditions are satisfied.
We will issue to Phantom Fiber shareholders and convertible debenture
holders a number of shares representing approximately 67% of the outstanding
post-acquisition shares, meaning that the pre-acquisition shares will constitute
approximately 33% of the shares of our common stock outstanding after the
acquisition. One closing condition of the share exchange agreement is that
Pivotal have enough shares to issue to Phantom Fiber shareholders and
convertible debenture holders. This is the reason we are including in this proxy
statement, as proposal 4, the proposal that we amend our certificate of
incorporation to increase the number of authorized shares of Pivotal common
stock.
As of March 31, 2004, there were outstanding 82,704,871 shares of our
common stock and no shares of our preferred stock and there are 11,735,589
shares reserved under options, warrants and other commitments. At closing, we
will issue 137,410,735 shares of common stock to Phantom Fiber and 30,000,000
shares of common stock and warrants to purchase 15,000,000 shares of our common
stock at any time over a two year period post-closing, at an exercise price of
$0.084 per share, to convertible debenture holders of Phantom Fiber. After the
acquisition is consummated there will be approximately
24
250,116,606 shares of our common stock outstanding; approximately 82,704,871
shares will be owned by current Pivotal shareholders and approximately
167,410,735 shares will be owned by Phantom Fiber shareholders and convertible
debenture holders. These numbers are approximations based on the number of our
outstanding shares on March 31, 2004. The actual numbers used in the transaction
will be based on the number of our outstanding shares immediately prior to the
consummation of the acquisition.
Each option or warrant to purchase Phantom Fiber common stock immediately
prior to the effective time of the acquisition will be cancelled and will be
replaced by an option or warrant to purchase our common stock. We will adjust
the number of shares issuable upon exercise and the exercise prices of such
options and warrants to reflect the acquisition's exchange ratio.
The shares issued to former holders of Phantom Fiber common stock are not
transferable unless they are registered under the Securities Act or if legal
counsel renders an opinion that these shares are transferable under an exemption
from the registration requirements of the Securities Act.
In the share exchange agreement the parties make representations that are
standard for a transaction of this kind. The share exchange agreement also
contains standard provisions governing our conduct and that of Phantom Fiber
during the period prior to closing with the exception that we will be permitted
to take any action necessary to satisfy the closing conditions of the share
exchange agreement.
In this proxy statement we are asking the shareholders to re-elect the
current board of John G. Simmonds and Brian Usher-Jones. According to the terms
of the share exchange agreement, however, our directors must voluntarily resign
after the consummation of the transaction. Our officers are also required under
the share exchange agreement to voluntarily resign immediately after the
consummation of the acquisition. Subject to an affirmative vote at the annual
general meeting, Jeffrey Halloran, Gordon Fowler, Graham Simmonds and Stephen
Gesner will become directors and will appoint Jeffrey Halloran and Vince
Bulbrook, as Chief Executive Officer and Chief Financial Officer and Secretary,
respectively.
The share exchange agreement does not require Phantom Fiber to change its
officers or directors.
The closing of the transaction is subject to a range of standard closing
conditions. Our shareholders must approve the amendment of the certificate of
incorporation to increase the number of outstanding shares, to elect Jeffrey
Halloran, Gordon Fowler, Graham Simmonds and Stephen Gesner as directors, to
increase the number of shares under stock option plans from 3,000,000 to
20,000,000 and to change our name to Phantom Fiber Corporation. These proposals,
and the respective votes required to approve each such proposal, are more fully
described elsewhere in this proxy statement.
The share exchange agreement can be terminated by either the Company or
Phantom Fiber on the grounds of one or more inaccurate representations or breach
of one or more obligations that is not timely cured. The Company and Phantom
Fiber each may terminate if the closing has not taken place with 60 days of
mailing of this proxy, or if each of their boards terminates the agreement by a
majority vote. Also, either party can terminate if the Company's shareholders do
not approve any acquisition-related proposal. Finally, the Company can terminate
the share exchange agreement if its Board of Directors determines in good faith
that it must accept a more favorable alternate transaction in order to avoid
breaching the directors' fiduciary duties.
25
Differences in Rights of Security Holders
Other than the dilution that will result from issuing shares of our common
stock that will constitute approximately 67% of our outstanding shares, there
will not be any material difference in the rights of our security holders as a
result of the transaction.
Accounting Treatment; Certain Federal Income Tax Consequences of the
Acquisition
We anticipate that the acquisition will close in the second or third
quarter of 2004. The acquisition will be recorded as a reverse acquisition since
the Phantom Fiber shareholders and convertible debenture holders will become our
controlling shareholders. Based on the recent thirty-day average price of our
common stock of $0.08, the preliminary estimate of the total purchase price is
approximately $14,600,000. On completion of a valuation, it is expected that the
combined company will record intangible assets (patents and licenses) for
substantially all of the purchase price.
The following discussion sets forth the material U.S. federal income tax
consequences of the transaction. It is based on the U.S. Internal Revenue Code
of 1986, as amended, Treasury Regulations promulgated thereunder, administrative
rulings and pronouncements and judicial decisions as of the date of this proxy
statement, all of which are subject to change, possibly with retroactive effect.
Any such change could alter the tax consequences discussed herein. We have not
sought any ruling from the Internal Revenue Service or an opinion of counsel
with respect to the federal tax consequences discussed in this proxy statement,
and there can be no assurance that the IRS or a court will not take a position
contrary to the federal tax consequences discussed in this proxy statement or
that any such contrary position taken by the IRS or a court would not be
sustained.
The Company and Phantom Fiber intend that the transaction qualify as a
tax-free reorganization within the meaning of Section 368(b) of the Internal
Revenue Code. If the transaction qualifies as a tax-free reorganization, no gain
or loss will be recognized by Pivotal or its shareholders or Phantom Fiber or
its shareholders as a result of the acquisition.
Since Phantom Fiber shareholders and convertible debenture holders will
receive more than 50% of the fair market value of the Company's stock in the
reorganization, the transaction will constitute a "reverse acquisition" for tax
purposes. As a result, the existing Company consolidated group will terminate
for tax purposes and the combined Company /Phantom Fiber group may thereafter be
subject to special rules involving, among other things, tax elections, tax
year-end, limitation on losses and the calculation of earnings and profits.
Regulatory Approvals
No federal or state regulatory requirements must be complied with or
approval obtained in connection with the transaction.
Reports, Opinions, Appraisals and Negotiations
We did not retain a third party to express its opinion as to the fairness
to our shareholders, from a financial point of view, of the proposed
transaction. We felt that sufficient expertise existed in the current director
group. We also relied on the experience of our officers who have concluded
similar transactions with a comparable level of complexity.
26
In performing our analyses of the transaction, we made numerous
assumptions with respect to industry performance, general business, economic,
market and financial conditions, and other matters, many of which are beyond our
control. Any estimates contained in the analyses performed by us are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by the analyses.
Additionally, estimates of the value of businesses or securities do not purport
to be appraisals or to reflect the prices at which the businesses or securities
might actually be sold. Accordingly, the analyses and estimates are inherently
subject to substantial uncertainty.
In connection with our analysis, we researched or reviewed various
materials and documents and held discussions with certain individuals. In
particular, we did the following:
o held discussions with senior management and directors of Phantom Fiber
concerning the outlook of their entity;
o reviewed historical audited financial statements of Phantom Fiber;
o reviewed economic, industry, demographic, and market related data,
factors, and outlooks for Phantom Fiber;
o performed valuation analyses related to the forecasted financial
performance for Phantom Fiber;
o visited Phantom Fiber's headquarters;
o reviewed documents related to the proposed acquisition;
o reviewed the ownership structure of Phantom Fiber and its subsidiaries;
o reviewed projections and previous valuation analyses for Phantom Fiber;
o considered our financial condition and our lack of access to appropriate
funding, and that without additional funds we would likely not be
successful.
We were unable to prepare any reliable comparable transaction or
comparable company analyses traditionally included in a fairness opinion
analysis because we could not find transactions comparable to the proposed
acquisition and it was unable to identify any comparable transactions or
comparable publicly traded companies, in part because of Phantom Fiber's lack of
meaningful revenues and respective early stages of development.
Related Transactions
As discussed above in "Business Conducted by Pivotal," we are primarily
engaged in the business of distributing batteries, flashlights and other
ancillary electronic products. Our board has indicated that, if the acquisition
takes place, it will not devote resources to developing the battery business.
Consequently, we anticipate that, after the effective time of the transaction,
it will dispose of the battery business. It is the view of our board that the
disposal of the battery business is fair to us. Developing the battery business
would require significant resources with no assurance of success. We do however,
believe that the battery business will attract interest from other companies.
Phantom Fiber Director and Officer Information
As explained above, on consummation of the acquisition, our board members
will resign. Our new board will consist of Jeffrey Halloran, Gordon Fowler,
Graham Simmonds and Stephen Gesner. Jeffrey Halloran and Gordon Fowler currently
serve as directors of Phantom Fiber. Our current officers
27
being John Simmonds, Chief Executive Officer, Gary Hokkanen, Chief Financial
Officer and Carrie Weiler, Corporate Secretary will be replaced by Jeffrey
Halloran, as Chief Executive Officer and Vince Bulbrook as Chief Financial
Officer and Secretary.
Biographical information about these individuals is included elsewhere in
the proxy document.
RISK FACTORS
Risks Relating to the Transaction
If the transaction is consummated, your equity will be diluted.
As of March 31, 2004, there were 82,704,871 shares of our common stock
outstanding and we have reserved 11,735,589 shares of our common stock for
issuance under options, warrants and other commitments. In this proxy statement
we are asking you to approve an amendment to our certificate of incorporation to
increase the total number of authorized shares of our common stock from 150
million to 400 million. If our proposed acquisition of Phantom Fiber is
consummated, we will issue to Phantom Fiber shareholders and convertible
debenture holders a number of shares representing approximately 67% of the
outstanding post-acquisition shares, meaning that the pre-acquisition shares
will constitute approximately 33% of the shares of our common stock outstanding
after the acquisition. As a result, each share of our common stock that you
currently hold would represent a substantially smaller percentage ownership
interest in Pivotal.
If the acquisition is consummated, former Phantom Fiber shareholders and
convertible debenture holders will be able to control the Company following the
transaction.
On the effective date of the acquisition, each of our executive officers
and directors will resign and Phantom Fiber's executive officers and directors
will become our executive officer and directors. After the acquisition, former
Phantom Fiber shareholders and convertible debenture holders, including those
who become directors and officers of our company, will hold approximately 67% of
the total number of shares of our common stock outstanding. As a result, Phantom
shareholders will then be able to control the election of directors and other
matter submitted for approval by our shareholders.
If the acquisition is not consummated, we may run out funds with which to
operate our business.
We have never been profitable and we may never become profitable. As of
March 31, 2004, we had an accumulated deficit of $9,146,487. We have not
achieved break even cash flow operations and do not expect to do so in the near
future, if ever. As of March 31, 2004, we had a cash balance of $2,120. We
anticipate that if the acquisition is not consummated our current resources will
be insufficient to finance our anticipated cash operating needs.
Risks Relating to Phantom Fiber
Clients may not adopt Phantom Fiber's technology.
Phantom Fiber's revenue model is heavily based on adoption. The more
clients that use it, the more revenue Phantom Fiber will make. However, Phantom
Fiber must incur the cost of integrating the software and creating the wireless
infra-structure for the clients. Therefore, if the adoption of wireless over the
next 3 to 5 years doesn't emerge, Phantom Fiber will not generate the revenue it
is projecting.
28
Phantom Fiber may not be able keep pace with technological advances.
The wireless industry, being still in its infancy, and integrating
solutions remains very complex and requires a high level of industry expertise.
We believe that, similar to the internet, wireless tools will advance and
simplify the application development process. Once this occurs, we believe there
will be less of a dependency on complex products and highly skilled individuals
and the wireless sector will become more of a commodity - like the internet has
become. Accordingly, we may not be able to achieve or maintain sufficient
margins on our products to be profitable.
Phantom Fiber may be unable to compete with larger well established competitors.
The wireless industry continues to attract the attention and funds of
large well established companies that can aggressively market into the wireless
sector to secure a significant portion of the market share. Phantom Fiber, being
a small company can not cover all industries and must strategically choose the
vertical markets it will go after. This leaves other markets open for
competitors to go after and secure relationships. With any growing and expanding
market, Phantom Fiber also expects new competitors to emerge and focus on
delivering wireless to specific vertical markets only.
If Phantom Fiber does not obtain additional funding, its ability to develop its
technologies will be materially adversely affected.
Phantom Fiber will need substantial additional funds to develop its
products. Funding may not, however, be available on acceptable terms, if at all.
If Phantom Fiber is unable to obtain additional financing as needed, it may be
forced to reduce the scope of its operations, which would have a material
adverse effect on its business. Phantom Fiber plans on releasing additional
software products over the next six months. If the results of the initial tests
by potential new clients are not promising, its ability to raise additional
funds may be adversely affected.
29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The tables below set forth certain information regarding the beneficial
ownership, as defined in regulations of the Securities and Exchange Commission,
of the Company's Common Stock as of March 31, 2004 of (i) each person known to
the Company to beneficially own more than 5% of the outstanding shares of the
Company's Common Stock; (ii) each director and director nominee of the Company;
each executive officer of the Company; and (iv) all directors and executive
officers as a group. As of March 31, 2004, a total of 82,704,871 shares of
Common Stock were outstanding. Each share of Common Stock is entitled to one
vote on matters on which Stockholders are eligible to vote. The column entitled
"Percentage of Common Stock" shows the percentage of total voting stock
beneficially owned by each listed party.
There has not been a change of control with respect to the Company during
or since the fiscal year ended December 31, 2003. However, upon the Closing of
the acquisition of Phantom Fiber, which is contingent upon shareholder approval
of election of the Target Nominee directors, the approval of an increase in the
authorized share capital and the amendments to the 2000 Stock Option Plan, there
would be a change of control of the Company. Please see the section of this
proxy under the caption "Proposed Acquisition of Phantom Fiber Corporation," and
the Share Exchange Agreement appended as Appendix D hereto for additional
information regarding this proposed change of control.
The number of shares beneficially owned is determined under rules
promulgated by the SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under those rules, beneficial
ownership includes any shares as to which the individual has sole or shared
voting power or investment power and also any shares which the individual has
the right to acquire within 60 days of March 31, 2004, through the exercise or
conversion of any stock option, convertible security, warrant or other right.
Including those shares in the tables does not, however, constitute an admission
that the named shareholder is a direct or indirect beneficial owner of those
shares. Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power (or shares that power with that person's
spouse) with respect to all shares of capital stock listed as owned by that
person or entity.
Security Ownership of Certain Beneficial Owners
===============================================================================
Name and Address of Amount and Nature Percent
Beneficial Owner of Beneficial of Common Stock
Ownership (1) (2)
- -------------------------------------------------------------------------------
1500450 Ontario Limited (3) 12,986,426 15.7%
119 Alexis Blvd. Toronto,
Ontario, Canada,
M3H 2P8
- -------------------------------------------------------------------------------
Wireless Source Distribution 6,000,000 7.3%
Ltd.
1408 Broad Street
Regina, Saskatchewan, Canada,
S4R 1Y9
- -------------------------------------------------------------------------------
Ken Adelberg 5,000,000 6.0%
609 Longchamps Drive
Devon, PA 19333
- -------------------------------------------------------------------------------
Brian Usher-Jones 4,277,346 (4) 5.2%
81 Glengowan Rd.
Toronto, Ontario Canada, M4N
1G5
===============================================================================
(1) Except as otherwise indicated below, each named person has sole voting and
investment power with respect to the securities beneficially owned by such
person.
30
(2) Based on 82,704,871 shares outstanding at March 31, 2004.
(3) Mr. Neil Greenberg is the sole shareholder of 1500450 Ontario Limited
which owns an aggregate of 12,986,426 shares of Common Stock, representing
15.7% of the aggregate shares of Common Stock outstanding. Accordingly,
1500450 Ontario Limited and, in his capacity as the sole shareholder of
1500450 Ontario Limited, Mr. Greenberg may each be deemed beneficially to
own 12,986,426 shares (or 15.7%) of the outstanding Common Stock.
(4) Includes 4,027,346 shares of Common Stock and 250,000 shares of Common
Stock issuable upon exercise of options granted under the Stock Option
Plan effective August 28, 2001, at an exercise price of $0.10 per share.
Does not include the following securities that are issuable in exchange
for CAD100,000 (approximately $73,690) principal amount of convertible
debentures of Phantom Fiber Corporation upon the Closing pursuant to the
share exchange agreement between the Company and Phantom Fiber
Corporation: (i) 2,500,000 shares of Common Stock; and (ii) warrants
exerciseable until the second anniversary of the Closing to purchase
1,250,000 shares of Common Stock at an exercise price of $0.084 per share.
Security Ownership of Management
The following table sets forth the beneficial ownership of Common Stock of the
Company as of March 31, 2004, by each director, each executive officer named in
the Summary Compensation Table, and by all directors and executive officers of
the Company as a group:
===========================================================
Name and Address of Amount and Nature Percent
Beneficial Owner of Beneficial of Common
Ownership (1) Stock (2)
- -----------------------------------------------------------
John G. Simmonds 979,000 (3) 1.2%
13980 Jane Street
King City, Ontario,
Canada
L7B 1A3
- -----------------------------------------------------------
Brian Usher-Jones 4,277,346 (4) 5.2%
81 Glengowan Rd.
Toronto, Ontario
M4N 1G5
- -----------------------------------------------------------
Carrie J. Weiler 1,500,000 (5) 1.8%
69 McCutcheon Ave.
Nobleton, Ontario
L0G 1N0
- -----------------------------------------------------------
Gary N. Hokkanen 2,500,000 (6) 3.0%
60 Dersingham Crescent
Thornhill, Ontario,
Canada
L3T 4E8
- -----------------------------------------------------------
All Executive 9,256,346 11.1%
Officers and
Directors as a group
===========================================================
(1) Except as otherwise indicated below, each named person has sole voting and
investment power with respect to the securities beneficially owned by such
person.
(2) Based on 82,704,871 shares outstanding at March 31, 2004.
(3) Includes: (a) 579,000 shares of Common Stock held directly; (b) 100,000
shares of Common Stock owned by Mr. Simmonds' wife; (c) 50,000 shares of
the Common Stock held by Mr. Simmonds' wife in trust for Mr. Simmonds' son
Jack Simmonds; and (d) 250,000 shares of Common Stock issuable upon
exercise of options granted under the Stock Option Plan effective August
28, 2001, at an exercise price of $0.10 per share. Does not include the
following securities that are issuable in exchange for CAD100,000
(approximately $73,690) principal amount of convertible debentures of
Phantom Fiber Corporation upon the Closing pursuant to the share exchange
agreement between the Company and Phantom Fiber Corporation: (i) 2,500,000
shares of Common Stock; and (ii) warrants exerciseable until
31
the second anniversary of the Closing to purchase 1,250,000 shares of
Common Stock at an exercise price of $0.084 per share.
(4) Includes 4,027,346 shares of Common Stock and 250,000 shares of Common
Stock issuable upon exercise of options granted under the Stock Option
Plan effective August 28, 2001, at an exercise price of $0.10 per share.
Does not include the following securities that are issuable in exchange
for CAD100,000 (approximately $73,690) principal amount of convertible
debentures of Phantom Fiber Corporation upon the Closing pursuant to the
share exchange agreement between the Company and Phantom Fiber
Corporation: (i) 2,500,000 shares of Common Stock; and (ii) warrants
exerciseable until the second anniversary of the Closing to purchase
1,250,000 shares of Common Stock at an exercise price of $0.084 per share.
(5) Does not include the following securities that are issuable in exchange
for CAD25,000 (approximately $18,423) principal amount of convertible
debentures of Phantom Fiber Corporation upon the Closing pursuant to the
share exchange agreement between the Company and Phantom Fiber
Corporation: (i) 625,000 shares of Common Stock; and (ii) warrants
exerciseable until the second anniversary of the Closing to purchase
312,500 shares of Common Stock at an exercise price of $0.084 per share.
(6) Includes 500,000 shares of Common Stock held directly and 2,000,000 shares
of Common Stock held by IRMG Inc., a corporation of which Mr. Hokkanen is
the sole stockholder.
32
EXECUTIVE COMPENSATION
1. Summary Compensation Table
The following table sets forth information concerning the compensation for
services in all capacities for the fiscal years ended December 31, 2003, 2002
and 2001 of the following named executive officers: (i) the chief executive
officer ("CEO"); (ii) the Company's four most highly compensated executive
officers other than the CEO who were serving as executive officers at the end of
the last completed fiscal year and earned compensation in excess of $100,000
during such year; and (iii) up to two additional individuals for whom disclosure
would have been provided pursuant to clause (ii) but for the fact that the
individual was not serving as executive officer of the Company at the end of the
last completed fiscal year.
- ---------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation Awards
- ---------------------------------------------------------------------------------------
Other Annual Securities
Name and Principal Salary Bonus Compensation Underlying Options
Position Year ($) ($) ($) (#)
- ---------------------------------------------------------------------------------------
John G. Simmonds 2003 $55,573(1) --- (2) ---
Chief Executive 2002 --- --- --- ---
Officer 2001 --- --- --- 250,000
- ---------------------------------------------------------------------------------------
Carrie J. Weiler 2003 $30,840(1) --- (2) ---
Secretary 2002 --- --- --- ---
2001 --- --- --- ---
---
- ---------------------------------------------------------------------------------------
Gary N. Hokkanen (3) 2003 $1,785 --- (2) ---
Chief Financial 2002 $10,340 --- --- ---
Officer 2001 --- --- --- 250,000
- ---------------------------------------------------------------------------------------
(1) Mr. Simmonds and Ms. Weiler each worked for the Company as consultants
during 2003, devoting only a portion of their time to the Company. Prior
to June 30, 2003 Mr. Simmonds was paid $55,573 and Ms. Weiler was paid
$30,840 for executive consulting services.
(2) In addition to the amounts listed in the table, pursuant to an oral
executive compensation arrangement, the Company accrued, without paying, a
management fee of $10,000 per month in the aggregate for the executive
management services of Mr. Simmonds, Ms. Weiler and Mr. Hokkanen.
(3) Mr. Hokkanen was paid $1,785 in 2003 and $10,340 in 2002 for financial
consulting services provided.
33
Option Grants for Fiscal 2003
During the fiscal year ended December 31, 2003 there were no options granted
under the Company's 2000 Stock Option Plan. Other than stock options, the
Company has never granted any long term incentive plan awards.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information regarding the exercise of stock
options during the last fiscal year by the executives named in the Summary
Compensation Table and the fiscal year-end value of unexercised options.
- ---------------------------------------------------------------------------------------
Unexercised
In-the-Money
Number of Securities Options at
Underlying December
Unexercised 31, 2003
Shares Acquired Value Options at exercisable/
Name on Exercise Realized December 31, 2003 unexercisable(1)
- ---------------------------------------------------------------------------------------
Exerciseable Unexerciseable
- ---------------------------------------------------------------------------------------
John G. Simmonds 0 $0 250,000 0 (2)
- ---------------------------------------------------------------------------------------
Carrie J. Weiler 0 $0 0 0 N/A
- ---------------------------------------------------------------------------------------
Gary N. Hokkanen 0 $0 0 0 N/A
- ---------------------------------------------------------------------------------------
(1) Represents the difference between the fair market value of securities
underlying the options and the exercise price of the options at fiscal
year end.
(2) None of options outstanding at December 31, 2003 under the 2000 Stock
Option Plan were In-the-Money.
Securities Authorized for Issuance Under Equity Compensation Plans
(a) (b) (c)
Number of Number of Securities
Securities to be Remaining Available
Issued Upon for Future Issuance
Exercise of Weighted Average Under Equity
Outstanding Exercise Price of Compensation Plans
Options, Outstanding Options, (Excluding Securities
Plan Category Warrants and Rights Warrants and Rights Reflected in Column(a))
- ----------------------------------------------------------------------------------------
Equity
Compensation Plans
Approved by
Stockholders 1,000,000 $0.115 2,000,000
- ----------------------------------------------------------------------------------------
Equity
Compensation Plans
Not Approved by
Stockholders 0 NA 0
- ----------------------------------------------------------------------------------------
TOTAL....... 1,000,000 $0.115 2,000,000
- ----------------------------------------------------------------------------------------
The 2000 Stock Option Plan is attached hereto as Appendix C and described below
under the caption "Proposal 5: Approval of Amendments to the Company's 2000
Stock Option Plan."
34
Compensation of Directors
Other than out of pocket expenses, the Company currently does not compensate
directors for their service in such capacity.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
The Company does not have any employment agreements with any of its current
officers. No retirement, pension or similar program has been adopted by the
Company.
Related Party Proceedings
The Company is not party to any material proceeding to which any director,
officer or affiliate of the Company, any owner of record or beneficially of more
than five percent of any class of voting securities of the Company, or any
associate of any such director, officer, affiliate or security holder is a party
adverse to the Company or any of its subsidiaries or has a material interest
adverse to the Company or any of its subsidiaries.
Directors and Executive Officers
Set forth below is certain information concerning the Company's directors,
nominees for election as directors and executive officers:
- -------------------------------------------------------------------------------
Directors, Officers, Nominees and Target Nominees (1)
- -------------------------------------------------------------------------------
Name Age Position(s)
- -------------------------------------------------------------------------------
John G. Simmonds 53 Chief Executive Officer, Chairman,
Current Director
- -------------------------------------------------------------------------------
Gary N. Hokkanen 48 Chief Financial Officer
- -------------------------------------------------------------------------------
Brian Usher-Jones 58 Current Director
- -------------------------------------------------------------------------------
Carrie J. Weiler 45 Secretary
- -------------------------------------------------------------------------------
Jeffrey Halloran 42 Target Nominee
- -------------------------------------------------------------------------------
Gordon Fowler 52 Target Nominee
- -------------------------------------------------------------------------------
Graham Simmonds 30 Target Nominee
- -------------------------------------------------------------------------------
Stephen Gesner 48 Target Nominee
- -------------------------------------------------------------------------------
Vince Bulbrook 45 (2)
- -------------------------------------------------------------------------------
(1) Unless otherwise indicated, each Director is also a Nominee.
(2) Vince Bulbrook is a financial consultant to Phantom Fiber, and the Company
has agreed to appoint him to serve as Chief Financial Officer and
Secretary for the Company following the Closing.
35
Directors/Nominees and Executive Officers
Brian Usher-Jones, Director, was appointed to the Board on June 15,
2001. Mr. Usher-Jones has been a merchant banker since 1995 and was the
former President of MB Capital Corporation and Thomson Kernaghan Co. Ltd., an
investment banking firm in Toronto, Ontario. Mr. Usher-Jones attained a
Bachelor of Commerce degree from Concordia University in 1969. Mr.
Usher-Jones is also a C.A. (Chartered Accountant) and is a member of the
Canadian Institute of Chartered Accountants (1970). Mr. Usher-Jones currently
serves as a director of various public companies including Xplore
Technologies Corp. and Calvalley Petroleum Inc.
John G. Simmonds, CEO and Director, has served as a Director of the
Company since October 15, 1999. Mr. Simmonds was appointed CEO of the Company
on February 22, 2002. Mr. Simmonds is an entrepreneur with several years'
experience in the wireless communications industry. Mr. Simmonds has been
involved in many business opportunities including distribution, golf course
development, gaming, wireless products, and manufacturing. Mr. Simmonds
founded Simmonds Capital Limited in 1991 and also launched TrackPower Inc.
(OTCBB: TPWR) in 1998. Mr. Simmonds principal occupation since 1991 was CEO
of Simmonds Capital Limited and since January 1998 CEO of TrackPower Inc. Mr.
Simmonds is a director of TrackPower, Inc. and has served on several boards
during his business career.
Gary N. Hokkanen, CFO, has served as the Company's CFO since July 5,
2001. Mr. Hokkanen, who holds a Bachelor of Arts degree from the University
of Toronto and is a CMA (Certified Management Accountant) and a member of the
Society of Management Accountants, Ontario, is CFO of the Company. Mr.
Hokkanen is also the sole Director and Officer of IRMG, a Toronto based
management consulting firm. Mr. Hokkanen was CFO of Simmonds Capital Limited
from July 1998 to January 2001 and was CFO of Trackpower Inc from February
1998 to June 2001. For the period April 1996 to July 1998, Mr. Hokkanen was
Treasurer of Simmonds Capital Limited. Mr. Hokkanen was a Director of the
Company beginning on July 5, 2001 until his resignation on February 22, 2002.
Carrie J. Weiler, Secretary. Ms. Weiler was appointed Secretary of the
Company in 2002. Ms. Weiler joined the Simmonds Capital Limited group of
companies in 1979. Ms. Weiler was promoted to Vice President of Corporate
Development for Simmonds Capital Limited and its divisions in 1994. Ms.
Weiler continues to serve as a key liaison between the various committees and
the Board of Directors.
Target Nominees and Executive Officers
Jeffrey Halloran is Chairman, President and CEO of Phantom Fiber
Corporation, which he founded in 2002. Prior to 2002, Mr. Halloran founded
Relation Solutions Incorporated, a consulting firm specializing in information
management and strategic information planning for Fortune 500 companies, in
1989, and operated it until he sold it to Microforum Inc. (a Toronto Stock
Exchange listed company) in 2000. Mr. Halloran was a Senior VP at Microforum
until 2001. Prior to forming Relational Solutions Mr. Halloran was Consulting
Manager for Oracle Corporation from 1987 though 1989 and a Senior Consultant
with LGS, a large Canadian
36
Consulting Firm from 1985 until 1987. From the time he graduated until he joined
LGS he was a Programmer/Analyst for Agriculture Canada. Mr. Halloran graduated
in Business Administration from St. Clair College in 1982.
Gordon Fowler is President and Chief Executive Officer of Nano-C, Inc. a
nanotechnology company in Westwood, MA (2002-present) which is commercializing
carbon nano-structures such as fullerenes and nanotubes. Prior to Nano-C, Mr.
Fowler spent 10 years consulting with companies to leverage emerging
technologies to improve their performance (Telelogic, TwixTel, MUSE Networks and
MeetingSpace). Mr. Fowler's early career included senior executive positions at
companies including Bose Corporation (VP 1978-1984), Telesciences, a Motorola
joint venture (VP 1992-1994) and Cray Communications (UK) (Director 1994-1996).
Mr. Fowler began his career with NorTel Networks (1970-1978) and was amongst the
first employees who started their US subsidiary where he grew to VP Operations
in their Advanced Telecommunications Products Division. Mr. Fowler graduated
with a BSc (1970) in engineering from the University of Saskatchewan and retains
his professional engineering status in Ontario.
Stephen Gesner currently serves as an independent consultant to selected
financial services and technology companies. Prior to such service, Mr. Gesner
served as the CTO for Cap Gemini Ernst and Young Canada during 2003. Mr. Gesner
spent the prior 14 years with TD Bank Financial Group, beginning in January 1989
as a Consultant in the Cash Management Group and moving through a variety of
ever increasing senior roles culminating in his posting as SVP and CTO from
March 2000 through November 2002. Mr. Gesner began his career with Ford Motor
Company of Canada in September, 1979 and held 11 different positions in Finance,
Treasury, Production Planning, and Industrial Relations through December 1988.
Mr. Gesner holds an Honours BSc from York University (1977) and an M.B.A from
the Schulich School of Business (1979). He is a member of the Technical Advisory
Board of Kinitos Software (April 2003) as well as a member of the J.L. Albright
III Venture Fund Advisory Board (August 2002).
Graham Simmonds has been President and CEO of Diversified Racing
Investments Inc. a private company that has owned and operated an equine
training facility since 2003. Mr. Simmonds is also and officer and director of
Simmonds Mercantile and Management Inc. a private corporate finance and
management services firm since 2003. Prior to 2003 Mr. Simmonds was General
Manager of TrackPower, Inc. a public company that was in the business of
operating an interactive wagering and video service for horseracing enthusiasts.
Mr. Simmonds attended McGill University from 1992 to 1996.
Vince Bulbrook is the proposed CFO and Secretary of the Company to take
office upon the Closing. Mr. Bulbrook has been a partner of The Sedona Group
since February, 2003. Prior to that Mr. Bulbrook served as a Director of Finance
and Innovation of Financial Models Company a publicly traded company, from 1999
through 2003. From 1994 until 1999 Mr. Bulbrook ran his own independent
consulting practice. Mr. Bulbrook was with Price Waterhouse as a member of the
technology practice from 1990 through 1994 and with Clarkson Gordon (Ernst &
Young) from 1984 until 1990 where he moved from the accounting practice into
37
providing corporate finance and restructuring services to businesses, investors
and lenders. Mr. Bulbrook earned an Honors BA in Business Administration degree
from The University of Western Ontario in 1984. Mr. Bulbrook is a C.A.
(Chartered Accountant) and is a member of the Canadian Institute of Chartered
Accountants, (1987).
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During fiscal 2003 there were four Board of Directors meetings. There were no
directors who attended less than 75% of the total number of meetings of the
Board and any committees on which such director served during fiscal 2003.
The Board of Directors has a Compensation Committee and an Audit Committee. The
Company does not have an Executive Committee or Nominating Committee. Board
believes that it is appropriate for the Company not to have such committees, due
to the Company's highly limited resources and the relative difficulty in getting
independent and qualified individuals to take an interest in serving as
directors of the Company. Nonetheless, the Company expects that, following the
Closing of the Phantom Fiber acquisition, the Company's Board will revisit the
issue and may decide that, at such time, it is appropriate for the Company to
have such committees.
Messrs. Usher-Jones and Simmonds serve as members of the Compensation Committee.
The primary function of the Compensation Committee is compensation review with
respect to the principal executive officers of the Company. The members of the
Compensation Committee provide advice and counsel to the Board of Directors
through their participation as directors in meetings of the Board and as members
of the Committee in meetings of the Committee held separate and apart from the
meetings of the Board. During fiscal 2003 the Compensation Committee did not
meet.
Messrs. Usher-Jones and Simmonds serve as members of the Audit Committee.
Pursuant to NASD Rule 4200(a)(15), Mr. Usher-Jones is an independent director
and Mr. Simmonds is not. The Company believes that it is appropriate for Mr.
Simmonds to serve on the Audit Committee, notwithstanding the fact that he is
not independent, due to the Company's limited resources and the relative
difficulty in getting independent and qualified individuals to take an interest
in serving as directors of the Company. Moreover, the Company expects that,
following the Closing of the Phantom Fiber acquisition, the Company's Board will
reconsider whether it is appropriate for the Company to have an Audit Committee
consisting entirely of independent directors. The primary function of the Audit
Committee is to meet with the Company's independent public accountants, counsel
and management to discuss the scope and results of the annual audit, internal
accounting procedures and certain other questions of accounting policy. The
Company's Board of Directors has adopted a written charter for the Audit
Committee, a copy of which is attached as Appendix A. During fiscal 2003 there
were five audit committee meetings. The Audit Committee approved in advance each
engagement of the independent auditors for audit or non-audit services for the
Company during fiscal 2003.
38
Report of the Audit Committee
The Audit Committee oversees the Company's financial reporting process on behalf
of the Board of Directors. Management has the primary responsibility for the
financial statements and the reporting process, including systems of internal
controls. In fulfilling its oversight responsibilities, the Committee reviewed
and discussed with management the audited financial statements in the Annual
Report. This review involves a discussion of the quality, not just the
acceptability, of the accounting principles, the reasonableness of significant
judgements, and the clarity of disclosures in the financial statements.
The Committee reviewed with the independent auditors (who are responsible for
expressing an opinion on the conformity of those audited financial statements
with generally accepted accounting principles), their judgements as to the
quality, not just the acceptability, of the Company's accounting principles and
such other matters as are required, under Statement of Accounting Standards No.
61, to be discussed with the Committee under generally accepted auditing
standards. In addition, the Committee has discussed with the independent
auditors the auditors' independence from management and the Company. The
Committee has received the written disclosures and the letter from the
independent accountants required by the Independence Standards Board Standard
No. 1, and has considered the compatibility of nonaudit services with the
auditors' independence.
In reliance on the reviews and discussions referred to above, the Committee
recommended to the Board of Directors (and the Board has approved) that the
audited financial statements be included in the Annual Report on Form 10-KSB for
the year ended December 31, 2003 for filing with the Securities and Exchange
Commission (the "Commission").
Brian Usher-Jones, Audit Committee Chair
John G. Simmonds, Audit Committee Member
March 29, 2004
Pre-Approval Policies and Procedures
The Audit Committee has established a procedure for the pre-approval of the
Company's engagement of independent accountants for audit and non-audit
services, pursuant to which the Audit Committee Chair may approve all such
engagements in advance and promptly inform the Audit Committee of each such
service; provided that the Audit Committee Chair is not also a member of the
Company's management.
39
Audit Fees
The Company was billed an aggregate amount of $33,500 and $20,438 for the audit
for the year ended December 31, 2003 and 2002, respectively, and the review of
quarterly reports by the Company's independent accountant.
Audit-Related Fees
The Company incurred $2,788 in costs for professional fees rendered by the
independent accountant for attending meetings with respect to structuring of
contracts during the year ended December 31, 2003 and zero during the year ended
December 31, 2002. All of the Company's audit-related fees for fiscal 2003 were
approved in advance by the Audit Committee Chair.
Tax Fees
The Company incurred $5,155 in costs for professional fees rendered by the
independent accountant for tax planning services during fiscal 2003 and zero in
fiscal 2002. All of the Company's tax fees for fiscal 2003 were approved in
advance by the Audit Committee Chair.
All Other Fees
The Company did not incur any other costs for services rendered by the
independent accountant during either fiscal 2003 or 2002.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than 10% of a registered class of the Company's equity
securities, to file initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company with the
Commission. Reporting persons are required to furnish the Company with copies of
all forms they file pursuant to Section 16(a) of the Exchange Act.
For the period January 1, 2003 to December 31, 2003, the Company believes that
Mr. Simmonds, Mr. Usher-Jones, Ms. Weiler and Mr. Hokkanen did not file required
Form 4 and that 1500450 Ontario Limited did not file required Forms 3 and 4.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past two fiscal years and through December 31, 2003, there have
been no material transactions in which the Company or any of its subsidiaries
was a party, and in which any director, officer, nominee, 5% stockholder of the
Company or any immediate family member of any such person had a direct or
indirect material interest, except as set forth below.
40
eieiHome.com Inc.
In October 1999, a publicly listed entity called Simmonds Capital Limited
("SCL") sold a business known as eieiHome.com Inc. to the Company. Part of the
consideration paid by the Company for SCL's business was a $2 million senior
convertible debenture and warrants to purchase 5,000,000 shares of Common Stock
at exercise prices between $1.00 and $3.00. At the time, John Simmonds, Gary
Hokkanen and Carrie Weiler were CEO, CFO and Corporate Secretary, respectively,
of each of the Company and SCL. The three were also stockholders of both the
Company and SCL, and Mr. Simmonds was a director of SCL and, following this
transaction, was made a director of the Company, as well. In October 2000 the
Company failed to make a principal repayment on the $2 million senior
convertible debenture and was therefore in default.
On June 28, 2001, SCL agreed to convert the principal and interest due under the
senior convertible debenture to Common Stock at $1.00 per share. The conversion
resulted in SCL receiving 2,111,726 shares of Common Stock in exchange for $2
million in principal under the debenture, $214,910 of accrued but unpaid
interest offset by $103,184 owed by SCL to the Company. In addition, on June 28,
2001, the warrants to purchase 5,000,000 shares of the Common Stock issued to
SCL on October 14, 1999 with exercise prices ranging between $1.00 and $3.00
were all repriced to $0.50 per share and the original expiry dates, which ranged
from October 14, 2005 to October 14, 2009 were all revised to December 31, 2004.
On February 18, 2002, SCL transferred 7,513,426 shares of the Company's common
stock to 1500450 Ontario Limited as part of settlement with a secured lender.
This transaction resulted in 1500450 Ontario Limited becoming a significant
shareholder (approximately 15.7%) of the Company.
IRMG Inc.
On June 15, 2001, the Company acquired all assets of 4Cash, a division of IRMG
Inc. ("IRMG"), in exchange for:
i) 10,000,000 shares of Common Stock;
ii) 10,000,000 shares of Common Stock subject to certain net profit
performance criteria; and
iii) Warrants to acquire 5,000,000 shares of Common Stock at an exercise
price of $0.10 per share, also subject to certain net profit
performance criteria; and
iv) issuing five-year warrants to Mr. Stephen L. Cussons, an officer and
director of IRMG, immediately exerciseable to purchase 1,100,000 shares
of Common Stock at an exercise price of $0.10 per share.
41
The stockholders of IRMG agreed that Mr. Cussons would receive the warrants as
described above because they wanted to reward him for his vision and
extraordinary efforts on behalf of IRMG. At such time, Mr. Simmonds, Ms. Weiler
and Mr. Hokkanen were directors and stockholders (each holding a 14.3% ownership
position, as did each of Mr. Cussons and the three other stockholders) of IRMG.
In connection with the acquisition of the 4Cash assets, the Company also entered
into a three-year management services agreement with IRMG for the management of
the Company for a fee of $55,000 per month, effective as of June 1, 2001. Such
fees were accrued but not paid during the term of the agreement and were
ultimately forgiven upon the cancellation of such agreement.
On August 2, 2001, IRMG repurchased the shares of IRMG common stock of Mr.
Simmonds, Ms. Weiler and three other IRMG stockholders with an aggregate of
5,000,000 shares of the Company's Common Stock it acquired on June 15, 2001 and
2,000,000 of 10,000,000 additional shares of Company's Common Stock to be issued
subject to certain net profit performance criteria and 1,000,000 of 5,000,000
warrants also subject to certain net profit performance criteria. In such August
2, 2001 repurchase transaction, each of the five IRMG stockholders, or an entity
wholly-owned by such person, received 1,000,000 of the 5,000,000 shares of the
Company's Common Stock, 400,000 of the 2,000,000 additional shares of the
Company's Common Stock to be issued subject to certain net profit criteria and
200,000 of the 1,000,000 warrants. The other three stockholders received an
aggregate of 2,000,000 of the 5,000,000 shares of the Company's Common Stock,
700,000 of the 1,000,000 additional shares of the Company's Common Stock to be
issued subject to certain net profit criteria and 700,000 of the 1,000,000
warrants in the August 2, 2001 transaction. As a result of this transaction,
each of Mr. Hokkanen and Mr. Cussons became a 50% stockholder of IRMG.
On March 5, 2002, the Company sold the 4Cash business, acquired on June 15, 2001
back to IRMG. Under the terms of the sale the Company sold its wholly-owned
subsidiary, 4CASH ATM Services Canada Inc., together with all the intellectual
property rights to operate the business to IRMG in exchange for:
i) The cancellation of warrants to purchase 5,000,000 Common Shares of the
Company issued to IRMG, including the 1,000,000 warrants that had
previously been transferred to IRMG's former stockholders;
ii) The cancellation of IRMG's right to earn 10,000,000 Common Shares of
the Company upon achievement of certain net profit performance
criteria, including the rights to earn 1,000,000 Common Shares that had
previously been transferred to IRMG's former stockholders;
iii) The cancellation of warrants to purchase 1,100,000 Common Shares of the
Company issued to Mr. Cussons; and
iv) Cancellation of the IRMG management services contract and forgiveness
of all fees accrued thereunder.
The former stockholders of IRMG had agreed to the cancellation of these warrants
and rights to earn Common Shares as part of the March 5, 2002 transactions. As a
result of such transactions,
42
essentially all the consideration that the Company had paid to IRMG in its June
15, 2001 acquisition of the 4Cash assets was cancelled, except for the
10,000,000 Common Shares.
In connection with the sale of the 4Cash business back to IRMG, Mr. Cussons and
Mr. Hokkanen resigned as directors of the Company and Mr. Cussons resigned as
the Company's President and CEO. Mr. Hokkanen agreed to serve as the Company's
CFO until a new business opportunity was found for the Company. Furthermore, in
anticipation of the March 5, 2002 transactions, Mr. Simmonds was appointed CEO
of the Company effective as of February 22, 2002.
On December 29, 2003 IRMG acquired the 50% ownership interest held by Mr.
Cussons with 3,000,000 of the remaining 5,000,000 shares of the Company's Common
Stock. As a result of these transactions described above, Mr. Hokkanen became
the sole stockholder of IRMG on December 29, 2003.
TrackPower Inc.
On June 25, 2001, the Company entered into an exclusive three year services
agreement with TrackPower Inc., a corporation in which Mr. Simmonds is also an
officer, director and shareholder. Under the terms of the agreement, Trackpower
granted to 4Cash the exclusive right to act as its ATM partner to install,
maintain and operate ATMs in locations that Trackpower contracts with at any
horse racetrack or gaming related facility. On November 1, 2001, the Company,
with the mutual consent of Trackpower, terminated the June 25, 2001 services
agreement.
Wireless Transactions
On June 7, 2002, the Company acquired all the issued and outstanding common
shares of Prime Wireless Corporation ("Prime Wireless") and certain assets of
Midland International Corporation from 1500450 Ontario Limited, an entity which
is a significant shareholder of the Company, in exchange for:
(i) $40,000 in cash;
(ii) $120,000 non-interest bearing note. Payable $2,000 per month commencing
July 1, 2002 for a period of 5 years, such payments contingent upon
revenue and the continued distribution agreement between the Prime
Wireless Inc. and Vertex Standard; and
(iii) Fifty percent (50%) of all net proceeds from the sale of any Midland
related asset payable 30 days after receipt of funds; such assets are
recorded on Prime Wireless' books at a nominal value.
On March 13, 2003, the Company transferred all of the issued and outstanding
common shares of Prime Wireless and all of its Midland related assets to
Wireless Age Communications, Inc., an entity listed on the NASD over-the-counter
bulletin board trading under the symbol WLSA, in exchange for 1,500,000 common
shares of Wireless Age. Pursuant to the terms of the Prime
43
Wireless acquisition agreement, dated June 7, 2002, between the Company and
1500450 Ontario Limited, The Company transferred to 1500450 Ontario Limited
750,000 of the 1,500,000 common shares of Wireless Age Communications, Inc. that
the Company received from its disposition of Prime Wireless. Under the terms of
the March 13, 2003 transaction with Wireless Age Communications, Inc., Mr.
Simmonds, the Company's CEO was appointed Chairman and CEO of Wireless Age
Communications, Inc. Prior to March 13, 2003 there was no relationship between
the Company and Wireless Age Communications, Inc.
Prime Battery Products Limited
On December 31, 2002, the Company, through a newly incorporated wholly-owned
subsidiary named Prime Battery Products Limited ("Prime Battery"), entered into
an Asset Purchase Agreement with DCS Battery Sales Ltd. ("DCS Battery) to
acquire certain assets of DCS Battery. DCS Battery was owned by David C.
Simmonds. David C. Simmonds is a brother of John G. Simmonds, the Company's
Chief Executive Officer and one of its directors. Under the terms of the
agreement, Prime Battery acquired certain assets of DCS Battery in exchange for:
(i) 6,000,000 newly issued common shares of the Company; and (ii) the right to
earn an additional 2,000,000 newly issued common shares of the Company for every
$100,000 of net profit earned by Prime Battery during the two year period
beginning on November 1, 2002 to a maximum of 10,000,000 additional shares.
Under the terms of the agreement, Prime Battery also agreed, among other things,
to a gross profit sharing arrangement with A.C. Simmonds and Sons ("ACS"). The
gross profit sharing arrangement included providing ACS with a portion of the
gross profit earned by Prime Battery. ACS and Prime Battery were to equally
split the gross profit earned, subject however to Prime Battery retaining a
minimum level of gross profit (calculated as 15% of sales). The payment of a
portion of the gross profit was intended to compensate ACS for management,
distribution and logistical services provided to Prime Battery. ACS, like DCS
Battery, is an entity wholly owned by David C. Simmonds. The agreement also
provided that ACS could purchase battery products from Prime Battery at cost
plus 10% for resale to certain non-retail industrial accounts.
Furthermore, Prime Battery agreed to appoint David C. Simmonds as its President
and to pay him CAD$7,500 per month for his services in such capacity. Prime
Battery also agreed to pay Pivotal CAD$10,000 per month for the services of John
G. Simmonds and Carrie J. Weiler. The agreement further provided that the Board
of Directors of Prime Battery would be made to consist of David C. Simmonds,
John G. Simmonds and one other mutually acceptable party (such party was never
in fact agreed upon). On July 2, 2003 Wireless Age Communications, Inc. acquired
the trade name A.C. Simmonds & Sons from David C. Simmonds. Later in July 2003,
the Company sub-licensed to a division of Wireless Age Communications, Inc.
which was newly-named "A.C. Simmonds & Sons," the Canadian rights to distribute
battery and ancillary products acquired under the Konnoc Battery distribution
agreement in exchange for a 10% royalty on goods purchased. The primary reason
for the sub-licensing was the Company's limited working capital resources and
the need to meet certain purchasing levels with Konnoc.
44
Loans From Related Parties
On November 12, 2002, Mr. Brian Usher-Jones, a Stockholder and director of the
Company, provided a $77,131 (CAD$100,000) loan by way of a note payable. Under
the terms of the loan agreement Mr. Usher-Jones would receive:
(i) A 5% fee of the amount borrowed;
(ii) 2% of the outstanding balance paid as interest on a monthly basis;
(iii) Warrants to purchase 1,000,000 shares of the Company's common stock for
each 30 day period or part thereof that the borrowed funds are
outstanding; and
(iv) A further 5% fee if the loan is not repaid in 90 days.
Also on November 12, 2002, Mr. Neil Greenberg, the sole shareholder of 1500450
Ontario Limited which may be deemed beneficially to own approximately 20.5% of
the Company's outstanding Common Shares, provided a $77,131 (CAD$100,000) loan
to the Company on the same terms as Mr. Usher-Jones.
On December 29, 2003, the Company entered into a settlement agreement with Mr.
Brian Usher-Jones pursuant to which the Company agreed to pay $101,041
(CAD$131,000) in cash on January 2, 2004 as full and complete repayment of the
loan. As part of the settlement Mr. Usher-Jones agreed to forgive all fees and
warrants issuable under the terms of the loan. On January 23, 2004, the Company
entered into a Settlement Agreement with Mr. Neil Greenberg. Under the terms of
the settlement, the Company transferred 50,000 shares of Wireless Age
Communications, Inc. common stock to Mr. Greenberg in payment of the loan. As
part of the settlement, Mr. Greenberg agreed to forgive all interest and
warrants issuable under the original loan agreement and the Company also agreed
to adjust the number of Wireless Age Communications, Inc. common shares as
follows: In the event that the closing price is less than $3.00 per share of
Wireless Age common stock on the earlier of (i) the date such stock becomes
freely tradable under Rule 144, or (ii) the date such stock becomes freely
tradable under an effective registration statement filed by Wireless Age, then
the Company shall issue to Mr. Greenberg an additional number of shares of
Wireless Age common stock equal to the excess of (x) US$150,000 divided by the
average per share closing price of Wireless Age common stock for the 5 trading
days immediately prior to such date, over (y) 50,000.
Phantom Fiber Acquisition
Pursuant to the terms of the share exchange agreement between the Company and
Phantom Fiber, upon Closing, the holders of an aggregate of CAD1,200,000
(approximately $932,280) principal amount of convertible debentures of Phantom
Fiber Corporation will receive an aggregate of 30,000,000 shares of the
Company's common stock and warrants exerciseable until the second anniversary of
the Closing to purchase 15,000,000 shares of the Company's common stock at an
exercise price of $0.084 per share. The Company's directors, Brian Usher-Jones
and John G. Simmonds, each hold CAD$100,000, and the Company's Secretary, Carrie
Weiler, holds CAD$25,000, principal amount of such Phantom Fiber debentures.
Accordingly, upon the
45
Closing, Mr. Usher-Jones, Mr. Simmonds and Ms. Weiler will receive 2,500,000,
2,500,000 and 625,000 shares of the Company's common stock and 1,250,000,
1,250,000 and 312,500 warrants, respectively.
46
PROPOSAL 1: REELECTION OF DIRECTORS
Nominees for Election
The Board of Directors proposes the reelection of a Board of two directors for
the upcoming year and until their respective successors are duly elected and
qualified or until the Closing. Unless contrary instructions are given, the
shares represented by a properly executed proxy will be voted "FOR" the election
of the following nominees: John G. Simmonds and Brian Usher-Jones. Mr. Simmonds
and Mr. Usher-Jones are currently members of the Board of Directors of the
Company and Mr. Simmonds is also the Company's Chief Executive Officer. While
management has no reason to believe that any of the nominees will not be
available as a candidate, should such a situation arise, no other person will be
nominated at the Meeting, and such position on the Board of Directors will not
be filled at the Meeting.
The Company's directors will serve until the earlier to occur of the Closing and
the next annual meeting of Stockholders when their respective successors are
duly elected and shall have qualified. The By-laws of the Company provide that
the number of directors of the Company shall be determined from time to time by
the Board of Directors. The number has been fixed by the Board of Directors at
two. Please note, however, that, in connection with the acquisition of Phantom
Fiber, the Board of Directors will increase the number of directors to four,
contingent upon, and effective as of, the Closing. Provided that the nominees
are accepted, there will be no vacancies on the Board of Directors. The General
Corporation Law of the State of Delaware provides that the Company's directors
may be removed by the Stockholders, with or without cause, upon the affirmative
vote of the holders of a majority of the votes cast and at a meeting called for
the purpose of such removal.
There are no family relationships among any of the directors, executive officers
or nominees of the Company.
Required Vote
The directors are to be elected by the affirmative vote of the holders of a
plurality of the shares entitled to vote and present in person or represented by
proxy at the Meeting. Nominee holders that do not receive instructions are
entitled to vote in the election of directors. Votes withheld from the election
of directors will have no effect, because they will not represent votes cast at
the Meeting for the purpose of electing directors.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE
NOMINEES AS DIRECTORS.
47
PROPOSAL 2: ELECTION OF TARGET NOMINEES
TO TAKE OFFICE UPON CLOSING
Target Nominees for Election
The Board of Directors proposes the election, immediately upon the occurrence of
the Closing, of a Board of four directors for the upcoming year and until the
2005 Annual Meeting of Stockholders when their respective successors are duly
elected and qualified. Unless contrary instructions are given, the shares
represented by a properly executed proxy will be voted "FOR" the election of the
following nominees: Jeffrey Halloran, Gordon Fowler, Graham Simmonds and Stephen
Gesner. None of the nominees are currently members of the Board of Directors of
the Company. While management has no reason to believe that any of the nominees
will not be available as a candidate, should such a situation arise, no other
person will be nominated at the Meeting, and such position on the Board of
Directors will not be filled at the Meeting.
The Target Nominees will serve as the Company's directors until the next annual
meeting of Stockholders and until their respective successors are duly elected
and shall have qualified. The By-laws of the Company provide that the number of
directors of the Company shall be determined from time to time by the Board of
Directors. In connection with the Company's acquisition of Phantom Fiber, the
number will been fixed at four, contingent upon, and effective as of, the
Closing. Provided that the nominees are accepted, there would be no vacancies on
the Board of Directors. The Company's Articles of Incorporation provides that
directors may be removed by the Stockholders, with or without cause, upon the
affirmative vote of the holders of a majority of the votes cast and at a meeting
called for the purpose of such removal.
There are no family relationships among any of the directors, executive officers
or Target Nominees.
Required Vote
The Target Nominees are to be elected as directors, to take office upon the
Closing, by the affirmative vote of the holders of a plurality of the shares
entitled to vote and present in person or represented by proxy at the Meeting.
Nominee holders that do not receive instructions are entitled to vote in the
election of directors. Votes withheld from the election of directors will have
no effect, because they will not represent votes cast at the Meeting for the
purpose of electing directors.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE
TARGET NOMINEES AS DIRECTORS, TO TAKE OFFICE UPON THE CLOSING.
48
PROPOSAL 3: RATIFICATION AND APPROVAL OF ACQUISITION OF PHANTOM FIBER
CORPORATION
Acquisition of Phantom Fiber Corporation
The Share Exchange Agreement provides, among other things, for the acquisition
by the Company of Phantom Fiber pursuant to which the Company will acquire
Phantom Fiber and its wholly owned subsidiary, Phantom Fiber Inc. The Company
will issue 137,410,735 shares of its common stock to the shareholders of Phantom
Fiber and 30,000,000 shares of its common stock and warrants to purchase
15,000,000 shares of its common stock to debenture holders of Phantom Fiber.
Upon consummation of the exchange, the shareholders and debenture holders of
Phantom Fiber will receive shares representing approximately 67% of the
Company's post-acquisition outstanding capital stock. The ratification of the
Agreement will also constitute approval of the transactions contemplated
thereby.
There are several reasons why our board is recommending that you approve
the proposed acquisition. In 2003, we made the decision to dispose of the
battery business and seek other business opportunities. The reason for this
decision is that we felt that the Battery Business was going to require
substantial working capital financing when it reached critical mass. Many of the
initiatives we have developed will require substantial amounts of incremental
financing. We believe that the type and level of financing required to make the
Battery Business a success is more easily achieved by a more mature entity, with
existing lines of credit and existing cashflows that can be utilized to offset
initial cash operating losses. This type of financing would likely have had to
come from equity financing or expensive debt instruments, both of which we
believe are not in the best interests of the Company.
We are running out of cash to fund our day-to-day operations. Our officers have
advised our board that it would be highly unlikely for us to fund the working
capital requirements and cash operating losses from any other source other than
equity or convertible debt. Our board concluded that the acquisition will likely
make it easier for us to raise funds in the future. Pivotal's post-acquisition
business will be devoted primarily to Phantom Fiber's business. The board
considers this to be an area of potential high growth, which may attract equity
investors more easily than our current business would.
Interests of Certain Persons in the Acquisition
John Simmonds and Brian Usher-Jones (who serve as members of our board of
directors) each hold CAD$100,000 of Phantom Fiber convertible debentures and
will each receive 2,500,000 shares of our common stock and warrants to purchase
another 1,250,000 shares of our common stock, in exchange for their Phantom
Fiber convertible debentures, if this transaction is consummated.
Carrie Weiler (one of our officers) holds CAD$25,000 of the Phantom Fiber
Corporation convertible debentures and will receive 625,000 shares of our common
stock and warrants to
49
purchase another 312,500 shares of common stock, in exchange for her Phantom
Fiber convertible debenture, if this transaction is consummated.
Our board of directors were aware of these interests and felt that they
did not present a material conflict.
Required Vote
The approval of this Proposal will require the affirmative vote of the holders
of a majority of the Company's outstanding shares as of the Record Date.
Appraisal Rights of Stockholders
Our stockholders will not have rights of appraisal under the Delaware General
Corporation Law, or DGCL, with respect to the merger because our common stock is
traded on the NASD Over-The-Counter Bulletin Board.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ACQUISITION OF PHANTOM FIBER
AND THE RATIFICATION OF THE SHARE EXCHANGE AGREEMENT.
50
PROPOSAL 4: APPROVAL OF AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION OF THE COMPANY TO CHANGE THE COMPANY'S NAME AND TO INCREASE
THE COMPANY'S AUTHORIZED CAPITAL STOCK
On April 23, 2004, the Board of Directors approved, and recommended for adoption
by stockholders at this Meeting, an amendment to Article FIRST and Article
FOURTH of the Company's Amended and Restated Certificate of Incorporation (the
"Company Charter") to change the name of the Company to "Phantom Fiber
Corporation" and to increase the authorized number of shares of common stock
from 150,000,000 to 400,000,000, par value $.001 per share ("Common Stock"). For
the reasons described below, the Board of Directors believes that it would be in
the best interests of the Company and its stockholders to change the name of the
Company and to increase the authorized Common Stock of the Company. To
accomplish this name change and this increase in authorized shares, it is
necessary to amend the applicable provisions of the Company Charter. The Company
Charter currently reads as set forth in Appendix E.
REASONS FOR AMENDMENT
The Company has recently entered into an agreement to purchase all of the
outstanding shares of Phantom Fiber Corporation, a wireless software provider.
The Board of Directors believes that changing the name of the Company to Phantom
Fiber Corporation if and when the Closing occurs will better reflect the
Company's focus after giving effect to the acquisition. Management believes that
advertising and marketing campaigns for Phantom Fiber have been very successful
and intends to continue to execute on these campaigns and to capitalize on the
existing brand awareness.
The full text of Article FIRST of the Amended and Restated Certificate of
Incorporation, as proposed to be amended, is as follows:
FIRST. The name of the corporation is: Phantom Fiber Corporation.
As of March 31, 2004, the Company had issued and outstanding 82,704,871 shares
of Common Stock and had reserved an additional 12,717,589 shares of Common Stock
for issuance upon conversion of outstanding convertible debentures and the
exercise of outstanding warrants and options. The proposed acquisition of
Phantom Fiber Corporation requires issuing 167,410,735 shares of Common Stock to
the shareholders and convertible debenture holders of Phantom Fiber (subject to
adjustment under certain circumstances). Increasing the Company's authorized
shares of Common Stock from 150,000,000 to 400,000,000 would allow the Company
to proceed with the acquisition of Phantom Fiber Corporation. The increase in
the number of authorized shares of Common Stock will allow the Company, after
the issuances contemplated by the Phantom Fiber acquisition, to act promptly
with respect to possible future financings, possible acquisitions, additional
issuances under the Company's benefit plans, stock splits and other corporate
purposes as may be approved by the Board of Directors.
51
Moreover, management believes that additional funding of the Phantom Fiber
business will be required and may be best obtained through the sale of
additional shares of Common Stock. Increasing the authorized number of shares of
Common Stock to 400,000,000 will give the Company the flexibility to issue up to
104,666,805 additional shares over and above the number required for the Phantom
Fiber acquisition and otherwise reserved.
Article FOURTH of the Company Charter currently provides as follows:
FOURTH. The total number of shares of stock which the Corporation is
authorized to issue is 150,000,000 shares of Common Stock, par value $.001
per share and 2,000 shares of Preferred Stock, par value $.001 per share.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by
the affirmative vote of the holders of a majority of the stock of the
Corporation entitled to vote, irrespective of the provisions of Section
242(b)(2) of the DGCL. The Board of Directors is authorized to define the
terms of the Preferred Stock and to increase or decrease the number of
authorized shares of Preferred Stock by the affirmative vote of a majority
of the Board of Directors of the Corporation.
If the proposed amendment is approved, then Article FOURTH of the Company
Charter would be deleted and replaced in its entirety with the following:
FOURTH. The total number of shares of stock which the Corporation
shall have authority to issue is four hundred million (400,000,000) shares
of Common Stock, of the par value of One Tenth of One Cent ($0.001) each,
amounting in the aggregate to Four Hundred Thousand Dollars ($400,000.00).
Section 242(a)(1) of the Delaware General Corporation Law provides that a
corporation may amend its certificate of incorporation to change its corporate
name. Furthermore, Section 242(a)(3) of the Delaware General Corporation Law
provides that a corporation may amend its certificate of incorporation to
increase or decrease its authorized capital stock. If Proposal Four is approved,
then, on or prior to the closing of the Stock Exchange, the Company will file a
certificate in substantially the form attached hereto as Appendix B with the
Secretary of State of the State of Delaware reflecting the changes resulting
from such amendment, such changes to become effective on the filing thereof. The
Board of Directors intends to cause the proposed amendment to the Company
Charter to be filed immediately prior to the closing of the Phantom Fiber
acquisition if and only if it appears that all the other conditions to closing
have been satisfied or waived. Following such filing, the legal name of the
Company will be "Phantom Fiber Corporation," and the number of authorized shares
of Common Stock will be Four Hundred Million (400,000,000).
Approval of Proposal No. Four will require the affirmative vote of a majority of
the outstanding shares of Common Stock. Abstentions and broker non-votes will
have the same effect as votes against Proposal No. Four.
Proxies solicited by the Board of Directors will be voted FOR this proposal,
unless the stockholder specifies otherwise in such Proxy.
52
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL (ITEM 4
ON THE ENCLOSED PROXY CARD) OF THE AMENDMENT TO THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF THE COMPANY TO CHANGE THE COMPANY'S NAME AND TO
INCREASE THE COMPANY'S AUTHORIZED CAPITAL STOCK.
53
PROPOSAL 5: APPROVAL OF AMENDMENTS TO THE COMPANY'S 2000 STOCK OPTION PLAN
On January 5, 2000, the Board of Directors adopted the 2000 Stock Option Plan
(the "Plan") effective as of January 5, 2000 and terminating on January 5, 2010.
At a Special Meeting of Stockholders on February 29, 2000, the Plan was approved
by the Company's stockholders.
The Board of Directors has adopted, subject to stockholder approval, amendments
to the Plan. The amendments were adopted by the Board of Directors on April 23
and April 26, 2004. The amendments increase the aggregate number of shares of
Common Stock issuable upon the exercise of options under the Plan from 3,000,000
to 20,000,000, limit option grants to any one individual in a calendar year to
2,000,000 shares, limit eligibility for options to key employees instead of all
employees and allow the Board of Directors to act in the place of the committee
that generally administers the Plan. As April 23, 2004, there were 1,000,000
options outstanding under the Plan.
The adoption of the amendments by the Board of Directors reflects a
determination by the Board that ensuring the continued availability of a
sufficient number of options available for grant under the Plan is important to
the Company's ongoing and continuing efforts to attract and retain key senior
management personnel and increase the interest of our executive officers and
employees in our continuing success.
The Board of Directors believes that in order to continue to retain and attract
qualified candidates for such positions who can contribute to the Company's
growth and development, provided that the Common Stock Proposal is approved and
therefore the acquisition of Phantom Fiber is completed, it will be necessary to
increase the number of shares of Common Stock issuable under the Plan from
3,000,000 to 20,000,000, which would represent 5% of the authorized number of
shares of Common Stock issuable by the Company if the Common Stock Proposal is
approved.
The annual limitation to 2,000,000 shares and the limitation of option grants to
key employees are intended to ensure the option grants under the Plan comply
with an exemption from the deduction limitation of Section 162(m) of the
Internal Revenue Code of 1986, as amended. Under Section 162(m), annual
compensation to the Company's chief executive officer and four next highest paid
executives is not deductible to the extent it exceeds $1,000,000. Income
realized from stock options is excluded from this limitation if the plan
satisfies certain requirements. Although the compensation currently paid to the
Company's executives does not approach the $1,000,000 level, the Board of
Directors nevertheless believes that the Plan should be drafted to qualify for
the exemption.
To provide greater flexibility in the administration of the Plan, the Board of
Directors amended the Plan to enable the Board of Directors to act for the
Committee.
The following summary is qualified in its entirety by reference to the Plan, a
copy of which is attached hereto as Appendix C.
54
Description of the Plan
The Plan is intended to help the Company and its subsidiaries or affiliates
attract and retain employees (including officers), directors, consultants and
independent contractors and to furnish additional incentives to such persons to
enhance the value of the Company over the long term by encouraging them to
acquire a proprietary interest in the Company.
Shares Subject to the Plan. Under the terms of the Plan, the Board is authorized
to issue 3,000,000 shares of Common Stock, which will increase to 20,000,000
shares if stockholders approve the amendment to the Plan. Currently, no single
person may acquire more than 25% of the aggregate number of shares reserved for
issuance under the Plan. If stockholders approve the amendment to the Plan, no
single person will be granted options in a calendar year with respect to more
than 10% of the aggregate number of shares reserved for issuance under the Plan.
Shares subject to options that expire or are cancelled unexercised shall again
be available for grant under the Plan. In the event of certain corporate events,
such as a stock split or reorganization, the Committee will, to the extent
necessary and appropriate, adjust the number of shares available for grant under
the Plan, the number and kind of shares subject to outstanding options and
exercise price of outstanding options. The shares subject to the Plan may be
authorized but unissued shares or shares acquired by the Company for purposes of
the Plan. The closing price for a share of common stock on April 22, 2004 was
$0.135.
Administration of the Plan. The Plan shall be administered by a committee of the
Board of Directors (the "Committee"), consisting of two or more directors who
are non-employee directors (as defined in Rule 16b-3 pursuant to the Securities
Exchange Act of 1934) and, to the extent applicable, are "outside directors"
within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended. The Committee has the authority to grant options and to determine,
subject to certain restrictions, the terms of the options, including whether the
option is an ISO or NQO (as described below), the exercise price per share of
common stock purchasable under an option, when and for how long each option may
be exercised, under what circumstances options may be settled, canceled,
forfeited, exchanged or surrendered and may impose additional terms, conditions,
restrictions and performance criteria relating to any option or its exercise.
The Committee has the authority to make adjustments in the terms and conditions
of, and the criteria and performance objectives included in, options in
recognition of unusual or non-recurring events affecting the Company or any
Subsidiary or Affiliate (as such terms are defined in the Plan) or the financial
statements of the Company or any Subsidiary or Affiliate, or in response to
changes in applicable laws, regulations or accounting principles. The Committee
(which need not be identical for each optionee) may make all other
determinations deemed necessary or advisable for the administration of the Plan.
The date on which the Committee adopts a resolution expressly granting an option
shall be considered the day on which such option is granted. Pursuant to the
amendment being submitted to stockholders for approval, the Board of Directors,
in its discretion, may act as the Committee.
Eligibility. The Plan provides for the discretionary grant of options to
purchase shares of common stock to key employees (including officers),
directors, consultants and independent contractors of the Company and its
present or future subsidiary and parent entities. The Company has no direct
employees (expect three individuals who serve as officers), two directors,
55
no consultants and no independent contractors. The granting of options is
discretionary and it is not possible to determine how many options actually will
be granted.
Option Grants. The Plan provides for the granting of stock options that qualify
as incentive stock options ("ISOs," which are options that provide the option
holder with favorable tax treatment) under Section 422 of the Internal Revenue
Code of 1986, as amended and options that do not qualify as ISOs ("Nonqualified
Options" or "NQOs"). The exercise price-per-share payable upon the exercise of
each option granted under the Plan is to be determined by the Committee,
provided that the exercise price of an ISO may not be less than the fair market
value of the stock at the date of grant. If an ISO is granted to an individual
who owns more than 10% of the total combined voting power of all classes of
stock of the Company, the exercise price-per-share may not be less than 110% of
the fair market value on the date of grant. The exercise price may be paid in
cash, with shares of stock already owned by the individual or by means of a
"cashless exercise."
Termination of employment. In general, an option will expire when the option
recipient ceases to be an employee or director of, or an independent contractor
with, the Company or any subsidiary or parent entity (or a successor company),
except that the Committee generally will provide at the grant of an option that
the option will remain exercisable for a limited period (but not later than the
expiration date of such option) following the option recipient's termination of
employment or death.
Change of control. In the event of a change in control of the Company, any and
all options then outstanding shall become fully exercisable and vested, whether
or not theretofore vested and exercisable.
U.S. Federal income tax consequences
The following is a description of the principal U.S. federal income tax
consequences of options under the Plan based on present federal tax laws.
Federal tax laws may change from time to time and future changes may
significantly affect the federal income tax consequences described below. The
description below does not purport to be a complete description of the tax
consequences associated with options under the Plan applicable to any particular
recipient. Differences in each individual's financial situation may cause
federal, state and local tax consequences of options to vary. In addition, many
of the individuals eligible to receive options under the Plan are not subject to
U.S. tax, but may be subject to tax in other jurisdictions. Each recipient of an
option should consult his or her personal tax adviser about the detailed
provisions of the applicable tax laws and regulations.
In general, at the time an option is granted the recipient of the option --
whether an ISO or a NQO -- will not be deemed to receive any income and the
Company will not be entitled to a federal tax deduction.
Nonqualified Options. When an option recipient exercises an NQO, he or she will
recognize ordinary compensation income equal to the excess of (a) the fair
market value on the exercise date of the shares received as a result of the
option exercise over (b) the option exercise price
56
(whether paid in cash or paid through a sale of shares received on exercise
through a broker-assisted cashless exercise), and the Company will be entitled
to a tax deduction in that amount. The shares acquired by the option recipient
upon exercise of the option will have a tax basis equal to the fair market value
of the shares on the exercise date. Upon any subsequent sale of those shares,
the option recipient will recognize a capital gain (or loss) in an amount equal
to the difference between the amount realized on the sale and such tax basis.
Any such gain (or loss) will be characterized as long-term capital gain (or
loss) if the shares received upon exercise have been held for more than one
year; otherwise, the gain (or loss) will be characterized as a short-term
capital gain (or loss). An option recipient's holding period for federal income
tax purposes for such shares will commence on the date following the date of
exercise. Short-term capital gain is subject to tax at the same rate as is
ordinary income. The Code currently provides that, in general, the net long-term
capital gain resulting from the sale of shares held for more than 12 months is
subject to tax at a maximum rate of 15% (5% for individuals in the 10% or 15%
tax bracket). The Code currently provides that the tax rate on net long-term
capital gain will change in future years: The 15% rate will increase to 20% in
2009 and the 5% rate will decrease to 0% in 2008 and then increase to 10% in
2009.
If all or any part of the exercise price of an option is paid by the option
recipient with shares of Common Stock, no gain or loss will be recognized by the
option recipient on the shares surrendered in payment. The number of new shares
received on exercise of the option equal to the number of shares surrendered
will have the same tax basis and holding period, for purposes of determining
whether subsequent dispositions result in long-term or short-term capital gain
or loss and the applicable tax rates, as the basis and holding period of the
shares surrendered. The balance of the shares received (the excess of new shares
received over the number of shares surrendered) on such exercise will be treated
for federal income tax purposes (and taxed as described in the preceding
paragraph) as though issued upon the exercise of the option for an exercise
price equal to the consideration, if any, paid by the option recipient in cash.
The option recipient will have ordinary income compensation equal to the fair
market value of the balance of shares received on exercise less any cash paid on
exercise. The Company's deduction will not be affected by whether the exercise
price is paid in cash or in shares.
Incentive Stock Options. In general, an option recipient will not be deemed to
receive any income at the time an ISO is exercised if the option recipient does
not dispose of the shares within two years after the grant of the ISO and one
year after the exercise of the ISO. In such a case, the gain or loss on a
subsequent sale (the difference between the amount realized on the sale and the
exercise price) will be a long-term capital gain or loss and will be subject to
tax as described in the discussion of NQOs above. However, for purposes of
computing the "alternative minimum tax" applicable to an option recipient, the
option recipient will include in the option recipient's alternative minimum
taxable income the amount the option recipient would have included in income if
the ISO were an NQO (the amount by which the fair market value of the shares on
the date of exercise exceed the option price). Such amount may be subject to an
alternative minimum tax of 26% or 28%. Similarly, for purposes of making
alternative minimum tax calculations, the option recipient's basis in the stock
received on the exercise of an ISO will be determined as if the ISO were an NQO.
57
If an option recipient sells the shares acquired on exercise of an ISO within
two years after the date of grant of the ISO or within one year after the
exercise of the ISO, the disposition is a "disqualifying disposition," and the
option recipient will recognize income in the year of the disqualifying
disposition equal to the excess of the amount received for the shares over the
exercise price. Of that income, the portion equal to the excess of the fair
market value of the shares at the time the ISO was exercised over the exercise
price will be treated as compensation to the option recipient, taxable as
ordinary income, and the balance (if any) will be long- or short-term capital
gain depending on whether the shares were sold more than one year after the ISO
was exercised. The federal tax rate applicable to any long-term capital gain is
as described above. If the option recipient sells the shares in a disqualifying
disposition at a price that is below the exercise price, the loss will be a
short-term capital loss if the option recipient has held the shares for one year
or less and otherwise will be a long-term capital loss.
If an option recipient uses shares acquired upon the exercise of an ISO to
exercise an ISO, and the sale of those shares for cash on the same date would
have been a disqualifying disposition of such shares, the use of such shares to
exercise an ISO also would constitute a disqualifying disposition. In such case
the tax consequences described above with respect to disqualifying dispositions
would apply, except that any additional appreciation in the value of the stock
that is not taxed as compensation income will not be recognized and thus no
capital gain results on the additional appreciation as a result of the
disqualifying disposition. The basis of the shares deemed to be received that
are equal in number to the shares surrendered will be the basis of the
surrendered shares increased by any reported compensation income as a result of
the disqualifying disposition. Any additional shares actually received will have
a basis equal to the amount of cash paid, if any, to exercise the new ISO. For
purposes of determining capital gain treatment, the option recipient will have a
carryover holding period with respect to those shares of stock deemed to be
received that are equal in number to the shares used for payment, whereas the
holding period of any additional shares of stock received will begin on the date
that the new ISO is exercised. For purposes of receiving favorable ISO tax
treatment, the holding period of all shares, including those shares deemed to be
received and those actually received, will begin on the date the new ISO is
exercised.
The Company is not entitled to a deduction as a result of the grant or exercise
of an ISO. If the option recipient has compensation taxable as ordinary income
as a result of a disqualifying disposition, the Company will be entitled to a
deduction in an amount equal to the compensation income resulting from the
disqualifying disposition in the taxable year of the Company in which the
disqualifying disposition occurs.
Withholding of Taxes. Whenever a participant is required to recognize taxable
income for federal income tax purposes, the Company may be obligated to withhold
amounts for the payment of federal, state and local taxes. The Company may take
such action as it deems necessary to enable the withholding obligations to be
met.
Other Tax Matters. Tax consequences different from or in addition to those
described above may result in the event of the vesting or exercise of an option
after the termination of an option recipient's employment by reason of death. In
addition, various state laws and/or the laws of
58
other applicable jurisdictions may provide for tax consequences that vary
significantly from those described above.
Required Vote
The affirmative vote of a majority of the shares of Common Stock represented and
voted at the Annual Meeting is required for approval of the amendments to the
Company's 2000 Stock Option Plan. Abstentions will have the same effect as a
vote "against" the amendments to the Company's 2000 Stock Option Plan, whereas
broker non-votes are not considered to have been voted on this proposal.
Proxies solicited by the Board of Directors will be voted FOR the amendment to
the Company's 2000 Stock Option Plan unless the stockholder specifies otherwise
in such Proxy.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AMENDMENTS TO THE 2000
STOCK OPTION PLAN
59
PROPOSAL 6: RATIFICATION OF INDEPENDENT PUBLIC AUDITORS
On February 27, 2003, the Board of Directors dismissed Pannell Kerr Forster PC
("PKF") of New York, New York as its principal accountants. PKF's reports on the
financial statements of the company for the past two years did not contain an
adverse opinion or disclaimer of opinion, and were not modified as to
uncertainty, audit scope or accounting principles. PKF's reports dated April 9,
2002, and April 5, 2001 both contained a paragraph expressing substantial doubt
about the Company's ability to continue as a going concern. Through the date of
change in accountants, there were no disagreements with PKF on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
PKF, would have caused it to make reference to the subject matter of the
disagreements in connection with its reports.
On February 27, 2003, the Registrant retained Mintz & Partners LLP, of Toronto,
Ontario, Canada, as the company's independent accountants to conduct an audit of
the Registrant's financial statements for the fiscal years ending December 31,
2002 and 2003. This action was previously approved by the Board of Directors. A
representative of Mintz & Partners is expected to be present at the Annual
Meeting with the opportunity to make a statement if he or she so desires and to
be available to respond to appropriate questions.
Required Vote
Ratification of the appointment of Mintz & Partners LLP requires the affirmative
vote of a majority of the shares of Common Stock present at the Meeting and
entitled to vote thereon.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPOINTMENT OF MINTZ &
PARTNERS LLP.
60
STOCKHOLDER PROPOSALS
The deadline for submitting Stockholder proposals for inclusion in the Company's
proxy statement and form of proxy for the Company's next annual meeting is
February 16, 2005. Such proposals must comply with the Company's By-Laws and the
requirements of Regulation 14A of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). To be properly submitted, the proposal must be
received at the Company's principal executive offices, 144 Front Street West,
Suite 580, Toronto, Ontario, Canada, M5J 2L7, no later than the deadline. In
order to avoid controversy, Stockholders should submit any proposals by means,
including electronic means, that permit them to prove the date of delivery.
In addition, Rule 14a-4 of the Exchange Act governs the Company's use of its
discretionary proxy voting authority with respect to a stockholder proposal that
is not addressed in this Proxy Statement. With respect to the Company's 2005
Annual Meeting of Stockholders, if the Company is not provided notice of a
stockholder proposal prior to May 2, 2005, the Company will be allowed to use
its discretionary voting authority when the proposal is raised at the meeting,
without any discussion of the matter in the proxy statement.
The deadlines described above are calculated by reference to a tentative June
16, 2005 meeting date. If the Board of Directors changes the date of next year's
annual meeting by more than 30 days, the Board will, in a timely manner, inform
the Stockholders of such a change and the effect of such a change on the
deadlines given above by including a notice under Item 5 in the Company's
earliest possible quarterly report on Form 10-QSB, or if that is impracticable,
then by any means reasonably calculated to inform the Stockholders.
61
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors was not aware
that any matters not referred to in this Proxy Statement would be presented for
action at the Meeting. If any other matter or matters are properly brought
before the Meeting or any adjournment thereof, the persons named in the
accompanying Proxy will have discretionary authority to vote all Proxies with
respect to such matters in accordance with their judgment, unless otherwise
restricted by law.
OTHER INFORMATION
IT IS IMPORTANT THAT YOUR STOCK BE REPRESENTED AT THE MEETING. WHETHER OR NOT
YOUR EXPECT TO ATTEND THE MEETING, THE BOARD URGES YOU TO COMPLETE, DATE, SIGN
AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID REPLY ENVELOPE. YOUR
COOPERATION AS A STOCKHOLDER, REGARDLESS OF THE NUMBER OF SHARES OF STOCK YOU
OWN, WILL REDUCE THE EXPENSES INCIDENT TO A FOLLOW-UP SOLICITATION OF PROXIES.
IF YOU HAVE QUESTIONS ABOUT VOTING YOUR SHARES, PLEASE TELEPHONE THE COMPANY
COLLECT AT (905) 833-3838.
By order of the Board of Directors,
John G. Simmonds
Chairman of the Board
King City, Ontario, Canada
June 16, 2004
62
INDEX TO FINANCIAL STATEMENTS
Page
----
PIVOTAL FINANCIAL STATEMENTS FOR THE MOST RECENT INTERIM PERIOD
Condensed Consolidated Balance Sheet (unaudited)
as of March 31, 2004.......................................................F-1
Condensed Consolidated Statements of Operations (unaudited) for
the three months ended March 31, 2004 and 2003.............................F-2
Condensed Consolidated Statements of Stockholders Equity
(unaudited) for the three months ended March 31, 2004 and 2003.............F-3
Condensed Consolidated Statements of Cash Flows (unaudited) for
the three months ended March 31, 2004 and 2003.............................F-5
Notes of Condensed Consolidated Financial Statements (unaudited)...........F-6
PIVOTAL FINANCIAL STATEMENTS FOR THE LAST TWO FISCAL YEARS
Independent Auditors' Report..............................................F-13
Consolidated Balance Sheets as of December 31, 2003.......................F-14
Consolidated Statements of Operations for the years ended
December 31, 2003 and 2002................................................F-15
Consolidated Statements of Changes in Stockholders' Deficiency
for the years ended December 31, 2003 and 2002............................F-16
Consolidated Statements of Cash Flows for the years ended
December 31, 2003 and 2002................................................F-19
Notes to Consolidated Financial Statements................................F-20
PHANTOM FIBER FINANCIAL STATEMENTS FOR THE MOST RECENT FISCAL YEAR
AND MOST RECENT INTERIM PERIOD
Independent Auditors' Report for year ended October 31, 2002..............F-38
Consolidated Balance Sheet as of October 31, 2002.........................F-39
Consolidated Statement of Income for the period January 7, 2002
to October 31, 2002.......................................................F-40
Consolidated Statement of Deficit for the period January 7, 2002
to October 31, 2002.......................................................F-41
Consolidated Schedule of Deferred Costs for the period
January 7, 2002 to October 31, 2002.......................................F-42
Notes to Consolidated Financial Statements as of October 31, 2002.........F-43
Independent Auditors' Report for year ended October 31, 2003..............F-45
Consolidated Balance Sheets as of October 31, 2003........................F-46
Consolidated Statements of Operations for the year ended October
31, 2003..................................................................F-47
Notes to Consolidated Financial Statements as of October 31, 2003.........F-48
Schedule of Deferred Development Costs for the year ended
Oceober 31, 2003..........................................................F-54
Condensed Consolidated Balance Sheet (unaudited) as of March 31,
2004......................................................................F-55
Condensed Consolidated Statement of Operations (unaudited) for
the five months ended March 31, 2004......................................F-56
Notes of Condensed Consolidated Financial Statements as at March
31, 2004 (unaudited)......................................................F-57
F-i
PRO FORMA FINANCIAL STATEMENTS
Introduction..............................................................F-58
Pro Forma Condensed Consolidated Balance Sheets as of December
31, 2003 and as of March 31, 2004 (unaudited).............................F-59
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements................................................................F-63
F-ii
Pivotal Self-Service Technologies Inc.
Condensed Consolidated Balance Sheet
March 31, 2004
(UNAUDITED)
ASSETS
Current Assets:
Cash $ 2,120
Notes receivable 180,000
Marketable securities (note 8) 923,800
Assets of discontinued operations (note 7) 55,467
- -------------------------------------------------------------------------------
Total current assets 1,161,387
- -------------------------------------------------------------------------------
Assets of discontinued operations (note 7) 75,700
- -------------------------------------------------------------------------------
TOTAL ASSETS $1,237,087
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 31,600
Accrued expenses - interest 29,900
Accrued expenses - professional fees 34,516
Accrued expenses - directors' fees 18,300
Accrued expenses - other 24,782
Notes payable (note 6) 147,725
Senior subordinated convertible debentures
(note 5) 91,500
Liabilities of discontinued operations (note 7) 318,263
- -------------------------------------------------------------------------------
Total current liabilities 696,586
Stockholders' equity
Common stock, $.001 par value, 150,000,000
shares authorized, 82,704,871 shares, issued
and outstanding at March 31, 2004. 82,705
Preferred stock, $100 par value, 8%,
non-voting, convertible, redeemable, 2,000
shares authorized, No shares issued and
outstanding -
Additional paid-in capital 8,715,084
Common stock subscribed 62,200
Accumulated deficit (9,146,487)
Accumulated other comprehensive income 826,999
- -------------------------------------------------------------------------------
Total stockholders' equity 540,501
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,237,087
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-1
Pivotal Self-Service Technologies Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(UNAUDITED)
Three Months Ended
March 31,
------------------------------------
2004 2003
---- ----
Operating expenses:
General and administrative expenses $ 51,137 $ 92,017
Occupancy 3,420 7,543
Interest 61,874 11,269
------------ ------------
Total operating expenses 116,431 110,829
Other expense
Foreign exchange loss 1,188 19,537
Non-cash financing expense -- 11,064
Gain on disposal of marketable securities (262,025) --
------------ ------------
Total expenses (144,406) 141,430
------------ ------------
Net income (loss) before discontinued operations 144,406 (141,430)
Discontinued operations:
(Loss) from operations of discontinued (31,105) (26,094)
operations, net of tax
Gain on disposal of subsidiary, net of tax -- 5,868
------------ ------------
Income from discontinued operations (31,105) (20,226)
------------ ------------
Net income (loss) $ 113,301 $ (161,656)
============ ============
Basic earnings (loss) per share of common stock:
Weighted average number of common shares
outstanding 80,158,356 60,401,106
Basic earnings (loss) per share $ 0.0014 $ (0.0026)
Earnings (loss) from continuing operations $ 0.0018 $ (0.0023)
Earnings (loss) from discontinued operations $ (0.0004) $ (0.0003)
Diluted earnings (loss) per share of common stock:
Weighted average number of common shares
outstanding 89,893,945 69,738,621
Diluted earnings per share $ 0.0013 --
Diluted earnings from continuing operations $ 0.0016 --
Diluted (loss) from discontinued operations $ (0.0003) --
Comprehensive
Income (Loss)
------------
Net income (loss) $ 113,301 $ (161,656)
Other comprehensive income (loss):
Unrealized holding (loss)on marketable
securities (917,025) --
Foreign exchange translation gain (loss) 4,567 6,510
------------ ------------
Comprehensive (loss) $ (799,157) $ (155,146)
------------ ------------
See accompanying notes to financial statements.
F-2
Pivotal Self-Service Technologies Inc.
Condensed Consolidated Statements of Stockholders' Equity
(UNAUDITED)
Accumulated
Common Stock Common Additional Other Total
------------------- Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Subscribed Capital Deficit Income Equity
----------------------------------------------------------- -----------------------------
Balance,
December 31, 2002 53,953,606 $53,953 252,750 8,039,213 (8,521,262) - (175,346)
Issuance of common
stock for business
assets acquires 6,000,000 6,000 (240,000) 234,000 - - -
Issuance of common
stock in connection
with private placements 4,410,000 4,410 - 83,790 - - 88,200
Common stock subscribed - - 109,800 - - - 109,800
Adjustment arising from
warrants issued - - - 11,063 - - 11,063
Adjustment arising from
foreign exchange
translation gain 6,510 6,510
Net loss for year three
month period ended March
31, 2003 - - - - (161,656) - (161,656)
----------------------------------------------------------- -----------------------------
Balance, March 31, 2003 64,363,606 $64,363 122,550 8,368,066 (8,682,918) 6,510 (121,429)
----------------------------------------------------------- -----------------------------
See accompanying notes to financial statements.
F-3
Pivotal Self-Service Technologies Inc.
Condensed Consolidated Statements of Stockholders' Equity
(UNAUDITED)
Accumulated
Common Stock Common Additional Other Total
---------------------- Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Subscribed Capital Deficit Income Equity
----------------------------------------------------------------------------------------------
Balance,
December 31, 2003 78,911,841 78,912 90,200 8,646,447 (9,259,788) 1,739,457 1,295,228
Issuance of common stock
for trade name 500,000 500 (10,000) 9,500 - - -
Issuances of common stock
in connection with
private placement 3,293,030 3,293 (62,430) 59,137 - - -
Common stock subscribed - - 44,430 - - - 44,430
Adjustment arising from
unrealized loss on
marketable securities - - - - - (917,025) (917,025)
Adjustment arising from
foreign exchange
translation gain 4,567 4,567
Earnings for the three
month period ended March
31, 2004 - - - - 113,301 - 113,301
---------------------------------------------------------------------------------------------
Balance, March 31, 2004 82,704,871 82,705 62,200 8,715,084 (9,146,487) 826,999 540,501
---------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-4
Pivotal Self-Service Technologies Inc.
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
Three Months Ended
March 31,
-----------------------
2004 2003
---- ----
Net cash used in operations
Net income (loss) $ 113,301 $(161,656)
Adjustments to reconcile net loss to net
cash (used in)
operating activities:
Depreciation and amortization -- 40
Gain on disposal of marketable securities (262,025) --
Foreign exchange loss 1,188 19,537
Non-cash financing expense -- 11,064
Changes in operating accounts, net of acquisition
and disposition:
Accounts receivable -- (275,588)
Inventory -- (40,185)
Deposits -- (101,500)
Due from related parties 40,702 (128,684)
Other current assets -- (1,970)
Accounts payable and accrued expenses (10,227) 73,681
--------- ---------
Net cash (used in) operating activities (117,061) (605,261)
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets -- (1,069)
Acquisition of subsidiary -- --
--------- ---------
Net cash (used in) investing activities -- (1,069)
--------- ---------
Cash flows from financing activities:
Proceeds from common stock subscribed 44,430 --
Proceeds from sale of common stock -- 198,000
Proceeds (repayment) of loans and advances (17,441) 392,771
--------- ---------
Net cash provided by financing activities: 26,989 590,771
--------- ---------
Increase (decrease) in cash (90,072) (15,559)
Cash, beginning of period 92,192 38,677
--------- ---------
Cash, end of period $ 2,120 $ 23,118
--------- ---------
Non cash financing activities:
During the three month period ended March 31, 2004, the Company:
o Transferred 130,000 shares of Wireless Age Communications, Inc. (recorded
in marketable securities) in settlement of notes payable including
principal and accrued interest totaling $281,200.
o Transferred intangible assets valued at $180,000 to a related party in
exchange for the return of 6,000,000 shares of the Company' common stock,
which in turn the Company transferred the common stock to another related
party in exchange for a promissory note of $180,000
During the quarter ended March 31, 2003, the Company recorded a non-cash
financing expense of $11,064 reflecting amortization of the fair value of
7,000,000 warrants issued pursuant to loan agreements.
See accompanying notes to financial statements.
F-5
Pivotal Self-Service Technologies Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2004
(Unaudited)
Note 1 - Recent Developments
- ----------------------------
On April 21, 2004, the Company entered into a Purchase Agreement to
acquire Phantom Fiber Corporation (Phantom Fiber). The Phantom Fiber acquisition
is subject to attaining the consent of stockholders to certain matters to be
presented at a stockholders meeting. The acquisition shall close within seven
days of the meeting, subject to obtaining the required consents.
Pursuant to the agreement, in consideration for all of the issued and
outstanding securities of Phantom Fiber, upon closing, the Company will issue
137,410,735 common shares to the Phantom Fiber shareholders and the Company will
issue another 30,000,000 common shares and warrants to purchase 15,000,000
additional common shares in exchange for subordinated convertible debentures of
Phantom Fiber.
The common stock issuable pursuant to the agreement exceeds the number of
shares that the Company is authorized to issue. Therefore the Board of Directors
of the Company is seeking the stockholders' approval to increase in the number
of shares that the Company is authorized to issue from 150,000,000 to
400,000,000.
Pursuant to the agreement, Jeff Halloran, Graham Simmonds, Gordon Fowler
and Stephen Gesner have been nominated for election to the Company's Board of
Directors. At closing John Simmonds and Brian Usher-Jones will resign as
Directors. In connection with the acquisition, John G. Simmonds, Gary N.
Hokkanen and Carrie J. Weiler have agreed to resign, effective as of the
closing, as Chief Executive Officer, Chief Financial Officer and Corporate
Secretary, respectively, and will be replaced by Jeff Halloran as Chief
Executive Officer and Vince Bulbrook as Chief Financial Officer and Corporate
Secretary. Also in connection with the acquisition, the Company has agreed to
change its name from Pivotal Self-Service Technologies Inc. to Phantom Fiber
Corporation. In order to attract and retain strong management the Company also
plans to amend its 2000 Stock Option Plan.
Note 2 - Basis of Presentation and business operations
- ------------------------------------------------------
GOING CONCERN AND BASIS OF PRESENTATION
The condensed unaudited consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the liquidation of liabilities in the ordinary course of business. As shown
in the accompanying financial statements, the Company has an accumulated deficit
of $9,146,487 at March 31, 2004. As a result, substantial doubt exists about the
Company's ability to continue to fund future operations using its existing
resources.
In order to ensure the success of the new business, the Company is
dependent upon the ability to realize substantial value from its investment in
available for sale securities.
The accompanying condensed unaudited consolidated financial statements of
Pivotal Self-Service Technologies Inc., (the "Company" or "Pivotal"), have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of Pivotal Self-Service
Technologies Inc., all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 2004, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended December 31, 2003.
F-6
BUSINESS OPERATIONS
The business of Pivotal Self-Service Technologies Inc. ("Pivotal" or
the "Company")(formerly known as Wireless Ventures Inc. and Hycomp, Inc.) is
conducted through its wholly-owned Canadian subsidiary Prime Battery Products
Limited ("Prime Battery"). On December 31, 2002, Pivotal, through a newly
incorporated wholly-owned subsidiary named Prime Battery completed the
acquisition of certain business assets of DCS Battery Sales Ltd. ("DCS
Battery"). Prime Battery distributes value priced batteries and other
ancillary products to dollar stores in North America.
The Company also conducted its business during part of fiscal 2003 through
another wholly-owned subsidiary called Prime Wireless Corporation. ("Prime
Wireless") which was in the business of earning sales commissions from selling
Vertex-Standard two way radio products in Canada, under an exclusive
distribution agreement. During the three month period ended March 31, 2003, the
Company disposed of all the issued and outstanding shares of Prime Wireless.
During fiscal 2003 management with the consent of the Board of Directors
decided to dispose of the battery business. The operating results of Prime
Wireless in 2003 and Prime Battery in 2003 have been classified as discontinued
operations. The assets and liabilities of Prime Battery have been separately
disclosed as held for sale.
Note 3 - Battery Business Operations
- ------------------------------------
In 2004, as part of the continuing steps to dispose of the battery
business, the Company transferred certain intellectual property rights
representing the Canadian dollar store customer lists to David C. Simmonds in
exchange for the 6,000,000 common shares of the Company that were issued to him
on December 31, 2002 in the battery business acquisition. Immediately upon the
completion of this transaction the Company transferred the securities to a
related party A.C. Simmonds & Sons division of Wireless Source Distribution Ltd
(a wholly owned subsidiary of Wireless Age Communications, Inc.) in exchange for
a $180,000 promissory note of Wireless Source. The note becomes due on December
31, 2004.
Note 4 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results may differ from these estimates.
Revenue recognition
Revenue from product sale is recognized when the rights of ownership of
the product are transferred to the purchaser on shipment or delivery and
collection is reasonably assured.
Shipping and delivery costs
The Company includes shipping and delivery costs in cost of goods sold.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible.
The criteria for allowance provision are determined based on historical
experience and the Company's assessment of the general financial conditions
affecting its customer base. If the Company's actual collections experience
changes, revisions to the allowance may be required.
F-7
Acquisitions and business combinations
The Company accounts for acquisitions and business combinations under the
purchase method of accounting. The Company includes the results of operations of
the acquired business from the acquisition date. Net assets of the companies
acquired are recorded at their fair value at the acquisition date. The excess of
the purchase price over the fair value of net assets acquired are included in
intangible assets in the accompanying consolidated balance sheets.
Intangibles and goodwill
The Company regularly reviews all of its long-lived assets, including
goodwill and other intangible assets, for impairment whenever events or changes
in circumstances indicate that the carrying value may not be recoverable.
Factors the Company considers important that could trigger an impairment review
include, but are not limited to, significant underperformance relative to
historical or projected future operating results, significant changes in the
manner of use of the acquired assets or the strategy for the Company's overall
business, and significant negative industry or economic trends. When management
determines that an impairment review is necessary based upon the existence of
one or more of the above indicators of impairment, the Company measures any
impairment based on a projected discounted cash flow method using a discount
rate commensurate with the risk inherent in our current business model.
Significant judgement is required in the development of projected cash flows for
these purposes including assumptions regarding the appropriate level of
aggregation of cash flows, their term and discount rate as well as the
underlying forecasts of expected future revenue and expense. To the extent that
events or circumstances cause assumptions to change, charges may be required
which could be material.
Investment
The Company's investment in marketable securities is classified as
available for sale securities. Unrealized holding gains and losses are reported
as a net amount in a separate component of shareholders' equity until realized.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
Under SFAS No. 109, deferred tax assets and liabilities are determined based on
temporary differences between the financial statement and tax bases of assets
and liabilities and net operating loss and credit carryforwards using enacted
tax rates in effect for the year in which the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. A provision for income tax
expense is recognized for income taxes payable for the current period, plus the
net changes in deferred tax amounts.
Financial instruments
The fair values of the financial assets and liabilities are indicated by
their carrying value.
Earnings or loss per share
For the three month period ended March 31, 2004 earnings per share has
been computed using the net income for the year divided by the weighted average
number of shares outstanding.
Foreign currency
The functional currency of the company is the U.S. dollar and the
functional currency of the wholly owned subsidiary located in Canada is the
Canadian dollar. Assets and liabilities of this subsidiary are translated to
U.S. dollars at year-end exchange rates and income statement items are
translated at the exchange rates present at the time such transactions arise.
Resulting translation adjustments, if material, are recorded as a separate
component of accumulated other comprehensive income, a component of
stockholders' equity (deficit).
F-8
Comprehensive income
Comprehensive Income includes the net exchange differences arising from
the translation of Canadian dollar denominated subsidiaries into US dollars and
accumulated unrealized holding gains and losses on the Company's available for
sale securities.
Recent Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS 149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". This Statement improves and clarifies financial reporting for
derivative instruments and hedging activities under SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities".
In May 2003, the FASB issued SFAS 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
requires a number of defined financial instruments to be classified as
liabilities instead of equity.
Management does not expect that the adoption of SFAS 149 and 150 will have
a material effect on the Company's operations or financial position.
Note 5 - Senior Subordinated Convertible Debentures
- ---------------------------------------------------
The senior subordinated convertible debentures totaling $91,500 at March
31, 2004, are subordinated to all other indebtedness, and bear interest at 8%
payable in arrears annually commencing March 6, 2001. The principal portions
mature on March 6, 2005. Each $0.25 of principal is convertible into one share
of common stock and one three year warrant to purchase an additional share of
common stock at an exercise price of $0.50 per share. Management had determined
that the value attached to the conversion feature and the related warrants is
insignificant and, therefore has not made an adjustment to the debentures'
carrying amount for these features. No payments of interest have been made by
the Company. The notes are technically in default and therefore have been
classified as current liabilities.
Note 6 - Notes Payable
- ----------------------
Non-interest bearing note payable (a) $57,500
5 year non-interest bearing note
payable (b) 90,225
Total $147,725
(a) In 2001, the Company restructured a $416,821 payable with a creditor,
whereby $76,821 was forgiven, $180,000 was satisfied through the issuance
of 1.8 million shares of the Company's common stock, and a note payable of
$160,000 was issued and has since been paid down to $57,500.
(b) In 2002, the Company issued a non-interest bearing note payable to an
affiliate for $120,000 payable over 5 years at $2,000 per month commencing
July 1, 2002 (this note was discounted to $106,000 representing its
present value using a 5% discount rate and has been paid down to $90,225).
The Company issued this note as part of the acquisition of Prime Wireless
that was later disposed of on March 13, 2003.
Note 7 - Discontinued Operations
- --------------------------------
The Company has accounted for the disposition of Prime Wireless in
accordance with Financial Accounting Standards Board ("FASB") Statement No.
144. Under FASB No. 144 the net gain or loss from the disposition of these
assets is classified as discontinued operations in the Consolidated
Statements of Operations.
F-9
In 2003, the Board of Directors made the decision to dispose of the
battery business and seek other business opportunities.
Accounting for the discontinued operations for the three month periods
ended March 31, 2004 and 2003 is summarized below:
2004 2003
---- ----
Loss from Prime Battery operations (31,105) (41,340)
Income from Prime Wireless operations -- 15,246
------- -------
Loss from operations of
discontinued operations, net of tax (31,105) (26,094)
------- -------
Gain on disposal of Prime Wireless -- 5,868
------- -------
Gain on disposal of subsidiary, net of tax -- 5,868
------- -------
Loss from discontinued operations (31,105) (20,226)
======= =======
Prime Wireless
- --------------
On March 13, 2003, the Company disposed of its investment in Prime
Wireless and related assets to another publicly traded company in exchange for
1,500,000 common shares of the purchaser (of which 750,000 shares were
transferred, pursuant to the June 7, 2002 purchase and sale agreement, to the
related party that the Company acquired Prime Wireless from).
The proforma financial operating results, assuming the Prime Wireless
acquisition was made as of the January 1, 2002, have not been included herein
due to the sale of Prime Wireless subsequent to year end on March 13, 2003 and
that proforma information would not materially add to the disclosure.
The discontinued operations of Prime Wireless are summarized as follows:
2003
----
Revenues
Commission income $ 26,322
Sales 16
--------
Total revenues 26,338
Less:
Cost of sales --
--------
Gross profit 26,338
--------
Operating expenses 11,474
--------
Operating income 14,864
Depreciation 48
Foreign exchange gain (430)
--------
Net income from discontinued operations $ 15,246
========
F-10
Prime Battery
- -------------
The discontinued operations of Prime Battery are summarized as follows:
2004 2003
---- ----
Revenues
Sales $ 2,259 $ 433,700
Royalties 6,597 --
--------- ---------
Total revenues 8,856 433,700
Less:
Cost of sales 2,259 368,360
--------- ---------
Gross profit 6,597 65,340
--------- ---------
Operating expenses 151 83,614
--------- ---------
Operating income 6,446 (18,274)
Depreciation 833 40
Interest 36,718 23,026
--------- ---------
Net income from discontinued operations $ (31,105) $ (41,340)
========= =========
Note 8 - Marketable Securities
- ------------------------------
As described in Note 6, the Company disposed of the Prime Wireless
subsidiary and received, net 750,000, common shares of a publicly traded entity
called Wireless Age Communications, Inc. (OTCBB:WLSA). The securities held by
the Company represent a 3.7% ownership position in Wireless Age.
On January 23, 2004, the Company transferred 50,000 of the Wireless Age
shares to an affiliate of the Company who had provided a loan of $123,129 to the
Company in November 2002. The transfer of these shares was in payment of the
$162,000 loan ($123,129 principal plus accrued interest of $38,871). The Company
also agreed to adjust the number of shares in event that the closing share price
is less than $3.00 on the earlier of; i) the date which the shares become freely
trading under securities legislation, or ii) the date the shares are freely
tradeable under a registration statement.
On March 31, 2004, the Company also transferred 40,000 of the Wireless Age
shares each to two affiliates of the Company who had each provided $50,000 90
day loans to the Company in complete repayment of the loans ($50,000 principal
plus accrued interest of $9,600 each).
During 2003 the Company changed the classification of these securities
from held to maturity to available for sale. The Company plans to dispose of
these securities over the next twelve months in order to finance the growth of
the Phantom Fiber business. These securities are currently restricted however
the Company believes it will have the ability to dispose of all of the shares
under regulatory rules within twelve months.
Unrealized holding gains and losses are shown separately as a component of
shareholders' equity. During the three month period ended March 31, 2004 the
share price of these securities declined from $2.48 at the beginning of the
period to $1.49 at the end. Accordingly the securities have been valued within
current assets at $923,800 and the Company recorded an unrealized holding loss
of $917,025 during the quarter.
Note 9 - Due to Related Parties
- -------------------------------
Amounts due to/from affiliates, which are included in accounts payable,
generally result from transactions with companies under common control and are
non-interest bearing with no specific terms for repayment.
F-11
On January 23, 2004, the Company transferred 50,000 Wireless Age
Communications, common shares (marketable securities) to a related party
(related by virtue of their ownership position in the Company), in repayment of
a promissory note of $162,000. The Company also agreed to adjust the number of
shares in event that the closing share price is less than $3.00 on the earlier
of; i) the date which the shares become freely trading under securities
legislation, or ii) the date the shares are freely tradeable under a
registration statement.
On March 31, 2004, the Company transferred 40,000 Wireless Age
Communications, Inc. common shares of marketable securities, each to two related
parties (related by virtue of being children of a director) in repayment of
$59,600 loans.
F-12
Independent Auditor's Report
- ----------------------------
To the Directors of
Pivotal Self-Service Technologies Inc.
We have audited the accompanying consolidated balance sheet of Pivotal
Self-Service Technologies Inc., as of December 31, 2003, and the related
consolidated statements of operations, changes in stockholders' deficiency and
cash flows for the years ended December 31, 2003 and 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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 that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pivotal Self-Service
Technologies Inc. at December 31, 2003, and the results of its operations and
its cash flows for the year ended December 31, 2003 and 2002 in conformity with
accounting principles generally accepted in the United States of America.
As described in the notes, the accompanying consolidated financial statements
have been prepared assuming the Company will continue as a going concern. At
December 31, 2003 the Company had an accumulated deficit of $9,259,788. The
continued operating losses raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the going concern assumption not
being applicable.
Toronto, Ontario
March 29, 2004 Mintz & Partners, LLP
Chartered Accountants
F-13
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2003
A S S E T S
CURRENT
Cash $ 92,192
Due from related parties (note 8) 40,702
Marketable securities (note 3) 1,860,000
Assets of discontinued operations (note 5) 122,452
-----------
TOTAL CURRENT ASSETS 2,115,346
ASSETS OF DISCONTINUED OPERATIONS (note 5) 256,276
-----------
TOTAL ASSETS $ 2,371,622
===========
L I A B I L I T I E S A N D S T O C K H O L D E R S' EQUITY
CURRENT LIABILITIES
Accounts payable $ 22,938
Accrued liabilities
Interest, including amounts owed to affiliates
of $22,112 (note 7) 50,187
Professional fees 38,978
Director's fees 18,300
Other 24,782
Notes payable (note 7) 448,856
Senior subordinated convertible debentures (note 6) 91,500
Liabilities of discontinued operations (note 5) 380,853
-----------
TOTAL CURRENT LIABILITIES 1,076,394
-----------
STOCKHOLDERS' EQUITY
Preferred stock, $100 par value, 8%, non-voting, convertible,
2,000 shares authorized, no shares issued and outstanding --
Common stock, $.001 par value, 150,000,000 shares authorized,
78,911,841 shares issued and outstanding (note 11) 78,912
Common stock subscribed (note 11) 90,200
Additional paid-in capital 8,646,447
Accumulated deficit (9,259,788)
Accumulated other comprehensive income (note 3) 1,739,457
-----------
TOTAL STOCKHOLDERS' EQUITY 1,295,228
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,371,622
===========
See Accompanying Notes
F-14
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended
December 31,
-----------------------------
2003 2002
---- ----
Revenues $ -- $ 13,162
Operating expenses
Selling, general and administrative 481,725 82,762
Occupancy 21,415 40,096
Interest (notes 6 and 7) 60,630 25,529
------------ ------------
Total operating expenses 563,770 148,387
Other (income) expense
Non-cash financing expense (note 9) 250,432 92,000
Realized loss/write down of marketable
securities (note 3) -- 14,400
Gain on extinguishment of debt (296,921) --
------------ ------------
Total expenses 517,281 254,787
------------ ------------
Loss before discontinued operations (517,281) (241,625)
Discontinued operations (note 5)
Income (loss) from operations of discontinued
operations, net of tax (221,245) 18,913
Gain from management fee forgiveness -- 54,037
Gain on disposal of subsidiary, net of tax -- 39,003
------------ ------------
Income (loss) from discontinued operations (221,245) 111,953
------------ ------------
Loss $ (738,526) $ (129,672)
============ ============
Loss per share of common stock (note 2)
Weighted average number of common shares
outstanding (note 2) 68,992,732 $ 45,917,502
Loss per share $ (0.012) $ (0.00)
Loss from continuing operations $ (0.009) $ (0.00)
Loss from discontinued operations $ (0.003) $ (0.00)
See Accompanying Notes
F-15
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
DECEMBER 31, 2003 AND 2002
Accumulated
Common Stock Common Additional Other Total
---------------------- Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Subscribed Capital Deficit Income Equity
--------------------------------------------------------------------------------------------------
Balance,
December 31, 2001 43,042,306 $43,042 41,250 7,768,109 (8,391,552) - (539,151)
Issuance of commonstock
in connection with
private placements 9,950,000 9,950 (22,500) 131,550 - - 119,000
Adjustment arising from
warrants issued pursuant
to notes payable (note 12) 92,000 92,000
Issuance of common stock
in connection with
services provided 420,000 420 (18,750) 21,030 - - 3,000
Issuance of common stock
in settlement of
outstanding debts (note 14) 541,300 541 - 26,524 - - 27,065
Common stock subscribed
(note 12) - - 252,750 - - - 252,750
Net loss for year ended
December 31, 2002 - - - - (129,710) - (129,710)
Balance,
December 31, 2002 53,953,606 $53,953 252,750 8,039,213 (8,521,262) - (175,346
See Accompanying Notes
F-16
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
DECEMBER 31, 2003 AND 2002
Accumulated
Common Stock Common Additional Other Total
---------------------- Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Subscribed Capital Deficit Income Equity
-----------------------------------------------------------------------------------------------------
Balance,
December 31, 2002 53,953,606 $53,953 252,750 8,039,213 (8,521,262) - (175,346)
Issuance of common stock
for business assets
acquired 6,000,000 6,000 (240,000) 234,000 - - -
Issuance of commonstock
in connection with
private placements 16,377,500 16,378 (12,750) 311,173 - - 314,800
Common stock subscribed
for trade-name and other
intellectual property
rights - - 10,000 - - - 10,000
Issuance of common stock
in connection with
conversion of debentures 2,580,735 2,581 - 61,937 - - 64,518
Adjustment arising from
warrants issued pursuant
to notes payable
(note 12) - 158,042 158,042
Adjustment arising from
settlement with notes
payable - - - (236,794) - - (236,794)
Adjustment arising from
conversion of debentures - - - 78,876 - - 78,876
Adjustment arising from
valuation of available
for sale securities - - - - - 1,743,526 1,743,526
Adjustment arising from
foreign exchange
translation losses (4,069) (4,069)
F-17
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
DECEMBER 31, 2003 AND 2002
Accumulated
Common Stock Common Additional Other Total
---------------------- Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Subscribed Capital Deficit Income Equity
----------------------------------------------------------------------------------------------------
Common stock subscribed - - 80,200 - - - 80,200
Net loss for year ended
December 31, 2003 - - - - (738,526) - (738,526)
- -------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2003 78,911,841 $78,912 90,200 8,646,447 (9,259,788) 1,739,457 1,295,228
- -------------------------------------------------------------------------------------------------------------------------------
See Accompanying Notes
F-18
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
-----------------------
2003 2002
Cash flows from operating activities
Net (loss) $(738,526) $(129,672)
Adjustment to reconcile net (loss) to net cash
(used) by operating activities
Common stock issued and subscribed for
services -- 21,450
Common stock issued in rent settlement -- 27,065
Cancellation of indebtedness (296,921) --
Provision for note receivable 40,000 --
Non-cash financing expense (note 9) 250,432 92,000
Realized loss /write down of marketable
securities (note 3) -- 14,400
Changes in operating assets and liabilities
Receivables 122,129 (120,575)
Other receivable -- (40,000)
Prepaid expenses -- 5,879
Accounts payable (74,511) (40,879)
Due from related parties (68,058) --
Accrued expenses 67,628 (12,889)
--------- ---------
Net cash (used) by operating activities (664,033) (182,681)
--------- ---------
Cash flows used in investing activities
Acquisition and disposal of subsidiaries 261,466 (6,577)
--------- ---------
Net (cash used in) provided by investing
activities 261,466 (6,577)
--------- ---------
Cash flows from financing activities
Change in bank overdraft -- (11,839)
Proceeds from issuance of notes payable 61,082 126,774
Proceeds from common stock subscribed 80,200 --
Proceeds from issuance of common stock 314,800 113,000
--------- ---------
Net cash provided by financing activities 456,082 227,935
--------- ---------
Net increase in cash 53,515 38,677
Cash, beginning of year 38,677 --
--------- ---------
Cash, end of year $ 92,192 $ 38,677
--------- ---------
See Accompanying Notes
F-19
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Supplemental disclosure of non-cash financing activities
o During 2003, the Company issued 2,580,735 common shares upon the
conversion of senior subordinated convertible debentures having a
face value of $50,000 plus accrued and unpaid interest of $14,518.
o During 2003, the Company agreed to issue 500,000 (which was recorded
in common stock subscribed at December 31, 2003) for a trade-name
and other intellectual property rights valued at $10,000.
o During 2003, the Company issued 6 million common shares valued at
$240,000 to acquire certain business assets. At December 31, 2002
these shares had not yet been issued and were recorded in common
stock subscribed. In 2003, the Company decided to dispose of the
business assets and has recorded them as discontinued operations
(see note 5).
o During 2003, recorded a gain on extinguishment of debt representing
$236,794 of non-cash financing expense representing the fair value
of 14,000,000 warrants issued in 2002 and 2003 pursuant to loan
agreements with affiliates and $60,127 of unsecured aged
liabilities.
o During 2002, the Company acquired a subsidiary with net assets of
$29,526 in exchange for $40,000 in cash and a note payable of
$120,000 ($90,225 discounted value, see note 7).
o During 2002, the Company issued 541,300 common shares valued at
$27,065 to a third party as partial settlement on an office lease.
o During 2002, the Company issued 375,000 common shares valued at
$18,750 for investor and public relations services provided and
45,000 common shares valued at $2,700 for general consulting
services provided.
F-20
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
1. Description of business and basis of presentation
GOING CONCERN BASIS OF PRESENTATION
The consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
liquidation of liabilities in the ordinary course of business. As shown in
the accompanying financial statements, the Company has had significant
operating losses for several years and has an accumulated deficit of
$9,259,788 at December 31, 2003. As a result, substantial doubt exists
about the Company's ability to continue to fund future operations using
its existing resources. The Company's ability to continue as a going
concern is contingent upon its ability to realize on its available for
sale securities.
DESCRIPTION OF BUSINESS
Pivotal Self-Service Technologies Inc. ("Pivotal" or the "Company"),
formerly known as Wireless Ventures, Inc. conducted its business during
2003 through a series of wholly owned subsidiaries.
On December 31, 2002, the Company acquired certain assets of DCS Battery
Products Limited through a newly incorporated Prime Battery Products
Limited ("Prime Battery"). Prime Battery began to distribute batteries and
other ancillary products in North America on January 1, 2003. During
fiscal 2003 management with the consent of the Board of Directors decided
to dispose of the battery business (see note 5).
The Company also conducted its business during a part of fiscal 2002
through another wholly-owned Canadian subsidiary known as Prime Wireless
Inc. ("Prime Wireless"). The Company acquired all of the issued and
outstanding Prime Wireless common shares on June 7, 2002 and disposed of
the subsidiary on March 13, 2003 (see note 5).
The operating results of Prime Wireless in 2002 and Prime Battery in 2003
have been classified as discontinued operations. The assets and
liabilities of Prime Battery have been separately disclosed as held for
sale. All intercompany accounts and transactions are eliminated in
consolidation.
2. Summary of significant accounting policies
Use of estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the period. Actual results
will differ from these estimates.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts based on
specifically identified amounts that management believes to be
uncollectible. The criteria for allowance provision are determined
based on historical experience and the Company's assessment of the
general financial conditions affecting its customer base. If the
Company's actual collections experience changes, revisions to the
allowance may be required.
F-21
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Acquisitions and business combinations
The Company accounts for acquisitions and business combinations
under the purchase method of accounting. The Company includes the
results of operations of the acquired business from the acquisition
date. Net assets of the companies acquired are recorded at their
fair value at the acquisition date. The excess of the purchase price
over the fair value of net assets acquired are included in
intangible assets in the accompanying consolidated balance sheets.
Intangibles and goodwill
The Company regularly reviews all of its long-lived assets,
including goodwill and other intangible assets, for impairment
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors the Company considers
important that could trigger an impairment review include, but are
not limited to, significant underperformance relative to historical
or projected future operating results, significant changes in the
manner of use of the acquired assets or the strategy for the
Company's overall business, and significant negative industry or
economic trends. When management determines that an impairment
review is necessary based upon the existence of one or more of the
above indicators of impairment, the Company measures any impairment
based on a projected discounted cash flow method using a discount
rate commensurate with the risk inherent in our current business
model. Significant judgement is required in the development of
projected cash flows for these purposes including assumptions
regarding the appropriate level of aggregation of cash flows, their
term and discount rate as well as the underlying forecasts of
expected future revenue and expense. To the extent that events or
circumstances cause assumptions to change, charges may be required
which could be material.
Investments
The Company's marketable securities are classified as
available-for-sale and are recorded at fair value. Available for
sale unrealized gains and losses based on year end market prices,
net of tax are recorded in stockholders' equity. Realized gains or
losses and other than temporary declines in value, if any are
reported in other income or expense as incurred.
Advertising and marketing costs
The Company expenses the costs of advertising and marketing as
incurred. The Company did not incur any advertising and marketing
expenses for the years ended December 31, 2003 and 2002.
Income taxes
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes. Under SFAS No. 109, deferred tax assets and
liabilities are determined based on temporary differences between
the financial statement and tax bases of assets and liabilities and
net operating loss and credit carryforwards using enacted tax rates
in effect for the year in which the differences are expected to
reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized. A
provision for income tax expense is recognized for income taxes
payable for the current period, plus the net changes in deferred tax
amounts.
F-22
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Financial instruments
The fair values of the financial assets and liabilities are
indicated by their carrying value.
Net loss per share
For both 2003 and 2002, net loss per share has been computed using
the net loss for the year divided by the weighted average number of
shares outstanding.
Diluted loss per share is not presented as the effects of
convertible debentures, warrants and options are anti-dilutive.
Foreign currency
The functional currency of the company is the U.S. dollar and the
functional currency of the wholly owned subsidiary located in Canada
is the Canadian dollar. Assets and liabilities of this subsidiary
are translated to U.S. dollars at year-end exchange rates and income
statement items are translated at the exchange rates present at the
time such transactions arise. Resulting translation adjustments, if
material, are recorded as a separate component of accumulated other
comprehensive income, a component of stockholders' equity (deficit).
The net exchange differences resulting from these translations were
included in the statement of operations in 2003 and 2002. For both
2003 and 2002 such exchange differences were not material.
3. Marketable securities
On March 13, 2003, the Company disposed of a wholly owned subsidiary
(Prime Wireless) and received 750,000 restricted shares of common stock of
a publicly traded related entity, Wireless Age Communications, Inc. in
exchange (note 5b). The Company has valued these securities at $1,860,000
as determined by the closing price of $2.48 per share on December 31,
2003. The Company has recorded a $1,743,526 unrealized holding gain on
marketable securities as a separate component of comprehensive income
within stockholders' equity.
Eighty thousand of the Wireless Age shares have been pledged as security
for two promissory notes to related parties totalling $100,000 (see note
7c). In addition 50,000 Wireless Age shares were transferred on January
23, 2004 to an affiliate for settlement of a note payable totalling
$124,000 (see note 7c). In addition, the Company agreed to adjust the
number of shares in event that the closing share price is less than $3.00
on the earlier of; i) the date which the shares become freely trading
under securities legislation, or ii) the date the shares are freely
tradeable under a registration statement.
In 2000, the Company purchased 160,000 shares of common stock of a
publicly-traded entity for $480,000. In 2001 the Company pledged the
securities and granted power of attorney rights to dispose of the shares
to the Company's attorneys as part of a settlement agreement on amounts
owed (note 7a). During the year ended December 31, 2002 the market value
of these securities declined from $16,000 to $1,600 and accordingly the
Company recorded a realized loss of $14,400. Effective December 31, 2002,
the Company reflected the transfer of ownership of these shares to the
attorneys by offsetting the remaining value of the securities with amounts
owed to the Company's counsel.
F-23
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
4. note receivable
On October 15, 2002, the Company entered into a letter of intent to
acquire an exclusive license for the manufacture and sale of a new line of
high-end stone like products in the United States from a third party.
Subsequently the Company, with the consent of the third party opted not to
pursue the opportunity. During 2002 the Company had advanced $40,000 to
the third party. On December 6, 2002, the advances were converted to a
note receivable secured by the Company retaining the exclusive rights for
the products. The note is non-interest bearing and was due and payable on
June 30, 2003. The Company has record a provision of $40,000 against the
note receivable during 2003 as substantial doubt exists on its
collectibility.
5. DISCONTINUED OPERATIONS
In 2002, the Board of Directors made the decision to focus the business of
the Company on the battery distribution business unit.
During the fourth quarter of 2002, the Company committed to a plan,
approved by the Board of Directors prior to year end, to dispose of the
Prime Wireless subsidiary. Management initiated an active plan to sell the
subsidiary at a price in relation to its market value and held discussions
with a prospective buyer. The Company came to terms on a transaction and
sold the subsidiary on March 13, 2003.
In 2003, the Board of Directors made the decision to dispose of the
battery business and seek other business opportunities.
The Company has accounted for the disposition of Prime Battery and Prime
Wireless in accordance with Financial Accounting Standards Board ("FASB")
Statement No. 144. Under FASB No. 144 the net gain or loss from the
disposition of these assets is classified as discontinued operations in
the Consolidated Statements of Operations and the assets and liabilities
of Prime Battery are separately disclosed as held for sale in the
Consolidated Balance Sheets.
The results of operations for the discontinued operations is summarized
below:
2003 2002
---- ----
Loss from Prime Battery operations (236,491) --
Loss from 4CASH operations -- (4,247)
Income from Prime Wireless
operations 15,246 23,160
-------- --------
Income (loss) from operations of
discontinued operations, net of tax (221,245) 18,913
Gain from management fee forgiveness -- 54,037
Gain on disposal of Prime
Wireless -- --
Effect of disposal of 4CASH -- 52,378
Loss from write off of 4CASH advances -- (13,375)
-------- --------
Gain on disposal of subsidiary,
net of tax -- 39,003
-------- --------
Income (loss) from discontinued
operations (221,245) 111,953
-------- --------
(a) 4CASH Acquisition and Disposition
On June 15, 2001, the Company acquired certain intangible assets of 4CASH
from IRMG (an affiliated entity by virtue of its ownership position in the
Company) through an asset purchase
F-24
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
agreement. Pursuant to the Asset Purchase Agreement, the Company issued 10
million shares of its common stock to IRMG and issued warrants to purchase
1.1 million common shares at $0.10 per share to the President of IRMG. In
addition, (1) the Company issued three-year warrants to IRMG to purchase 5
million common shares at $0.10 per share which vest subject to the
achievement of cumulative net profits from the date of closing and (2)
subject to achieving cumulative pre-tax net profits of $1 million within 2
years from closing, the Company agreed to issue an additional 10 million
common shares to IRMG. The Company also agreed to enter into a 3-year
management services agreement with IRMG under which IRMG would provide
certain management services to the Company. The historical cost basis of
the intangible assets acquired amounted to $-0- and, accordingly, no value
was assigned to the assets acquired or the consideration paid.
On March 5, 2002, the Company entered into an agreement whereby the 4CASH
subsidiary was sold back to IRMG. In exchange for the 4CASH subsidiary,
IRMG and certain directors of IRMG agreed to surrender and cancel; 1) its
rights to obtain an additional 10 million common shares subject to
achieving certain net profit levels, and 2) warrants to purchase 6.1
million shares as originally issued as part of the acquisition in June
2001. The original 10 million shares of the Company's common stock issued
in the purchase transaction in June 2001 were retained by IRMG.
The discontinued operations of 4CASH are summarized as follows:
2002
----
Revenues 729
------
Expenses
Direct costs 295
Selling, general and administrative 4,546
Depreciation 135
------
4,976
Net loss from discontinued operations (4,247)
======
Under the terms of the sale of the 4CASH subsidiary to IRMG, IRMG granted
the Company an option to satisfy, for full and complete settlement, the
outstanding fees under the management services agreement, totalling
approximately $104,350, owed to IRMG for a cash payment of $15,753
(CAD$25,000). During the year ended December 31, 2002 the payment was made
and the Company recorded a $34,560 credit to general and administrative
expenses in respect of expenses previously recorded in 2002. Additionally
$54,037 was recorded as a gain from forgiveness of management fees
representing fees accrued in prior years.
On March 5, 2002 as a result of the disposition of 4CASH the Company
recorded the effect of the disposal of $52,378 (representing primarily net
losses of the subsidiary while owned by the Company) and wrote off
advances and intercompany amounts totalling $13,375 made by the Company to
4CASH since June 2001.
(b) Prime Wireless Acquisition and Disposition
On June 7, 2002, the Company purchased all of the issued and outstanding
common shares of Prime Wireless from an affiliate in exchange for:
(1) $40,000 in cash,
(2) A non-interest bearing note payable for $120,000 payable over 5
years at $2,000 per month commencing July 1, 2002 (this note has
been discounted to $106,000 representing its present value using a
5% discount rate), and
F-25
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(3) Fifty percent (50%) of all net proceeds from the sale of any related
asset payable 30 days after receipt of funds, such assets are
recorded on the Company's books at a nominal value.
Prime Wireless, prior to the acquisition was, owned by a shareholder of
the Company.
Accounting for the acquisition is summarized as follows:
Net working capital assets acquired $ 29,526
Intangible assets acquired 116,474
---------
Purchase consideration $ 146,000
=========
The excess of purchase price over net assets acquired has been allocated
to intangible assets and represents mainly tooling, trade name and
intellectual property associated with the acquisition.
On March 13, 2003, the Company disposed of its investment in Prime
Wireless and related assets to another publicly traded company in exchange
for 1,500,000 common shares of the purchaser (of which 750,000 shares were
transferred, pursuant to the June 7, 2002 purchase and sale agreement, as
a share of proceeds, to the related party that the Company acquired Prime
Wireless from).
The proforma financial operating results, assuming the Prime Wireless
acquisition was made as of the January 1, 2001, have not been included
herein due to the sale of Prime Wireless subsequent to year end and as
that proforma information would not materially add to the disclosure.
The discontinued operations of Prime Wireless during 2003 and 2002 are
summarized as follows:
2003 2002
---- ----
Revenues
Commission income 26,322 65,923
Sales 16 255
------ ------
Total revenues 26,338 66,178
Less:
Cost of sales -- 200
------ ------
Gross profit 26,338 65,978
Operating expenses 11,044 42,631
------ ------
Operating income 15,294 23,347
Depreciation 48 187
------ ------
Net income from discontinued operations 15,246 23,160
====== ======
(c) Prime Battery Acquisition and Disposition
On December 31, 2002, the Company, through a newly incorporated wholly
owned subsidiary named Prime Battery, acquired certain assets of DCS
Battery Products Ltd. ("DCS Battery").
DCS Battery is owned by a relative of the Company's Chief Executive
Officer and one of its Directors.
Under the terms of the agreement Prime Battery acquired assets as follows:
F-26
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
- All assets and intellectual property rights of DCS Battery including
all trademarks, tradenames, distribution agreements with Konnoc
Battery in Canada and the United States of America, and all
agreements or relationships with dollar stores in Canada and the
United States,
- All inventory, and
- All contracts, books and records.
in exchange for:
- 6,000,000 newly issued common shares of the Company's common stock,
and
- The right to earn an additional 2,000,000 newly issued common shares
of Pivotal for every $100,000 of net profit earned by the Prime
Battery business during the two year period beginning on November 1,
2002 to a maximum of 10,000,000 additional shares.
Under the terms of the agreement the Company also agreed as follows:
- To finance the newly acquired business with $126,780 (CAD$200,000)
in cash,
- To share up to 50% of the net gross profit (subject to the Prime
Battery business earning a minimum gross profit of 15%) of the
business with A.C. Simmonds and Sons ("ACS" an entity also owned by
a relative of the Company's Chief Executive Officer) in exchange for
management, distribution and logistical services provided by ACS to
the Prime Battery business, and
- To sell any battery products to ACS intended to be sold to
industrial accounts at cost plus 10%.
The Company opted not to acquire any of the inventories owned by DCS
Battery for its own account. All inventory transferred between DCS Battery
and the Company was sold to third parties.
The acquisition was accounted for using the purchase method. The fair
value of the assets and liabilities acquired were as follows:
Current assets $165,028
Intangible assets 235,664
--------
400,692
Less:
Liabilities 160,692
--------
Net assets acquired at fair values $240,000
Total consideration:
6,000,000 shares of the Company's
common stock $240,000
The excess of the purchase price over net assets acquired has been
allocated to intangible assets, representing customer lists and
non-contractual customer relationships. Management has valued the Prime
Battery intangible assets at $235,664 based on estimated future cash flows
arising from two retail customers.
During 2003, management initiated an active plan to sell the subsidiary at
a price in relation to its market value and held discussions with
prospective buyers.
Pursuant to a letter agreement dated June 19, 2003 certain affiliates of
the Company became guarantors of the $283,437 note payable outstanding at
December 31, 2003.
F-27
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The discontinued operations of Prime Battery during 2003 are summarized as
follows:
Total revenues 1,194,457
Less:
Cost of sales 984,803
----------
Gross profit 209,654
Operating expenses:
Selling, general &
administrative 282,333
Occupancy 13,518
----------
Operating expenses 295,851
Other expenses:
Interest 147,533
Depreciation 2,761
----------
Total expenses 446,145
----------
Net loss from discontinued operations (236,491)
==========
In accordance with disclosures required by FASB statement No. 144 the
major categories of Prime Battery assets and liabilities held for sale as
at December 31, 2003 were as follows:
Cash $ (1,214)
Due from related parties 76,878
Accounts receivable 8,137
Inventory 2,297
Deferred costs 33,500
Other current assets 2,854
---------
Assets of discontinued
operations - current $ 122,452
---------
Equipment, net $ 9,600
Due from related parties 1,012
Intangible assets 245,664
---------
Assets of discontinued
operations - non current $ 256,276
---------
Accounts payable $ 83,118
Accrued liabilities 14,298
Note payable 283,437
---------
Liabilities of discontinued
operation - current $ 380,853
---------
6. SENIOR SUBORDINATED CONVERTIBLE DEBENTURES
The senior subordinated convertible debentures totalling $91,500 at
December 31, 2003, are subordinated to all other indebtedness, and bear
interest at 8% payable in arrears annually commencing March 6, 2001. The
principal portions mature on March 6, 2005. Each $0.25 of principal is
convertible into one share of common stock and one three year warrant (see
note 11) to purchase an additional share of common stock at an exercise
price of $0.50 per share. Management had determined that the value
attached to the conversion feature and the related warrants is
insignificant and, therefore has not made an adjustment to the debentures'
carrying amount for these features. Interest expense on these notes during
2003 and 2002 amounted to $10,048 and $11,320, respectively. No payments
of interest have been made by the Company. The notes are technically in
default and therefore have been classified as current liabilities.
F-28
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
During the year ended December 31, 2003, $50,000 of senior subordinated
convertible debentures plus accrued interest of approximately $15,000 was
converted to 2,580,735 common shares. These debenture holders, with the
consent of the consent of the Board of Directors, were provided the option
to convert principal plus interest into shares of the Company's common
stock at a special reduced conversion price of $0.025 per share. Under the
original terms of the debenture the Company would have issued 258,074
common shares upon conversion. However, under the revised terms 2,580,735
common shares were issued and the 2,322,661 incremental common shares
issued valued at share prices between $0.02 - $0.04 resulted in non-cash
financing expense charges of $78,876.
7. NOTES PAYABLE
Non-interest bearing note payable (a) $ 57,500
90 day note payable - director (b) 77,131
90 day note payable - affiliate (b) 124,000
90 day note payable - affiliate (c) 50,000
90 day note payable - affiliate (c) 50,000
5 year non-interest bearing note
payable (d) 90,225
---------
Total $ 448,856
=========
(a) During the year ended December 31, 2001, the Company issued a note
payable of $160,000 to an unsecured creditor as partial payment of
amounts owed. The note is non-interest bearing and was repayable
with progressively increasing payments over a period of 15 months
with final payment due in December 2002. The Company is currently in
default.
(b) On November 12, 2002, a director and an affiliate of the Company
each provided $77,131 (CAD$100,000) 90-day loans to the Company.
Under the terms of the agreements the lenders will receive a 5% fee
of the amount borrowed, monthly interest of 2% of the balance
borrowed (24% on an annual basis), warrants to purchase 1,000,000
common shares at $0.01 per share for each 30 days the loan is
outstanding and another 5% of the loan balance if not repaid in 90
days.
On December 29, 2003 the Company entered into a settlement agreement
with the director pursuant to which the Company agreed to pay
$101,041 (CAD$131,000) in cash on January 2, 2004 as full and
complete repayment of the loan. As part of the settlement the
director agreed to forgive all fees and warrants issuable under the
terms of the loan.
On January 23, 2004, the Company entered into a settlement agreement
with the affiliate pursuant to which the Company agreed to transfer
50,000 shares of its marketable securities as repayment of the loan.
As part of the settlement the affiliate agreed to forgive all fees
and warrants issuable under the terms of the loan. In addition, the
Company agreed to adjust the number of shares in event that the
closing share price is less than $3.00 on the earlier of; i) the
date which the shares become freely trading under securities
legislation, or ii) the date the shares are freely tradeable under a
registration statement.
(c) On December 31, 2003, two affiliates of the Company each provided
$50,000 90-day loans to the Company. The loans are at Canadian Prime
+ 2% and are due on March 30, 2004. The
F-29
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Company agreed to pledge to each lender 40,000 shares of the
Company's available for sale securities as security for the notes.
(d) On June 7, 2002, the Company issued a non-interest bearing note
payable to an affiliate for $120,000 payable over 5 years at $2,000
per month commencing July 1, 2002 (this note has been discounted to
$90,225 representing its present value using a 5% discount rate).
8. RELATED PARTY TRANSACTIONS
Amounts due to/from related parties generally result from transactions
with companies under common control and are non-interest bearing with no
specific terms for repayment. As at December 31, 2003 $40,702 was due from
related parties.
The Company accrued $60,000 to a related party for management fees
services provided and was obligated under a premise lease arrangement
(note 13) to a related party during the year ended December 31, 2003.
On December 31, 2003, related parties provided loans totalling $100,000 to
the Company (note 7c).
On March 13, 2003, the Company sold a wholly owned subsidiary to a third
party (note 5b), concurrent with the transaction, all of the officers and
directors of the Company became officers and directors of the third party.
In November 2002, a director of the Company provided a $77,131
(CAD$100,000) 90 day loan to the Company (see note 7b). In addition, a
shareholder of an affiliate of the Company provided another $77,131
(CAD$100,000) loan on the same basis. These loans were issued in the
normal course of business with terms as described in note 7b. The Company
entered into settlement agreements with the director and the affiliate and
both loans were repaid in January 2004 (see note 7b and 15).
9. NON-CASH FINANCING EXPENSE
During the year ended December 31, 2003, the Company provided senior
subordinated debenture holders the ability to convert their debentures to
common stock at an incentive conversion price of $0.025 per share rather
than $0.25 per share as stipulated under the original terms of the
debentures. Under the original terms of the debenture the Company would
have issued 258,074 common shares upon conversion. However, under the
revised terms 2,580,735 common shares were issued and the 2,322,661
incremental common shares issued valued at share prices between $0.02 -
$0.04 resulted in non-cash financing expense charges of $78,876.
During the year ended December 31, 2003 and 2002, the Company issued
warrants to purchase 13,000,000 and 2,000,000 common shares, respectively,
of the Company at $0.01 per share to related parties who had provided
short term loans to the Company (note 7b and 11). The warrants are
immediately exercisable and have a term to expiry of the later of December
31, 2004 or 90 days after the effectiveness of a registration statement.
Management has valued the warrants, using a Black-Scholes pricing model at
an aggregate value of $393,500 during fiscal 2003 and $92,000 during
fiscal 2002. During fiscal 2003 and 2002 the Company expensed $158,042 and
$92,000 of these costs as non-cash financing expense.
Management used the following assumptions in the valuation; 1) expected
life of 2.1 years, 2) 5% risk free interest rate, 3) expected volatility
of 183.6% based on twenty share price observations between May 2001 and
December 2002, and 4) 0% expected dividend yield. Accordingly, $92,000
F-30
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
has been recorded as a non-cash financing expense during the year ended
December 31, 2002. On December 29, 2003 and January 23, 2004, the Company
entered into settlement agreements under which the lenders agreed to
cancel all warrants issued in 2002 and 2003 (note 7b).
10. GAIN ON EXTINGUISHMENT OF DEBT
The Company recorded a gain from cancellation of indebtedness and reversal
of non-cash financing expenses totalling $296,291 during the year ended
December 31, 2003.
The balance includes $60,127 of various unsecured liabilities of the
Company associated with previous business opportunities where the creditor
has ceased communicating with the Company. Should the matter result in a
future loss, the Company will recognize the loss when it becomes known.
In addition, the Company recorded a gain of $236,794 associated with the
forgiveness of 14,000,000 warrants issued during 2002 and 2003, pursuant
to two loans received in 2002 (see note 7b and 9). Under the terms of
settlement agreements with the lenders (who where affiliated of the
Company) agreed to forgive all warrants issued. The Company and the
creditors agreed that the Company would cease issuing warrants to the
lenders in June 2003 until a settlement on the two loans was negotiated.
11. CAPITAL STRUCTURE
Capital stock: The Company is authorized to issue up to 150,000,000 common
shares.
Common stock subscribed
During 2003, 4,010,000 shares of the Company's common stock valued
at $80,200 have been subscribed. In addition, the Company acquired
an intangible asset valued at $10,000 with 500,000 shares of the
Company's common stock which shares had not been issued at December
31, 2003 and was therefore recorded as common stock subscribed.
Voting rights
The holders of shares of common stock are entitled to receive notice
of, attend and vote at all meetings of the stockholders. Each share
of common stock carries one vote at such meetings.
Warrants
The following is a summary of warrant activity for 2003 and 2002:
Number of
Shares to
Purchase under
Warrants Expiry Date
---------------------------------------
Balance, January 1, 2002 12,327,515
Issued 2,000,000 December 31, 2004(1)
Surrendered and cancelled (6,100,000)
Exercised -
-----------
Balance, December 31, 2002 8,227,515
F-31
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Between November 14,
2005 and
November 20, 2006(2)
Issued 14,508,074
Surrendered and cancelled (14,000,000)
Exercised -
-----------
Balance, December 31, 2003 8,735,589
(1) Includes warrants to purchase 1,250,000 common shares at $0.04
per share issued under a warrant agreement for which another
1,250,000 warrants, exercisable at $0.10 per share are
issuable upon exercise of the initial warrants.
(2) Warrants issued on December 12, 2002 and June 12, 2003 were
cancelled pursuant to a settlement agreements dated December
29, 2003 and January 23, 2004 (see notes 7b and 15).
Warrants outstanding at December 31, 2003 are summarized as follows:
Year of Vesting
Number Price Issue Period Term
----------- ----------- ---------- ------------ ----------
5,000,000 $ 0.50 1999 Immediately 5 years
1,227,515 0.50 2001 Immediately 3 years
258,074 0.50 2003 Immediately 3 years
1,000,000 0.02 2003 Immediately 2 years
1,250,000 0.04 2003 Immediately 2 years
---------
8,735,589
---------
Weighted average exercise price is $0.379 and the weighted average
life to expiry is 1.202 years. Should all outstanding warrants be
exercised, the total additional consideration available to the
Company is approximately $3,312,795. A maximum of 8,735,589 common
shares would be issued.
Stock options
In connection with the Company's reorganization in 1999, the 2000
stock option plan (2000 Plan) was established. The Company reserved
a maximum of 3,000,000 options to be issued under the 2000 Plan.
Options granted under both plans are being accounted for under
Accounting Principles Board Opinion No. 25 (APB Opinion No. 25),
"Accounting for Stock Issued to Employees". All options have been
granted at a price equal to or greater than the fair value of the
Company's common stock at the date of the grant.
No options were granted under the 2000 Plan in either of 2002 or
2003.
F-32
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The following is a summary of stock option activity for 2003 and
2002:
2000 Plan
-------------------------------
Weighted
Average
Exercise
Shares Price
------------- ---------------
Balance, January 1, 2002 1,750,000 $ 0.12
Surrendered and cancelled (500,000) 0.10
Expired (100,000) 0.10
---------
Balance, December 31, 2002 1,150,000 $ 0.13
Surrendered and cancelled -
Expired (150,000) 0.25
---------
Balance, December 31, 2003 1,000,000 $ 0.12
During the year 2002, 500,000 options issued in 2001 to directors
were returned to the Company. In addition 100,000 options issued in
2001 to employees were amended to expire on December 31, 2002 and
expired unexercised. In 2003 150,000 options issued to officers
expired unexercised.
Options outstanding at December 31, 2003 are summarized as follows:
Year of Vesting
Number Price Issue Period Term
------------ ------------ ----------- ------------ -----------
100,000 $ 0.25 2000 Immediately 1.1 years
500,000 0.10 2001 2 years 7.6 years
400,000 0.10 2001 Immediately 0.5 years
---------
1,000,000
---------
At December 31, 2003, options exercisable according to the vesting
period amounted to 1,000,000 with a weighted average exercise price
of $0.115. The weighted average remaining contractual life of
options outstanding and exercisable was 4.1 years at December 31,
2003.
12. INCOME TAXES
The company files US Federal income tax returns for its US operations.
Separate income tax returns are filed, as locally required, for each of
its foreign subsidiaries.
There was no provision for income taxes for the years ended December 31,
2003 and 2002.
The total provision for income taxes differs from that amount which would
be computed by applying the United States federal income tax rate to
income (loss) before provision for income taxes. The reasons for these
differences are as follows:
F-33
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Year Ended December 31,
2003 2002
---- ----
Amount % Amount %
Statutory income tax rate (recovery) (244,299) (34) (37,288) (34)
Foreign Taxes Payable - 0 - 0
Non-deductible items 23,799 3 20,799 19
Use of losses carried forward - 0 (26,634) (24)
Other, including valuation
Allowance adjustment 220,500 31 43,123 39
Net taxes (recovery) and
effective rate $ - 0 $ - 0
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities and net
operating loss carry-forwards. Temporary differences and carry-forwards,
which give rise to deferred tax assets and liabilities are as follows:
December 31, 2003 December 31, 2002
Component Tax Effect Component Tax Effect
--------- ---------- --------- ----------
Net operating losses - domestic $ 389,937 $ 132,578 $ 146,832 $ 49,925
Less valuation allowance (389,937) (132,578) (146,832) (49,925)
Net deferred asset $ - $ - $ - $ -
Net operating losses - foreign $ 328,589 $ 111,720 $ 37,160 $ 12,634
Use of losses carried forward (37,160) (12,634)
Less valuation allowance (328,589) (111,720) - -
Net deferred asset $ - $ - $ - $ -
As December 31, 2003, the Company had cumulative net operating loss
carry-forwards of approximately $2,100,000 and $200,000 in the United
States and Canada respectively. These amounts will expire in various years
through 2020. The related deferred tax assets have been completely offset
by a valuation allowance. The Company has no significant deferred tax
liabilities.
13. COMMITMENTS AND CONTINGENCIES
Commitments
On January 31, 2003, the Company entered into an office lease with
an entity that an officer and director of the Company is a
shareholder. The Company is committed under the lease agreement for
rental payments until January 31, 2004. Minimum monthly lease
payments are approximately $951.
F-34
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Contingencies
Pursuant to a letter agreement dated June 19, 2003 became a party to
a loan agreement between the Company's wholly owned operating
subsidiary and a note holder owed $283,437 as at December 31, 2003.
14. SEGMENT INFORMATION
All businesses of the Company are categorized as discontinued operations.
15. SUBSEQUENT EVENTS
On January 2, 2004 the Company repaid a $77,131 (CAD$100,000) 90-day loan
provided by a director of the Company on November 12, 2002 (see Note 7b).
On January 23, 2004 the Company entered into a Settlement Agreement with
an affiliate who provided the Company with a $77,131 (CAD$100,000) 90-day
loan on November 12, 2002 (see Note 7b). Under the terms of the settlement
the Company transferred 50,000 shares of its Wireless Age Communications,
Inc. marketable securities in payment of the loan. In addition, the
Company agreed to adjust the number of shares in event that the closing
share price is less than $3.00 on the earlier of; i) the date which the
shares become freely trading under securities legislation, or ii) the date
the shares are freely tradeable under a registration statement. As part of
the settlement the affiliate agreed to forgive all interest and warrants
issuable under the original loan agreement.
On February 9, 2004 announced that it entered into a Letter of Intent to
acquire all of the issued and outstanding common shares of Phantom Fiber
Corporation, a provider of secure wireless technology and mobile
solutions. Under the terms of the Letter of Intent Pivotal will issue
common stock in exchange for all of the issued and outstanding Phantom
Fiber common shares. The transaction is subject to further due diligence
and receipt of various approvals and consents by all parties.
16. COMPARATIVE FIGURES
The comparative figures have been reclassified in accordance with the
current year presentation.
F-35
PHANTOM FIBER CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
AS AT OCTOBER 31, 2002
Contents
Exhibit - 1 Consolidated Auditors' Report
Exhibit - 2 Consolidated Balance Sheet
Exhibit - 3 Consolidated Statement of Income
Exhibit - 4 Consolidated Statement of Deficit
Exhibit - 5 Consolidated Schedule of Deferred Costs
Exhibit - 6 Notes to Consolidated Financial Statements
F-36
HSA [Company Logo] Hauer Snider & Applebaum, Chartered Accountants
Exhibit - 1
Jack I. Hauer, C.A., Barry Applebaum, C.A., Joseph Commisso, B.Comm, C.A.
------------------------------------------------------------------------------
AUDITORS' REPORT
To the Shareholder of
Phantom Fiber Corporation
Toronto, Ontario
We have audited the consolidated balance sheet of Phantom Fiber Corporation as
at October 31, 2002, and the consolidated statements of deficit, income and the
consolidated schedule of deferred costs for the period from January 7, 2002 to
October 31, 2002. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at October 31, 2002
and the results of its operations for the period then ended in accordance with
Canadian generally accepted accounting principles.
Markham, Ontario Hauer, Snider & Applebaum
December 12, 2002 Chartered Accountants
2800 14th Avenue, Suite 400, Markham, ON L3R OE4 Tel.: (905) 477-6996 Toronto
Tel.: (416) 494-4892 Fax: (905) 477-9381 e-mail: info@hsa.tube.com
F-37
Exhibit - 2
PHANTOM FIBER CORPORATION
-------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
AS AT OCTOBER 31, 2002
----------------------
ASSETS
CURRENT
Cash 130,261
Accounts receivable 32,604
Prepaid expenses and sundry assets 4,762
---------
167,627
Capital assets (Notes 1 and 2) 4,058
Deferred costs net - Exhibit 5 786,287
---------
$ 957,972
=========
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 62,812
LONG-TERM
Loan payable (Note 3) 24,315
---------
87,127
SHAREHOLDER'S EQUITY
Capital stock (Note 4) 871,100
Deficit (255)
870,845
---------
957,972
=========
Approved on behalf of the Board:
_________________ (Director)
The accompanying notes form an integral part of these financial statements.
F-38
Exhibit - 3
PHANTOM FIBER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD JANUARY 7, 2002 TO OCTOBER 31, 2002
REVENUE -
EXPENSES
Bank charges 255
NET LOSS FOR THE PERIOD $(255)
======
The accompanying notes form an integral part of these financial statements.
F-39
Exhibit - 4
PHANTOM FIBER CORPORATION
-------------------------
CONSOLIDATED STATEMENT OF DEFICIT
---------------------------------
FOR THE PERIOD JANUARY 7, 2002 TO OCTOBER 31, 2002
--------------------------------------------------
RETAINED EARNINGS, BEGINNING OF PERIOD -
------
Net loss for the period (255)
------
DEFICIT, END OF PERIOD $(255)
======
The accompanying notes form an integral part of these financial statements.
F-40
Exhibit - 5
PHANTOM FIBER CORPORATION
CONSOLIDATED SCHEDULE OF DEFERRED COSTS
FOR THE PERIOD FROM JANUARY 7, 2002 TO OCTOBER 31, 2002
DEFERRED COSTS
DEFERRED RESEARCH AND DEVELOPMENT COSTS
Salaries and benefits 441,930
Software licenses 81,031
Supplies 8,521
Equipment leasing 5,610
Carriers 4,408
Other 3,875
--------
545,375
--------
DEFERRED SELLING COSTS
Salaries and benefits 51,273
Advertising and promotions 41,203
Travel 8,855
Market research 6,930
Meals and entertainment 5,762
Amortization 678
--------
114,701
--------
DEFERRED ADMINISTRATION COSTS
Salaries and benefits 75,307
Occupancy costs 30,135
Office and general 20,537
Telephone 9,484
Insurance 4,700
Bank charges and interest 839
--------
141,002
--------
DEFERRED PROFESSIONAL FEES
Consulting services 89,039
Legal fees 69,597
Government grant consulting 32,165
Accounting fees 3,500
--------
194,301
--------
TOTAL DEFERRED COSTS 995,379
LESS: GRANTS AND MISCELLANEOUS INCOME
Government grants 207,767
Consulting services 1,223
Interest income 102
--------
209,092
--------
NET DEFERRED COSTS (NOTE 8) 786,287
========
The accompanying notes form an integral part of these financial statements.
F-41
PHANTOM FIBER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS AT OCTOBER 31, 2002
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Financial Statements
The consolidated financial statements include Phantom Fiber
Corporation, incorporated January 7, 2002 and Phantom Fiber Inc.,
incorporated January 4, 2002. Both corporations were incorporated
pursuant to The Ontario Business Corporations Act.
Capital assets and amortization
Capital assets are recorded in the accounts at cost and are being
amortized on a diminishing balance basis at the following annual
rates:
Furniture and fixtures - 20%
Computer hardware - 30%
Use of Estimates
The preparation of the financial statements in conformity with
Canadian generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. By their nature, these
estimates are subject to measurement uncertainty and the effect on
the statement of cash flows in such estimates in future periods
could be significant.
Financial Instruments
The company's financial instruments consist of cash, accounts
receivable, prepaid expenses and sundry assets, accounts payable and
accrued liabilities and loan payable. Unless otherwise noted, it is
management's opinion that the company is not exposed to significant
interest, currency or credit risks arising from these financial
instruments. The fair market value of these financial instruments
approximate their carrying values, unless otherwise noted.
NOTE 2 CAPITAL ASSETS
Accumulated
Cost Amortization Net
---- ------------ ---
Furniture and fixtures 648 65 583
Computers 4,088 613 3,475
$4,736 $678 $4,058
NOTE 3 LOAN PAYABLE
Director $24,315
=======
The loan is unsecured, non-interest bearing and has no specific
terms of repayment. The director has no intention to demand
repayments during the next fiscal year.
NOTE 4 CAPITAL STOCK
AUTHORIZED
Unlimited Redeemable, non-voting, participating Class A shares
Unlimited Redeemable, voting, participating Class B shares
Unlimited Redeemable, non-voting, participating Class C shares
F-42
Unlimited Common shares
Issued and fully paid
13,000,000 Common shares 100
8,710,000 Class A 871,000
--------
$ 871,100
NOTE 5 SUBSEQUENT EVENT
Subsequent to the year end, the corporation issued from treasury
3,240,000 Series I Class A shares, for proceeds of $324,000.
NOTE 6 SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT CREDIT
The company has applied for $277,315 in scientific research and
experimental development credits from federal and provincial
governments. The credits will be recognized in income when received.
NOTE 7 STATEMENT OF CASH FLOWS AND COMPARATIVE FIGURES
The Consolidated statement of cash flows has not been included, as
management is of the opinion it does not provide additional
meaningful financial information under the circumstances. The
comparative figures are not shown due to the fact that this is the
first year of operations.
NOTE 8 RESEARCH AND DEVELOPMENT COSTS
The corporation meets the criteria to justify initial and continuing
deferral of development costs. These criteria are:
a) the product or process is clearly defined and the costs
attributable thereto can be identified;
b) the technical feasibility of the product or process has been
established;
c) the management of the enterprise had indicated its intention
to produce and market, or use, the product or process;
d) the future market for the product or process is clearly
defined or, if it is to be used internally rather than sold,
its usefulness to the enterprise has been established; and
e) adequate resources exist, or are expected to be available, to
complete the project.
F-43
PHANTOM FIBER CORPORATION
CONSOLIDATED BALANCE SHEET
AS AT OCTOBER 31, 2003
AUDITORS' REPORT
To the Shareholders of
Phantom Fiber Corporation
We have audited the consolidated balance sheet of Phantom Fiber Corporation as
at October 31, 2003 and the consolidated statements of operations and deficit
for the year then ended. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at October 31, 2003
and the results of its operations for the year then ended in accordance with
Canadian generally accepted accounting principles.
The comparative figures for the period ended October 31, 2002 were audited by
another firm of Chartered Accountants.
Chartered Accountants
Markham, Ontario
February 4, 2004 /s/ Burns Hubley LLP
F-44
PHANTOM FIBER CORPORATION
CONSOLIDATED BALANCE SHEET
AS AT OCTOBER 31, 2003
(Note 11)
- -------------------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and bank $ 92,972 $ 130,261
Accounts receivable 32,156 32,604
Investment tax credits receivable (Note 1) 499,653 --
Prepaid expenses 11,360 4,762
----------- -----------
636,141 167,627
EQUIPMENT (Note 2) 2,899 4,058
DEFERRED DEVELOPMENT COSTS (Note 3) 1,169,356 786,287
----------- -----------
$ 1,808,396 $ 957,972
=========== ===========
LIABILITIES
CURRENT
Accounts payable and accrued charges $ 148,457 $ 62,812
Current portion of long-term debt 212,178 --
----------- -----------
360,635 $ 62,812
LONG-TERM DEBT (Note 4) -- 24,315
----------- -----------
360,635 871,100
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 5) 1,198,555 871,100
EQUITY PORTION OF 250,000 --
CONVERTIBLE DEBENTURES (Note 6)
DEFICIT (794) (255)
----------- -----------
1,447,761 870,845
----------- -----------
$ 1,808,396 $ 957,972
=========== ===========
APPROVED ON BEHALF OF THE BOARD:
Director Director
- ----------------------- ---------------------
F-45
PHANTOM FIBER CORPORATION
STATEMENT OF OPERATIONS AND DEFICIT
FOR THE YEAR ENDED OCTOBER 31, 2003
- --------------------------------------------------------------------------------
(Note 11)
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
REVENUE
Interest income 381 -
EXPENSES
Interest and bank charges 920 255
---------- ---------
NET LOSS FOR THE YEAR (539) (255)
DEFICIT, beginning of the year (255) -
---------- ---------
DEFICIT, end of the year $ (794) $ (255)
- --------------------------------------------------------------------------------
F-46
PHANTOM FIBER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the financial statements of
the company and its wholly owned subsidiary Phantom Fiber Inc.
Basis of Presentation
The financial statements have been prepared on the basis that the company
will continue to operate as a going concern and that its assets and
liabilities will be realized under normal operations.
The company is in the developmental stage of its products cycle and as a
result has been funded to date through advances from its parent and
government investment tax credits received.
Until the company generates sufficient sales of its products, the company
will need to raise additional financing, either through additional equity
or debt issues, in order to continue operations. There is no certainty
that the company will be able to raise such additional financing.
Deferred Development Costs
Deferred development costs related to the commercial development of
wireless technology for mobile communication devices are capitalized by
the company to the date of commercial use of the product. The deferred
costs will be expensed on a straight line basis over 12 months from the
date of commercial use.
Equipment and Amortization
The company records its equipment at acquisition cost. Significant
improvements which extend the useful life of the assets are also
capitalized. Amortization of the equipment is recorded as follows:
Computer equipment 30% declining balance
Furniture and fixtures 20% declining balance
In the year of addition one-half of the applicable rate of amortization is
recorded, and in the year of disposition the related cost and accumulated
amortization are removed from the accounts. Idle equipment is not
amortized until put into use.
F-47
PHANTOM FIBER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2003
1. SIGNIFICANT ACCOUNTING POLICIES (ont'd)
Investment Tax Credits
The company claims investment tax credits as a result of incurring
scientific research and experimental development expenditures. Investment
tax credits are recognized when the related expenditures are incurred, and
there is reasonable assurance of their realization. Management has made a
number of estimates and assumptions in determining the expenditures
eligible for the investment tax credit claim. It is possible that the
allowed amount of the investment tax credit could be materially different
from the recorded amount upon assessment by Canada Customs and Revenue
Agency.
Government Assistance
Grants received in the year have been credited against deferred
development costs to match the treatment of the related expenditures.
Income Taxes
The company follows an asset and liability approach to financial
accounting and reporting for income taxes. Future income tax assets and
future income tax liabilities are computed annually for differences
between the financial statements and tax based on enacted tax laws and
rates applicable to the periods in which the differences are expected to
affect taxable income.
Stock Option Plan
The company has a stock option plan in its shares for employees of Phantom
Fiber Inc., its wholly owned subsidiary, which is described in Note 5. No
amount of compensation expense has been recognized in the financial
statements. Any consideration paid by employees on exercise of options is
credited to share capital.
F-48
PHANTOM FIBER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2003
2. EQUIPMENT
Equipment consists of the following:
------------------------------------------------------
2003 2002
------------------------------------------------------
Cost Accumulated Net Net
Amortization Book Value Book Value
------------------------------------------------------
Computer equipment $4,088 $1,656 $2,432 $3,475
Furniture and fixtures 648 181 467 583
------ ------ ------ ------
$4,736 $1,837 $2,899 $4,058
====== ====== ====== ======
3. DEFERRED DEVELOPMENT COSTS
-----------------------------
2003 2002
-----------------------------
Balance, beginning of the year $ 786,287 $ -
Capitalized in the year per schedule 383,069 786,287
------------- ---------
Balance, end of the year $ 1,169,356 786,287
============= =========
Deferred development costs represent expenses incurred by the company
during the year and in the prior period related to the development of its
wireless products for handheld devices.
Investment tax credits on account of scientific research and experimental
development expenditures from the Federal government in the amount of
$210,502 and $379,261 and Ontario Innovation tax credits from the Ontario
government of $66,813 and $120,392 for the period ended October 31, 2002
and the year ended October 31, 2003 respectively have been recognized as a
credit against deferred development costs in these statements.
As the company has not commenced commercial use of the product at year
end, the deferred development costs have not yet been amortized.
F-49
PHANTOM FIBER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2003
4. LONG TERM DEBT
Long-term debt consists of the following:
------------------------
2003 2002
------------------------
Unsecured loan which is non-interest bearing
with no specific terms of repayment $129,000 $ --
Loan from director, unsecured, non-interest 65,178 24,315
bearing with no specific terms of repayment
18,000 --
-------- --------
Loan payable which is unsecured, non-interest
bearing, with no specific terms of repayment
212,178 24,315
Less: amounts due within one year,
included in current liabilities 212,178 --
-------- --------
$ -- $ 24,315
-------- --------
F-50
PHANTOM FIBER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2003
5. SHARE CAPITAL
------------------------
2003 2002
------------------------
Authorized:
Unlimited Series A preference shares
Unlimited common shares
Issued and fully paid:
11,983,770 Series A preference shares $1,198,455 $871,000
(2002 - 8,710,000) 100 100
13,000,000 common shares $1,198,555 $871,100
========== ========
The Series "A" preference shares are convertible to common shares at any
time at the option of the holder and at the option of the company on the
occurrence of certain events. The shares are retractable after September
1, 2006 with support of 50% of the holders. The shares are voting and are
entitled to a cumulative dividend at 20% per annum, to be paid only when
declared by the Board of Directors. The dividends accrue annually based on
the issue date of the shares.
During the year, the company issued 3,273,770 Series "A" preference shares
for total proceeds of $327,455. (2002 - 8,710,000 shares for $871,000).
As at December 31, 2003 total unpaid cumulative dividends amounted to
$174,200.
Stock Option Plan
The stock option plan allows employees of Phantom Fiber Inc. to receive
options to purchase common shares of the company. Options granted under
the plan generally vest with the employees equally over a three year
period starting on the first anniversary date of the giant and expire five
years after vesting. The option exercise price approximates the market
price for the common shares on the date the options are issued.
No amount of compensation expense has been recognized in the financial
statements for the stock options granted to employees.
During the year the company granted 490,000 options (2002 - 1,510,000),
including 145,000 (2002 - Nil) which vested immediately, with an exercise
price of $0.10 (2002 - $0.10) per common share, resulting in a total of
2,000,000 outstanding at October 31, 2003. No options were exercised nor
forfeited in 2003 or 2002.
6. CONVERTIBLE DEBENTURES
On October 10, 2003, the company issued unsecured convertible debentures
in the aggregate principal amount of $500,000 payable in four equal
installments on October 10, 2003, October 17, 2003, November 7, 2003 and
November 28, 2003. The debentures bear interest at 7% per annum, mature on
October 9, 2006 and at the option of the holder are convertible into
common shares of the company at a conversion price of $0.25 per share plus
a two year warrant to purchase one common share at $0.60.
F-51
PHANTOM FIBER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2003
7. TAX LOSS CARRY FORWARD
The company has income tax losses of approximately $717,000 which can be
applied against taxable income of future years. If not utilized, these
losses will start to expire as follows:
2009 $ 435,000
2010 282,000
In addition, the company also has unapplied research and development
expenditure pool balances of approximately $998,000 for Ontario tax
purposes and $788,000 for Federal tax purposes which can be utilized to
reduce future taxable income. These expenditure pools have no expiry date.
The income tax benefits of these amounts have not been recognized in the
financial statements.
8. SUBSEQUENT EVENT
The company currently is in receipt of a Letter of Intent dated February
4, 2004 from Pivotal Self-Service Technologies Inc. to acquire all the
outstanding shares of the company, including a conversion of the
Convertible Debentures described in Note 6.
9. CONTINGENT LIABILITY
In October 2003 the company received correspondence demanding repayment of
grants in the aggregate of $200,000 for alleged breach of contract. The
company is contesting the alleged breach of contract.
F-52
PHANTOM FIBER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2003
Neither the possible outcome nor the amount of possible settlement can be
foreseen. Therefore, no provision has been made in the financial
statements.
10. STATEMENT OF CASH FLOWS
A statement of cash flows has not been presented, as the required
information is readily apparent from the other financial statements
presented and the notes to the financial statements.
11. COMPARATIVE FIGURES
Certain comparative figures, as at October 31, 2002 and for the period
from January 7, 2002(date of incorporation) to October 31, 2002, have been
reclassified to conform to the presentation adopted in the current year
F-53
PHANTOM FIBER CORPORATION
SCHEDULE OF DEFERRED DEVELOPMENT COSTS
FOR THE YEAR ENDED OCTOBER 31, 2003
(Comparatives for the period from January 7, 2002 to October 31, 2002)
(Note 11)
- -------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT COSTS
Salaries and benefits $ 672,206 $ 441,930
Equipment leasing 11,424 5,610
Supplies 4,320 8,521
Carriers 2,558 4,408
Software licenses 1,463 81,031
Others 39 3,875
692,010 545,375
----------- ---------
SELLING COSTS
Salaries and benefits 75,442 51,273
Travel 28,535 8,855
Advertising and promotions 12,762 41,203
Meals and entertainment 12,366 5,762
Amortization 1,159 678
Market research - 6,930
----------- ---------
130,264 114,701
ADMINISTRATION COSTS
Salaries and benefits 102,042 75,307
Occupancy costs 39,900 30,135
Office and general 28,931 20,537
Telephone 13,355 9,484
Bank charges and interest 2,783 839
Insurance 4,700
187,011 141,002
----------- ---------
PROFESSIONAL FEES
Government grants and consulting 116,760 32,165
Consulting services 55,416 89,039
Accounting fees 24,400 3,500
Legal fees 22,288 69,597
218,864 194,301
----------- ---------
TOTAL DEVELOPMENT COSTS INCURRED 1,228,149 995,379
----------- ---------
LESS: INVESTMENT TAX CREDITS, GRANTS
AND OTHER INCOME
Investment tax credits 776,968 -
Consulting services 60,676 1,223
Government grants 5,073 207,767
Interest and other income 2,363 102
845,080 209,092
----------- ---------
NET DEFERRED DEVELOPMENT COSTS $ 383,069 $ 786,287
=========== =========
F-54
PHANTOM FIBER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
As at March 31, 2004
(In accordance with United States Generally Accepted
Accounting Principals and stated in U.S. dollars) March 31,2004
-------------
CURRENT ASSETS
Accounts receivable $ 34,308
Prepaid expenses 19,452
Investment tax credit receivable 381,235
Note receivable 381,500
-----------
Total Current Assets 816,495
-----------
EQUIPMENT 2,921
-----------
TOTAL ASSETS $ 819,416
===========
CURRENT LIABILITIES
Bank indebtedness $ 928
Accounts payable and accrued charges 178,518
Current portion of long term debt 114,486
-----------
Total Current Liabilities 293,932
-----------
STOCKHOLDERS' DEFICIENCY
Common stock, unlimited number of shares authorized,
13,000,000 issued and outstanding at March 31, 2004 76
Series A preference shares, unlimited number of
shares authorized, 11,983,770 issued and outstanding
at March 31, 2004 790,671
Convertible debentures 919,780
Comprehensive income 19,516
Deficit (1,204,559)
Total Stockholders' Deficiency (525,484)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 819,416
- ---------------------------------------------- ===========
F-55
PHANTOM FIBER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE FIVE MONTHS ENDED
MARCH 31, 2004
For the
Five Months
Ended March
31, 2004
------------
REVENUE $ 23,877
---------
OPERATING EXPENSES
Selling, general and administrative 170,004
Occupancy 10,788
Research and development 252,715
---------
Total Operating Expenses 433,507
---------
NET LOSS $(409,630)
- -------- =========
F-56
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS AT MARCH 31, 2004
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, the
financial statements do not include all information and footnotes required by
accounting principles generally accepted in the United States of America for
complete annual financial statements. In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments,
consisting of only normal recurring adjustments, considered necessary for fair
presentation. Interim operating results are not necessarily indicative of
results that may be expected for the year ending October 31, 2004 or for any
subsequent period. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements, of Phantom Fiber
Corporation as of and for the year ended October 31, 2003.
(2) INCOME TAXES
Phantom incurred a net loss for the five months ended March 31, 2004. In
addition, Phantom does not expect to generate book income for the year ended
October 31, 2004. Therefore, no income taxes have been reflected for the
five-month period ended March 31, 2004.
(3) LONG TERM DEBT
Long term debt is non-interest bearing with no specific terms of
repayment.
(4) SHARE CAPITAL
The Series "A" preference shares are convertible to common shares at any
time at the option of the holder and at the option of the company on the
occurrence of certain events. The shares are retractable after September 1, 2006
with the support of 50% of the holders. The shares are voting and are entitled
to a cumulative dividend of 20% per annum, to be paid only when declared by the
Board of Directors. The dividends accrue annually based on the issue date of the
shares.
(5) CONVERTIBLE DEBENTURES
The debentures bear interest at 7% per annum, mature on October 9, 2006
and at the option of the holder are convertible into common shares of the
company at a conversion price of $0.25 per share plus a two year warrant to
purchase one common share at $0.60.
(6) STATEMENT OF CASH FLOWS
A statement of cash flows has not been presented, as the required
information is readily apparent from the other financial statements presented.
F-57
INTRODUCTION TO THE PRO FORMA FINANCIAL STATEMENTS
Pivotal Self-Service Technologies Inc. ("Pivotal") recently signed a share
exchange agreement ("transaction") with Phantom Fiber Corporation ("Phantom")
providing for the acquisition of all of the shares of Phantom. If the
transaction is consummated, shareholders of Phantom will be issued 167,410,735
shares of Pivotal which represents 67% of Pivotal's post-transaction outstanding
capital stock. We anticipate that the transaction will close in July of 2004.
The transaction will be recorded as a reverse acquisition since the Phantom
stockholders will become the controlling stockholders of Pivotal. Based on the
recent thirty-day average price of Pivotal's common stock of $0.08, the
preliminary estimate of the total purchase price is approximately $13.4 million.
It is expected that the combined company will record intangible assets (patents
and licenses) for substantially all of the purchase price.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet combines the
historical consolidated balance sheet of Pivotal and the historical consolidated
balance sheet of Phantom, giving effect to the transaction as if it had been
consummated on December 31, 2002.
You should read this information in conjunction with the:
o accompanying notes to the Unaudited Pro Forma Consolidated Financial
Statements;
o separate historical unaudited financial statements of Pivotal as of
and for the three months ended March 31, 2004 included in Pivotal's
Quarterly Report on Form 10-QSB for the three month period ended
March 31, 2004, which is included in this document;separate
historical unaudited financial statements of Phantom as of and for
the five months ended March 31, 2004, which is included in this
document. This statement conforms to accounting principles generally
accepted in the United States and are expressed in US funds.
o separate historical audited consolidated financial statements of
Pivotal for the year ended December 31, 2003, with comparative
figures for December 31, 2002, included in Pivotal's Annual Report
on Form 10-KSB for the year ended December 31, 2003;
o separate audited consolidated financial statements for Phantom for
the year ended October 31, 2003 and for the year ended October 31,
2002, which is included in this document. These statements conform
to accounting principles generally accepted in Canada and are
expressed in Canadian funds;
o reconciliation of Canadian and US generally accepted accounting
principles for Phantom for the years ended October 31, 2003 and
2002, which is included in this document;
o Schedules converting the Phantom statements of operations for the
years ended December 31, 2003 and December 31, 2002 from Canadian to
US funds.
We present the unaudited pro forma condensed consolidated financial
information for informational purposes only. The pro forma information is not
necessarily indicative of what our financial position would have been had we
completed the transaction on January 1, 2002. In addition, the unaudited pro
forma condensed consolidated financial information does not purport to project
the future financial position of the combined company.
Share Exchange Agreement
Under the share exchange agreement Pivotal will issue 137,410,735 new
common shares of Pivotal to the Common shareholders of Phantom for 100% of
Phantom's Common shares. Pivotal will issue 30,000,000 new common shares of
Pivotal to the holders of Phantom Debentures totalling $920,000. A copy of the
share exchange agreement is attached as a schedule to this Proxy. Accordingly
the transaction is accounted for as a reverse acquisition through the issuance
of stock by Phantom for the net monetary assets of Pivotal, accompanied by a
recapitalization of Phantom. No goodwill or any other intangible assets have
been recorded.
F-58
PIVOTAL SELF SERVICE TECHNOLOGIES INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 2004
(IN US DOLLARS)
A S S E T S
Consolidated
Pivotal-Self
Service Consolidated
Technologies Phantom Fiber Pro Forma Proforma
Inc. Corporation Adjustments Consolidated
------------ ------------- ----------- ------------
CURRENT
Cash $ 2,120 (928) 1,192
Marketable securities 923,800 923,800
Accounts receivable 34,308 34,308
Prepaid expenses 19,452 19,452
Note receivable 180,000 381,500 561,500
Investment tax credit receivable 381,235 381,235
Assets of discontinued operations 55,467 -- 55,467
-------------------------------------------------------------
TOTAL CURRENT ASSETS 1,161,387 815,567 1,976,954
EQUIPMENT 2,921
ASSETS OF DISCONTINUED OPERATIONS 75,700 -- 75,700
----------
TOTAL ASSETS $1,237,087 818,488 2,055,575
==========
F-59
PIVOTAL SELF SERVICE TECHNOLOGIES INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 2004
(IN US DOLLARS)
(continued)
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
Consolidated
Pivotal-Self Service Consolidated
Technologies Phantom Fiber Pro Forma Proforma
Inc. Corporation Adjustments Consolidated
-------------------- ------------- ----------- ------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 139,098 178,518 317,616
Notes payable 147,725 262,211
Senior subordinated convertible debentures 91,500 91,500
Liabilities of discontinued operations 318,263 318,263
-------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 696,586 293,004 989,590
-------------------------------------------------------------------
STOCKHOLDERS' EQUITY Preferred stock,
$100 par value, 8%, non-voting,
convertible, 2,000 shares authorized, no
shares issued and outstanding --
Common stock, $.001 par value,
150,000,000 shares authorized,
250,115,606 shares issued and outstanding 82,705 (82,705)
Common stock subscribed 62,200 (62,200)
Additional paid-in capital 8,715,084 (8,715,084)
Common stock 790,747 790,747
Convertible debenture 919,780 919,780
Accumulated other comprehensive income 826,999 (18,827) 808,172
Accumulated deficit (9,146,487) (1,166,217) 8,859,989 (1,452,715)
-------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 540,501 525,484 1,065,984
-------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,237,087 818,488 $ 2,055,575
===================================================================
F-60
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2003 (IN US DOLLARS)
A S S E T S
Consolidated
Pivotal-Self Service Consolidated
Technologies Phantom Fiber Pro Forma Proforma
Inc. Corporation Adjustments Consolidated
-------------------- ------------- ----------- ------------
CURRENT
Cash $ 92,192 19,742 111,934
Marketable securities 1,860,000 1,860,000
Accounts receivable 20,368 20,368
Prepaid expenses 3,685 3,685
Due from related parties 40,702 -- 40,702
Investment tax credit receivable 386,731 386,731
Assets of discontinued operations 122,452 -- 122,452
----------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,115,346 430,526 2,545,872
EQUIPMENT -- 2,244 2,244
ASSETS OF DISCONTINUED OPERATIONS 256,276 -- 256,276
----------------------------------------------------------------------
TOTAL ASSETS $2,371,622 432,770 2,804,392
======================================================================
F-61
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2003
(IN US DOLLARS)
(continued)
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
Consolidated
Pivotal-Self Service Consolidated
Technologies Phantom Fiber Pro Forma Proforma
Inc. Corporation Adjustments Consolidated
-------------------- ------------- ----------- ------------
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 155,185 56,941 212,126
Notes payable 448,856 448,856
Senior subordinated
convertible debentures 91,500 91,500
Liabilities of discontinued
operations 380,853 380,853
------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,076,394 56,941 1,133,335
------------------------------------------------------------------
NOTES PAYABLE 137,136 137,136
------------------------------------------------------------------
TOTAL LIABILITIES 1,076,394 194,077 1,270,471
------------------------------------------------------------------
STOCKHOLDERS' EQUITY Preferred stock,
$100 par value, 8%, non-voting,
convertible, 2,000 shares authorized, no
shares issued and outstanding --
Common stock, $.001 par value,
150,000,000 shares authorized,
246,322,576 shares issued and outstanding 78,912 (78,912)
Common stock subscribed 90,200 (90,200)
Additional paid-in capital 8,646,447 (8,646,447)
Common stock 790,747 790,747
Convertible debenture 294,120 294,120
Accumulated other comprehensive income 1,739,457 (13,675) 1,725,782
Accumulated deficit (9,259,788) (832,499) 8,815,559 (1,276,728)
------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,295,228 238,693 1,533,921
------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,371,622 $ 432,770 $ 2,804,392
==================================================================
F-62
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO THE PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 and March 31, 2004
Note 1 Basis of Presentation
---------------------
The accompanying consolidated balance sheets give effect to the
acquisition of the shares of Phantom Fiber Corporation ("Phantom")
by Pivotal Self-Service Technologies Inc. ("Pivotal") as if it had
occurred on December 31, 2002.
The pro forma consolidated balance sheets of Pivotal included herein
have been prepared by management of Pivotal in accordance with the
accounting principles generally accepted in the United States of
America. They have been prepared from information derived from the
December 31, 2003 and 2002 (audited) financial statements of Pivotal
and the October 31, 2003 and 2002 (audited) financial statements of
Phantom, together with other information available to the
corporations. The March 31, 2004 information was derived from the
March 31, 2004 (unaudited) financial statements as filed with
Pivotal's 10QSB and interim March 31, 2004 (unaudited) financial
statements of Phantom Fiber. The Phantom financial statements were
prepared in accordance with Canadian Generally Accepted Accounting
Principles. They have been adjusted to conform with accounting
principles generally accepted in the United States of America for
the preparation of the pro forma. In the opinion of management of
Pivotal, these pro forma consolidated balance sheets include all
adjustments necessary for fair presentation of the acquisition of
Phantom by Pivotal as described below.
The pro forma consolidated balance sheets should be read in
conjunction with the historical financial statements and notes
thereto of Pivotal and Phantom referred to above and a
reconciliation of Phantom's Canadian GAAP statements to US GAAP that
is included below.
The functional currency of Phantom is the Canadian Dollar. All
assets and liabilities have been translated into US dollars at the
exchange rate on the balance sheet date and revenues and expenses,
which result in the accumulated deficit, have been translated at the
average rate of exchange for the period. The resulting translation
adjustment has been recorded as a separate component of accumulated
other comprehensive income as a component of stockholders' equity.
F-63
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
NOTES TO THE PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002 and March 31, 2004
Note 2 The audited consolidated financial statements of the Phantom have
been changed from the historic statements as follows:
a) The statements were converted from Canadian to US GAAP; and
b) Canadian dollars ("CDN") were converted to United States
dollars ("US").
Phantom Fiber Corporation
Consolidated Balance Sheet
Reconciliation of US and Canadian GAAP
As at October 31, 2003
Oct 31/03
In accordance Oct 31/03 Oct 31/03
with Canadian In accordance In accordance
GAAP Adjustments with US GAAP with US GAAP
Audited to US GAAP Unaudited Unaudited
(CAD $) (CAD $) (CAD $) (US $)
- ----------------------------------------------------------------------------------------------------------------------------
Balance sheet
- ----------------------------------------------------------------------------------------------------------------------------
Current assets 636,141 636,141 483,467
- ----------------------------------------------------------------------------------------------------------------------------
Equipment 2,899 2,899 2,203
- ----------------------------------------------------------------------------------------------------------------------------
Deferred development costs (Note 2.1) 1,169,356 (1,169,356)
- ----------------------------------------------------------------------------------------------------------------------------
Total assets 1,808,396 (1,169,356) 639,040 485,670
- ----------------------------------------------------------------------------------------------------------------------------
Current liabilities 360,635 360,635 274,083
- ----------------------------------------------------------------------------------------------------------------------------
Share capital 1,198,555 1,198,555 807,457
- ----------------------------------------------------------------------------------------------------------------------------
Equity portion of convertible debentures 250,000 250,000 189,500
- ----------------------------------------------------------------------------------------------------------------------------
Comprehensive income (15,720)
- ----------------------------------------------------------------------------------------------------------------------------
Deficit (794) (1,169,356) (1,170,150) (769,650)
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders's equity 1,808,396 (1,169,356) 639,040 485,670
- ----------------------------------------------------------------------------------------------------------------------------
F-64
------------------------------------------------------------------
Phantom Fiber Corporation
Condensed Consolidated Statement of Operations
Reconciliation of US and Canadian GAAP
For the year ended October 31, 2003
------------------------------------------------------------------
CAD$ US$
------------------------------------------------------------------
Loss according to Canadian GAAP (539) (372)
------------------------------------------------------------------
Expense start up costs (Note 2.1) (383,069) (264,318)
------------------------------------------------------------------
Loss according to US GAAP (383,608) (264,690)
------------------------------------------------------------------
Canadian generally accepted accounting principles allow the deferral and
amortization of development costs. The Notes to the Canadian GAAP
financial statements describe the policy used:
Deferred development costs related to the commercial development of
wireless technology for mobile communication devices are capitalized
by the company to the date of commercial use of the product. The
deferred costs will be expensed on a straight line basis over 12
months from the date of commercial use.
Under US GAAP these development costs have been expensed because:
Cost incurred for software development prior to technological
feasibility are expensed as product development cost in the period
incurred. Once the point of technological feasibility is reached,
development costs are capitalized until the product is available for
general release. Capitalized costs are then amortized on a
straight-line basis over the estimated useful life or on the ratio
of current revenue to the total projected product revenue, whichever
is greater. Technological feasibility, which we define as the
establishment of a working model and which typically occurs when
beta testing is commences, was not reached prior to October 31,
2003. As a result, all development costs incurred in the years ended
October 31, 2003 and October 31, 2002 were expensed.
The following costs, previously deferred under Canadian GAAP, were
expensed under the provisions of US GAAP:
--------------------------------------------------------------
2003
--------------------------------------------------------------
Net selling, general and administrative costs 473,100
--------------------------------------------------------------
Software development costs (net of government (90,031)
assistance)
--------------------------------------------------------------
Total costs expensed 383,069
--------------------------------------------------------------
The effect of this change was to decrease Deferred development costs,
increase the loss and deficit for the year ended October 31, 2003.
F-65
The functional currency of Phantom is the Canadian Dollar. All assets and
liabilities have been translated into US dollars at the exchange rate on
the balance sheet date and revenues and expenses, which result in the
accumulated deficit, have been translated at the average rate of exchange
for the period. The resulting translation adjustment has been recorded as
a separate component of accumulated other comprehensive income as a
component of stockholders' equity. The exchange rates used in these
schedules are:
---------------------------------------------------------
Mar 31,2004 Dec 31, 2003
---------------------------------------------------------
Average rate for the period .759 .714
---------------------------------------------------------
Period end rate .763 .774
---------------------------------------------------------
F-66
Appendix A
Audit Committee Charter
The Audit Committee (sometimes referred to as the "Committee") is appointed by
the Board of Directors (the "Board") of Pivotal Self-Service Technologies Inc.
(the "Company") to assist the Board in monitoring (1) the integrity of the
financial statements of the Company, (2) the compliance by the Company with
legal and regulatory requirements and (3) the independence and performance of
the Company's external auditors.
The Audit Committee shall be comprised of three or more directors, each of whom
shall be free from any relationship that, in the opinion of the Board, would
interfere with his or her exercise of independent judgment and must be found by
the board to (i) qualify as an "independent director" under the Nasdaq
Marketplace Rules (the "Marketplace Rules"), unless the Board determines that an
exemption to such qualification is available under the Marketplace Rules, (ii)
meet the "independence" requirements under Section 10A of the Securities
Exchange Act of 1934 (the "Exchange Act") and (iii) satisfy the other
requirements of the Nasdaq Marketplace Rules. In addition, all members of the
Audit Committee shall be able to read and understand fundamental financial
statements, including the balance sheet, income statement and cash flow
statement. At least one member of the Audit Committee should be, in the judgment
of the Board, an audit committee financial expert in accordance with the rules
and regulations of the Securities and Exchange Commission (the "SEC") and shall
have past employment experience in finance or accounting, requisite professional
certification in accounting, or other comparable experience or background, which
results in such member's financial sophistication, including a current or past
position as a chief executive or financial officer or other senior officer with
financial oversight responsibilities.
Members of the Audit Committee shall serve at the pleasure of the Board and may
be removed at the Board's sole and absolute discretion. Members shall serve
until their successors shall be duly elected and qualified. The Audit
Committee's chairperson shall be designated by the full Board or, if the Board
does not do so, the Audit Committee members shall elect a chairperson by vote of
a majority of the full Audit Committee.
The Audit Committee shall have the authority to retain special legal, accounting
or other consultants to advise the Committee. The Audit Committee may request
any officer or employee of the Company or the Company's outside counsel or
independent auditor to attend a meeting of the Committee or to meet with any
members of, or consultants to, the Committee. The Audit Committee may also meet
with the Company's investment bankers or financial analysts who follow the
Company.
The Audit Committee shall make regular reports to the Board.
The Audit Committee shall:
1. Review and reassess the adequacy of this Charter annually and recommend any
proposed changes to the Board for approval.
2. Review the annual audited financial statements with management, including
major issues regarding accounting and auditing principles and practices as well
as the adequacy of internal controls that could significantly affect the
Company's financial statements.
3. Review an analysis prepared by management and the independent auditor of
significant financial reporting issues and judgments made in connection with the
preparation of the Company's financial statements, including an analysis of the
effect of alternative GAAP methods on the Company's financial statements and a
description of any transactions as to which management obtained Statement on
Auditing Standards No. 50 letters.
4. Review with management and the independent auditor the effect of regulatory
and accounting initiatives as well as off-balance sheet structures on the
Company's financial statements.
5. Review with management and the independent auditor the Company's quarterly
financial statements prior to the filing of its Form 10-QSB, including the
results of the independent auditors' reviews of the quarterly financial
statements.
6. Meet periodically with management to review the Company's major financial
risk exposures and the steps management has taken to monitor and control such
exposures.
7. Review major changes to the Company's auditing and accounting principles and
practices as suggested by the independent auditor, internal auditors or
management.
8. Recommend to the Board the appointment of the independent auditor, which firm
is ultimately accountable to the Audit Committee and the Board.
9. Review the experience and qualifications of the senior members of the
independent auditor team and the quality control procedures of the independent
auditor.
10. Approve the fees to be paid to the independent auditor for audit services.
11. Approve the retention of the independent auditor for any non-audit service
and the fee for such service.
12. Receive periodic reports from the independent auditor regarding the
auditor's independence, discuss such reports with the auditor, consider whether
the provision of non-audit services is compatible with maintaining the auditor's
independence and, if so determined by the Audit Committee, recommend that the
Board take appropriate action to satisfy itself of the independence of the
auditor.
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13. Evaluate together with the Board the performance of the independent auditor
and, whether it is appropriate to adopt a policy of rotating independent
auditors on a regular basis. If so determined by the Audit Committee, recommend
that the Board replace the independent auditor.
14. Discuss with the national office of the independent auditor, if any, issues
on which it was consulted by the Company's audit team and matters of audit
quality and consistency.
15. Meet with the independent auditor prior to the audit to review the planning
and staffing of the audit.
16. Obtain from the independent auditor assurance that Section 10A of the
Securities Exchange Act of 1934 has not been implicated.
17. Obtain reports from management and the independent auditor that the
Company's subsidiaries/foreign affiliated entities, if any, are in conformity
with applicable legal requirements and the Company's Code of Conduct, when
formally established, including disclosures of insider and affiliated party
transactions.
18. Discuss with the independent auditor the matters required to be discussed by
Statement on Auditing Standards No. 61 relating to the conduct of the audit.
19. Review with management and the independent auditor any correspondence with
regulators or governmental agencies and any employee complaints or published
reports which raise material issues regarding the Company's financial statements
or accounting policies.
20. Review with the independent auditor any problems or difficulties the auditor
may have encountered and any management letter provided by the auditor and the
Company's response to that letter. Such review should include any difficulties
encountered in the course of the audit work, including any restrictions on the
scope of activities or access to required information, and any disagreements
with management.
21. Prepare the report required by the rules of the Securities and Exchange
Commission to be included in the Company's annual proxy statement.
22. Advise the Board with respect to the Company's policies and procedures
regarding compliance with applicable laws and regulations and with the Company's
Code of Conduct, when formally established.
23. Review with the Company's General Counsel legal matters that may have a
material impact on the financial statements, the Company's compliance policies
and any material reports or inquiries received from regulators or governmental
agencies.
24. Meet at least quarterly with the chief financial officer and the independent
auditor in separate executive sessions.
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While the Audit Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Audit Committee to plan or conduct audits or
to determine that the Company's financial statements are complete and accurate
and are in accordance with generally accepted accounting principles. This is the
responsibility of management and the independent auditor. Nor is it the duty of
the Audit Committee to conduct investigations, to resolve disagreements, if any,
between management and the independent auditor or to assure compliance with laws
and regulations and the Company's Code of Conduct, when formally established.
This Charter was adopted by the Board on April 23, 2004.
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Appendix B
CERTIFICATE OF AMENDMENT
OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
Pivotal Self-Service Technologies Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the corporation,
resolutions were duly adopted setting forth proposed amendments of the Amended
and Restated Certificate of Incorporation of the corporation, as amended, and
declaring that such amendments are advisable and that such amendments should be
submitted to the stockholders of the corporation for approval. The resolutions
setting forth the proposed amendments are as follows:
RESOLVED, that Article FIRST of the Amended and Restated Certificate
of Incorporation be deleted and replaced with the following:
"FIRST. The name of the corporation is: Phantom Fiber
Corporation."
; and be it further
RESOLVED, that Article FOURTH of the Amended and Restated
Certificate of Incorporation be deleted and replaced with the following:
FOURTH. The total number of shares of stock which the
Corporation shall have authority to issue is four hundred million
(400,000,000) shares of Common Stock, of the par value of One Tenth
of One Cent ($0.001) each, amounting in the aggregate to Four
Hundred Thousand Dollars ($400,000.00).
; and be it further
RESOLVED, that at any time prior to the effectiveness of the filing
of the amendments with the Secretary of State of the State of Delaware,
notwithstanding authorization of the proposed amendments by the
corporation's stockholders, the Board of Directors of the corporation may
abandon such proposed amendments without further action by the
stockholders.
SECOND: Thereafter, pursuant to resolutions of the corporation's Board of
Directors, the amendments were submitted to the stockholders of the corporation
for approval at a Meeting of Stockholders, and such meeting was called and held
upon notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware. The necessary number of shares as required by statute were
voted in favor of the amendments.
THIRD: The said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the corporation has caused this certificate to be
signed by _________________, its duly authorized officer, as of this ___ day of
______, 2004.
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
By:
-----------------------------------
Name:
Title:
B - 2
Appendix C
THE EIEIHOME.COM INC.
2000 STOCK OPTION PLAN
1. Purpose. The purpose of the 2000 Stock Option Plan (the "Plan") of
eieiHome.com Inc., a Delaware corporation (the "Company"), is to attract and
retain employees (including officers), directors, consultants and independent
contractors of the Company, or any Subsidiary or Affiliate which now exists or
hereafter is organized or acquired, and to furnish additional incentives to such
persons to enhance the value of the Company over the long term encouraging them
to acquire a proprietary interest in the Company.
2. Definitions. For purposes of the Plan, the following terms shall be defined
as set forth below:
(a) "Affiliate" means any entity if, at the time of granting of an Option,
(i) the Company, directly, owns at least 50% of the combined voting power of all
classes of stock of such entity or at least 50% of the ownership interest in
such entity or (ii) such entity, directly or indirectly, owns at least 50% of
the combined voting power of all classes of stock of the Company.
(b) "Beneficiary" means the person, persons, trust or trusts which have
been designated by an Optionee in his or her most recent written beneficiary
designation filed with the Company to receive the Optionee's rights under the
Plan upon the Optionee's death, or, if there is no such designation or no such
designated person survives the Optionee, then the person, persons, trust or
trusts entitled by will or applicable law to receive such rights or, if no such
person has such right then the Optionee's executor or administrator.
(c) "Board" means the Board of Directors of the Company.
(d) "Change in Control" means a change in control of the Company which
will be deemed to have occurred if:
(i) any "person" as such term is used in Section 13(d) and 14(d) of
the Exchange Act (other than an Exempt Person) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or more of the
combined voting power of the Company's then outstanding voting securities;
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board, and any new director (other
than a director designated by a person who has entered into an agreement with
the Company to effect a transaction described in clause (i), (iii) or (iv) of
this Section 2(d) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least a majority of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute at least a majority thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (A) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving or parent entity) 50% or more of the combined voting power of the
voting securities of the Company or such surviving or parent entity outstanding
immediately after such merger or consolidation or (B) a merger or consolidation
effected to implement a recapitalization of the Company (or similar transaction)
in which no "person" (as hereinbefore defined), other than an Exempt Person,
acquired 50% or more of the combined voting power of the Company's then
outstanding securities; or
(iv) the stockholders of the Company approve of a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets (or any transaction
having a similar effect).
(e) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(f) "Committee" means the committee, consisting exclusively of two or more
Non-Employee Directors (as defined in Rule 16b-3), if and as the same may be
established by the Board to administer the Plan; provided, however, that to the
extent required for the Plan to comply with the applicable provisions of Section
162(m) of the Code, "Committee" means either such committee or a subcommittee of
that committee, as the case may be, which shall be constituted to comply with
the applicable requirements of Section 162(m) of the Code and the regulations
promulgated thereunder. If the Committee does not exist, or for any other reason
determined by the Board, the Board may take any action under the Plan that would
otherwise be the responsibility of the Committee and, in such a case, all
references herein to the Committee shall refer to the Board.
(g) "Company" means eieiHome.com Inc., a corporation organized under the
laws of the State of Delaware, or any successor corporation.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and as now or hereafter construed, interpreted and applied by
regulations, rulings and cases.
(i) "Exempt Person" means (1) the Company, (2) any trustee or other
fiduciary holding securities under an employee benefit plan of the Company, (3)
any corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of Stock, or
(4) any person or group of persons who, immediately prior to the adoption of
this Plan, owned more than 50% of the combined voting power of the Company's
then outstanding voting securities.
(j) "Fair Market Value" means, with respect to Stock or other property,
the fair market value of such Stock or other property determined by such methods
or procedures as shall be established from time to time by the Committee.
Notwithstanding the foregoing, the per share Fair Market Value of Stock as of a
particular date shall mean (i) if the shares of Stock are then
C - 2
listed on a national securities exchange, the closing sales price per share of
Stock on the national securities exchange on which the Stock is principally
traded, for the last preceding date on which there was a sale of such Stock on
such exchange, or (ii) if the shares of Stock are then traded on the National
Market System of the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"), the reported per share closing price of the Stock
on the day prior to such date or, if there was no such price reported for such
date, on the next preceding date for which such a price was reported, or (iii)
if the shares of Stock are then traded in an over-the-counter market other than
on the NASDAQ National Market System, the average of the closing bid and asked
prices for the shares of Stock in such over-the-counter market for the last
preceding date on which there was a sale of such Stock in such market, or (iv)
if the shares of Stock are not then listed on a national securities exchange or
traded in an over-the-counter market, such value as the Committee, in its sole
discretion, shall determine in good faith.
(k) "ISO" means any Option intended to be and designated as an incentive
stock option within the meaning of Section 422 of the Code.
(l) "NQSO" means any Option not designated as an ISO.
(m) "Option" means a right, granted to an Optionee under Section 6(b) of
the Plan, to purchase shares of Stock, subject to the terms and conditions of
this Plan. An Option may be either an ISO or an NQSO, provided that ISOs may be
granted only to employees of the Company or a Subsidiary.
(n) "Optionee" means a person who, as an employee, director, officer,
consultant or independent contractor of the Company, a Subsidiary or an
Affiliate, has been granted an Option.
(o) "Plan" means this eieiHome.com Inc. 2000 Stock Option Plan, as amended
from time to time.
(p) "Rule 16b-3" means Rule 16b-3, as from time to time in effect,
promulgated by the Securities and Exchange Commission under Section 16 of the
Exchange Act, including any successor to such Rule.
(q) "Stock" means the common stock, par value $0.001 per share, of the
Company.
(r) "Stock Option Agreement" means any written agreement, contract, or
other instrument or document evidencing an Option.
(s) "Subsidiary" means any corporation in which the Company, directly or
indirectly, owns stock possessing 50% or more of the total combined voting power
of all classes of stock of such corporation.
(t) "Ten Percent Shareholder" means a person or persons who own, directly
or indirectly, more than 10% of the total combined voting power of all classes
of stock of the Company or any of its Subsidiaries.
C - 3
3. Administration. The Plan shall be administered by the Committee. The
Committee shall have the authority, in its discretion, subject to and not
inconsistent with the express provisions of the Plan, to administer the Plan and
to exercise all the powers and authorities either specifically granted to it
under the Plan or necessary or advisable in the administration of the Plan,
including, without limitation, the authority to grant Options; to determine the
persons to whom and the time or times at which Options shall be granted; to
determine the type and number of Options to be granted, the number of shares of
Stock to which Options may relate and the terms, conditions, restrictions and
performance criteria relating to any Options; to determine whether, to what
extent, and under what circumstances Options may be settled, canceled,
forfeited, exchanged or surrendered; to make adjustments in the terms and
conditions of, and the criteria and performance objectives included in, Options
in recognition of unusual or non-recurring events affecting the Company or any
Subsidiary or Affiliate or the financial statements of the Company or any
Subsidiary or Affiliate, or in response to changes in applicable laws,
regulations or accounting principles; to designate Affiliates; to construe and
interpret the Plan and any Options; to prescribe, amend and rescind rules and
regulations relating to the Plan; to determine the terms and provisions of the
Stock Option Agreement (which need not be identical for each Optionee); and to
make all other determinations deemed necessary or advisable for the
administration of the Plan.
The Committee may appoint a chairperson and a secretary and may make such
rules and regulations for the conduct of its business as it shall deem
advisable, and shall keep minutes of its meetings. All determinations of the
Committee shall be made by a majority of its members either present in person or
participating by conference telephone at a meeting or by written consent. The
Committee may delegate to one or more of its members or to one or more agents
such administrative duties as it may deem advisable, and the Committee or any
person to whom it has delegated duties as aforesaid may employ one or more
persons to render advice with respect to any responsibility the Committee or
such person may have under the Plan. All decisions, determinations and
interpretations of the Committee shall be final and binding on all persons,
including the Company, and any Subsidiary, Affiliate or Optionee (or any person
claiming any rights under the Plan from or through any Optionee) and any
stockholder.
No member of the Board or Committee shall be liable for any action taken
or determination made in good faith with respect to the Plan or any Option
granted hereunder.
4. Eligibility. Options may be granted in the discretion of the Committee to key
employees as determined by the Committee (including officers), directors and
consultants of the Company and its present or future Subsidiaries and
Affiliates. In determining the persons to whom Options shall be granted and the
type of Options granted (including the number of shares to be covered by such
Options), the Committee shall take into account such factors as the Committee
shall deem relevant in connection with accomplishing the purposes of the Plan.
5. Stock Subject to the Plan. The maximum number of shares of Stock reserved for
the grant of Options under the Plan shall be 3,000,000 shares of Stock, subject
to adjustment as provided herein. Such shares may, in whole or in part, be
authorized but unissued shares or shares that shall have been or may be
reacquired by the Company in private transactions or otherwise. The number of
shares of Stock available for issuance under the Plan shall be reduced
C - 4
by the number of shares of Stock subject to outstanding Options. If any shares
subject to an Option are forfeited, canceled, exchanged or surrendered or if an
Option otherwise terminates or expires without a distribution of shares to the
Optionee, the shares of Stock with respect to such Option shall, to the extent
of any such forfeiture, cancellation, exchange, surrender, termination or
expiration, again be available for Options under the Plan. In no event shall any
Optionee be granted Options under this Plan in any one calendar year with
respect to more than 10% of the aggregate number of shares of Stock reserved for
awards under the Plan.
In the event that the Committee shall determine, in it sole discretion,
that any dividend or other distribution (whether in the form of cash, Stock, or
other property), recapitalization, stock split, reverse split, any
reorganization, merger, consolidation, spin-off, combination, repurchase, share
exchange, license arrangement, strategic alliance or other similar corporate
transaction or event, affects the Stock such that an adjustment is appropriate
in order to prevent dilution or enlargement of the rights of any Optionees under
the Plan, then the Committee shall make such equitable changes or adjustments as
it deems necessary or appropriate to any or all of (i) the number and kind of
shares of Stock which may thereafter be issued in connection with Options, (ii)
the number and kind of shares of Stock issued or issuable in respect of
outstanding Options, and (iii) the exercise price, grant price, or purchase
price relating to any Option; provided that, with respect to ISOs, such
adjustment shall be made in accordance with Section 424(h) of the Code.
6. Specific Terms of Options.
(a) General. Options may be granted at the discretion of the Committee.
The term of each Option shall be for such period as may be determined by the
Committee. The Committee may make rules relating to Options, and may impose on
any Option or the exercise thereof, at the date or thereafter, such additional
terms and conditions, not inconsistent with the provisions of the Plan, as the
Committee shall determine.
(b) Options. The Committee is authorized to grand Options to Optionees on
the following terms and conditions:
(i) Type of Option. The Stock Option Agreement evidencing the grant
of an Option under the Plan shall designate the Option as an ISO (in the event
its terms, and the individual to whom it is granted, satisfy the requirements
for ISOs under the Code), or an NQSO.
(ii) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee; provided that,
in the case of an ISO, (i) such exercise price shall be not less than the Fair
Market Value of a share of Stock on the date of grant of such Option or such
other exercise price as may be required by the Code, (ii) if the Optionee is a
Ten Percent Shareholder, such exercise price shall not be less than 110% of the
Fair Market Value of a share of Stock on the date of grant of such Option and in
no event shall the exercise price for the purchase of shares of Stock be less
than par value. The exercise price for Stock subject to an Option may be paid in
cash or by an exchange of Stock owned by the Optionee for at least six months
prior to the date of the exchange ("Mature Stock"), or a combination of both, in
an amount having a combined value equal to such exercise price. Any shares of
Mature Stock
C - 5
exchanged upon the exercise of any Option shall be valued at the Fair Market
Value on the date on which such shares are exchanged. An Optionee may also elect
to pay all or a portion of the aggregate exercise price by having shares of
Stock with a Fair Market Value on the date of exercise equal to the aggregate
exercise price withheld by the Company or sold by a broker-dealer in accordance
with applicable law.
(iii) Term and Exercisability of Options. The date on which the
Committee adopts a resolution expressly granting an Option shall be considered
the day on which such Option is granted. Options shall be exercisable over the
exercise period (which shall not exceed ten years from the date of grant), at
such times and upon such conditions as the Committee may determine, as reflected
in the Stock Option Agreement. An Option may be exercised to the extent of any
or all full shares of Stock as to which the Option has become exercisable, by
giving written notice of such exercise to the Company's Secretary and paying the
exercise price as described in Section 6(b)(ii).
(iv) Termination of Employment, etc. An Option may not be exercised
unless the Optionee is then in the employ or a director of, or then maintains an
independent contractor relationship with, the Company or any Subsidiary or
Affiliate (or a company or a parent or subsidiary company of such company
issuing or assuming the Option in a transaction to which Section 424(a) of the
Code applies), and unless the Optionee has continuously maintained any of such
relationships since the date of grant of the Option; provided that, the Stock
Option Agreement may contain provisions extending the exercisability of Options,
in the event or specified terminations, to a date not later than the expiration
date of such Option. The Committee may establish a period during which the
Beneficiaries of an Optionee who died while an employee, director or independent
contractor of the Company or any Subsidiary or Affiliate or during any extended
period referred to in the immediately preceding proviso may exercise those
Options which were exercisable on the date of the Optionee's death; provided
that no Option shall be exercisable after its expiration date.
(v) Nontransferability. Options shall not be transferable by an
Optionee except by will or the laws of descent and distribution and shall be
exercisable during the lifetime of an Optionee only by such Optionee.
(vi) Other Provisions. Options may be subject to such other
conditions as the Committee may prescribe in it discretion.
7. Change in Control Provisions. In the event of a Change in Control, any and
all Options then outstanding shall become fully exercisable and vested, whether
or not theretofore vested and exercisable.
8. General Provisions.
(a) Compliance with Legal and Exchange Requirements. The Plan, the
granting and exercising of Options thereunder, and the other obligations of the
Company under the Plan and any Stock Option Agreement, shall be subject to all
applicable federal and state laws, rules and regulations, and to such approvals
by any regulatory or governmental agency as may be required.
C - 6
The Company, in its discretion, may postpone the issuance or delivery of Stock
under any Option until completion of such stock exchange listing or registration
or qualification of such Stock or other required action under any state, federal
or foreign law, rule or regulation as the Company may consider appropriate, and
may require any Optionee to make such representations and furnish such
information as it may consider appropriate in connection with the issuance or
delivery of Stock in compliance with applicable laws, rules and regulations.
(b) No Right to Continued Employment, etc. Nothing in the Plan or in any
Option granted or Stock Option Agreement entered into pursuant to the Plan shall
confer upon any Optionee the right to continue in the employ of, or to continue
as a director of or an independent contractor to, the Company, any Subsidiary or
any Affiliate, as the case may be, or to be entitled to any remuneration or
benefits not set forth in the Plan or such Stock Option Agreement or to
interfere with or limit in any way the right of the Company or any such
Subsidiary or Affiliate to terminate such Optionee's employment, directorship or
independent contractor relationship.
(c) Taxes. The Company or any Subsidiary or Affiliate is authorized to
withhold from any Option granted, any payment relating to an Option under the
Plan (including from a distribution of Stock), or any other payment to an
Optionee, amounts of withholding and other taxes due in connection with any
transaction involving an Option, and to take such other action as the Committee
may deem advisable to enable the Company and an Optionee to satisfy obligations
for the payment of withholding taxes and other tax obligations relating to any
Option. This authority shall include authority to withhold or receive Stock or
other property and to make cash payments in respect thereof in satisfaction of
an Optionee's tax obligations.
(d) Amendment and Termination of the Plan. The Board may at any time and
from time to time alter, amend, suspend, or terminate the Plan in whole or in
part; provided that, no amendment which requires stockholder approval in order
for the Plan to continue to comply with Rule 16b-3 or Sections 422 and 424 of
the Code and the regulations promulgated thereunder shall be effective unless
the same shall be approved by the requisite vote of the stockholders of the
Company entitled to vote thereon. Notwithstanding the foregoing, no amendment
shall affect adversely any of the rights of any Optionee, without such
Optionee's consent, under any Option theretofore granted under the Plan.
(e) No Rights to Options; No Stockholder Rights. No person shall have any
claim to be granted any Option under the Plan, and there is no obligation for
uniformity of treatment of Optionees. Except as provided specifically herein, an
Optionee or transferor of an Option shall have no rights as a stockholder with
respect to any shares covered by the Option until the date of the issuance of a
stock certificate to such Optionee for such shares.
(f) Unfunded Status of Options. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. Nothing contained in
the Plan or any Option shall give any such Optionee any rights that are greater
than those of a general creditor of the Company.
(g) No Fractional Shares. No fractional shares of Stock shall be issued or
delivered pursuant to the Plan or any Option. The Committee shall determine
whether cash, other Options,
C - 7
or other property shall be issued or paid in lieu of such fractional shares or
whether such fractional shares or any rights thereto shall be forfeited or
otherwise eliminated.
(h) Governing Law. The Plan and all determinations made and actions taken
pursuant hereto shall be governed by the laws of the State of Delaware without
giving effect to the conflict of laws principles thereof.
(i) Effective Date; Plan Termination.
(i) The Plan shall take effect upon its adoption by the Board (the
"Effective Date"), but the Plan (and any grants of Options made prior to the
stock holder approval mentioned herein), shall be subject to the approval of the
holder(s) of a majority of the issued and outstanding shares of voting
securities of the Company entitled to vote, which approval must occur within
twelve months of the date the Plan is adopted by the Board. In the absence of
such approval, such Options shall be null and void.
(ii) The Board may terminate the Plan at any tine with respect to
any shares of Stock that are not subject to Options. Unless terminated earlier
by the Board, the Plan shall terminate ten years after the Effective Date and no
Options shall be granted under the Plan after such date. Termination of the Plan
under this Section 8(i) will not affect the rights and obligations of any
Optionee with respect to Options granted prior to termination.
C - 8
Appendix D
SHARE EXCHANGE AGREEMENT
This Share Exchange Agreement, dated as of April 21, 2004, is made by and
among PIVOTAL SELF-SERVICE TECHNOLOGIES INC., a Delaware corporation (the
"Acquiror"), each of the Persons listed on Exhibit A (collectively, the
"Shareholders"), and PHANTOM FIBER CORPORATION, a Canadian corporation (the
"Company").
BACKGROUND
The Shareholders have agreed to transfer to the Acquiror, and the Acquiror
has agreed to acquire from the Shareholders (i) all of the Shares, which Shares
constitute 100% of the outstanding capital stock of the Company, in exchange for
137,410,735 shares of the Acquiror's Common Stock and (ii) all of the Company
Debentures, in exchange for 30,000,000 shares of the Acquiror's Common Stock and
Warrants to purchase 15,000,000 shares of the Acquiror's Common Stock, all on
the terms and conditions as set forth herein.
SECTION I
DEFINITIONS
Unless the context otherwise requires, the terms defined in this Section 1
will have the meanings herein specified for all purposes of this Agreement,
applicable to both the singular and plural forms of any of the terms herein
defined.
1.1. "Accredited Investor" has the meaning set forth in Regulation D under
the Securities Act and set forth on Exhibit B.
1.2. "Acquired Companies" means, collectively, the Company and the Company
Subsidiaries.
1.3. "Acquiror Balance Sheet" means the Acquiror's audited consolidated
balance sheet at December 31, 2003.
1.4. "Acquiror Board" means the Board of Directors of the Acquiror.
1.5. "Acquiror Companies" means, collectively, the Acquiror and the
Acquiror Subsidiaries.
1.6. "Acquiror's Common Stock" means the Pivotal Self-Service Technologies
Inc. common stock, par value $0.001 per share.
1.7. "Acquiror Shares" means, collectively, the 137,410,735 shares of
Acquiror's Common Stock being issued to the Shareholders in exchange for the
Shares and the 30,000,000 shares of Acquiror's Common Stock being issued to the
Shareholders in exchange for the Company Debentures, pursuant to this Agreement.
1.8. "Acquiror Subsidiaries" means all of the direct and indirect
Subsidiaries of the Acquiror.
1.9. "Acquisition Transaction" has the meaning set forth in Section
11.1.7.
1.10. "Additional Shares" has the meaning set forth in Section 12.3.2.
1.11. "Affiliate" means any Person that directly or indirectly controls,
is controlled by or is under common control with the indicated Person.
1.12. "Agreement" means this Share Exchange Agreement, including all
Schedules and Exhibits hereto, as this Share Exchange Agreement may be from time
to time amended, modified or supplemented.
1.13. "Approved Plans" means a stock option or similar plan for the
benefit of employees or others which has been approved by the stockholders of
the Acquiror.
1.14. "Business Day" means a day, other than Saturday, on which banks in
New York City are open for business.
1.15. "Claims Period" has the meaning set forth in Section 12.2.1.
1.16. "Closing" has the meaning set forth in Section 3.
1.17. "Closing Date" has the meaning set forth in Section 3.
1.18. "Code" means the Internal Revenue Code of 1986, as amended.
1.19. "Common Stock" means the Company's common stock, without par value.
1.20. "Commission" means the United States Securities and Exchange
Commission or any other federal agency then administering the Securities Act.
1.21. "Company Balance Sheet" means, on the date of this Agreement, the
Company's unaudited consolidated balance sheet at March 31, 2004 and, on the
Closing Date, the Company's audited consolidated balance sheet at October 31,
2003.
1.22. "Company Benefit Plans" means employee pension benefit plans,
medical, disability, severance pay, educational, life insurance and other
employee welfare benefit plans, and all other bonus, stock option, stock
purchase or other equity-based compensation arrangements, and incentive,
deferred compensation, supplemental retirement, severance, disability, vacation,
cafeteria and other similar employee benefit plans, policies, programs or
contracts (including those which contain change of control provisions or pending
change of control provisions), and any employment, executive compensation or
severance agreements (including those with change of control provisions or
pending change of control provisions), as amended, modified or supplemented, in
any case that (a) are maintained or contributed to (or to which there was an
obligation to contribute) by any Acquired Company, or (b) were formerly
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maintained or contributed to (or to which there was an obligation to
contribute), by any Acquired Company, as well as each plan with respect to which
any Acquired Company has or could have any liability, whether direct or indirect
or actual or contingent (including any liability arising out of an
indemnification, guarantee, hold harmless or similar agreement).
1.23. "Company Audited Financial Statements" has the meaning set forth in
Section 8.5.
1.24. "Company Board" means the Board of Directors of the Company.
1.25. "Company Debentures" means the convertible debentures of the Company
in the aggregate principal amount of $1,200,000 Canadian Dollars.
1.26. "Company Indemnified Party" has the meaning set forth in Section
12.3.1.
1.27. "Company Nominees" means the four individuals designated by the
Shareholders pursuant to Section 2.4 to be nominated for election to the
Acquiror Board to take office if and when the Closing occurs.
1.28. "Company Preliminary Financial Statements" has the meaning set forth
in Section 5.8.
1.29. "Company Subsidiary" means Phantom Fiber Inc.
1.30. "Covered Persons" has the meaning set forth in Section 8.6.3.
1.31. "Damages" has the meaning set forth in Section 12.2.1.
1.32. "D&O Insurance" has the meaning set forth in Section 8.6.4.
1.33. "Distributor" means any underwriter, dealer or other Person who
participates, pursuant to a contractual arrangement, in the distribution of the
securities offered or sold in reliance on Regulation S.
1.34. "Environmental Laws" means any Law or other requirement relating to
the environment, natural resources, or public or employee health and safety.
1.35. "Environmental Permit" means all licenses, permits, authorizations,
approvals, franchises and rights required under any applicable Environmental Law
or Order.
1.36. "Equity Security" means any stock or similar security, including,
without limitation, securities containing equity features and securities
containing profit participation features, or any security convertible into or
exchangeable for, with or without consideration, any stock or similar security,
or any security carrying any warrant, right or option to subscribe to or
purchase any shares of capital stock, or any such warrant or right.
1.37. "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
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1.38. "Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same may be in effect from time to time.
1.39. "Exhibits" means the several exhibits referred to and identified in
this Agreement.
1.40. "GAAP" means, with respect to any Person, United States generally
accepted accounting principles applied on a consistent basis with such Person's
past practices.
1.41. "Governmental Authority" means any federal or national, state or
provincial, municipal or local government, governmental authority, regulatory or
administrative agency, governmental commission, department, board, bureau,
agency or instrumentality, political subdivision, commission, court, tribunal,
official, arbitrator or arbitral body, in each case whether U.S. or non-U.S.
1.42. "Indebtedness" means any obligation, contingent or otherwise. Any
obligation secured by a Lien on, or payable out of the proceeds of, or
production from, property of the relevant party will be deemed to be
Indebtedness.
1.43. "Indebtedness for Borrowed Money" means (a) all Indebtedness in
respect of money borrowed; (b) all Indebtedness evidenced by a promissory note,
bond or similar written obligation to pay money; or (c) all such Indebtedness
guaranteed by the relevant party or for which the relevant party is otherwise
contingently liable.
1.44. "Indemnified Persons" has the meaning set forth in Section 8.6.2.
1.45. "Intellectual Property" means all industrial and intellectual
property, including, without limitation, all U.S. and non-U.S. patents, patent
applications, patent rights, trademarks, trademark applications, common law
trademarks, Internet domain names, trade names, service marks, service mark
applications, common law service marks, and the goodwill associated therewith,
copyrights, in both published and unpublished works, whether registered or
unregistered, copyright applications, franchises, licenses, know-how, trade
secrets, technical data, designs, customer lists, confidential and proprietary
information, processes and formulae, all computer software programs or
applications, layouts, inventions, development tools and all documentation and
media constituting, describing or relating to the above, including manuals,
memoranda, and records, whether such intellectual property has been created,
applied for or obtained anywhere throughout the world.
1.46. "Laws" means, with respect to any Person, any U.S. or non-U.S.
federal, national, state, provincial, local, municipal, international,
multinational or other law (including common law), constitution, statute, code,
ordinance, rule, regulation or treaty applicable to such Person.
1.47. "Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind, including, without limitation, any conditional sale
or other title retention agreement, any lease in the nature thereof and the
filing of or agreement to give any financing statement under the Uniform
Commercial Code of any jurisdiction and including any lien or charge arising by
Law.
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1.48. "Market Price," with respect to Acquiror's Common Stock, shall mean
the average of the reported per share closing bid price and closing ask price of
Acquiror's Common Stock regular way on the OTC Bulletin Board (or, if it is not
then quoted on the OTC Bulletin Board, the over-the-counter market as furnished
by any NASD member firm selected from time to time by the Acquiror for that
purpose) for five (5) consecutive trading days ending with the trading day
immediately prior to the date as of which the Market Price is being determined.
1.49. "Material Acquiror Contract" means any and all agreements,
contracts, arrangements, leases, commitments or otherwise, of the Acquiror
Companies, of the type and nature that the Acquiror is required to file with the
Commission.
1.50. "Material Adverse Effect" means, when used with respect to the
Acquiror Companies or the Acquired Companies, as the case may be, (a) any
material adverse effect on the business, assets, financial condition or results
of operations of the Acquiror Companies or the Acquired Companies, as the case
may be, in each case taken as a whole or (b) any material impairment of the
ability of the Acquiror or the Company, as the case may be, to perform their
respective obligations under this Agreement.
1.51. "Material Company Contract" means any and all agreements, contracts,
arrangements, leases, commitments or otherwise, of the Acquired Companies, of
the type and nature that would be required to be filed with the Commission if
the Company were a reporting company.
1.52. "Order" means any award, decision, injunction, judgment, order,
ruling, subpoena, or verdict entered, issued, made, or rendered by any
Governmental Authority.
1.53. "Organizational Documents" means (a) the articles or certificate of
incorporation and the by-laws or code of regulations of a corporation; (b) the
partnership agreement and any statement of partnership of a general partnership;
(c) the limited partnership agreement and the certificate of limited partnership
of a limited partnership; (d) the articles or certificate of formation and
operating agreement of a limited liability company; (e) any other document
performing a similar function to the documents specified in clauses (a), (b),
(c) and (d) adopted or filed in connection with the creation, formation or
organization of a Person; and (f) any and all amendments to any of the
foregoing.
1.54. "Outside Date" has the meaning set forth in Section 11.1.3.
1.55. "Permitted Liens" means (a) Liens for Taxes not yet payable or in
respect of which the validity thereof is being contested in good faith by
appropriate proceedings and for the payment of which the relevant party has made
adequate reserves; (b) Liens in respect of pledges or deposits under workmen's
compensation laws or similar legislation, carriers, warehousemen, mechanics,
laborers and materialmen and similar Liens, if the obligations secured by such
Liens are not then delinquent or are being contested in good faith by
appropriate proceedings conducted and for the payment of which the relevant
party has made adequate reserves; (c) statutory Liens incidental to the conduct
of the business of the relevant party which were not incurred in connection with
the borrowing of money or the obtaining of advances or credits and that do not
D - 5
in the aggregate materially detract from the value of its property or materially
impair the use thereof in the operation of its business; and (d) Liens that
would not reasonably be expected to have a Material Adverse Effect.
1.56. "Person" means all natural persons, corporations, business trusts,
associations, companies, partnerships, limited liability companies, joint
ventures and other entities, governments, agencies and political subdivisions.
1.57. "Proceeding" means any action, arbitration, audit, hearing,
investigation, litigation, or suit (whether civil, criminal, administrative,
investigative, or informal) commenced, brought, conducted, or heard by or
before, or otherwise involving, any Governmental Authority.
1.58. "Regulation S" means Regulation S under the Securities Act, as the
same may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission.
1.59. "Required Acquiror Stockholder Actions" means, collectively, the
vote of the holders of Acquiror's Common Stock approving: (i) the election of
the Company Nominees to the Acquiror Board, to take office if and when the
Closing occurs; (ii) an increase in the authorized number of shares of
Acquiror's Common Stock from 150,000,000 to 400,000,000 shares; (iii) an
increase in the number of shares of Acquiror's Common Stock reserved under stock
option plans from 3,000,000 to 20,000,000, (iv) a change in Acquiror's name to
"Phantom Fiber Corporation," immediately following, and subject to, the Closing.
1.60. "Returned Shares" has the meaning set forth in Section 12.2.2.
1.61. "Rule 144" means Rule 144 under the Securities Act, as the same may
be amended from time to time, or any successor statute.
1.62. "Schedules" means the several schedules referred to and identified
herein, setting forth certain disclosures, exceptions and other information,
data and documents referred to at various places throughout this Agreement.
1.63. "SEC Documents" has the meaning set forth in Section 6.26.
1.64. "Section 4(2)" means Section 4(2) under the Securities Act, as the
same may be amended from time to time, or any successor statute.
1.65. "Securities Act" means the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same will be in effect at the time.
1.66. "Shares" means, collectively, the 24,983,770 outstanding shares of
Common Stock of the Company.
1.67. "Subsidiary" means, with respect to any Person, any corporation,
limited liability company, joint venture or partnership of which such Person (a)
beneficially owns, either directly
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or indirectly, more than 50% of (i) the total combined voting power of all
classes of voting securities of such entity, (ii) the total combined equity
interests, or (iii) the capital or profit interests, in the case of a
partnership; or (b) otherwise has the power to vote or to direct the voting of
sufficient securities to elect a majority of the board of directors or similar
governing body.
1.68. "Survival Period" has the meaning set forth in Section 12.1.
1.69. "Taxes" means all foreign, federal, state or local taxes, charges,
fees, levies, imposts, duties and other assessments, as applicable, including,
but not limited to, any income, alternative minimum or add-on, estimated, gross
income, gross receipts, sales, use, transfer, transactions, intangibles, ad
valorem, value-added, franchise, registration, title, license, capital, paid-up
capital, profits, withholding, payroll, employment, unemployment, excise,
severance, stamp, occupation, premium, real property, recording, personal
property, federal highway use, commercial rent, environmental (including, but
not limited to, taxes under Section 59A of the Code) or windfall profit tax,
custom, duty or other tax, governmental fee or other like assessment or charge
of any kind whatsoever, together with any interest, penalties or additions to
tax with respect to any of the foregoing; and "Tax" means any of the foregoing
Taxes.
1.70. "Tax Return" means any return, declaration, report, claim for refund
or credit, information return, statement or other similar document filed with
any Governmental Authority with respect to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
1.71. "Transaction Documents" means, collectively, all agreements,
instruments and other documents described herein or related hereto, including
the Phantom Fiber Shareholder Agreement and the Halloran Employment Agreement.
1.72. "Transaction Securities" has the meaning set forth in Section 4.2.1.
1.73. "U.S." means the United States of America.
1.74. "U.S. person" has the meaning set forth in Regulation S under the
Securities Act and set forth on Exhibit C hereto.
1.75. "Warrants" means, warrants issued to holders of Company Debentures
to acquire Acquiror's Common Stock, at $0.084 per share, immediately exercisable
and expiring on the second anniversary of Closing Date.
SECTION II
EXCHANGE OF SHARES AND SHARE CONSIDERATION
2.1. Share Exchange. At the Closing, each of the Shareholders shall
transfer to, and the Acquiror shall acquire from each Shareholder, that number
of Shares and Convertible Debentures set out beside such Shareholder's name on
Exhibit A for the consideration and on the terms set forth in this Agreement.
Subject to Section 3.2, the aggregate consideration for the Shares and the
Company Debentures acquired by Acquiror pursuant to this Agreement shall be
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167,410,735 Acquiror Shares to be issued to each Shareholder on a pro rata basis
in accordance with the portion of all of the Shares and Convertible Debentures,
taken together on an as-converted basis, that such Shareholder owns and Warrants
to acquire 15,000,000 shares of Acquiror's Common Stock, to be issued to each
holder of Company Debentures on pro rata basis in accordance with the portion of
all Convertible Debentures that such holder owns, (all as set forth on Exhibit
A).
2.2. Withholding. The Acquiror shall be entitled to deduct and withhold
from the Acquiror Shares and Warrants otherwise payable pursuant to this
Agreement to any Shareholder such amounts as it is required to deduct and
withhold with respect to the making of such payment under the Code or any
provision of state, local, provincial or foreign tax Law. To the extent that
amounts are so withheld, such withheld amounts shall be treated for all purposes
of this Agreement as having been paid to the Shareholder in respect of which
such deduction and withholding was made.
2.3. Section 368 Reorganization. For U.S. federal income tax purposes, the
exchange by the Shareholders of the Shares and Company Debentures for the
Acquiror Shares and Warrants is intended to constitute a "reorganization" within
the meaning of Section 368(a)(1)(B) of the Code. The parties to this Agreement
hereby adopt this Agreement as a "plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations.
Notwithstanding the foregoing or anything else to the contrary contained in this
Agreement, the parties acknowledge and agree that no party is making any
representation or warranty as to the qualification of the exchange by the
Shareholders of the Shares and Company Debentures for the Acquiror Shares and
Warrants as a reorganization under Section 368 of the Code. The parties
acknowledge and agree that each (i) has had the opportunity to obtain
independent legal and tax advice with respect to the transaction contemplated by
this Agreement, and (ii) is responsible for paying its own Taxes including
without limitation, any adverse Tax consequences that may result if the
transaction contemplated by this Agreement is not determined to qualify as a
reorganization under Section 368 of the Code.
2.4. Directors of Acquiror at Closing. Prior to the Closing, Acquiror
shall hold a meeting of its stockholders at which the following individuals (the
"Company Nominees") shall be considered for election to the Acquiror Board to
take office if and when the Closing occurs: Gordon Fowler; Jeffrey Halloran;
Graham Simmonds; Stephen Gesner and James Hardy.
SECTION III
CLOSING
3.1. Closing. The closing (the "Closing") of the share exchange will occur
at the offices of the Acquiror, 13980 Jane Street, King City, Ontario, L7B 1A3,
Canada, on the third business day after the Acquiror Stockholder Approval or at
such later date as all of the closing conditions set forth in Sections 9 and 10
have been satisfied or waived (the "Closing Date"). At the Closing, each
Shareholder shall deliver to Acquiror any Company Debentures and certificate(s)
evidencing the number of Shares held by such Shareholder, all as set forth in
Exhibit A, along with executed stock powers transferring such Shares to the
Acquiror, against delivery to each Shareholder by Acquiror of a certificate
evidencing the number of Acquiror
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Shares and the Warrants, if any, to which such Shareholder is entitled pursuant
to Section 2.1, as set forth in Exhibit A, subject to Section 3.2.
SECTION IV
REPRESENTATIONS, WARRANTIES AND COVENANTS OF SHAREHOLDERS
4.1. Generally. Each Shareholder, severally and not jointly, hereby
represents, warrants and covenants to the Acquiror as follows:
4.1.1. Authority. Such Shareholder has the right, power, authority
and capacity to execute and deliver this Agreement and each of the Transaction
Documents to which such Shareholder is a party, to consummate the transactions
contemplated by this Agreement and each of the Transaction Documents to which
such Shareholder is a party, and to perform such Shareholder's obligations under
this Agreement and each of the Transaction Documents to which such Shareholder
is a party. This Agreement has been, and each of the Transaction Documents to
which such Shareholder is a party will be, duly and validly authorized and
approved, executed and delivered by such Shareholder. Assuming this Agreement
has been, and the Transaction Documents have been, duly and validly authorized,
executed and delivered by the parties thereto other than such Shareholder, this
Agreement is, and as of the Closing each of the Transaction Documents to which
such Shareholder is a party will have been, duly authorized, executed and
delivered by such Shareholder and constitutes or will constitute the legal,
valid and binding obligation of such Shareholder, enforceable against such
Shareholder in accordance with its terms, except as such enforcement is limited
by general equitable principles, or by bankruptcy, insolvency and other similar
Laws affecting the enforcement of creditors rights generally.
4.1.2. No Conflict. Neither the execution or delivery by such
Shareholder of this Agreement or any Transaction Document to which such
Shareholder is a party, nor the consummation or performance by such Shareholder
of the transactions contemplated hereby or thereby will, directly or indirectly,
(a) contravene, conflict with, or result in a violation of any provision of the
Organizational Documents of such Shareholder (if such Shareholder is not a
natural person); (b) contravene, conflict with, constitute a default (or an
event or condition which, with notice or lapse of time or both, would constitute
a default) under, or result in the termination or acceleration of, any agreement
or instrument to which such Shareholder is a party or by which the properties or
assets of such Shareholder are bound; or (c) contravene, conflict with, or
result in a violation of, any Law or Order to which such Shareholder, or any of
the properties or assets of such Shareholder, may be subject.
4.1.3. Ownership of Shares and Company Debentures. Such Shareholder
owns, of record and beneficially, and has good, valid and indefeasible title to
and the right to transfer to the Acquiror pursuant to this Agreement, the Shares
and Company Debentures set forth beside such Shareholder's name on Exhibit A
free and clear of any and all Liens. There are no options, rights, voting
trusts, stockholder agreements or any other contracts or understandings to which
such Shareholder is a party or by which such Shareholder or such Shareholder's
Shares or Company Debentures are bound with respect to the issuance, sale,
transfer, voting or registration of such Shareholder's Shares or Company
Debentures. At the Closing, the Acquiror will acquire
D - 9
good, valid and marketable title to such Shareholder's Shares and Company
Debentures free and clear of any and all Liens.
4.1.4. Litigation. There is no pending Proceeding against such
Shareholder that challenges, or may have the effect of preventing, delaying or
making illegal, or otherwise interfering with, any of the transactions
contemplated by this Agreement and, to the knowledge of such Shareholder, no
such Proceeding has been threatened, and no event or circumstance exists that is
reasonably likely to give rise to or serve as a basis for the commencement of
any such Proceeding.
4.1.5. No Brokers or Finders. Except as disclosed in Schedule 4.1.5,
no Person has, or as a result of the transactions contemplated herein will have,
any right or valid claim against such Shareholder for any commission, fee or
other compensation as a finder or broker, or in any similar capacity, and such
Shareholder will indemnify and hold the Acquiror harmless against any liability
or expense arising out of, or in connection with, any such claim.
4.2. Investment Representations. Each Shareholder, severally and not
jointly, hereby represents and warrants to the Acquiror as follows:
4.2.1. Acknowledgment. Such Shareholder understands and agrees that
none of the Acquiror Shares, any Additional Shares, the Warrants, and shares of
Acquiror's Common Stock issuable upon exercise of the Warrants (collectively,
the "Transaction Securities") have been registered under the Securities Act or
the securities laws of any state of the U.S. and that the issuance of the
Acquiror Shares is being effected in reliance upon an exemption from
registration afforded either under Section 4(2) for transactions by an issuer
not involving a public offering or Regulation S for offers and sales of
securities outside the U.S. to Persons that are not U.S. persons.
4.2.2. Status. By its execution of this Agreement, such Shareholder
represents and warrants to the Acquiror as indicated on its signature page to
this Agreement, either that:
(a) it is an Accredited Investor; or
(b) it is not a U.S. person.
Such Shareholder understands that the Transaction Securities are
being offered and sold to such Shareholder in reliance upon the truth and
accuracy of the representations, warranties, agreements, acknowledgments and
understandings of such Shareholder set forth in this Agreement, in order that
the Acquiror may determine the applicability and availability of the exemptions
from registration of the Transaction Securities on which the Acquiror is
relying.
4.2.3. Additional Representations and Warranties of Accredited
Investors. If such Shareholder indicates that it is an Accredited Investor on
its signature page to this Agreement, then such Shareholder further makes the
representations and warranties to the Acquiror set forth on Exhibit D.
D - 10
4.2.4. Additional Representations and Warranties of Non-U.S.
Persons. If such Shareholder indicates that it is not a U.S. person on its
signature page to this Agreement, then such Shareholder further makes the
representations and warranties to the Acquiror set forth on Exhibit E.
4.3. Stock Legends. Each Shareholder hereby agrees with the Acquiror as
follows:
4.3.1. Securities Act Legend - Accredited Investors. The
certificates evidencing the shares of Acquiror's Common Stock constituting
Transaction Securities issued to those Shareholders who are Accredited
Investors, and each certificate issued in transfer thereof, shall bear the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY
BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT (1)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND APPLICABLE STATE SECURITIES LAWS OR (2) PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS, IN WHICH CASE THE HOLDER MUST, PRIOR TO
SUCH TRANSFER, FURNISH TO THE COMPANY AN OPINION OF COUNSEL, WHICH COUNSEL
AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED IN THE MANNER CONTEMPLATED PURSUANT TO AN AVAILABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS.
4.3.2. Securities Act Legend - Non-U.S. Persons. The certificates
evidencing the shares of Acquiror's Common Stock constituting Transaction
Securities issued to those Shareholders who are not U.S. persons, and each
certificate issued in transfer thereof, shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY
BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT (1) IN
ACCORDANCE WITH THE PROVISIONS OF REGULATION S PROMULGATED UNDER THE
SECURITIES ACT, AND BASED ON AN OPINION OF COUNSEL, WHICH COUNSEL AND
OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT THE PROVISIONS OF
REGULATION S HAVE BEEN SATISFIED, (2)
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PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND APPLICABLE STATE SECURITIES LAWS OR (3) PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS, IN WHICH CASE THE HOLDER MUST, PRIOR TO
SUCH TRANSFER, FURNISH TO THE COMPANY AN OPINION OF COUNSEL, WHICH COUNSEL
AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED IN THE MANNER CONTEMPLATED PURSUANT TO AN AVAILABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS. HEDGING TRANSACTIONS INVOLVING THE SECURITIES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE
WITH THE SECURITIES ACT.
4.3.3. Other Legends. The Warrants shall bear legends analogous to
those set forth in Sections 4.3.1 and 4.3.2, as Acquiror shall reasonably deem
appropriate. The certificates representing the Transaction Securities, and each
certificate issued in transfer thereof, will also bear any other legend required
under any applicable Law, including, without limitation, any U.S. state
corporate and state securities law, or contract.
4.3.4. Opinion. Such Shareholder shall not transfer any Transaction
Securities pursuant to Regulation S or absent an effective registration
statement under the Securities Act and applicable state securities law covering
the disposition of such Transaction Securities, without first providing the
Acquiror with an opinion of counsel (which counsel and opinion are reasonably
satisfactory to the Acquiror) to the effect that such transfer will be made in
compliance with Regulation S or will be exempt from the registration and the
prospectus delivery requirements of the Securities Act and the registration or
qualification requirements of any applicable U.S. state securities laws.
4.3.5. Consent. Such Shareholder understands and acknowledges that
the Acquiror may refuse to transfer the Transaction Securities, unless such
Shareholder complies with this Section 4.3 and any other restrictions on
transferability set forth in Exhibits D and E. Such Shareholder consents to the
Acquiror making a notation on its records and giving instructions to any
transfer agent of the Acquiror's Common Stock in order to implement the
restrictions on transfer of the Transaction Securities.
SECTION V
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
The Company represents, warrants and covenants to the Acquiror as follows:
5.1. Organization and Qualification. Each of the Acquired Companies is
duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization,
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has all requisite authority and power (corporate and other), governmental
licenses, authorizations, consents and approvals to carry on its business as
presently conducted and to own, hold and operate its properties and assets as
now owned, held and operated by it, except where the failure to be so organized,
existing and in good standing or to have such authority and power, governmental
licenses, authorizations, consents or approvals would not reasonably be expected
to have a Material Adverse Effect. Each of the Acquired Companies is duly
qualified, licensed or domesticated as a foreign corporation in good standing in
each jurisdiction wherein the nature of its activities or its properties owned,
held or operated makes such qualification, licensing or domestication necessary,
except where the failure to be so duly qualified, licensed or domesticated and
in good standing would not reasonably be expected to have a Material Adverse
Effect. Schedule 5.1 sets forth a true, complete and correct list of each
Acquired Company's jurisdiction of organization and each other jurisdiction in
which such Acquired Company presently conducts its business or owns, holds and
operates its properties and assets.
5.2. Subsidiaries. Except as set forth on Schedule 5.2, no Acquired
Company owns, directly or indirectly, any equity or other ownership interest in
any corporation, partnership, joint venture or other entity or enterprise.
5.3. Organizational Documents. The Company has delivered true, correct and
complete copies of the Organizational Documents of each Acquired Company to the
Acquiror prior to the execution of this Agreement, and no action has been taken
to amend or repeal such Organizational Documents. No Acquired Company is in
violation or breach of any of the provisions of its Organizational Documents,
except for such violations or breaches as would not reasonably be expected to
have a Material Adverse Effect.
5.4. Authorization. The Company has all requisite authority and power
(corporate and other), governmental licenses, authorizations, consents and
approvals to enter into this Agreement and each of the Transaction Documents to
which the Company is a party, to consummate the transactions contemplated by
this Agreement and each of the Transaction Documents to which the Company is a
party and to perform its obligations under this Agreement and each of the
Transaction Documents to which the Company is a party. The execution, delivery
and performance by the Company of this Agreement and each of the Transaction
Documents to which the Company is a party and the recording of the transfer of
the Shares have been duly authorized by all necessary corporate action and do
not require from the Company Board or the Shareholders any consent or approval
that has not been validly and lawfully obtained. The execution, delivery and
performance by the Company of this Agreement and each of the Transaction
Documents to which the Company is a party and the recording of the transfer of
the Shares and the Company Debentures requires no authorization, consent,
approval, license, exemption of or filing or registration with any Governmental
Authority or other Person.
5.5. No Violation. Neither the execution or delivery by the Company of
this Agreement or any Transaction Document to which the Company is a party, nor
the consummation or performance by the Company of the transactions contemplated
hereby or thereby will, directly or indirectly, (a) contravene, conflict with,
or result in a violation of any provision of the Organizational Documents of any
Acquired Company; (b) contravene, conflict with, constitute a default (or an
event or condition which, with notice or lapse of time or both,
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would constitute a default) under, or result in the termination or acceleration
of, or result in the imposition or creation of any Lien under, any agreement or
instrument to which any Acquired Company is a party or by which the properties
or assets of any Acquired Company are bound; (c) contravene, conflict with, or
result in a violation of, any Law or Order to which any Acquired Company, or any
of the properties or assets owned or used by any Acquired Company, may be
subject; or (d) contravene, conflict with, or result in a violation of, the
terms or requirements of, or give any Governmental Authority the right to
revoke, withdraw, suspend, cancel, terminate or modify, any licenses, permits,
authorizations, approvals, franchises or other rights held by any Acquired
Company or that otherwise relate to the business of, or any of the properties or
assets owned or used by, any Acquired Company, except, in the case of clause
(b), (c) or (d), for any such contraventions, conflicts, violations, or other
occurrences which would not reasonably be expected to have a Material Adverse
Effect.
5.6. Binding Obligations. Assuming this Agreement has and as of the
Closing the Transaction Documents will have been duly and validly authorized,
executed and delivered by the parties thereto other than the Company, this
Agreement has been, and as of the Closing each of the Transaction Documents to
which the Company is a party will be, duly authorized, executed and delivered by
the Company and constitutes or will constitute, as the case may be, the legal,
valid and binding obligations of the Company, enforceable against the Company in
accordance with its terms, except as such enforcement is limited by general
equitable principles, or by bankruptcy, insolvency and other similar Laws
affecting the enforcement of creditors rights generally.
5.7. Capitalization and Related Matters.
5.7.1. Capitalization. The authorized capital stock of the Company
consists of an unlimited number of shares of Common Stock, of which 24,983,770
shares are issued and are outstanding. There are $1,200,000 Canadian Dollars
aggregate principal amount of Company Debentures outstanding, plus accrued and
unpaid interest thereon, which are convertible, in the aggregate, into 5,454,545
shares of Common Stock. There are warrants issuable pursuant to the Company
Debentures upon the conversion thereof on a half warrant for each share of
Company Common Stock issued basis, exercisable at CAD$0.60 per share (the
"Company Warrants"). There are also 2,000,000 shares of Company Common Stock
reserved for issuance under Company Stock Options (the "Company Stock Options")
of which 2,000,000 have been granted and 2,000,000 remain unexercised. At
Closing the Company Stock Options will be cancelled and replaced by options
granted under the proposed Acquiror Stock Option Plan. Other than the Company
Debentures, the Company Stock Options and Company Warrants, there are no
outstanding or authorized options, warrants, purchase agreements, participation
agreements, subscription rights, conversion rights, exchange rights or other
securities or contracts that could require the Company to issue, sell or
otherwise cause to become outstanding any of its authorized but unissued shares
of capital stock or any Equity Security or to create, authorize, issue, sell or
otherwise cause to become outstanding any new class of capital stock. There are
no outstanding stockholders' agreements, voting trusts or arrangements,
registration rights agreements, rights of first refusal or other contracts
pertaining to the capital stock of the Company. The Shares and the Company
Debentures are duly authorized, validly issued, fully paid and nonassessable and
have
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not been issued in violation of any preemptive or similar rights of any Person
or in violation of any Law.
5.7.2. No Redemption Requirements. Except as set forth in Schedule
5.7.2, there are no outstanding contractual obligations (contingent or
otherwise) of the Company to retire, repurchase, redeem or otherwise acquire any
outstanding shares of capital stock of, or other ownership interests in, the
Company or to provide funds to or make any investment (in the form of a loan,
capital contribution or otherwise) in any other Person.
5.7.3. Subsidiaries. The capitalization of each Company Subsidiary
is as set forth on Schedule 5.7.3. The issued and outstanding shares of capital
stock of each Company Subsidiary set forth on such schedule have been duly
authorized and are validly issued and outstanding, fully paid and
non-assessable, and constitute all of the issued and outstanding capital stock
of such Company Subsidiary. The owners of the shares of each of the Company
Subsidiaries set forth on Schedule 5.7.3 own, and have good, valid and
marketable title to, all shares of capital stock of such Company Subsidiaries.
There are no outstanding or authorized options, warrants, purchase agreements,
participation agreements, subscription rights, conversion rights, exchange
rights or other securities or contracts that could require any of the Company
Subsidiaries to issue, sell or otherwise cause to become outstanding any of its
respective authorized but unissued shares of capital stock or Equity Security,
or to create, authorize, issue, sell or otherwise cause to become outstanding
any new class of capital stock. There are no outstanding stockholders'
agreements, voting trusts or arrangements, registration rights agreements,
rights of first refusal or other contracts pertaining to the capital stock of
any of the Company Subsidiaries. None of the outstanding shares of capital stock
of any of the Company Subsidiaries has been issued in violation of any rights of
any Person or in violation of any Law.
5.8. Financial Statements. Attached as Schedule 5.8 are the Company's
audited consolidated financial statements for the period ended October 31, 2003
and the Company's unaudited consolidated financial statements for the period
ended March 31, 2004, including, in each case, the notes thereto (the "Company
Interim Financial Statements"). The Company Interim Financial Statements: (a)
are in accordance with the books and records of the Acquired Companies; (b)
present fairly the financial condition and the results of operations, changes in
stockholder's equity and cash flow of the Acquired Companies for the periods
therein specified; and (c) have been prepared in accordance with GAAP applied on
a consistent basis during the periods concerned.
5.9. Shareholders. Exhibit A contains a true and complete list of the
names and addresses of the record and beneficial holders of the Shares and the
Company Debentures. Except as expressly provided in this Agreement, no
Shareholder or holder of any other security of the Company or any other Person
is entitled to any preemptive right, right of first refusal or similar right in
connection with the exchange of the Shares and the Company Debentures or any
other transaction contemplated by this Agreement or the Transaction Documents.
There is no voting trust, agreement or arrangement among any of the Shareholders
affecting the exercise of the voting rights of any Shares.
5.10. Compliance with Laws. Except as would not reasonably be expected to
have a Material Adverse Effect: (i) the business and operations of each Acquired
Company have been
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and are being conducted in accordance with all applicable Laws and Orders; (ii)
no Acquired Company has received notice of any violation (or any Proceeding
involving an allegation of any violation) of any applicable Law or Order by or
affecting such Acquired Company and, to the knowledge of the Company, no
Proceeding involving an allegation of violation of any applicable Law or Order
is threatened or contemplated; and (iii) no Acquired Company is subject to any
obligation or restriction of any kind or character, nor is there, to the
knowledge of the Company, any event or circumstance relating to any Acquired
Company that materially and adversely affects in any way its business,
properties, assets or prospects or that prohibits the Company from entering into
this Agreement or any Transaction Document to which it is a party or would
prevent its performance of or compliance with all or any part of this Agreement
or any Transaction Document to which it is a party or the consummation of the
transactions contemplated hereby and thereby.
5.11. No Brokers or Finders. Except as disclosed in Schedule 5.11, no
Person has, or as a result of the transactions contemplated herein will have,
any right or valid claim against any Acquired Company for any commission, fee or
other compensation as a finder or broker, or in any similar capacity, and the
Company shall indemnify and hold the Acquiror harmless against any liability or
expense arising out of, or in connection with, any such claim.
5.12. Employees.
5.12.1. Schedule 5.12.1 sets forth a true, correct and complete list
of each employee of the Acquired Companies. Except as would not reasonably be
expected to have a Material Adverse Effect, each Acquired Company is in full
compliance with all Laws regarding employment, wages, hours, benefits, the
payment of Taxes, occupational safety and health. No Acquired Company is liable
for the payment of any compensation, damages, Taxes, fines, penalties or other
amounts, however designated, for failure to comply with any of the foregoing
Laws.
5.12.2. Except as set forth on Schedule 5.12.2, each employee of
each Acquired Company is employed on an at-will basis and no Acquired Company
has any contract with any of its employees which would interfere with such
Acquired Company's ability to discharge its employees.
5.13. Litigation; Orders. Except as would not reasonably be expected
to have a Material Adverse Effect, there is no Proceeding (whether federal,
state, local or foreign) pending or, to the knowledge of the Company, threatened
against or affecting any Acquired Company or any Acquired Company's properties,
assets, business or employees. To the knowledge of the Company, there is no fact
that might result in or form the basis for any such Proceeding. No Acquired
Company is subject to any Orders.
5.14. Interested Party Transactions. Except as disclosed in Schedule 5.14,
no officer, director or stockholder of any Acquired Company or any Affiliate or
"associate" (as such term is defined in Rule 405 of the Commission under the
Securities Act) of any such Person has or has had, either directly or
indirectly, (1) an interest in any Person which (a) furnishes or sells services
or products which are furnished or sold or are proposed to be furnished or sold
by any Acquired Company, or (b) purchases from or sells or furnishes to, or
proposes to purchase from, sell to or
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furnish any Acquired Company any goods or services; or (2) a beneficial interest
in any contract or agreement to which any Acquired Company is a party or by
which it may be bound or affected.
5.15. Title to and Condition of Properties. Except as would not reasonably
be expected to have a Material Adverse Effect, each Acquired Company owns (with
good and marketable title in the case of real property) or holds under valid
leases or other rights to use all real property, plants, machinery, equipment
and other personal property necessary for the conduct of its business as
presently conducted, free and clear of all Liens, except Permitted Liens. The
material buildings, plants, machinery and equipment necessary for the conduct of
the business of each Acquired Company as presently conducted are structurally
sound, are in good operating condition and repair and are adequate for the uses
to which they are being put, and none of such buildings, plants, machinery or
equipment is in need of maintenance or repairs, except for ordinary, routine
maintenance and repairs that are not material in nature or cost. The buildings,
plants, machinery, equipment and other personal property of the Acquired
Companies are sufficient for the continued conduct of the Acquired Companies'
businesses after the Closing in substantially the same manner as conducted prior
to the Closing.
5.16. Board Recommendation; Shareholder Approval. The Company Board, at a
meeting duly called and held, has by unanimous vote of those directors present
(who constituted 100% of the directors then in office), determined that this
Agreement and the transactions contemplated by this Agreement, are advisable and
in the best interests of the Company's Shareholders. The Shareholders, by
unanimous written consent, have approved this Agreement and the transactions
contemplated by this Agreement.
5.17. Absence of Undisclosed Liabilities. Except as set forth on Schedule
5.17, no Acquired Company has any debt, obligation or liability (whether
accrued, absolute, contingent, liquidated or otherwise, whether due or to become
due, whether or not known to such Acquired Company) arising out of any
transaction entered into at or prior to the Closing, or any act or omission at
or prior to the Closing, except (a) to the extent set forth on or reserved
against on the Company Balance Sheet; or (b) current liabilities incurred and
obligations under agreements entered into, in the usual and ordinary course of
business since October 31, 2003, none of which would reasonably be expected to
have a Material Adverse Effect.
5.18. Changes. Except as set forth on Schedule 5.18, no Acquired Company
has, since October 31, 2003:
5.18.1. Ordinary Course of Business. Conducted its business or
entered into any transaction other than in the usual and ordinary course of
business, except for this Agreement.
5.18.2. Adverse Changes. Suffered or experienced any change in, or
affecting, its condition (financial or otherwise), properties, assets,
liabilities, business, operations, results of operations or prospects other than
changes, events or conditions in the usual and ordinary course of its business,
none of which would reasonably be expected to have a Material Adverse Effect;
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5.18.3. Loans. Made any loans or advances to any Person other than
travel advances and reimbursement of expenses made to employees, officers and
directors in the ordinary course of business;
5.18.4. Liens. Created or permitted to exist any Lien on any
material property or asset of the Acquired Companies, other than Permitted
Liens;
5.18.5. Capital Stock. Issued, sold, disposed of or encumbered, or
authorized the issuance, sale, disposition or encumbrance of, or granted or
issued any option to acquire any shares of its capital stock or any other of its
securities or any Equity Security, or altered the term of any of its outstanding
securities or made any change in its outstanding shares of capital stock or its
capitalization, whether by reason of reclassification, recapitalization, stock
split, combination, exchange or readjustment of shares, stock dividend or
otherwise;
5.18.6. Dividends. Declared, set aside, made or paid any dividend or
other distribution to any of its stockholders;
5.18.7. Employees. Materially increased the compensation or other
remuneration or benefits payable or to become payable to any of its directors,
executive officers or employees, except for increases in the ordinary course of
business, or entered into any employment, severance or similar contracts with
any of the foregoing;
5.18.8. Company Benefit Plans. Adopted, amended or increased the
payments to or benefits under any Company Benefit Plan;
5.18.9. Material Company Contracts. Entered into, terminated or
modified any Material Company Contract, except for termination upon expiration
in accordance with the terms thereof;
5.18.10. Claims. Released, waived or cancelled any claims or rights
relating to or affecting such Acquired Company in excess of $10,000 in the
aggregate or instituted or settled any Proceeding involving in excess of $10,000
in the aggregate;
5.18.11. Discharged Liabilities. Paid, discharged or satisfied any
claim, obligation or liability in excess of $10,000 in the aggregate, except for
liabilities incurred prior to the date of this Agreement in the ordinary course
of business;
5.18.12. Indebtedness. Created, incurred, assumed or otherwise
become liable for any Indebtedness in excess of $10,000 in the aggregate;
5.18.13. Guarantees. Guaranteed or endorsed in a material amount any
obligation of any Person;
5.18.14. Acquisitions. Acquired the capital stock or other
securities or any ownership interest in, or substantially all of the assets of,
any other Person;
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5.18.15. Accounting. Changed its method of accounting or the
accounting principles or practices used in the preparation of its financial
statements, other than as required by GAAP;
5.18.16. Intellectual Property. Granted any license, sublicense or
other rights of use with respect to any Intellectual Property of the Acquired
Companies.
5.18.17. Agreements. Except as set forth on Schedule 5.18.17,
entered into any agreement, or otherwise obligated itself, to do any of the
foregoing.
5.19. Material Company Contracts.
5.19.1. The Company has made available to the Acquiror, prior to the
date of this Agreement, true, correct and complete copies of each Material
Company Contract, including each amendment, supplement and modification relating
thereto. Each Material Company Contract is a valid and binding agreement of the
Acquired Company that is party thereto, and is in full force and effect.
5.19.2. Except as would not reasonably be expected to have a
Material Adverse Effect, no Acquired Company is in breach or default of any
Material Company Contract to which it is a party and, to the knowledge of the
Company, no other party to any Material Company Contract is in breach or default
thereof. No Acquired Company has received notice of the pending or threatened
cancellation, revocation or termination of any Material Company Contract to
which it is a party. There are no renegotiations of, or attempts to renegotiate,
or outstanding rights to renegotiate any material terms of any Material Company
Contract.
5.20. Tax Matters.
5.20.1. Except as set forth on Schedule 5.20.1, (a) all material Tax
Returns required to be filed by or on behalf of the Acquired Companies have been
timely filed and all such Tax Returns were (at the time they were filed) and are
true, correct and complete in all material respects; (b) all material Taxes of
each Acquired Company required to have been paid (whether or not reflected on
any Tax Return) have been fully and timely paid, except those Taxes which are
presently being contested in good faith or for which an adequate reserve for the
payment of such Taxes has been established on the Company Balance Sheet; (c) no
waivers of statutes of limitation have been given or requested with respect to
any Acquired Company in connection with any Tax Returns covering such Acquired
Company or with respect to any Taxes payable by it; (d) no Governmental
Authority in a jurisdiction where an Acquired Company does not file Tax Returns
has made a claim, assertion or threat to such Acquired Company that such
Acquired Company is or may be subject to taxation by such jurisdiction; (e) each
Acquired Company has duly and timely collected or withheld, and paid over and
reported to the appropriate Governmental Authority all amounts required to be so
collected or withheld and paid over for all periods under all applicable Laws;
(f) there are no Liens with respect to Taxes on any Acquired Company's property
or assets other than Permitted Liens; (g) there are no Tax rulings, requests for
rulings, or closing agreements relating to any Acquired Company for any period
(or portion of a period) that would affect any period after the date hereof; and
(h) any adjustment of
D - 19
Taxes of an Acquired Company made by a Governmental Authority in any examination
that such Acquired Company is required to report to the appropriate state, local
or foreign taxing authorities has been reported, and any additional Taxes due
with respect thereto have been paid.
5.20.2. Each Acquired Company is treated as a corporation for U.S.
federal income tax purposes, and no Acquired Company has made an election under
Treasury Regulation Section 301.7701-3 to be treated as a partnership.
5.20.3. No Acquired Company is, or has ever been, a controlled
foreign corporation, as that term is defined in Section 957 of the Code and the
Treasury Regulations promulgated thereunder.
5.20.4. There is no pending Proceeding with respect to any Taxes of
the Acquired Companies, nor, to the knowledge of the Company, is any such
Proceeding threatened. The Company has made available to the Acquiror, prior to
the date of this Agreement, true, correct and complete copies of all Tax
Returns, examination reports and statements of deficiencies assessed or asserted
against or agreed to by the Acquired Companies since their inception and any and
all correspondence with respect to the foregoing.
5.20.5. No Acquired Company is a party to any Tax allocation or
sharing agreement.
5.21. Material Assets. The Company Preliminary Financial Statements
reflect, and the Company Audited Financial Statements will reflect, the material
properties and assets (real and personal) owned or leased by each Acquired
Company and necessary for the conduct of its business as presently conducted,
and include all of the operating assets of the Acquired Companies. The Acquired
Companies have good and marketable title to, or a valid leasehold interest in,
such properties and assets, free and clear of all Liens, other than Permitted
Liens. Such properties and assets are sufficient for the continued conduct of
the Acquired Companies' businesses after the Closing in substantially the same
manner as conducted prior to the Closing. No Affiliate of any Acquired Company
or the Shareholders which is not also an Acquired Company owns or otherwise has
any interest in or right to use any properties or assets used or held for use
in, or otherwise arising from or relating to, the business of the Acquired
Companies.
5.22. Insurance Coverage. The Company has made available to the Acquiror,
prior to the date of this Agreement, true, correct and complete copies of all
insurance policies maintained by each Acquired Company on its properties and
assets. Except as would not reasonably be expected to have a Material Adverse
Effect, all of such policies (a) taken together, provide adequate insurance
coverage for the properties, assets and operations of each Acquired Company for
all risks normally insured against by a Person carrying on the same business as
such Acquired Company, and (b) are sufficient for compliance with all applicable
Laws and Material Company Contracts. All of such policies are valid, outstanding
and in full force and effect and, by their express terms, will continue in full
force and effect following the consummation of the transactions contemplated by
this Agreement. There are no pending claims with respect to any Acquired Company
or its properties or assets under any such insurance policies, and there are no
D - 20
claims as to which the insurers have notified any Acquired Company that they
intend to deny liability. There is no existing default under any such insurance
policy.
5.23. Intellectual Property. Each Acquired Company owns, licenses or
otherwise has the legal right to use all Intellectual Property used in its
business as currently conducted. The Company is not aware of any violation or
infringement of any of the Intellectual Property of any Acquired Company.
Neither the execution nor delivery of this Agreement or the agreements
contemplated by this Agreement, nor the carrying on of the Acquired Companies'
businesses by the employees of the Acquired Companies, nor the conduct of the
Acquired Companies' businesses as proposed will, to the knowledge of the
Company, conflict with or result in a breach of the terms, conditions, or
provisions of, or constitute a default under, any contract, covenant, or
instrument under which any of such employees is now obligated which would have a
material impact on the ability of the Company to conduct its business. To the
knowledge of the Company, it is not necessary for any Acquired Company to use in
its business any inventions, trade secrets or proprietary information of any of
its officers, employees, consultants or persons it currently intends to hire
made prior to their employment with any such Acquired Company, except for
inventions, trade secrets or proprietary information that have been assigned to
such Acquired Company.
5.24. Employee Benefits. Except as set forth on Schedule 5.24, no Acquired
Company has in effect any employment agreements, consulting agreements, deferred
compensation, pension or retirement agreements or arrangements, bonus,
severance, incentive or profit-sharing plans or arrangements, or labor or
collective bargaining agreements, written or oral. To the knowledge of the
Company, none of the officers or other key employees of any Acquired Company
presently intends to terminate his or her employment. Each Acquired Company is
in compliance in all material respects with all applicable laws and regulations
relating to labor, employment, fair employment practices, terms and conditions
of employment, and wages and hours. Upon termination of the employment of any
employees, no Acquired Company will be obligated to provide advance notice of
termination of employment or be liable to any such employees for so-called
"severance pay" or retiree health benefits. Each Acquired Company is in material
compliance with the terms of all plans, and programs relating to employment,
including, without limitation, those plans and programs listed on Schedule 5.24,
and each such plan or program is in compliance with all of the requirements and
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and the Code and is terminable in the discretion of such Acquired
Company without liability to such Acquired Company upon or following such
termination. No such plan, or program has engaged in any "prohibited
transaction" as defined in Section 4975 of the Code or has incurred any
"accumulated funding deficiency" as defined in Section 302 of ERISA, nor has any
reportable event as defined in Section 4043(b) of ERISA occurred with respect to
any such plan or program. No Acquired Company has ever maintained, sponsored or
contributed to any plan which is subject to Title IV of ERISA or Section 412 of
the Code. At no time has any Acquired Company contributed to or been obligated
to contribute to any "multi-employer plan" as defined in Section 3(37) of ERISA.
With respect to each plan listed on Schedule 5.24, all required filings,
including all filings required to be made with the United States Department of
Labor and Internal Revenue Service, have been timely filed.
D - 21
5.25. Environmental and Safety Matters.
5.25.1. Each Acquired Company has at all times been and is in
material compliance with all Environmental Laws applicable to such Acquired
Company.
5.25.2. There are no Proceedings pending or threatened against any
Acquired Company alleging the violation of any Environmental Law or
Environmental Permit applicable to such Acquired Company, or alleging that such
Acquired Company is a potentially responsible party for any environmental site
contamination.
5.25.3. Neither this Agreement nor the consummation of the
transactions contemplated by this Agreement shall impose any obligations to
notify or obtain the consent of any Governmental Authority or third Persons
under any Environmental Laws applicable to any Acquired Company.
5.26. Product Liability and Recalls.
5.26.1. Except as would not reasonably be expected to have a
Material Adverse Effect, there are no losses, damages, expenses or liabilities
(whether absolute, accrued, contingent or otherwise) against any Acquired
Company asserted and arising out of or based upon incidents occurring on or
prior to the date hereof with respect to: (a) any product liability or any
similar claim that relates to any of the products designed, developed,
manufactured, produced, distributed, supplied or sold by such Acquired Company
to others; (b) the delivery of faulty services; or (c) any claim for the breach
of any express or limited product warranty, or any similar claim that relates to
any product designed, developed, manufactured, produced, distributed, supplied
or sold, or any service delivered, by such Acquired Company, and the Company has
no knowledge of any product or service defects which could give rise to any such
losses, claims, damages, expenses or liabilities.
5.26.2. To the knowledge of the Company, there exists no basis for
the recall, withdrawal or suspension by order of any Governmental Authority of
any product designed, developed, manufactured, produced, distributed, supplied
or sold by any Acquired Company. To the knowledge of the Company, there are no
defects in the designs, specifications, or process with respect to any product
designed, manufactured, sold, supplied or distributed by any Acquired Company
that would give rise to any liability. There has been no recall, withdrawal, or
suspension from the market of any product designed, manufactured, sold, supplied
or distributed by any Acquired Company.
SECTION VI
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE ACQUIROR
The Acquiror represents, warrants and covenants to the Shareholders and
the Company as follows:
6.1. Organization and Qualification. Each of the Acquiror Companies is
duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization, has all requisite authority and power (corporate
and other), governmental licenses, authorizations,
D - 22
consents and approvals to carry on its business as presently conducted and to
own, hold and operate its properties and assets as now owned, held and operated
by it, except where the failure to be so organized, existing and in good
standing, or to have such authority and power, governmental licenses,
authorizations, consents or approvals would not reasonably be expected to have a
Material Adverse Effect. Each of the Acquiror Companies is duly qualified,
licensed or domesticated as a foreign corporation in good standing in each
jurisdiction wherein the nature of its activities or its properties owned, held
or operated makes such qualification, licensing or domestication necessary,
except where the failure to be so duly qualified, licensed or domesticated and
in good standing would not reasonably be expected to have a Material Adverse
Effect. Schedule 6.1 sets forth a true, complete and correct list of each
Acquiror Company's jurisdiction of organization and each other jurisdiction in
which such Acquiror Company presently conducts its business or owns, holds and
operates its properties and assets.
6.2. Subsidiaries. Except as set forth on Schedule 6.2, no Acquiror
Company owns, directly or indirectly, any equity or other ownership interest in
any corporation, partnership, joint venture or other entity or enterprise.
6.3. Organizational Documents. Acquiror has delivered true, correct and
complete copies of the Organizational Documents of each Acquiror Company to the
Company prior to the execution of this Agreement, and no action has been taken
to amend or repeal such Organizational Documents. No Acquiror Company is in
violation or breach of any of the provisions of its Organizational Documents,
except for such violations or breaches as would not reasonably be expected to
have a Material Adverse Effect.
6.4. Authorization. The Acquiror has all requisite authority and power
(corporate and other), governmental licenses, authorizations, consents and
approvals to enter into this Agreement and each of the Transaction Documents to
which the Acquiror is a party, to consummate the transactions contemplated by
this Agreement and each of the Transaction Documents to which the Acquiror is a
party and to perform its obligations under this Agreement and each of the
Transaction Documents to which the Acquiror is a party. Except as set forth on
Schedule 6.4, the execution, delivery and performance by the Acquiror of this
Agreement and each of the Transaction Documents to which the Acquiror is a party
have been duly authorized by all necessary corporate action and do not require
from the Acquiror Board or the stockholders of the Acquiror any consent or
approval that has not been validly and lawfully obtained. The execution,
delivery and performance by the Acquiror of this Agreement and each of the
Transaction Documents to which the Acquiror is a party requires no
authorization, consent, approval, license, exemption of or filing or
registration with any Governmental Authority or other Person other than (a) the
filing of a Definitive Proxy Statement and related materials with the Commission
in connection with the Required Acquiror Stockholder Actions; (b) the filing of
a Certificate of Amendment to Acquiror's Certificate of Incorporation with the
Secretary of State of Delaware which, among other things, increases the
authorized number of shares of Acquiror's Common Stock to 400,000,000 shares
(the "Charter Amendment"); and (c) such other customary filings with the
Commission for transactions of the type contemplated by this Agreement.
6.5. No Violation. Neither the execution or delivery by the Acquiror of
this Agreement or any Transaction Document to which the Acquiror is a party, nor
the consummation
D - 23
or performance by the Acquiror of the transactions contemplated hereby or
thereby will, directly or indirectly, (a) contravene, conflict with, or result
in a violation of any provision of the Organizational Documents of any Acquiror
Company; (b) contravene, conflict with, constitute a default (or an event or
condition which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination or acceleration of, or result in
the imposition or creation of any Lien under, any agreement or instrument to
which any Acquiror Company is a party or by which the properties or assets of
any Acquiror Company are bound; (c) contravene, conflict with, or result in a
violation of, any Law or Order to which any Acquiror Company, or any of the
properties or assets owned or used by any Acquiror Company, may be subject; or
(d) contravene, conflict with, or result in a violation of, the terms or
requirements of, or give any Governmental Authority the right to revoke,
withdraw, suspend, cancel, terminate or modify, any licenses, permits,
authorizations, approvals, franchises or other rights held by any Acquiror
Company or that otherwise relate to the business of, or any of the properties or
assets owned or used by, any Acquiror Company, except, in the case of clause
(b), (c), or (d), for any such contraventions, conflicts, violations, or other
occurrences which would not reasonably be expected to have a Material Adverse
Effect.
6.6. Binding Obligations. Assuming this Agreement has been and as of the
Closing the Transaction Documents will have been duly and validly authorized,
executed and delivered by the parties thereto other than the Acquiror, this
Agreement has been, and as of the Closing each of the Transaction Documents to
which the Acquiror is a party will be, duly authorized, executed and delivered
by the Acquiror and constitutes or will constitute, as the case may be, the
legal, valid and binding obligations of the Acquiror, enforceable against the
Acquiror in accordance with its terms, except as such enforcement is limited by
general equitable principles, or by bankruptcy, insolvency and other similar
Laws affecting the enforcement of creditors rights generally.
6.7. Securities Laws. Assuming the accuracy of the representations and
warranties of the Shareholders contained in Section 4 and Exhibits D and E, the
issuance of the Acquiror Shares pursuant to this Agreement have been or, on or
prior to the Closing Date, will be (a) exempt from the registration and
prospectus delivery requirements of the Securities Act, (b) registered or
qualified (or are exempt from registration and qualification) under the
registration permit or qualification requirements of all applicable state
securities laws, and (c) accomplished in conformity with all other applicable
federal and state securities laws.
6.8. Capitalization and Related Matters.
6.8.1. Capitalization. The authorized capital stock of the Acquiror
consists of 150,000,000 shares of the Acquiror's Common Stock, of which (a)
82,704,871 shares are issued and outstanding, and (b) 11,735,589 shares are
reserved for issuance upon the exercise of outstanding options and warrants to
purchase the Acquiror's Common Stock. All issued and outstanding shares of the
Acquiror's Common Stock are duly authorized, validly issued, fully paid and
nonassessable, and have not been issued in violation of any preemptive or
similar rights. Except as disclosed in Schedule 6.8.1 or the SEC Documents,
there are no outstanding or authorized options, warrants, purchase agreements,
participation agreements, subscription rights, conversion rights, exchange
rights or other securities or contracts that could require the Acquiror
D - 24
to issue, sell or otherwise cause to become outstanding any of its authorized
but unissued shares of capital stock or any securities convertible into,
exchangeable for, or carrying a right or option to purchase, shares of capital
stock or to create, authorize, issue, sell or otherwise cause to become
outstanding any new class of capital stock. There are no outstanding
stockholders' agreements, voting trusts or arrangements, registration rights
agreements, rights of first refusal or other contracts pertaining to the capital
stock of the Acquiror.
6.8.2. No Redemption Requirements. Except as set forth in Schedule
6.8.2 or in the SEC Documents, there are no outstanding contractual obligations
(contingent or otherwise) of the Acquiror to retire, repurchase, redeem or
otherwise acquire any outstanding shares of capital stock of, or other ownership
interests in, the Acquiror or to provide funds to or make any investment (in the
form of a loan, capital contribution or otherwise) in any other Person.
6.8.3. Duly Authorized. Assuming the occurrence of the Required
Acquiror Stockholder Actions and the filing of the Charter Amendment, the
issuance of the Acquiror Shares will be duly authorized and, upon delivery to
the Shareholders of certificates therefor in accordance with the terms of this
Agreement, the Acquiror Shares will have been validly issued, fully paid and
nonassessable, and will be free of preemptive rights and will be free and clear
of all Liens and restrictions, other than Liens created by the Shareholders and
restrictions on transfer imposed by this Agreement and the Securities Act.
6.8.4. Subsidiaries. The capitalization of each Acquiror Subsidiary
is as set forth on Schedule 6.8.4. The issued and outstanding shares of capital
stock of each Acquiror Subsidiary set forth on such schedule have been duly
authorized and are validly issued and outstanding, fully paid and
non-assessable, and constitute all of the issued and outstanding capital stock
of such Acquiror Subsidiary. The owners of the shares of each of the Acquiror
Subsidiaries set forth on Schedule 6.8.4 own, and have good, valid and
marketable title to, all shares of capital stock of such Acquiror Subsidiaries.
There are no outstanding or authorized options, warrants, purchase agreements,
participation agreements, subscription rights, conversion rights, exchange
rights or other securities or contracts that could require any of the Acquiror
Subsidiaries to issue, sell or otherwise cause to become outstanding any of its
respective authorized but unissued shares of capital stock or Equity Securities
or to create, authorize, issue, sell or otherwise cause to become outstanding
any new class of capital stock. There are no outstanding stockholders'
agreements, voting trusts or arrangements, registration rights agreements,
rights of first refusal or other contracts pertaining to the capital stock of
any of the Acquiror Subsidiaries. None of the outstanding shares of capital
stock of any of the Acquiror Subsidiaries has been issued in violation of any
rights of any Person or in violation of any Law.
6.8.5. Financial Statements. The Acquiror Balance Sheet, and audited
consolidated statements of income and retained earnings and cash flows of
Acquiror for the year ended December 31, 2003 (collectively with the Acquiror
Balance Sheet, the "Acquiror Financial Statements"), are contained in the SEC
Documents. The Acquiror Financial Statements have been prepared in accordance
with GAAP applied on a consistent basis during the periods involved and fairly
present in all material respects the consolidated financial position of Acquiror
as of the dates thereof and its consolidated results of operations and cash
flows for the periods then ended.
D - 25
6.9. Compliance with Laws. Except as would not reasonably be expected to
have a Material Adverse Effect: (i) the business and operations of each Acquiror
Company have been and are being conducted in accordance with all applicable Laws
and Orders; (ii) no Acquiror Company has received notice of any violation (or
any Proceeding involving an allegation of any violation) of any applicable Law
or Order by or affecting such Acquiror Company and, to the knowledge of the
Acquiror, no Proceeding involving an allegation of violation of any applicable
Law or Order is threatened or contemplated; and (iii) no Acquiror Company is
subject to any obligation or restriction of any kind or character, nor is there,
to the knowledge of the Acquiror, any event or circumstance relating to any
Acquiror Company that materially and adversely affects in any way its business,
properties, assets or prospects or that prohibits the Acquiror from entering
into this Agreement or any Transaction Document to which it is a party or would
prevent its performance of or compliance with all or any part of this Agreement
or any Transaction Document to which it is a party or the consummation of the
transactions contemplated hereby or thereby.
6.10. No Brokers or Finders. Except as disclosed in Schedule 6.10, no
Person has, or as a result of the transactions contemplated herein will have,
any right or valid claim against any Acquiror Company for any commission, fee or
other compensation as a finder or broker, or in any similar capacity, and the
Acquiror will indemnify and hold the Company harmless against any liability or
expense arising out of, or in connection with, any such claim.
6.11. Employees.
6.11.1. Except as set forth on Schedule 6.11.1, the Acquiror
Companies have no employees, independent contractors or other Persons providing
research or other services to them. Except as would not reasonably be expected
to have a Material Adverse Effect, each Acquiror Company is in full compliance
with all Laws regarding employment, wages, hours, benefits, equal opportunity,
collective bargaining, the payment of Social Security and other taxes,
occupational safety and health and plant closing. No Acquiror Company is liable
for the payment of any compensation, damages, taxes, fines, penalties or other
amounts, however designated, for failure to comply with any of the foregoing
Laws.
6.11.2. Except as set forth on Schedule 6.11.2, each employee of
each Acquiror Company is employed on an at-will basis and no Acquiror Company
has any contract with any of its employees which would interfere with such
Acquiror Company's ability to discharge its employees.
6.12. Litigation; Orders. Except as would not reasonably be expected to
have a Material Adverse Effect, there is no Proceeding (whether federal, state,
local or foreign) pending or, to the knowledge of the Acquiror, threatened
against or affecting any Acquiror Company or any Acquiror Company's properties,
assets, business or employees. To the knowledge of the Acquiror, there is no
fact that might result in or form the basis for any such Proceeding. No Acquiror
Company is subject to any Orders.
6.13. Interested Party Transactions. Except as disclosed in Schedule 6.13,
no officer, director or stockholder of any Acquiror Company or any Affiliate or
"associate" (as such term is
D - 26
defined in Rule 405 of the Commission under the Securities Act) of any such
Person has or has had, either directly or indirectly, (1) an interest in any
Person which (a) furnishes or sells services or products which are furnished or
sold or are proposed to be furnished or sold by any Acquiror Company, or (b)
purchases from or sells or furnishes to, or proposes to purchase from, sell to
or furnish any Acquiror Company any goods or services; or (2) a beneficial
interest in any contract or agreement to which any Acquiror Company is a party
or by which it may be bound or affected.
6.14. Title to and Condition of Properties. Except as would not reasonably
be expected to have a Material Adverse Effect, each Acquiror Company owns (with
good and marketable title in the case of real property) or holds under valid
leases or other rights to use all real property, plants, machinery, equipment
and other personal property necessary for the conduct of its business as
presently conducted, free and clear of all Liens, except Permitted Liens. The
material buildings, plants, machinery and equipment necessary for the conduct of
the business of each Acquiror Company as presently conducted are structurally
sound, are in good operating condition and repair and are adequate for the uses
to which they are being put, and none of such buildings, plants, machinery or
equipment is in need of maintenance or repairs, except for ordinary, routine
maintenance and repairs that are not material in nature or cost.
6.15. Absence of Undisclosed Liabilities. Except as set forth on Schedule
6.15 or in the SEC Documents, no Acquiror Company has any debt, obligation or
liability (whether accrued, absolute, contingent, liquidated or otherwise,
whether due or to become due, whether or not known to such Acquiror Company)
arising out of any transaction entered into at or prior to the Closing, or any
act or omission at or prior to the Closing, except (a) to the extent set forth
on or reserved against on the Acquiror Balance Sheet, or (b) current liabilities
incurred and obligations under agreements entered into, in the usual and
ordinary course of business since December 31, 2003, none of which would
reasonably be expected to have a Material Adverse Effect.
6.16. Changes. Except as set forth on Schedule 6.16 or in the SEC
Documents, no Acquiror Company has, since December 31, 2003:
6.16.1. Ordinary Course of Business. Conducted its business or
entered into any transaction other than in the usual and ordinary course of
business, except for this Agreement.
6.16.2. Adverse Changes. Suffered or experienced any change in, or
affecting, its condition (financial or otherwise), properties, assets,
liabilities, business, operations, results of operations or prospects other than
changes, events or conditions in the usual and ordinary course of its business,
none of which would reasonably be expected to have a Material Adverse Effect;
6.16.3. Loans. Made any loans or advances to any Person other than
travel advances and reimbursement of expenses made to employees, officers and
directors in the ordinary course of business;
6.16.4. Liens. Created or permitted to exist any Lien on any
material property or asset of the Acquiror Companies, other than Permitted
Liens;
D - 27
6.16.5. Capital Stock. Issued, sold, disposed of or encumbered, or
authorized the issuance, sale, disposition or encumbrance of, or granted or
issued any option to acquire any shares of its capital stock or any other of its
securities or any Equity Security, or altered the term of any of its outstanding
securities or made any change in its outstanding shares of capital stock or its
capitalization, whether by reason of reclassification, recapitalization, stock
split, combination, exchange or readjustment of shares, stock dividend or
otherwise;
6.16.6. Dividends. Declared, set aside, made or paid any dividend or
other distribution to any of its stockholders;
6.16.7. Material Acquiror Contracts. Entered into, terminated or
modified any Material Acquiror Contract, except for termination upon expiration
in accordance with the terms thereof;
6.16.8. Claims. Released, waived or cancelled any claims or rights
relating to or affecting such Acquiror Company in excess of $10,000 in the
aggregate or instituted or settled any Proceeding involving in excess of $10,000
in the aggregate;
6.16.9. Discharged Liabilities. Paid, discharged or satisfied any
claim, obligation or liability in excess of $10,000 in the aggregate, except for
liabilities incurred prior to the date of this Agreement in the ordinary course
of business;
6.16.10. Indebtedness. Created, incurred, assumed or otherwise
become liable for any Indebtedness in excess of $10,000 in the aggregate;
6.16.11. Guarantees. Guaranteed or endorsed in a material amount any
obligation of any Person;
6.16.12. Acquisitions. Acquired the capital stock or other
securities or any ownership interest in, or substantially all of the assets of,
any other Person;
6.16.13. Accounting. Changed its method of accounting or the
accounting principles or practices used in the preparation of its financial
statements, other than as required by GAAP;
6.16.14. Agreements. Except as set forth on Schedule 6.16.14 or in
the SEC Documents, entered into any agreement, or otherwise obligated itself, to
do any of the foregoing.
6.17. Material Acquiror Contracts.
6.17.1. Except to the extent filed with the SEC Documents, the
Acquiror has made available to the Company, prior to the date of this Agreement,
true, correct and complete copies of each written Material Acquiror Contract,
including each amendment, supplement and modification thereto. Each Material
Acquiror Contract is a valid and binding agreement of the Acquiror Company that
is party thereto, and is in full force and effect.
D - 28
6.17.2. No Defaults. Except as would not reasonably be expected to
have a Material Adverse Effect, no Acquiror Company is in breach or default of
any Material Acquiror Contract to which it is a party and, to the knowledge of
the Acquiror, no other party to any Material Acquiror Contract is in breach or
default thereof. No Acquiror Company has received notice of the pending or
threatened cancellation, revocation or termination of any Material Acquiror
Contract to which it is a party. There are no renegotiations of, or attempts to
renegotiate, or outstanding rights to renegotiate any material terms of any
Material Acquiror Contract.
6.18. Tax Matters.
6.18.1. Except as set forth on Schedule 6.18.1, (a) all material Tax
Returns required to be filed by or on behalf of the Acquiror Companies have been
timely filed and all such Tax Returns were (at the time they were filed) and are
true, correct and complete in all material respects; (b) all material Taxes of
each Acquiror Company required to have been paid (whether or not reflected on
any Tax Return) have been fully and timely paid, except those Taxes which are
presently being contested in good faith or for which an adequate reserve for the
payment of such Taxes has been established on the Acquiror Balance Sheet; (c) no
waivers of statutes of limitation have been given or requested with respect to
any Acquiror Company in connection with any Tax Returns covering such Acquiror
Company or with respect to any Taxes payable by it; (d) no Governmental
Authority in a jurisdiction where an Acquiror Company does not file Tax Returns
has made a claim, assertion or threat to such Acquiror Company that such
Acquiror Company is or may be subject to taxation by such jurisdiction; (e) each
Acquiror Company has duly and timely collected or withheld, paid over and
reported to the appropriate Governmental Authority all amounts required to be so
collected or withheld and paid over for all periods under all applicable laws;
(f) there are no Liens with respect to Taxes on any Acquiror Company's property
or assets other than Permitted Liens; (g) there are no Tax rulings, requests for
rulings, or closing agreements relating to any Acquiror Company for any period
(or portion of a period) that would affect any period after the date hereof; and
(h) any adjustment of Taxes of an Acquiror Company made by a Governmental
Authority in any examination that such Acquiror Company is required to report to
the appropriate state, local or foreign taxing authorities has been reported,
and any additional Taxes due with respect thereto have been paid.
6.18.2. Each Acquiror Company is treated as a corporation for U.S.
federal income tax purposes, and no Acquiror Company has made an election under
Treasury Regulation Section 301.7701-3 to be treated as a partnership.
6.18.3. No Acquiror Company is, or has ever been, a controlled
foreign corporation, as that term is defined in Section 957 of the Code and the
Treasury Regulations promulgated thereunder.
6.18.4. There is no pending Proceeding with respect to any Taxes of
the Acquiror Companies, nor, to the knowledge of the Acquiror, is any such
Proceeding threatened. The Acquiror has made available to the Company, prior to
the date of this Agreement, true, correct and complete copies of all Tax
Returns, examination reports and statements of
D - 29
deficiencies assessed or asserted against or agreed to by the Acquiror Companies
since their inception and any and all correspondence with respect to the
foregoing.
6.18.5. No Acquiror Company is a party to any Tax allocation or
sharing agreement.
6.19. Material Assets. The financial statements of the Acquiror set forth
in the SEC Documents reflect the material properties and assets (real and
personal) owned or leased by each Acquiror Company and necessary for the conduct
of its business as presently conducted, and include all of the operating assets
of the Acquiror Companies. The Acquiror Companies have good and marketable title
to, or a valid leasehold interest in, such properties and assets, free and clear
of all Liens, other than Permitted Liens. Such properties and assets are
sufficient for the continued conduct of the Acquiror Companies' businesses after
the Closing in substantially the same manner as conducted prior to the Closing.
No Affiliate of any Acquiror Company which is not also an Acquiror Company owns
or otherwise has any interest in or right to use any properties or assets used
or held for use in, or otherwise arising from or relating to, the business of
the Acquiror Companies.
6.20. Insurance Coverage. The Acquiror has made available to the Company,
prior to the date of this Agreement, true, correct and complete copies of all
insurance policies maintained by each Acquiror Company on its properties and
assets. Except as would not reasonably be expected to have a Material Adverse
Effect, all of such policies (a) taken together, provide adequate insurance
coverage for the properties, assets and operations of each Acquiror Company for
all risks normally insured against by a Person carrying on the same business as
such Acquiror Company, and (b) are sufficient for compliance with all applicable
Laws and Material Acquiror Contracts. All of such policies are valid,
outstanding and in full force and effect and, by their express terms, will
continue in full force and effect following the consummation of the transactions
contemplated by this Agreement. There are no pending claims with respect to any
Acquiror Company or its properties or assets under any such insurance policies,
and there are no claims as to which the insurers have notified any Acquiror
Company that they intend to deny liability. There is no existing default under
any such insurance policies.
6.21. Intellectual Property. Each Acquiror Company owns, licenses or
otherwise has the legal right to use all Intellectual Property for its business
as currently conducted. The Acquiror is not aware of any violation or
infringement of any of the Intellectual Property of any Acquiror Company.
Neither the execution nor delivery of this Agreement or the agreements
contemplated by this Agreement, nor the carrying on of the Acquiror Companies'
businesses by the employees of the Acquiror Companies, nor the conduct of the
Acquiror Companies' businesses as proposed will, to the knowledge of Acquiror,
conflict with or result in a breach of the terms, conditions, or provisions of,
or constitute a default under, any contract, covenant, or instrument under which
any of such employees is now obligated which would have a material impact on the
ability of the Acquiror to conduct its business. To the knowledge of the
Acquiror, it is not necessary for any Acquiror Company to utilize in its
business any inventions, trade secrets or proprietary information of any of its
officers, employees, consultants or persons it currently intends to hire made
prior to their employment with any such Acquiror Company,
D - 30
except for inventions, trade secrets or proprietary information that have been
assigned to such Acquiror Company.
6.22. SEC Documents. Except as set forth on Schedule 6.22, the Acquiror
has filed all reports required to be filed by it under the Exchange Act,
including pursuant to Section 13(a) or 15(d) thereof, for the three years
preceding the date hereof (or such shorter period as the Acquiror was required
by law to file such material) (the foregoing materials being collectively
referred to herein as the "SEC Documents"). The SEC Documents comply in all
material respects with the requirements of the Securities Act and the Exchange
Act and the rules and regulations of the Commission promulgated thereunder. All
material agreements to which the Acquiror is a party or to which the property or
assets of the Acquiror are subject have been appropriately filed as exhibits to
the SEC Documents as and to the extent required under the Exchange Act.
6.23. Employee Benefits. Except as set forth on Schedule 6.23, no Acquiror
Company has in effect any employment agreements, consulting agreements, deferred
compensation, pension or retirement agreements or arrangements, bonus,
severance, incentive or profit-sharing plans or arrangements, or labor or
collective bargaining agreements, written or oral. To the knowledge of the
Acquiror, none of the officers or other key employees of any Acquiror Company
presently intends to terminate his or her employment. Each Acquiror Company is
in compliance in all material respects with all applicable laws and regulations
relating to labor, employment, fair employment practices, terms and conditions
of employment, and wages and hours. Upon termination of the employment of any
employees, no Acquiror Company will be obligated to provide advance notice of
termination of employment or be liable to any such employees for so-called
"severance pay" or retiree health benefits. Each Acquiror Company is in material
compliance with the terms of all plans, and programs relating to employment,
including, without limitation, those plans and programs listed on Schedule 6.23,
and each such plan or program is in compliance with all of the requirements and
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and the Code and is terminable in the discretion of such Acquiror
Company without liability to such Acquiror Company upon or following such
termination. No such plan, or program has engaged in any "prohibited
transaction" as defined in Section 4975 of the Code or has incurred any
"accumulated funding deficiency" as defined in Section 302 of ERISA, nor has any
reportable event as defined in Section 4043(b) of ERISA occurred with respect to
any such plan or program. No Acquiror Company has ever maintained, sponsored or
contributed to any plan which is subject to Title IV of ERISA or Section 412 of
the Code. At no time has any Acquiror Company contributed to or been obligated
to contribute to any "multi-employer plan" as defined in Section 3(37) of ERISA.
With respect to each plan listed on Schedule 6.23, all required filings,
including all filings required to be made with the United States Department of
Labor and Internal Revenue Service, have been timely filed.
6.24. Environmental and Safety Matters.
6.24.1. Each Acquiror Company has at all times been and is in
material compliance with all Environmental Laws applicable to such Acquiror
Company.
D - 31
6.24.2. There are no Proceedings pending or threatened against any
Acquiror Company alleging the violation of any Environmental Law or
Environmental Permit applicable to such Acquiror Company or alleging that such
Acquiror Company is a potentially responsible party for any environmental site
contamination.
6.24.3. Neither this Agreement nor the consummation of the
transactions contemplated by this Agreement shall impose any obligations to
notify or obtain the consent of any Governmental Authority or third Persons
under any Environmental Laws applicable to any Acquiror Company.
6.25. Board Recommendation. The Acquiror Board, at a meeting duly called
and held, has determined that this Agreement and the transactions contemplated
by this Agreement are advisable and in the best interests of the Acquiror's
stockholders and has duly authorized this Agreement and the transactions
contemplated by this Agreement.
SECTION VII
COVENANTS OF THE COMPANY AND THE SHAREHOLDERS
7.1. Access and Investigation. Between the date of this Agreement and the
Closing Date, the Company shall, and shall cause each Company Subsidiary to, (a)
afford the Acquiror and its agents, advisors and attorneys during normal
business hours, full and free access to each Acquired Company's personnel,
properties, contracts, books and records, and other documents and data, (b)
furnish the Acquiror and its agents, advisors and attorneys with copies of all
such contracts, books and records, and other existing documents and data as the
Acquiror may reasonably request, and (c) furnish the Acquiror and its agents,
advisors and attorneys with such additional financial, operating, and other data
and information as the Acquiror may reasonably request.
7.2. Operation of the Business of the Company.
7.2.1. Between the date of this Agreement and the Closing Date, the
Company will, and will cause each Company Subsidiary to:
(a) conduct its business only in the ordinary course of
business;
(b) use its best efforts to preserve intact its current
business organization and business relationships, including, without
limitation, relationships with suppliers, customers, landlords, creditors,
officers, employees and agents;
(c) obtain the prior written consent of the Acquiror prior to
taking any action of the type specified in Section 5.18 or entering into
any Material Company Contract;
(d) confer with the Acquiror concerning operational matters of
a material nature; and
D - 32
(e) otherwise report periodically to the Acquiror concerning
the status of its business, operations, and finances.
7.2.2. Notwithstanding the foregoing, between the date of this
Agreement and the Closing Date, the Company shall not, and shall cause each
Company Subsidiary not to, directly or indirectly, without the prior written
consent of the Acquiror, engage in any transaction with, or enter into any
agreement with, the Company or any Company Subsidiary, any officer, director or
stockholder of the Company or any Company Subsidiary, or any Affiliate or
"associate" (as such term is defined in Rule 405 of the Commission under the
Securities Act) of any such Person.
7.3. No Transfers of Capital Stock.
7.3.1. Between the date of this Agreement and the Closing Date, the
Shareholders shall not assign, transfer, mortgage, pledge or otherwise dispose
of any or all of the Shares (or any interest therein) or grant any Person the
option or right to acquire such Shares (or any interest therein).
7.3.2. Between the date of this Agreement and the Closing Date, the
Company shall not, and shall cause each Company Subsidiary not to, assign,
transfer, mortgage, pledge or otherwise dispose of any or all of the capital
stock of any Acquired Company (or any interest therein) or grant any Person the
option or right to acquire the capital stock of any Acquired Company (or any
interest therein).
7.4. Required Filings and Approvals.
7.4.1. As promptly as practicable after the date of this Agreement,
the Company shall, and shall cause each Company Subsidiary to, make all filings
required to be made by it in order to consummate the transactions contemplated
by this Agreement, if applicable. Between the date of this Agreement and the
Closing Date, the Company shall, and shall cause each Company Subsidiary to, (a)
cooperate with the Acquiror with respect to all filings that the Acquiror elects
to make or is required to make in connection with the transactions contemplated
by this Agreement, and (b) cooperate with the Acquiror in obtaining any consents
or approvals required to be obtained by the Acquiror in connection herewith.
7.4.2. Without limiting the foregoing, the Company and the
Shareholders shall promptly furnish to the Acquiror any information reasonably
requested by the Acquiror in connection with the preparation, filing and mailing
of the Acquiror's proxy statement (the "Acquiror Proxy") for a meeting of its
stockholders to consider, among other things, the Required Acquiror Stockholder
Actions, including, without limitation, information concerning the Acquired
Companies, the Shareholders and the Company Nominees. The Company and each
Shareholder, severally and not jointly, represents and warrants to the Acquiror
that the information supplied by the Company and each Shareholder for inclusion
in the Acquiror Proxy will not, on the date the Acquiror Proxy is filed with the
Commission or first mailed to the stockholders of the Acquiror, contain any
statement which, at such time and in light of the circumstances under which it
shall be made, is false or misleading with respect to any material
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fact, or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not false or misleading. If,
at any time prior to the Closing Date, any information should be discovered by
the Company or any Shareholder which should be set forth in an amendment to the
Acquiror Proxy so that such Acquiror Proxy would not include any misstatement of
a material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, then the Company or such Shareholder, as the case may be, shall
promptly notify the Acquiror.
7.5. Notification. Between the date of this Agreement and the Closing
Date, the Company and the Shareholders will promptly notify the Acquiror in
writing if the Company, the Shareholders or any Company Subsidiary becomes aware
of any fact or condition that causes or constitutes a breach of any of the
representations and warranties of the Company or the Shareholders, as the case
may be, as of the date of this Agreement, or if the Company, any Shareholder or
any Company Subsidiary becomes aware of the occurrence after the date of this
Agreement of any fact or condition that would (except as expressly contemplated
by this Agreement) cause or constitute a breach of any such representation or
warranty had such representation or warranty been made as of the time of
occurrence or discovery of such fact or condition. Should any such fact or
condition require any change in the Schedules to this Agreement if the Schedules
to the Agreement were dated the date of the occurrence or discovery of any such
fact or condition, the Company or the Shareholders, as the case may be, will
promptly deliver to the Acquiror a supplement to the Schedules to the Agreement
specifying such change; provided, however, that such delivery shall not affect
any rights of the Acquiror set forth herein, including the right of the Acquiror
to seek a remedy in damages for losses incurred as a result of such supplemented
disclosure. During the same period, the Company and the Shareholders will, and
will cause each Company Subsidiary to, promptly notify the Acquiror of the
occurrence of any breach of any covenant of the Company or the Shareholders in
this Section 7 or of the occurrence of any event that may make the satisfaction
of the conditions in Section 9 impossible or unlikely.
7.6. Company Interim Financial Statements. At least seven days prior to
the Closing, the Company shall deliver to the Acquiror the Company's unaudited
interim consolidated financial statements for the period ended March 31, 2004,
including the notes thereto. The Company Interim Financial Statements shall (a)
be in accordance with the books and records of the Acquired Companies; (b)
present fairly the financial condition and the results of operations, changes in
stockholders' equity and cash flow of the Acquired Companies for the periods
therein specified; and (c) be prepared in accordance with GAAP applied on a
consistent basis during the periods concerned.
7.7. Closing Conditions. Between the date of this Agreement and the
Closing Date, each of the Company and the Shareholders will use its commercially
reasonable efforts to cause the conditions in Section 9 to be satisfied.
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SECTION VIII
COVENANTS OF THE ACQUIROR
8.1. Operation of the Business of the Acquiror. Between the date of this
Agreement and the Closing Date, the Acquiror shall, and shall cause each of the
Acquiror Subsidiaries to:
8.1.1. conduct its business only in the ordinary course of business;
8.1.2. use its best efforts to preserve intact the current business
organization and business relationships, including, without limitation,
relationships with suppliers, customers, landlords, creditors, officers,
employees and agents;
8.1.3. obtain the prior written consent of the Company prior to
taking any action of the type specified in Section 6.16 or entering into any
Material Acquiror Contract;
8.1.4. confer with the Company concerning operational matters of a
material nature; and
8.1.5. otherwise report periodically to the Company concerning the
status of its business, operations, and finances.
8.2. Required Filings and Approvals.
8.2.1. As promptly as practicable after the date of this Agreement,
the Acquiror shall, and shall cause each of the Acquiror Subsidiaries to, make
all filings legally required to be made by it to consummate the transactions
contemplated by this Agreement. Between the date of this Agreement and the
Closing Date, the Acquiror shall cooperate with the Company with respect to all
filings that the Company is legally required to make in connection with the
transactions contemplated hereby.
8.2.2. Without limiting the foregoing, as promptly as practicable
after the execution of this Agreement, the Acquiror shall prepare and file the
Acquiror Proxy with the Commission. The Acquiror will advise the Company,
promptly after it receives notice thereof, of any request by the Commission for
the amendment of the Acquiror Proxy or comments thereon and responses thereto or
requests by the Commission for additional information. The Acquiror shall mail
the Acquiror Proxy to its stockholders as promptly as practicable pursuant to
the Securities Act, the Exchange Act and the rules and regulations of the
Commission related thereto. Acquiror shall use its best efforts to hold the
stockholders meeting relating to the Required Acquiror Stockholder Action as
soon as practicable.
8.3. Notification. Between the date of this Agreement and the Closing
Date, the Acquiror will promptly notify the Company and the Shareholders in
writing if the Acquiror becomes aware of any fact or condition that causes or
constitutes a breach of any of the representations and warranties of the
Acquiror, as of the date of this Agreement, or if the Acquiror becomes aware of
the occurrence after the date of this Agreement of any fact or condition that
would (except as expressly contemplated by this Agreement) cause or constitute a
breach of any such representation or warranty had such representation or
warranty been made as of the time of occurrence or discovery of such fact or
condition. Should any such fact or condition require any change in the Schedules
to this Agreement if the Schedules to the Agreement were dated the date of the
occurrence or discovery of any such fact or condition, the
D - 35
Acquiror will promptly deliver to the Company and the Shareholders a supplement
to the Schedules to the Agreement specifying such change; provided, however,
that such delivery shall not affect any rights of the Shareholders set forth
herein, including the right of the Shareholders to seek a remedy in damages for
losses incurred as a result of such supplemented disclosure. During the same
period, the Acquiror will promptly notify the Company and the Shareholders of
the occurrence of any breach of any covenant of the Acquiror in this Section 8
or of the occurrence of any event that may make the satisfaction of the
conditions in Section 10 impossible or unlikely.
8.4. Closing Conditions. Between the date of this Agreement and the
Closing Date, the Acquiror will use commercially reasonable efforts to cause the
conditions in Section 10 to be satisfied.
8.5. Indemnification and Insurance.
8.5.1. The indemnification provisions set forth in the
Organizational Documents of the Acquiror Companies shall not be amended,
modified or otherwise repealed for a period of six years from the Closing Date
in any manner that would adversely affect the rights thereunder as of the
Closing Date of individuals who at or prior to the Closing Date were directors,
officers, employees or agents of the Acquiror Companies, unless such
modification is required after the Closing Date by Law and then only to the
minimum extent required by such Law.
8.5.2. The Acquiror shall, to the fullest extent permitted under
applicable Law or its Organizational Documents, indemnify and hold harmless,
each present and former director, officer or employee of the Acquiror or any
Acquiror Subsidiary (collectively, the "Indemnified Parties") against any costs
or expenses (including attorneys' fees), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
Proceeding (x) arising out of or pertaining to the transactions contemplated by
this Agreement or (y) otherwise with respect to any acts or omissions occurring
at or prior to the Closing Date, to the maximum extent permitted by Delaware law
for a period of six years after the Closing Date. In the event of any such
Proceeding (whether arising before or after the Closing Date), (i) any counsel
retained by the Indemnified Parties for any period after the Closing Date shall
be reasonably satisfactory to the Acquiror, (ii) after the Closing Date, the
Acquiror shall pay the reasonable fees and expenses of such counsel, promptly
after statements therefor are received, provided that the Indemnified Parties
shall be required to reimburse the Acquiror for such payments in the
circumstances and to the extent required by the Acquiror's Organizational
Documents, any applicable contract or agreement or applicable Law, and (iii) the
Acquiror shall cooperate in the defense of any such matter; provided, however,
that the Acquiror shall not be liable for any settlement effected without its
written consent (which consent shall not be unreasonably withheld); and
provided, further, that, in the event that any claim or claims for
indemnification are asserted or made within such six-year period, all rights to
indemnification in respect of any such claim or claims shall continue until the
disposition of any and all such claims. The Indemnified Parties as a group may
retain only one law firm to represent them in each applicable jurisdiction with
respect to any single action unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the positions
of any
D - 36
two or more Indemnified Parties, in which case each Indemnified Party with
respect to whom such a conflict exists (or group of such Indemnified Parties who
among them have no such conflict) may retain one separate law firm in each
applicable jurisdiction.
8.5.3. The Acquiror shall honor and fulfill in all respects its
obligations pursuant to any indemnification agreements and employment agreements
(the parties under such agreements being referred to as the "Covered Persons")
with the Acquiror's directors and officers existing at or before the Closing
Date.
8.5.4. In addition, the Acquiror, on a best efforts basis, shall
provide, for a period of not less than six years after the Closing Date, the
Acquiror's current directors and officers with an insurance and indemnification
policy that provides sufficient coverage, as determined in good faith by a
majority of those Persons who were directors of Acquiror on the date of this
Agreement, for events occurring at or prior to the Closing Date (the "D&O
Insurance").
8.5.5. This Section 8.5 shall survive the consummation of the
transactions contemplated by this Agreement at the Closing Date, is intended to
benefit the Indemnified Parties and the Covered Persons, shall be binding on all
successors and assigns of the Acquiror and shall be enforceable by the
Indemnified Parties and the Covered Persons.
8.6. Rule 144 Reporting. With a view to making available to the Acquiror's
stockholders the benefit of certain rules and regulations of the Commission
which may permit the sale of the Acquiror Common Stock to the public without
registration, from and after the Closing Date, the Acquiror agrees to:
8.6.1. Make and keep public information available, as those terms
are understood and defined in Rule 144; and
8.6.2. File with the Commission, in a timely manner, all reports and
other documents required of the Acquiror under the Exchange Act.
8.7. Employment Agreement. Acquiror has entered into an employment
agreement (subject to customary termination provisions) with Jeff Halloran, a
copy of which is included as Schedule 8.7, pursuant to which Acquiror employs
Mr. Halloran as its President and CEO (the "Halloran Employment Agreement").
8.8. Removal of Officers. Each officer of Acquiror shall either resign or
Acquiror shall cause such officer to be removed, in each case, effective on or
prior to the Closing Date.
SECTION IX
CONDITIONS PRECEDENT TO THE ACQUIROR'S
OBLIGATION TO CLOSE
The Acquiror's obligation to acquire the Shares and to take the other
actions required to be taken by the Acquiror at the Closing is subject to the
satisfaction, at or prior to the Closing, of
D - 37
each of the following conditions (any of which may be waived by the Acquiror, in
whole or in part):
9.1. Accuracy of Representations. The representations and warranties of
the Company and the Shareholders set forth in this Agreement or in any Schedule
or certificate delivered pursuant hereto shall be true and correct in all
material respects as of the date of this Agreement, and shall be deemed repeated
as of the Closing Date and shall then be true and correct in all material
respects, except to the extent a representation or warranty is expressly limited
by its terms to another date and without giving effect to any supplemental
Schedule.
9.2. Performance by the Company and Shareholders.
9.2.1. All of the covenants and obligations that the Company and
Shareholders are required to perform or to comply with pursuant to this
Agreement at or prior to the Closing (considered collectively), and each of
these covenants and obligations (considered individually), must have been duly
performed and complied with in all material respects.
9.2.2. Each document required to be delivered by the Company and the
Shareholders pursuant to this Agreement at or prior to Closing must have been
delivered.
9.3. Company Interim Financial Statements. The Company shall have
delivered to the Acquiror the Company Interim Financial Statements in compliance
with Section 7.6, and such Company Audited Financial Statements shall not be
materially worse than the Company Audited Financial Statements for the period
ended October 31, 2003.
9.4. Certificate of Officer. The Company will have delivered to the
Acquiror a certificate, dated the Closing Date, executed by an officer of the
Company, certifying the satisfaction of the conditions specified in Sections
9.1, 9.2, 9.3 and 9.4.
9.5. Certificate of Shareholders. Each Shareholder will have delivered to
the Acquiror a certificate, dated the Closing Date, executed by such
Shareholder, if a natural person, or by an authorized officer of such
Shareholder, if an entity, certifying the satisfaction of the conditions
specified in Sections 9.1 and 9.2 solely with respect to such Shareholder.
9.6. Consents.
9.6.1. All material consents, waivers, approvals, authorizations or
orders required to be obtained, and all filings required to be made, by the
Company and/or the Shareholders for the authorization, execution and delivery of
this Agreement and the consummation by them of the transactions contemplated by
this Agreement, shall have been obtained and made by the Company or the
Shareholders, as the case may be, except where the failure to receive such
consents, waivers, approvals, authorizations or orders or to make such filings
would not reasonably be expected to have a Material Adverse Effect on the
Company or the Acquiror.
9.6.2. Without limiting the foregoing, the Acquiror Proxy shall have
been mailed to the stockholders of the Acquiror not less than 10 days prior to
the Closing Date. No
D - 38
Proceeding occasioned by Acquiror Proxy shall have been initiated or threatened
by the Commission (which Proceeding remains unresolved as of the Closing Date).
9.6.3. The stockholders of the Acquiror shall have approved the
Required Acquiror Stockholder Action.
9.7. Documents. The Company and the Shareholders must have caused the
following documents to be delivered to the Acquiror:
9.7.1. the Company Debentures and share certificates evidencing all
of the Shares held by the Shareholders (as set forth in Exhibit A), along with
executed stock powers transferring such Company Debentures and Shares to the
Acquiror;
9.7.2. a Secretary's Certificate of the Company, dated the Closing
Date, certifying attached copies of (A) the Organizational Documents of the
Company and each Company Subsidiary, (B) the resolutions of the Company Board
and the Shareholders approving this Agreement and the transactions contemplated
hereby; and (C) the incumbency of each authorized officer of the Company signing
this Agreement and any other agreement or instrument contemplated hereby to
which the Company is a party;
9.7.3. a certified certificate of good standing, or equivalent
thereof, of the Company;
9.7.4. each of the Transaction Documents to which the Company and/or
the Shareholders is a party, duly executed; and
9.7.5. such other documents as the Acquiror may reasonably request
for the purpose of (i) evidencing the accuracy of any of the representations and
warranties of the Company and the Shareholders pursuant to Section 9.1, (ii)
evidencing the performance of, or compliance by the Company and the Shareholders
with, any covenant or obligation required to be performed or complied with by
the Company or the Shareholders, as the case may be, (iii) evidencing the
satisfaction of any condition referred to in this Section 9, or (iv) otherwise
facilitating the consummation or performance of any of the transactions
contemplated by this Agreement.
9.8. No Proceedings. Since the date of this Agreement, there must not have
been commenced or threatened against the Acquiror, the Company or any
Shareholder, or against any Affiliate thereof, any Proceeding (which Proceeding
remains unresolved as of the Closing Date) (a) involving any challenge to, or
seeking damages or other relief in connection with, any of the transactions
contemplated by this Agreement, or (b) that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with any of the transactions
contemplated by this Agreement.
D - 39
SECTION X
CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY
AND THE SHAREHOLDERS TO THE CLOSING
The Shareholders' obligation to transfer the Shares and the obligations of
the Company to take the other actions required to be taken by the Company at the
Closing are subject to the satisfaction, at or prior to the Closing, of each of
the following conditions (any of which may be waived by the Company, in whole or
in part):
10.1. Accuracy of Representations. The representations and warranties of
the Acquiror set forth in this Agreement or in any Schedule or certificate
delivered pursuant hereto shall be true and correct in all material respects as
of the date of this Agreement, and shall be deemed repeated as of the Closing
Date and shall then be true and correct in all material respects, except to the
extent a representation or warranty is expressly limited by its terms to another
date and without giving effect to any supplemental Schedule.
10.2. Performance by the Acquiror.
10.2.1. All of the covenants and obligations that the Acquiror are
required to perform or to comply with pursuant to this Agreement at or prior to
the Closing (considered collectively), and each of these covenants and
obligations (considered individually), must have been performed and complied
with in all respects.
10.2.2. Each document required to be delivered by the Acquiror
pursuant to this Agreement must have been delivered.
10.3. Certificate of Officer. The Acquiror will have delivered to the
Company a certificate, dated the Closing Date, executed by an officer of the
Acquiror, certifying the satisfaction of the conditions specified in Sections
10.1 and 10.2.
10.4. Consents.
10.4.1. All material consents, waivers, approvals, authorizations or
orders required to be obtained including, without limitation, the Required
Acquiror Stockholder Action, and all filings required to be made including,
without limitation, the filing of the Charter Amendment, by the Acquiror for the
authorization, execution and delivery of this Agreement and the consummation by
it of the transactions contemplated by this Agreement, shall have been obtained
and made by the Acquiror, except where the failure to receive such consents,
waivers, approvals, authorizations or orders or to make such filings would not
reasonably be expected to have a Material Adverse Effect on the Company or the
Acquiror.
10.4.2. Without limiting the foregoing, the Acquiror Proxy shall
have been mailed to the stockholders of the Acquiror not less than 10 days prior
to the Closing Date. No Proceeding occasioned by the Acquiror Proxy shall have
been initiated or threatened by the Commission (which Proceeding remains
unresolved as of the Closing Date).
10.5. Documents. The Acquiror must have caused the following documents to
be delivered to the Company and/or the Shareholders:
10.5.1. share certificates evidencing each Shareholder's pro rata
share of the Acquiror Shares and the Warrants (as set forth in Exhibit A);
D - 40
10.5.2. a Secretary's Certificate, dated the Closing Date certifying
attached copies of (A) the Organizational Documents of the Acquiror and each
Acquiror Subsidiary, (B) the resolutions of the Acquiror Board approving this
Agreement and the transactions contemplated hereby; and (C) the incumbency of
each authorized officer of the Acquiror signing this Agreement and any other
agreement or instrument contemplated hereby to which the Acquiror is a party;
10.5.3. a Certificate of Good Standing of the Acquiror;
10.5.4. each of the Transaction Documents to which the Acquiror is a
party, duly executed; and
10.5.5. such other documents as the Company may reasonably request
for the purpose of (i) evidencing the accuracy of any representation or warranty
of the Acquiror pursuant to Section 10.1, (ii) evidencing the performance by the
Acquiror of, or the compliance by the Acquiror with, any covenant or obligation
required to be performed or complied with by the Acquiror, (iii) evidencing the
satisfaction of any condition referred to in this Section 10, or (iv) otherwise
facilitating the consummation of any of the transactions contemplated by this
Agreement.
10.6. No Proceedings. Since the date of this Agreement, there must not
have been commenced or threatened against the Acquiror, the Company or any
Shareholder, or against any Affiliate thereof, any Proceeding (which Proceeding
remains unresolved as of the Closing Date) (a) involving any challenge to, or
seeking damages or other relief in connection with, any of the transactions
contemplated hereby, or (b) that may have the effect of preventing, delaying,
making illegal, or otherwise interfering with any of the transactions
contemplated hereby.
10.7. No Claim Regarding Stock Ownership or Consideration. There must not
have been made or threatened by any Person any claim asserting that such Person
(a) is the holder of, or has the right to acquire or to obtain beneficial
ownership of the Shares or any other Equity Security or ownership interest in,
the Company, or (b) is entitled to all or any portion of the Transaction
Securities.
10.8. Each officer of Acquiror shall have either resigned or Acquiror
shall have caused such officer to be removed, in each case, effective on or
prior to the Closing Date.
SECTION XI
TERMINATION
11.1. Termination Events. This Agreement may, by notice given prior to or
at the Closing, be terminated:
11.1.1. by mutual consent of the Acquiror and the Company;
11.1.2. by the Acquiror, if any of the conditions in Section 9 have
not been satisfied as of the Closing Date or if satisfaction of such a condition
is or becomes impossible (other than through the failure of the Acquiror to
comply with its obligations under this
D - 41
Agreement) and the Acquiror has not waived such condition on or before the
Closing Date; or (ii) by the Company, if any of the conditions in Section 10
have not been satisfied as of the Closing Date or if satisfaction of such a
condition is or becomes impossible (other than through the failure of the
Company or any Shareholder to comply with its obligations under this Agreement)
and the Company has not waived such condition on or before the Closing Date;
11.1.3. by the Acquiror or the Company, if the Closing has not
occurred other than due to the failure of the Acquiror (in the event the
Acquiror seeks to terminate this Agreement) or other than due to the failure of
the Company or any Shareholder (in the case the Company seeks to terminate this
Agreement) 60 days after the final mailing of the Acquiror Proxy to the
stockholders of the Acquiror (or such later date as the parties may agree upon,
the "Outside Date");
11.1.4. by either the Acquiror or the Company, if there shall have
been entered a final, nonappealable order or injunction of any Governmental
Authority restraining or prohibiting the consummation of the transactions
contemplated hereby;
11.1.5. by the Acquiror, if, prior to the Closing Date, the Company
or any Shareholder is in material breach of any representation, warranty,
covenant or agreement herein contained and such breach shall not be cured within
10 days of the date of notice of default served by the Acquiror claiming such
breach; provided, however, that the right to terminate this Agreement pursuant
to this Section 11.1.5 shall not be available to the Acquiror if the Acquiror is
in material breach of this Agreement at the time notice of termination is
delivered;
11.1.6. by the Company, if, prior to the Closing Date, the Acquiror
is in material breach of any representation, warranty, covenant or agreement
herein contained and such breach shall not be cured within 10 days of the date
of notice of default served by the Company claiming such breach or, if such
breach is not curable within such 10 day period, such longer period of time as
is necessary to cure such breach; provided, however, that the right to terminate
this Agreement pursuant to this Section 11.1.6 shall not be available to the
Company if the Company or any Shareholder is in material breach of this
Agreement at the time notice of termination is delivered; or
11.1.7. by the Acquiror, if, prior to the Closing Date, the Acquiror
Board approves any merger, liquidation, recapitalization, consolidation or other
business combination involving the Acquiror or the Acquiror Subsidiaries or any
capital stock or any material portion of the assets of the Acquiror or any
Acquiror Subsidiary, or any combination of the foregoing (an "Acquisition
Transaction"); provided that a majority of the members of the Acquiror Board
have determined in good faith and on reasonable basis, after consultation with
outside counsel and advisors, that (i) such Acquisition Transaction is more
favorable from a financial point of view to the Acquiror's stockholders than the
transactions contemplated by this Agreement and (ii) failure to take such action
would constitute a breach of the fiduciary duties of the Acquiror Board under
applicable Law.
11.2. Effect of Termination. Each party's right of termination under
Section 11.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of a
D - 42
right of termination will not be an election of remedies. If this Agreement is
terminated pursuant to Section 11.1, all further obligations of the parties
under this Agreement will terminate, except that the obligations in Sections
5.12, 6.11, 11.2, and 13 will survive; provided, however, that if this Agreement
is terminated by a party because of the breach of the Agreement by another party
or because one or more of the conditions to the terminating party's obligations
under this Agreement is not satisfied as a result of another party's failure to
comply with its obligations under this Agreement, the terminating party's right
to pursue all legal remedies will survive such termination unimpaired.
SECTION XII
INDEMNIFICATION; REMEDIES
12.1. Survival. All representations, warranties, covenants, and
obligations in this Agreement shall survive the Closing and expire thirty (30)
days from the date on which the audited financial statements of the Acquiror for
its fiscal year ended December 31, 2004 shall have been filed as part of the
Acquiror's Annual Report on Form 10-K, but in no event earlier than April 30,
2005 (the "Survival Period"). The right to indemnification, payment of Damages
or other remedy based on such representations, warranties, covenants, and
obligations will not be affected by any investigation conducted with respect to,
or any knowledge acquired (or capable of being acquired) at any time, whether
before or after the execution and delivery of this Agreement or the Closing
Date, with respect to the accuracy or inaccuracy of or compliance with, any such
representation, warranty, covenant, or obligation. The waiver of any condition
based on the accuracy of any representation or warranty, or on the performance
of or compliance with any covenant or obligation, will not affect the right to
indemnification, payment of Damages, or other remedy based on such
representations, warranties, covenants, and obligations.
12.2. Indemnification by the Company.
12.2.1. From and after the Closing until (a) the expiration of the
Survival Period, or (b) with respect to a specific claim made by the Acquiror
against the Company prior to the expiration of the Survival Period, until a
court of competent jurisdiction renders a final unappealable decision (or
appeals of a decision are not taken within the time period permitted for filing
same) (the "Claims Period"), the Company shall indemnify and hold harmless the
Acquiror from and against any liabilities, loss, claims, damages (excluding
consequential, punitive and other similar damages), fines, penalties, expenses
(including costs of investigation and defense and reasonable attorneys' fees) or
diminution of value (collectively, "Damages") arising, directly or indirectly,
from or in connection with:
(a) any breach of any representation or warranty made by the
Company in this Agreement or in any certificate delivered by the Company
pursuant to this Agreement;
(b) any breach by the Company of its covenants or obligations
in this Agreement; or
D - 43
(c) any breach by the Acquiror of any covenants or obligations
in this Agreement required to be performed by the Acquiror from and after
the Closing Date, including, without limitation, the covenants set forth
in Sections 8.6 and 8.7.
12.2.2. The amount of any and all Damages suffered by the Acquiror
shall be recovered by the return to the Acquiror of a specified number of
Acquiror Shares by the Shareholders (the "Returned Shares"), the amount of
which shall be determined in accordance with Section 12.4 below. All
Returned Shares shall be retired.
12.2.3. Any claims of the Acquiror pursuant to this Section 12.2 may
be brought on behalf of the Acquiror by those Persons who were stockholders of
the Acquiror immediately prior to the Closing.
12.3. Indemnification by the Acquiror.
12.3.1. From and after the Closing until the expiration of the
Claims Period, the Acquiror shall indemnify and hold harmless the Company and
the Shareholders (collectively, the "Company Indemnified Parties"), from and
against any Damages arising, directly or indirectly, from or in connection with:
(a) any breach of any representation or warranty made by the
Acquiror in this Agreement or in any certificate delivered by the Acquiror
pursuant to this Agreement; or
(b) any breach by the Acquiror of any covenant or obligation
of the Acquiror in this Agreement required to be performed by the Acquiror
on or prior to the Closing Date.
12.3.2. The amount of any and all Damages suffered by a Company
Indemnified Party shall be recovered by the issuance to the Shareholders of a
specified number of additional shares of Acquiror Common Stock (the "Additional
Shares"), the amount of which shall be determined in accordance with Section
12.5 below.
12.4. Return of Returned Shares. The number of Returned Shares to be
returned by the Shareholders to the Acquiror and retired pursuant to Section
12.2 shall be equal to the aggregate amount of the Damages suffered by the
Acquiror, divided by the Market Price of the Acquiror's Common Stock on the date
that such amount of Damages is finally determined by arbitration or pursuant to
a binding settlement agreement among the stockholders of the Acquiror other than
the Shareholders and the Company Indemnified Parties. The Returned Shares shall
be returned by each Shareholder on a pro rata basis, as determined by such
Shareholder's pro rata share of the Acquiror Shares issuable at Closing as set
forth in Exhibit A.
12.5. Issuance of Additional Shares. The number of Additional Shares to be
issued to the Shareholders pursuant to Section 12.3 shall be equal to the
aggregate amount of the Damages suffered by the Company Indemnified Parties,
divided by the Market Price of the Acquiror's Common Stock on the date that such
amount of Damages is determined by arbitration or pursuant to a binding
settlement agreement among the stockholders of the Acquiror other than
D - 44
the Shareholders and the Company Indemnified Parties. The Additional Shares
shall be issued to each Shareholder on a pro rata basis, as determined by such
Shareholder's pro rata share of the Acquiror Shares issuable at Closing as set
forth in Exhibit A.
12.6. Limitations on Amount - the Shareholders. The Acquiror shall not be
entitled to indemnification pursuant to Section 12.2, unless and until the
aggregate amount of Damages to the Acquiror with respect to such matters under
Section 12.2.1 exceeds $250,000, at which time, subject to the following cap on
the maximum number of Returned Shares to be returned to the Acquiror, the
Acquiror shall be entitled to indemnification for the total amount of such
Damages. The aggregate number of Returned Shares to be returned to the Acquiror
shall not exceed 27,482,147 adjusted for any stock split, reverse stock split,
stock dividend, reclassification, recapitalization, merger or consolidation or
like capital adjustment affecting the Acquiror Common Stock. The Acquiror and
the Shareholders agree that 27,482,147 shares of the Acquiror Common Stock
issuable to Shareholders pursuant to this Agreement shall be held in escrow
pursuant to Section 12.2 for a period of one year following Closing Date, copy
of said Escrow Agreement is included herein as Schedule 12.6.
12.7. Limitations on Amount - the Acquiror. No Company Indemnified Party
shall be entitled to indemnification pursuant to Section 12.3, unless and until
the aggregate amount of Damages to all Company Indemnified Parties with respect
to such matters under Section 12.3.1 exceeds $250,000, at which time, subject to
the following cap on the maximum number of Additional Shares issuable, the
Company Indemnified Parties shall be entitled to indemnification for the total
amount of such Damages. The Shareholders shall not be issued more than
15,782,000 Additional Shares in the aggregate, adjusted for any stock split,
reverse stock split, stock dividend, reclassification, recapitalization, merger
or consolidation or like capital adjustment affecting the Acquiror Common Stock.
12.8. Determining Damages. Materiality qualifications to the
representations and warranties of the Company and the Acquiror shall not be
taken into account in determining the amount of Damages occasioned by a breach
of any such representation and warranty for purposes of determining whether the
baskets set forth in Sections 12.6 and 12.7 have been met.
12.9. Breach by Shareholders. Nothing in this Section 12 shall limit the
Acquiror's right to pursue any appropriate legal or equitable remedy against any
Shareholder with respect to any Damages arising, directly or indirectly, from or
in connection with: (a) any breach by such Shareholder of any representation or
warranty made by such Shareholder in this Agreement or in any certificate
delivered by such Shareholder pursuant to this Agreement or (b) any breach by
such Shareholder of its covenants or obligations in this Agreement. All claims
of the Acquiror pursuant to this Section 12.9 may be brought on behalf of the
Acquiror by those Persons who were stockholders of the Acquiror immediately
prior to the Closing.
SECTION XIII
GENERAL PROVISIONS
13.1. Expenses. Except as otherwise expressly provided in this Agreement,
each party to this Agreement will bear its respective expenses incurred in
connection with the preparation,
D - 45
execution, and performance of this Agreement and the transactions contemplated
by this Agreement, including all fees and expenses of agents, representatives,
counsel, and accountants. In the event of termination of this Agreement, the
obligation of each party to pay its own expenses will be subject to any rights
of such party arising from a breach of this Agreement by another party.
13.2. Public Announcements. The Acquiror shall promptly, but no later than
three days following the effective date of this Agreement, issue a press release
disclosing the transactions contemplated hereby. Between the date of this
Agreement and the Closing Date, the Company and the Acquiror shall consult with
each other in issuing any other press releases or otherwise making public
statements or filings and other communications with the Commission or any
regulatory agency or stock market or trading facility with respect to the
transactions contemplated hereby and neither party shall issue any such press
release or otherwise make any such public statement, filings or other
communications without the prior written consent of the other, which consent
shall not be unreasonably withheld or delayed, except that no prior consent
shall be required if such disclosure is required by law, in which case the
disclosing party shall provide the other party with prior notice of such public
statement, filing or other communication and shall incorporate into such public
statement, filing or other communication the reasonable comments of the other
party.
13.3. Confidentiality.
13.3.1. Each Shareholder, the Company and Acquiror (in such
capacity, the "Receiving Parties") shall use the confidential information of
each other party (in such capacity, the "Disclosing Parties") solely for the
purpose of evaluating and consummating the transactions contemplated hereby, and
that such confidential information shall be kept confidential and the Receiving
Parties shall not disclose such confidential information of the Disclosing
Parties in any manner whatsoever; provided, however, that (i) a Receiving Party
may make any disclosure of confidential information to which the Disclosing
Party gives its prior written consent, and (ii) the Acquiror may disclose such
information as is provided to it in writing for inclusion in the Acquiror Proxy.
Without limitation, the Receiving Parties shall maintain the confidential
information of the Disclosing Parties in confidence and limit its use to the
purposes contemplated by this agreement using at least the same degree of care
as it employs in maintaining as secret its own trade secret, proprietary and
confidential information, but always at least a reasonable degree of care.
13.3.2. As used in this Section 13.3, "confidential information"
shall be deemed to include all any and all nonpublic information (in whatever
form) disclosed, or made available, to the Receiving Party by or on behalf of
the Disclosing Party with respect to the Disclosing Party, its Affiliates or its
or their respective business, clients or potential clients, including, but not
limited to, financial statements and financial information, marketing plans,
technology, customer lists, the status of ongoing deals, deal pitches and
business forecasts. Notwithstanding the foregoing, the term "confidential
information" does not include information which (i) is or becomes generally
available to the public other than as a result of a breach of this Agreement,
(ii) was within the possession of the Receiving Party prior to its being
furnished to Receiving Party by or on behalf of the Disclosing Party, provided
that the source of such information was
D - 46
reasonably believed by the Receiving Party not to be bound by a confidentiality
agreement with, or other contractual, legal or fiduciary obligation of
confidentiality to, the Disclosing Party or any other party with respect to such
information or (iii) is or becomes available to the Receiving Party on a
non-confidential basis from a source other than the Disclosing Party or any of
their respective representatives, provided that such source was reasonably
believed by the Receiving Party not to be bound by a confidentiality agreement
with or other contractual, legal or fiduciary obligation of confidentiality to
the Disclosing Party or any other party with respect to such information.
13.4. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given or
made if: (i) sent by registered or certified mail, return receipt requested,
postage prepaid; (ii) hand delivered; or (iii) sent by prepaid overnight
carrier, with a record of receipt, in each case to each of the parties at the
address(es) set forth for such party below (or at such other address(es) as
shall be designated by such party by notice to each other party):
(i) If to the Company:
Phantom Fiber Corporation
144 Front Street, Suite 580
Toronto, Ontario M5J 2L7
CANADA
Attn: Jeff Halloran, President
(ii) If to Acquiror:
Pivotal Self-Service Technologies Inc.
13980 Jane Street
King City, Ontario L7B 1A3
CANADA
Attention: John G. Simmonds, Chairman and CEO
with a copy to:
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
USA
Attention: Scott S. Rosenblum, Esq.
(ii) If to any Shareholder, to the address set forth on the
counterpart signature page hereto of for such Shareholder.
13.5. Arbitration. Any dispute or controversy under this Agreement shall
be settled exclusively by arbitration in the City of New York, County of New
York in accordance with the rules of the American Arbitration Association then
in effect. Judgment may be entered on the arbitration award in any court having
jurisdiction.
D - 47
13.6. Further Assurances. The parties agree (a) to furnish upon request to
each other such further information, (b) to execute and deliver to each other
such other documents, and (c) to do such other acts and things, all as the other
party may reasonably request for the purpose of carrying out the intent of this
Agreement and the documents referred to in this Agreement.
13.7. Waiver. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by any party
in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of
this Agreement or the documents referred to in this Agreement can be discharged
by one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party; (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given; and (c) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement or the documents referred to in this Agreement.
13.8. Entire Agreement and Modification. This Agreement supersedes all
prior agreements between the parties with respect to its subject matter
(including the letter of intent between the Acquiror and the Company, dated
February 4, 2004) and constitutes (along with the documents referred to in this
Agreement) a complete and exclusive statement of the terms of the agreement
between the parties with respect to its subject matter. This Agreement may not
be amended except by a written agreement executed by the party against whom the
enforcement of such amendment is sought.
13.9. Assignments, Successors, and No Third-Party Rights. No party may
assign any of its rights under this Agreement without the prior consent of the
other parties. Subject to the preceding sentence, this Agreement will apply to,
be binding in all respects upon, and inure to the benefit of and be enforceable
by the respective successors and permitted assigns of the parties. Except as set
forth in [Section 8.6 and Section 12.3,] nothing expressed or referred to in
this Agreement will be construed to give any Person other than the parties to
this Agreement any legal or equitable right, remedy, or claim under or with
respect to this Agreement or any provision of this Agreement. This Agreement and
all of its provisions and conditions are for the sole and exclusive benefit of
the parties to this Agreement and their successors and assigns.
13.10. Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
13.11. Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as the
D - 48
circumstances require. Unless otherwise expressly provided, the word "including"
does not limit the preceding words or terms.
13.12. Governing Law. This Agreement will be governed by the laws of the
State of New York without regard to conflicts of laws principles.
13.13. Shareholder Representative.
13.13.1. The Acquiror shall be entitled to deal exclusively with
Jeff Halloran (the "Shareholder Representative") as the sole and exclusive
representative and agent of all of the Shareholders in respect of all matters
arising under or pertaining to this Agreement, unless and until the Acquiror
receives notice to the contrary as provided in Section 13.13.2 below. Without
limiting the foregoing, (a) any amounts payable under this Agreement by the
Acquiror to any Shareholder may be paid to the Shareholder Representative for
the account of such Shareholder; (b) any notice, communication, demand, claim,
action or proceeding required or permitted hereunder may be delivered by the
Acquiror to, or brought by the Acquiror against, the Shareholder Representative
in its capacity as agent and representative of the Shareholders with the same
effect, and which shall be binding to the same degree, as if delivered to, or
brought against, the Shareholder individually; (c) any settlement or other
agreement of the Acquiror with the Shareholder in its capacity as agent and
representative of the Shareholders in respect of all matters arising under or
pertaining to this Agreement shall have the same effect, and be binding upon,
the Shareholders to the same degree as if made with the Shareholders
individually; and (d) except as provided in Section 13.13.2, the Acquiror shall
not be required to recognize or respond to, and shall not be bound by, any
notice, communication, demand, claim, action or proceeding delivered to or
brought against the Acquiror by any Shareholder in respect of all matters
arising under or pertaining to this Agreement except through the Shareholder
Representative in its capacity as agent and representative of the Shareholders.
13.13.2. The Shareholders by notice in writing to the Acquiror
signed by all the Shareholders or their legal representative may designate
another single Person to act as representative and agent of the Shareholders as
provided in Section 13.13.1 above.
13.14. Termination of Shareholder Agreement. The Shareholders and the
Company hereby agree that the Shareholder Agreement a copy of which is included
herein as Schedule 13.14 shall terminate and be of no further force and effect
immediately prior to the Closing.
13.15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
D - 49
COUNTERPART SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have executed and delivered this Share
Exchange Agreement as of the date first written above.
Acquiror:
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
By:
-----------------------------------------
Name:
Title:
Company:
PHANTOM FIBER CORPORATION
By:
-----------------------------------------
Name:
Title:
COUNTERPART SIGNATURE PAGE
(FOR ISSUANCES PURSUANT TO REGULATION S)
IN WITNESS WHEREOF, the parties have executed and delivered this Share
Exchange Agreement as of the date first written above.
By signing below, I represent that I am
not a U.S. person.
[ENTITY]
By:
-------------------------------------
Name:
Title:
OFFSHORE DELIVERY INSTRUCTIONS:
- ------------------------------------------
PRINT EXACT NAME IN WHICH YOU WANT
THE SECURITIES TO BE REGISTERED
Attn:
--------------------------------------
Address:
--------------------------------------
--------------------------------------
--------------------------------------
Phone No.
--------------------------------------
Facsimile No.
--------------------------------------
COUNTERPART SIGNATURE PAGE
(FOR ISSUANCES PURSUANT TO SECTION 4(2))
IN WITNESS WHEREOF, the parties have executed and delivered this Share
Exchange Agreement as of the date first written above.
By signing below, I represent that I am
not a U.S. person.
[ENTITY]
By:
-------------------------------------
Name:
Title:
Circle the category under which you are an "accredited investor" pursuant to
Exhibit B:
1 2 3 4 5 6 7 8
- ------------------------------------------
PRINT EXACT NAME IN WHICH YOU WANT
THE SECURITIES TO BE REGISTERED
Attn:
--------------------------------------
Address:
--------------------------------------
--------------------------------------
--------------------------------------
Phone No.
--------------------------------------
Facsimile No.
--------------------------------------
EXHIBIT A
SHARES, COMPANY DEBENTURES AND
ACQUIROR SHARES TO BE EXCHANGED
Total Shares to be delivered by the Shareholders to Acquiror: 24,983,770
Total Company Debentures to be delivered by the Shareholders to 1,200,000
Acquiror (in Canadian Dollars principal amount):
Total Acquiror Shares to be delivered by the Acquiror to the 167,410,735
Shareholders:
Total Warrants to be delivered by the Acquiror to the Shareholders: 15,000,000
Number of Number of
Shares Owned Shares Percentage of
or issuable upon issuable upon Total Shares Pro Rata
conversion of conversion of Owned on aws- Share of
Name and Address of Each Preferred Shares Company converted Acquiror Share of
Shareholder owned Debentures basis Shares Warrants
- ---------------------------- ----------------- -------------- -------------- --------- --------
EXHIBIT B
Definition of "Accredited Investor"
The term "accredited investor" means:
(1) A bank as defined in Section 3(a)(2) of the Securities Act, or a savings
and loan association or other institution as defined in Section 3(a)(5)(A)
of the Securities Act, whether acting in its individual or fiduciary
capacity; a broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934; an insurance company as defined in
Section 2(13) of the Securities Act; an investment company registered
under the Investment Company Act of 1940 (the "Investment Company Act") or
a business development company as defined in Section 2(a)(48) of the
Investment Company Act; a Small Business Investment Company licensed by
the U.S. Small Business Administration under Section 301(c) or (d) of the
Small Business Investment Act of 1958; a plan established and maintained
by a state, its political subdivisions or any agency or instrumentality of
a state or its political subdivisions for the benefit of its employees, if
such plan has total assets in excess of $5,000,000; an employee benefit
plan within the meaning of the Employee Retirement Income Security Act of
1974 ("ERISA"), if the investment decision is made by a plan fiduciary, as
defined in Section 3(21) of ERISA, which is either a bank, savings and
loan association, insurance company, or registered investment advisor, or
if the employee benefit plan has total assets in excess of $5,000,000 or,
if a self-directed plan, with investment decisions made solely by persons
that are accredited investors.
(2) A private business development company as defined in Section 202(a)(22) of
the Investment Advisers Act of 1940.
(3) An organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000.
(4) A director or executive officer of the Acquiror.
(5) A natural person whose individual net worth, or joint net worth with that
person's spouse, at the time of his or her purchase exceeds $1,000,000.
(6) A natural person who had an individual income in excess of $200,000 in
each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year.
(7) A trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Rule 506(b)(2)(ii)
(i.e., a person who has such knowledge and experience in
financial and business matters that he is capable of evaluating the merits
and risks of the prospective investment).
(8) An entity in which all of the equity owners are accredited investors. (If
this alternative is relied upon, the Shareholder must identify each equity
owner and provide statements signed by each demonstrating how each is
qualified as an accredited investor.)
EXHIBIT C
Definition of "U.S. Person"
(1) "U.S. person" (as defined in Regulation S) means:
(i) Any natural person resident in the United States;
(ii) Any partnership or corporation organized or incorporated under the
laws of the United States;
(iii) Any estate of which any executor or administrator is a U.S. person;
(iv) Any trust of which any trustee is a U.S. person;
(v) Any agency or branch of a foreign entity located in the United
States;
(vi) Any non-discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary for the benefit
or account of a U.S. person;
(vii) Any discretionary account or similar account (other than an estate
or trust) held by a dealer or other fiduciary organized,
incorporated, or (if an individual) resident in the United States;
and
(viii) Any partnership or corporation if: (A) organized or incorporated
under the laws of any foreign jurisdiction; and (B) formed by a U.S.
person principally for the purpose of investing in securities not
registered under the Securities Act, unless it is organized or
incorporated, and owned, by accredited investors (as defined in Rule
501(a)) who are not natural persons, estates or trusts.
(2) Notwithstanding paragraph (1) above, any discretionary account or similar
account (other than an estate or trust) held for the benefit or account of
a non-U.S. person by a dealer or other professional fiduciary organized,
incorporated, or (if an individual) resident in the United States shall
not be deemed a "U.S. person."
(3) Notwithstanding paragraph (1), any estate of which any professional
fiduciary acting as executor or administrator is a U.S. person shall not
be deemed a U.S. person if:
(i) An executor or administrator of the estate who is not a U.S. person
has sole or shared investment discretion with respect to the assets
of the estate; and
(ii) The estate is governed by foreign law.
(4) Notwithstanding paragraph (1), any trust of which any professional
fiduciary acting as trustee is a U.S. person shall not be deemed a U.S.
person if a trustee who is not a U.S. person has sole or shared investment
discretion with respect to the trust assets, and no beneficiary of the
trust (and no settlor if the trust is revocable) is a U.S. person.
(5) Notwithstanding paragraph (1), an employee benefit plan established and
administered in accordance with the law of a country other than the United
States and customary practices and documentation of such country shall not
be deemed a U.S. person.
(6) Notwithstanding paragraph (1), any agency or branch of a U.S. person
located outside the United States shall not be deemed a "U.S. person" if:
(i) The agency or branch operates for valid business reasons; and
(ii) The agency or branch is engaged in the business of insurance or
banking and is subject to substantive insurance or banking
regulation, respectively, in the jurisdiction where located.
(7) The International Monetary Fund, the International Bank for Reconstruction
and Development, the Inter-American Development Bank, the Asian
Development Bank, the African Development Bank, the United Nations, and
their agencies, affiliates and pension plans, and any other similar
international organizations, their agencies, affiliates and pension plans
shall not be deemed "U.S. persons."
EXHIBIT D
ACCREDITED INVESTOR REPRESENTATIONS
Each Shareholder indicating that it is an Accredited Investor, severally and not
jointly, further represents and warrants to the Acquiror as follows:
1. Such Shareholder qualifies as an Accredited Investor on the basis set
forth on its signature page to this Agreement.
2. Such Shareholder has sufficient knowledge and experience in finance,
securities, investments and other business matters to be able to protect
such Shareholder's interests in connection with the transactions
contemplated by this Agreement.
3. Such Shareholder has consulted, to the extent that it has deemed
necessary, with its tax, legal, accounting and financial advisors
concerning its investment in the Acquiror Shares.
4. Such Shareholder understands the various risks of an investment in the
Acquiror Shares and can afford to bear such risks for an indefinite period
of time, including, without limitation, the risk of losing its entire
investment in the Acquiror Shares.
5. Such Shareholder has had access to the Acquiror's publicly filed reports
with the SEC.
6. Such Shareholder has been furnished during the course of the transactions
contemplated by this Agreement with all other public information regarding
the Acquiror that such Shareholder has requested and all such public
information is sufficient for such Shareholder to evaluate the risks of
investing in the Acquiror Shares.
7. Such Shareholder has been afforded the opportunity to ask questions of and
receive answers concerning the Acquiror and the terms and conditions of
the issuance of the Acquiror Shares.
8. Such Shareholder is not relying on any representations and warranties
concerning the Acquiror made by the Acquiror or any officer, employee or
agent of the Acquiror, other than those contained in this Agreement.
9. Such Shareholder is acquiring the Acquiror Shares for such Shareholder's
own account, for investment and not with a view to distribution or resale
to others.
10. Such Shareholder will not sell or otherwise transfer the Acquiror Shares,
unless either (A) the transfer of such securities is registered under the
Securities Act or (B) an exemption from registration of such securities is
available.
11. Such Shareholder understands and acknowledges that the Acquiror is under
no obligation to register the Acquiror Shares for sale under the
Securities Act.
12. Such Shareholder consents to the placement of a legend on any certificate
or other document evidencing the Acquiror Shares substantially in the form
set forth in Section 4.3.1.
13. Such Shareholder represents that the address furnished by such Shareholder
on its signature page to this Agreement and in Exhibit A is such
Shareholder's principal residence if he is an individual or its principal
business address if it is a corporation or other entity.
14. Such Shareholder understands and acknowledges that the Acquiror Shares
have not been recommended by any federal or state securities commission or
regulatory authority, that the foregoing authorities have not confirmed
the accuracy or determined the adequacy of any information concerning the
Acquiror that has been supplied to such Shareholder and that any
representation to the contrary is a criminal offense.
15. Such Shareholder acknowledges that the representations, warranties and
agreements made by such Shareholder herein shall survive the execution and
delivery of this Agreement and the purchase of the Acquiror Shares.
EXHIBIT E
NON-U.S. PERSON REPRESENTATIONS
Each Shareholder indicating that it is not a U.S. person, severally and not
jointly, further represents and warrants to the Acquiror as follows:
1. At the time of (a) the offer by the Acquiror and (b) the acceptance of the
offer by such Shareholder, of the Acquiror Shares, such Shareholder was
outside the United States.
2. No offer to acquire the Acquiror Shares or otherwise to participate in the
transactions contemplated by this Agreement was made to such Shareholder
or its representatives inside the United States.
3. Such Shareholder is not purchasing the Acquiror Shares for the account or
benefit of any U.S. person, or with a view towards distribution to any
U.S. person, in violation of the registration requirements of the
Securities Act.
4. Such Shareholder will make all subsequent offers and sales of the
Acquiror Shares either (x) outside of the United States in compliance
with Regulation S; (y) pursuant to a registration under the Securities
Act; or (z) pursuant to an available exemption from registration under
the Securities Act. Specifically, such Shareholder will not resell the
Acquiror Shares to any U.S. person or within the United States prior to
the expiration of a period commencing on the Closing Date and ending on
the date that is one year thereafter (the "Distribution Compliance
Period"), except pursuant to registration under the Securities Act or
an exemption from registration under the Securities Act.
5. Such Shareholder is acquiring the Acquiror Shares for such Shareholder's
own account, for investment and not for distribution or resale to others.
6. Such Shareholder has no present plan or intention to sell the Acquiror
Shares in the United States or to a U.S. person at any predetermined time,
has made no predetermined arrangements to sell the Acquiror Shares and is
not acting as a Distributor of such securities.
7. Neither such Shareholder, its Affiliates nor any Person acting on such
Shareholder's behalf, has entered into, has the intention of entering
into, or will enter into any put option, short position or other similar
instrument or position in the U.S. with respect to the Acquiror Shares at
any time after the Closing Date through the Distribution Compliance Period
except in compliance with the Securities Act.
8. Such Shareholder consents to the placement of a legend on any certificate
or other document evidencing the Acquiror Shares substantially in the form
set forth in Section 4.3.2.
9. Such Shareholder is not acquiring the Acquiror Shares in a transaction (or
an element of a series of transactions) that is part of any plan or scheme
to evade the registration provisions of the Securities Act.
10. Such Shareholder has sufficient knowledge and experience in finance,
securities, investments and other business matters to be able to protect
such Shareholder's interests in connection with the transactions
contemplated by this Agreement.
11. Such Shareholder has consulted, to the extent that it has deemed
necessary, with its tax, legal, accounting and financial advisors
concerning its investment in the Acquiror Shares.
12. Such Shareholder understands the various risks of an investment in the
Acquiror Shares and can afford to bear such risks for an indefinite period
of time, including, without limitation, the risk of losing its entire
investment in the Acquiror Shares.
13. Such Shareholder has had access to the Acquiror's publicly filed reports
with the SEC.
14. Such Shareholder has been furnished during the course of the transactions
contemplated by this Agreement with all other public information regarding
the Acquiror that such Shareholder has requested and all such public
information is sufficient for such Shareholder to evaluate the risks of
investing in the Acquiror Shares.
15. Such Shareholder has been afforded the opportunity to ask questions of and
receive answers concerning the Acquiror and the terms and conditions of
the issuance of the Acquiror Shares.
16. Such Shareholder is not relying on any representations and warranties
concerning the Acquiror made by the Acquiror or any officer, employee or
agent of the Acquiror, other than those contained in this Agreement.
17. Such Shareholder will not sell or otherwise transfer the Acquiror Shares,
unless either (A) the transfer of such securities is registered under the
Securities Act or (B) an exemption from registration of such securities is
available.
18. Such Shareholder understands and acknowledges that the Acquiror is under
no obligation to register the Acquiror Shares for sale under the
Securities Act.
19. Such Shareholder represents that the address furnished by such Shareholder
on its signature page to this Agreement and in Exhibit A is such
Shareholder's principal residence if he is an individual or its principal
business address if it is a corporation or other entity.
20. Such Shareholder understands and acknowledges that the Acquiror Shares
have not been recommended by any federal or state securities commission or
regulatory authority, that the foregoing authorities have not confirmed
the accuracy or determined the adequacy of any information concerning the
Acquiror that has been supplied to such Shareholder and that any
representation to the contrary is a criminal offense.
21. Such Shareholder acknowledges that the representations, warranties and
agreements made by such Shareholder herein shall survive the execution and
delivery of this Agreement and the purchase of the Acquiror Shares.
Appendix E
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
WIRELESS VENTURES, INC.
Pursuant to Sections 242 and 245 of the
General Corporation Law
of the State of Delaware
Wireless Ventures, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. That the name of the Corporation is Wireless Ventures, Inc.
2. That the Certificate of Incorporation was filed in the office of the
Secretary of State of Delaware on the 25th day of February, 2000 under the name
of eieihome.com Inc.
3. That this Amended and Restated Certificate of Incorporation restates
and amends the Certificate of Incorporation of this Corporation, as amended to
date.
4. That the text of the Certificate of Incorporation is hereby restated
and amended to read in its entirety as follows:
FIRST. The name of the Corporation is Pivotal Self-Service Technologies
Inc.
SECOND. The address of its registered office of the Corporation in the
State of Delaware is 1209 Orange Street, City of Wilmington, County of New
Castle, and the name of its registered agent at such address is The Corporation
Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law (the "DGCL").
FOURTH. The total number of shares of stock which the Corporation is
authorized to issue is 150,000,000 shares of Common Stock, par value $.001 per
share and 2,000 shares of Preferred Stock, par value $.001 per share.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
DGCL. The Board of Directors is authorized to define the terms of the Preferred
Stock and to increase or decrease the number of authorized shares of Preferred
Stock by the affirmative vote of a majority of the Board of Directors of the
Corporation.
FIFTH. Except as required in the By-Laws, no election of Directors need be
by written ballot.
SIXTH. The Board of Directors shall have the power to make, alter, or
repeal By-Laws subject to the power of the stockholders to alter or repeal the
By-Laws made or altered by the Board of Directors.
SEVENTH. The personal liability of the Directors of the Corporation is
hereby eliminated to the fullest extent permitted by the provisions of paragraph
(7) of subsection (b) of ss. 102 of the DGCL. If the DGCL is hereafter amended
to authorize the further elimination or limitation of the liability of a
Director, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the DGCL, as so
amended.
EIGHTH. The Corporation, to the fullest extent permitted by the provisions
of ss. 145 of the DGCL, as the same may be amended and supplemented, shall
indemnify each person who is or was an officer or Director of the Corporation
and may indemnify any and all other persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-Law, agreement,
vote of stockholders or disinterested Directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a Director or
officer and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
NINTH. The Corporation may purchase and maintain insurance , at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise (including any employee benefit plan) against any expense, liability
or loss incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the DGCL.
TENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and this Certificate of
Incorporation and all rights conferred upon stockholders herein are granted
subject to this reservation.
5. This Amended and Restated Certificate of Incorporation was declared
advisable by the Board of Directors of the Corporation and was duly adopted by
the Board of Directors in accordance with the provisions of Sections 242 and 245
of the DGCL and it was duly adopted by a majority of the stockholders entitled
to vote thereon in accordance with the provisions of Section 228 of the DGCL and
written notice was given to the stockholders in accordance with the provisions
of subsection (e) of such section of the DGCL.
E-2
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by an Authorized Person on this 2nd
day of October, 2001.
Wireless Ventures, Inc.
By /s/ Gary Hokkanen
---------------------------------
NAME: Gary Hokkanen
TITLE: Secretary
E-3
PIVOTAL SELF-SERVICE TECHNOLOGIES INC.
Annual Meeting of Stockholders
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
The undersigned hereby appoints Brian Usher-Jones and John Simmonds, or if
only one is present, then that individual, with full power of substitution, to
vote all shares PIVOTAL SELF-SERVICE TECHNOLOGIES INC. (the "Company"), which
the undersigned is entitled to vote at the Annual Meeting of the Company's
Stockholders to be held at 144 Front Street West, Suite 580, Toronto, Ontario,
Canada, on the 28th day of June, 2004, at 10:00 a.m. Toronto time, and at any
adjournment or postponement thereof, hereby ratifying all that said proxies or
their substitutes may do by virtue hereof, and the undersigned authorizes and
instructs said proxies to vote as follows:
1. REELECTION OF DIRECTORS: To elect the nominees for director below to take
office for a term of one year or until the Closing, if earlier, of the
proposed acquisition of Phantom Fiber Corporation;
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees
listed below
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
John Simmonds Brian Usher-Jones
2. ELECTION OF TARGET NOMINEE DIRECTORS: To elect the Target Nominees for
director below to take office if and when the Closing occurs for the
proposed acquisition of Phantom Fiber Corporation, and to serve until the
annual meeting in 2005 and until their successors are duly qualified;
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees
listed below
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Jeffrey Halloran Gordon Fowler
Graham Simmonds Stephen Gesner
3. APPROVAL OF ACQUISITION: To ratify the Share Exchange Agreement and
approve the transactions contemplated thereby;
FOR AGAINST ABSTAIN
4. APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION: To approve an
amendment to the Company's Certificate of Incorporation to change the name
of the Company to Phantom Fiber Corporation and to increase the authorized
number of shares of Common Stock from 150,000,000 to 400,000,000;
FOR AGAINST ABSTAIN
(Continued and to be dated and signed on the other side.)
5. APPROVAL OF AMENDMENTS TO 2000 STOCK OPTION PLAN: To approve the proposed
amendment to the 2000 Stock Option Plan;
FOR AGAINST ABSTAIN
6. APPROVAL OF AUDITORS: To ratify and approve the appointment of Mintz &
Partners LLP as independent public auditors for the fiscal year ending
December 31, 2004;
FOR AGAINST ABSTAIN
and in their discretion, upon any other matters that may properly come before
the meeting or any adjournment or postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDERS. IF NO OTHER DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR ALL NOMINEES AND TARGET NOMINEES LISTED IN PROPOSALS 1
AND 2, FOR PROPOSALS 3, 4 AND 5 AND, IN ACCORDANCE WITH THE JUDGMENT OF THE
PROXIES, FOR OR AGAINST ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE
ANNUAL MEETING AND ANY POSTPONEMENT OR ADJOURNMENT THEREOF.
PLEASE DATE, SIGN AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
Receipt of the Notice of Annual Meeting of Stockholders and of the Proxy
Statement and Annual Report of the Company accompanying the same is hereby
acknowledged.
Dated: _____________________________, 2004
-------------------------------------------
(Name of Stockholder)
-------------------------------------------
(Signature of Stockholder)
Please sign exactly as your name(s)
appear(s) on your stock certificate. If
signing as attorney, executor,
administrator, trustee or guardian, please
indicate the capacity in which signing. When
signing as joint tenants, all parties to the
joint tenancy must sign. When the proxy is
given by a corporation, it should be signed
by an authorized officer.