UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period:
SIDEWARE SYSTEMS INC.
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(Exact name of Registrant as specified in its charter)
British Columbia
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(State or jurisdiction (IRS Employer
of incorporation) Identification No.)
1810 Samuel Morse Drive, Reston, Virginia 20190-5316
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(Address of principal executive offices)
Issuer's telephone number (703) 437-9002
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Shares without par value
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(Title of Class)
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes x No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. x
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates, computed by reference to the closing
price for trading of the issuer's stock on the OTC-Bulletin Board as at
January 31, 2001: $87,606,000.00.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 66,167,167 common
shares without par value, as at March 16, 2001.
Index to Exhibits on Page 52
Sideware Systems Inc.
Form 10-K
TABLE OF CONTENTS
PART I
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Commons Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 39
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants on Accounting
Financial Disclosure 40
PART III
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management 46
Item 13. Certain Relationship and Related Transactions 48
PART IV
Item 14.Exhibits, Financial Statement Schedules, and Reports on Form
8-K 52
(ii)
This annual report contains forward-looking statements which involve
risks and uncertainties. When used in this annual report the words
"believes," "anticipates," "expects" and similar expressions are
intended to identify forward-looking statements. Our actual results
may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause these differences
include, but are not limited to, those discussed in ITEM 7, under the
heading "Risk Factors." Readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the
date of this annual report. We undertake no obligation to publicly
release the results of any revisions to the forward-looking statements
which may be made to reflect events or circumstances after the date of
this annual report, or to reflect the occurrence of unanticipated
events.
An investment in our shares is highly speculative and involves a high
degree of risk. Prospective investors should consider the risk
factors involved in an investment in our shares, including the
following: (a) that we have not at any time generated substantial
sales revenue, (b) our history of losses, (c) the intense competition
in the industry in which we operate, (d) the volatility of our stock
price, and (e) the uncertainty of future funding. Prospective
investors should carefully read each section of this annual report
which describes these and other risk factors.
Prior to November 2000 we filed annual and other reports with the
Securities and Exchange Commission as a foreign private issuer, as
defined under the Securities Exchange Act of 1934. Beginning in
November 2000 we began to file our reports as a domestic issuer.
Reports which we filed prior to November 2000 contained financial
statements prepared in accordance with Canadian generally accepted
accounting principles. The financial statements contained in this
annual report were prepared in accordance with United States generally
accepted accounting principles, and we have restated the results from
prior periods in accordance with those principles.
Prior to December 1998 we operated with an April 30 fiscal year end.
In December 1998, we changed our fiscal year end from April 30 to
December 31. Financial results for periods up to April 30, 1998 are
reported with an April 30 year end. Financial results for periods
subsequent to April 30, 1998 are reported with a December 31 year end.
All monetary amounts are stated in United States dollars, unless
stated to be in Canadian dollars (C$). As a substantial number of our
employees are stationed in Canada, a significant portion of our
operating costs are incurred in Canadian dollars. For purposes of
this annual report, other than amounts taken from our financial
statements, Canadian dollar amounts have been converted to United
States dollars using an exchange rate of C$1.00 = US$0.66
1
PART I.
ITEM 1. BUSINESS
OVERVIEW
Our business is the development and marketing of interactive e-
business software. Our current products are offered as the Sideware
Enterprise Interaction Suite 3.0. Our products support Web based
customer communication, and are intended for the growing market for
electronic Customer Relationship Management ("eCRM") software.
We were incorporated in April 1983 in the Province of British
Columbia, under the name "Heart Minerals Ltd." We entered the
business of software development in 1990. On January 9, 1991 our
corporate name was changed to "Evergreen International Technology
Inc.", following the acquisition of a private company named "Evergreen
Technology Corp.".
We came under the control of new management in May 1995, following a
series of legal disputes. Owing to events under prior management, our
shares were suspended from trading and subject to a cease trade order
of the British Columbia Securities Commission. New management began
the task of restoring our business and returning our shares to trading
status.
In November 1995, we released our first commercial product, JOT-IT!.
JOT-IT! was an enhanced version of a product named "Evergreen Notes",
whose development was commenced under prior management. Essentially
an electronic "sticky" note, JOT-IT! allowed a user to "stick" notes
directly onto documents, applications, drop down menus, text entry
fields, and other locations, allowing notes to appear when the user
required them.
In September 1996, our shares returned to trading on the Canadian
Venture Exchange. We completed our first financing under new
management, and the cease trade order of the British Columbia
Securities Commission was revoked. On January 31, 1997 we changed our
corporate name to "JOT-IT! Software Corp.".
In July 1997, 3M Corporation commenced legal proceedings against us
alleging that the name "JOT-IT!" infringed 3M trademarks. In October
1997, we settled the 3M litigation, and agreed to change our corporate
and product names. Our single user product was re-named "Tagalongs".
In November 1997, we released our first groupware product, Net
Notions, and the final version of our single user product, Tagalongs
3.0. Neither Tagalongs nor Net Notions generated material revenue,
and both products have been discontinued. On February 18, 1998, to
comply with our agreement with 3M Corporation, we changed our
corporate name to "Sideware Systems Inc."
RECENT DEVELOPMENTS
In the fall of 1997, we also commenced development of Dr. Bean, the
predecessor of our current products. Dr. Bean created direct real
time communication between customers and producers marketing their
products through Internet e-commerce sites. An alpha version of the
Dr. Bean client software was demonstrated at the fall Comdex exhibit
in November 1997, and a beta version was demonstrated at the Internet
World trade show in November 1998.
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In April 1999, at the Spring Internet World trade show in Los Angeles,
we released the initial version of Dr. Bean for commercial
distribution. In June 1999, at the JavaOne trade show in San
Francisco, we released Dr. Bean 2.0.
In November 1999, we released Dr. Bean 3.0. Dr. Bean 3.0 included a
major upgrade in the features available to Dr. Bean users. Further
enhancements to Dr. Bean were released in January 2000 and April 2000.
In April 2000, we also released Dr. Bean On Call, which was designed
to provide the essential functions of Dr. Bean as an Internet service,
rather than as an installed product.
In January 2001, we released the Sideware Enterprise Interaction Suite
3.0, our current group of products. The Enterprise Interaction Suite
includes Sideware Collaboration, which is based on the software code
of our Dr. Bean On Call product, and which offers chat functions
similar to our previous Dr. Bean products. The Enterprise Interaction
Suite also includes Sideware Email, an e-mail management program, and
Sideware Telephony, which integrates Web based and telephone
communications.
We are continuing the development of our Enterprise Interaction Suite.
Our current development plans include enhancements to the existing
functions of our products, as well as the addition of voice over
Internet (VoIP), artificial intelligence, and wireless functions.
We have two operating subsidiaries, Sideware Corp. and Sideware
International SRL. Sideware Corp. is incorporated in the State of
Washington, and markets our products in the United States. Sideware
International SRL is incorporated in Barbados, and owns certain
intellectual property rights in our products. Further information on
our subsidiaries, and on agreements among the corporate group, is
contained under the heading "Intellectual Property".
INDUSTRY OVERVIEW
The Internet has evolved rapidly from an information source to a new
platform for commerce. International Data Corporation has projected
that the number of customers buying goods and services over the
Internet worldwide will grow from approximately 30 million in 1998 to
133 million in 2002. During the same period, the total value of goods
and services purchased over the Internet is projected to increase from
approximately $50 billion to over $734 billion.
High quality customer service may be even more important on the
Internet than it is in the physical world. According to a recent
survey by Net Effect Systems, a California based developer of e-
business systems, online customers abandon two-thirds of the
commercial transactions they commence. Unlike traditional customers,
who contact their vendors in person or by phone, Internet customers
cannot easily gain direct vendor contact. Whether to ask about
product features, or to check the status of an order, online consumers
have traditional service needs. Companies that do not meet those
needs are only a click away from competitors who will.
We believe that successful customer service systems will have to
blend, and to exploit the different advantages of, multiple channels
of customer communication. Currently, most online customer
communication takes place through e-mail. However, many companies
have not taken adequate steps to manage their e-mail communication, or
to provide alternatives. A recent survey of 125 top e-commerce sites
by Jupiter Communications, a New York based Internet research firm,
showed that 42% of the sites either refused to accept an e-mail
message, never responded to the message, or took longer than five days
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to respond. We believe that by responding to customers through real-
time chat, or by improving responsiveness to e-mail, companies can
convert potential buyers into actual buyers.
THE SIDEWARE STRATEGY
Our Enterprise Interaction Suite is intended for the emerging market
for eCRM software. We believe that the potential benefits to users of
eCRM software include the following:
- - increased customer loyalty;
- - easier dissemination of product information;
- - reduced operating costs;
- - increased productivity of sales and service personnel.
Our development strategy is to create a customer service system that
can:
- - meet the need for immediate and responsive interaction with
customers;
- - integrate multiple channels of customer communication, both
online and offline;
- - scale to meet growing Internet-based communication needs; and
- - integrate easily with legacy computer and data systems.
We have developed our products using the proprietary Java programming
language of Sun Microsystems, to enhance scalability and portability
among different operating systems and platforms. Our products include
features which integrate to existing customer databases, and which can
combine communications from different sources into a common queue.
Integration of additional communications channels, including wireless
devices and Voice over Internet (VoIP) technology, is one of our
continuing development objectives.
Our sales strategy is to:
- - develop and advance strategic relationships with major companies
in the software industry;
- - target Global 2000 customers; and
- - focus our selling efforts on key market segments, including the
public sector and banking and finance.
We have not generated substantial sales to date, and we have not yet
established referenceable accounts with major companies. Generating
sales to major companies is our primary business objective for the
balance of 2001.
PRODUCTS
GLOSSARY
Our products are technical, and we use technical terms in describing
them. The following technical terms have the following meanings.
"Applet" is a Java program which can be distributed as an attachment
to a World-Wide Web document and executed by a Java-enabled web
browser.
4
"ASP" or "Application Service Provider" is a company which makes
software applications available for use as services over the Internet,
in place of programs installed in the user's computer.
"Browser" is a computer program which allows a person to read
documents in HTML.
"Firewall" is a form of computer security which controls
communication between a private computer network and the Internet.
"GUI" or "graphical user interface" is screen display which
incorporates graphic elements, such as windows or icons, to present
the input or output of a computer program.
"Host" is a computer which makes information or a service available
to other computers.
"HTML" or "Hypertext Markup Language" is a document format used on
the World-Wide Web. HTML permits users to embed tags or links into a
web page, permitting users to move instantly from one Web page to
another.
"Interface" is a convention by which two software systems or programs
communicate.
"Java" is a computer programming language developed by Sun
Microsystems, which supports use of the Internet through its ability
to run on different operating systems.
"Natural language" means a human language, such as English.
"Server" means a computer whose purpose is to receive, store, and
retrieve information, usually for other computers connected to it by a
network, or through the Internet.
"SQL" or "Structured Query Language" is a standardized computer
language for creating databases, and conducting database searches.
"URL" or "Uniform Resource Locator" is the Internet address of a
document accessible on the World-Wide Web.
THE SIDEWARE ENTERPRISE INTERACTION SUITE
We market our products as the Sideware Enterprise Interaction Suite
3.0. The Enterprise Interaction Suite includes three separate
products: Sideware Collaboration, Sideware Email, and Sideware
Telephony. Sideware Collaboration and Sideware Email can be used as
stand alone products without any of the others. Sideware Telephony
can only be used in conjunction with either Sideware Collaboration or
Sideware Email.
DESCRIPTION OF SIDEWARE COLLABORATION
Sideware Collaboration is intended for use on Internet e-commerce
sites, and facilitates direct communication over the Internet between
customers and customer service representatives ("CSRs").
A company using Sideware Collaboration includes designated icons in
its Internet "storefront". Clicking a Collaboration icon opens an
interactive peer-to-peer link between the customer and a company CSR.
Collaboration establishes a queue of customers waiting for service,
and directs them to available CSRs.
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The customer and CSR can then communicate through "real time" chat -
messages typed by either party show up immediately on the other's
display screen.
Sideware Collaboration is written in the Java programming language,
and is based on a "client/server" model. The server software
transmits messages between the customer and CSR. The client software
includes a GUI, which is downloaded to the customer's computer, and
displayed on the customer's screen.
Sideware Collaboration is designed to support two different modes of
use - as an installed solution or through an ASP. A company using
Sideware Collaboration as an installed solution must install the
server software on its own computer system. A company using Sideware
Collaboration through an ASP acquires Sideware Collaboration as a
service, utilized through the Internet, rather than as a product. The
ASP version allows companies to enjoy the principal features and
functions offered by Collaboration without the cost or commitment of
managing their own server.
Sideware Collaboration operates compatibly with system firewalls, and
can be configured to operate within a company's established security
environment. Because it is written in the Java programming language,
the Sideware Collaboration server is also compatible with a large
number of operating systems and platforms. They include commonly
implemented platforms of IBM and Sun Microsystems, and also the
Windows NT operating system.
Some features of Sideware Collaboration require the use of a browser
on either a CSR workstation or the computer of a customer. Sideware
Collaboration is compatible with the Internet Explorer browser of
Microsoft Corporation. Owing to the dominance of the Internet
Explorer program and the Windows operating system, we have not yet
made Sideware Collaboration compatible with other workstation
browsers. However, Sideware Collaboration is a Java based program,
and we can adapt it to other browsers and other workstation operating
systems if demand requires.
Chat sessions created by Sideware Collaboration can be stored in a
database and retrieved. Sideware Collaboration runs on any SQL
compliant database. In addition, Sideware Collaboration must operate
through an application server program, such as IBM Websphere or BEA
Weblogic.
Sideware Collaboration includes the following additional features.
- - Administration and Server Manager modules that permit users to
set up CSR accounts, and also permit ASPs to add or remove
customers.
- - A Supervisor module that permits supervisors to monitor CSR
performance, and to take over customer chat sessions from a CSR.
- - Application programmer interfaces that permit users to customize
Collaboration, so that it can be accessed from other
applications.
- - An Enterprise Application Manager that permits users to launch
other applications from Collaboration.
- - A Customer Information Manager that permits users to access data
stored in other components of a user's system.
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- - ASPs can direct communications for several clients to the same
CSR or group of CSRs, making Collaboration suitable for use by
call centers providing out-sourced customer service.
- - Collaboration users can customize the "look and feel" of the
GUI shown to their users. The Collaboration GUI can also ask
customers what kind of response they want to their inquiries.
Customers can select either a chat session, a response by e-mail,
or a telephone call back. The Queue manager shows CSRs what type
of response each customer wants.
- - Collaboration can provide CSRs with pre-defined responses, such
as pre-defined chat messages or URLs to be provided to customers.
- - Collaboration permits a CSR to push web pages to customers, and
to draw graphics, known as "whiteboarding" on images being
transmitted to customers.
- - A CSR can forward customers to other CSRs.
- - Our Enterprise Reporting feature permits users to assemble a
broad range of statistical information and reports relating to
system or CSR performance.
- - CSRs can work from remote locations, connected to their
employer's server through the Internet.
DESCRIPTION OF SIDEWARE EMAIL
Sideware Email is an e-mail management system which allows customers
to send e-mails to specified CSR groups. On clicking a "Contact Us"
or similar button, the customer is shown an e-mail message template
which can be completed and transmitted through the Sideware Email
server.
Sideware Email incorporates the following additional features:
- - A company using both Collaboration and Email can establish a
common queue, through which requests for chat sessions and e-mail
messages can be dealt with in order, regardless of their source.
- - Email permits users to designate groups of CSRs, and allows
customers to choose which group their message will be sent to.
Sideware Email is a relatively new product, having been released
during the first quarter of 2001. Rather than incurring extensive
cost and development time to enhance Email further, our current
intention, for future releases of the Enterprise Interaction Suite, is
to secure the right to re-sell the e-mail management system of another
vendor.
DESCRIPTION OF SIDEWARE TELEPHONY
Sideware Telephony extends the ability of the Enterprise Interaction
Suite to establish a common queue for incoming customer
communications. Through Sideware Telephony, users of the Enterprise
Interaction Suite can also include telephone communications in a
common queue with Collaboration chat sessions or e-mail messages. All
incoming communications are handled through the same queue, and
directed to the appropriate CSRs in order, regardless of whether they
originate through chat, e-mail or telephone.
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Sideware Telephony utilizes IBM's Callpath to control telephone
switching systems. Sideware Telephony is presently compatible with the
following switching systems:
- - ECI Telecom (Tadiran) Coral I, II, III, SL ;
- - Lucent Definity Generic PBX (G3) ;
- - Nortel DMS100 ; and
- - Nortel Meridian 1 (SL/1) .
Sideware Telephony incorporates the following additional features:
- - CSRs can place telephony communications on hold, and can switch
back and forth between customers.
- - CSRs can handle telephony communications while remaining
connected to a Web chat customer.
- - If a CSR is unable to pick up an incoming call, another CSR can
intercede to pick it up.
FUTURE DEVELOPMENT - ENTERPRISE INTERACTION SUITE 4.0
Our next planned release is the Sideware Enterprise Interaction Suite
4.0. In addition to enhancements to existing components, version 4.0
will include three new components, Sideware Assist, Sideware VoIP, and
Sideware Wireless. We expect to release version 4.0 in the second
quarter of 2001.
Sideware Assist will permit a company to provide automated responses
to questions from its customers. Sideware Assist will offer customers
an inquiry window, in which questions can be typed. Sideware Assist
will utilize the principles of natural language processing and
interpretation to interpret the questions, and to select an
appropriate response from a series of pre-defined responses.
To offer Sideware Assist, we will have to license natural language
processing software, and artificial intelligence software, from third
parties. We are in negotiation with third parties to license the
required software.
We expect that installations of Sideware Assist will be highly
customized to individual users, and will require a user to assemble:
- - a "knowledge" database of words, phrases, and questions that
are likely to be used by its customers; and
- - a set of standardized responses, and procedures that can be used
to select the appropriate response.
Sideware VoIP will permit customers to send voice messages over the
Internet to CSRs. Sideware VoIP will also require us to utilize
technology licensed from third parties, to facilitate transmission of
digitised voice data over the Internet. We are in negotiation with
third parties to secure either licensing or marketing rights in
appropriate third party software. Our software will include an
interface to the applicable third party software.
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Sideware Wireless will include software which interfaces with browsers
used by wireless devices, such as cellular phones or palm pilots.
Wireless will thus permit customers using those devices to interact
with companies using Collaboration.
Our development plans may change, depending on our technical and
financial capabilities, and our assessment of the demands of the
marketplace. There can be no assurance that our development work will
produce commercially viable products, or that we will be able to
license the third party technology we require on commercially
acceptable terms.
SALES, MARKETING, AND PROFESSIONAL SERVICES
We earned our first material revenue, totalling $667,628, during the
year ended December 31, 2000.
- - License revenue accounted for $461,962, or approximately 69% of
total revenue.
- - Services revenue accounted for $96,217 or approximately 14% of
total revenue. Services revenue during 2000 was incidental to
product sales.
- - Re-sales of hardware and software to arm's length parties
accounted for $27,504, or approximately 4.1% of total revenue.
- - Re-sales of hardware and software to related parties accounted
for $81,945, or approximately 12.3 % of total revenue.
We did not have material sales revenue from sales to arm's length
parties during either the year ended December 31, 1999 or the eight
month period ended December 31, 1998. Total revenue during those
periods was $33,389 and $104,982, respectively. The substantial
majority of that revenue, in each period, came from hardware and
software re-sales to related parties.
All of our sales to date have taken place in the United States and
Canada. With the exception of intellectual property rights owned by
our Barbados subsidiary, Sideware International SRL, all of our assets
are also located in the United States and Canada. We do not believe
that our prospects for generating future sales are dependent on any
single customer, or a few customers.
SOLUTION SALES
We plan to sell the Enterprise Interaction Suite through two principal
channels, our direct sales force and value added resellers.
Our direct sales force is headquartered in Reston, Virginia. We
employ regional sales personnel in Atlanta, San Jose, Los Angeles, New
York, Chicago, Toronto and Vancouver. Including sales representatives
and system engineers, our direct sales force consists of approximately
34 employees.
We augment our direct sales force with the Sideware Partner Program.
As of March 15, 2001 we have signed re-seller agreements with 51
companies. Participants in the Sideware Partner Program purchase our
products for re-sale at specified discounts. We have 7 employees
administering the Sideware Partner Program, and other programs aimed
at developing industry alliances and joint marketing programs.
We have been accepted into the Independent Software Vendor program of
IBM. If we are able to do so, we intend to increase our involvement
in IBM marketing programs, and to develop marketing agreements with
other major companies in the computer industry.
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ASP OFFERING
Beginning in February 2001, we offer the Enterprise Interaction Suite
as a service, available over the Internet. We currently host the
application service at our own facilities. If we are able to develop
a sufficient customer base for our ASP service, we will likely
contract with a third party to host the service. ASP customers
purchase our service on a monthly fee basis.
PROFESSIONAL SERVICES
We offer a range of services in defining the eCRM needs of our
customers, and in designing software, hardware, and networking
environments to meet those needs. We plan to offer professional
services independently of our software sales. To date, however, all
of our services revenue has been incidental to sales of our software
products.
MARKETING
As of March 15, 2001 we have 14 employees in our marketing group. Our
marketing strategy is to build awareness of Sideware as a provider of
eCRM solutions. We participate in industry trade shows, and we have
also used direct mail and telemarketing campaigns to create brand
awareness for our products.
CUSTOMERS
As of March 15, 2001 we have approximately 35 customers, including
both installed sales and signed contracts awaiting installation.
EMPLOYEES
As of March 15, 2001 we have a total of 134 employees, including our
research and development, sales and marketing, and administrative
personnel.
ENTERPRISE INTERACTION SUITE - COMPETITIVE POSITION
Our competitors include companies offering one or more products for
the eCRM market, some of which compete directly with our products.
Some of our competitors are: eGain Communications Corp., eShare
Technologies, Inc., Interactive Intelligence, Kana Communications,
Inc., Liveperson Inc., Primus Knowledge Solutions Inc., Quintus Corp.,
ServiceSoft Inc. and WebLine Communications Corp., a subsidiary of
Cisco Systems.
Vendors of eCRM software compete on many factors. We believe that
some of the most important factors are:
- - price;
- - reliability;
- - the ability of the product to scale, to service increasing
demand; and
- - ease of integration to existing systems and to other
applications.
We do not have sufficient sales history with our products to state how
well they will compete against specific products of our competitors.
We believe that an important competitive factor for our products
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will be how well they integrate to other systems and applications. Our
development strategy has been to emphasize features that will make
that integration easier and more complete, such as our Customer
Information Manager and our Enterprise Application Manager.
Investors are cautioned that:
- - The market for e-commerce software is intensely competitive, and
is changing rapidly. We expect the intensity of the competition
to increase.
- - The list of competitors set out above is not exhaustive. We are
aware of over 30 companies providing products or services which
are competitive to some degree with the Enterprise Interaction
Suite.
RESEARCH AND DEVELOPMENT
We employ research and development personnel in both the United States
and Canada. As of March 15, 2001, approximately 53 of our employees
are engaged in research and development activities.
During the years ended December 31, 2000 and December 31, 1999, we
incurred research and development expenditures of $4,526,397 and
$1,490,352, respectively. These figures include non-cash stock based
compensation expenses of $1,131,887 and $55,508, respectively. During
the eight month period ended December 31, 1998, we incurred research
and development expenditures of $349,434, which includes non-cash
stock based compensation expense of $12,349. Our own personnel
currently do substantially all of our research and development work.
INTELLECTUAL PROPERTY
COPYRIGHT AND TRADEMARK
Computer source code for our products is protected by copyright.
Under the Copyright Act (Canada), copyright protection lasts for a
minimum of 50 years.
We have registered the trademarks "Sideware" and "Dr. Bean" with the
United States Patent and Trademark office, and under the Trademark Act
of Canada. We also have pending applications to register our "Dr.
Bean" graphic logo in both Canada and the United States. We no longer
use the name "Dr. Bean" in marketing our products, but we continue to
use the Dr. Bean logo. We have not submitted applications to register
the name "Enterprise Interaction Suite" as a trademark, as we believe
that name is descriptive of our products, and is thus unlikely to
receive trademark protection.
THIRD PARTY SOFTWARE
Our Enterprise Interaction Suite includes software licensed from
Actuate Corporation, which forms part of our Enterprise Reporting
feature. A license fee of $1,000 must be paid to Actuate Corporation,
either by us or by our customer, for each copy of the Actuate software
licensed. The functions provided by the Actuate software are an
optional part of the Enterprise Interaction Suite.
We expect that we will have to license additional third party software
to continue development of our Assist and VoIP products. As yet, we
have not secured any of the additional license rights we will require.
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DEVELOPMENT AND MARKETING AGREEMENTS WITH SUBSIDIARIES
The description of our business contained in this annual report
includes the business activities of Sideware Systems Inc., Sideware
Corp., and Sideware International SRL.
Sideware Corp. was incorporated on January 21, 1997 in the State of
Washington, under the name "Collaborative Groupware Inc." On August
13, 1998, Collaborative Groupware Inc. changed its name to "Sideware
Corp.". Sideware Corp. markets our products in the United States.
Sideware International SRL was organised as a society with restricted
liability under the laws of Barbados on August 27, 1999. Sideware
Systems Inc. owns 100% of Sideware International SRL, in part
directly, and in part through another subsidiary, 3032650 Nova Scotia
Company.
Sideware Systems Inc. and Sideware International SRL entered into a
Software License Agreement effective August 27, 1999, under which
Sideware International SRL received a license to use our previous Dr.
Bean software to develop and market new products. Sideware Systems
Inc. and Sideware International SRL also entered into a Software
Development Cost Sharing Agreement effective August 27, 1999, under
which the two companies agreed to develop new software jointly.
Under the first agreement, Sideware International SRL agreed to pay
Sideware Systems Inc. a royalty based on the revenues realized from
the new products. Under the second, the parties agreed to share
development costs, with Sideware International SRL having the right to
exploit the new software worldwide except in Canada, and Sideware
Systems Inc. having the right to exploit the software in Canada.
Our Enterprise Interaction Suite has been developed under the Software
Development Cost Sharing Agreement.
Sideware Corp., our United States subsidiary, has entered into
distribution agreements with Sideware International SRL effective
January 2, 2001. The distribution agreements give Sideware Corp. the
right to market both the ASP and license versions of the Enterprise
Interaction Suite in the United States. Sideware Corp. purchases
copies of the software in question from Sideware International SRL at
specified prices.
ITEM 2. PROPERTIES
We currently operate from 8 office locations.
Substantially all of our research and development work has
historically been done at our premises in North Vancouver, British
Columbia. In September 2000, we hired a new Chief Technology Officer,
who is stationed at our head office in Reston, Virginia. As a result,
we have begun to do more of our research and development work in
Reston. Administrative functions are performed in both Reston and
North Vancouver.
HEAD OFFICE - RESTON, VIRGINIA
Our head office is at 1810 Samuel Morse Drive, Reston, Virginia. Our
Reston office consists of an office building with a rentable area of
approximately 16,000 square feet. The term of the lease is 7.5 years,
commencing April 14, 2000 and ending October 14, 2007. The rent
commences at $38,667.00 per month ($464,000 per annum) and escalates
by approximately 3% per year to $47,555 per month (equivalent to
$570,661 per annum) during the final half year. We have an option to
renew the lease for an additional three years at rental rates which
continue to escalate at approximately 3% per year.
12
We occupied our present head office in the Spring of 2000. We have
sublet our previous premises at 208 Elden Street, Suite 200, Herndon VA
20170, although we remain responsible to the landlord if the subtenant
does not pay the rent. The lease for the Elden Street premises runs
to January 31, 2004. Rent payable under the lease is approximately
$12,000 per month.
CANADIAN HEAD OFFICE - NORTH VANCOUVER, BRITISH COLUMBIA
Our Canadian head office is located in North Vancouver, British
Columbia, Canada. Our North Vancouver premises occupy 14,867 square
feet. The term of the lease expires August 31, 2003.
The North Vancouver lease currently provides for annual minimum rent
of approximately $135,000 (equal to approximately $8.90 per square
foot). Annual minimum rent increases to $9.06 per square foot
effective September 1, 2001 and to $9.25 per square foot effective
September 1, 2002.
The landlord under the lease is HOOPP Realty Inc., an arm's length
company. The tenant under the lease is Techwest Management Inc., a
private company of which Grant Sutherland and Owen Jones, our former
President, are each 50% shareholders. We are a co-covenantor under
the lease, and as such we are directly responsible to the landlord for
rental and other related charges. Techwest Management Inc. passes
costs under the lease through to us without any additional charges or
mark-up.
VANCOUVER, BRITISH COLUMBIA
Effective July 1, 1999, we occupied additional office space in
downtown Vancouver, B.C. The downtown premises consist of two suites
at 1600 and 1620, 777 Dunsmuir Street, Vancouver, B.C. The total area
of these suites is 8,235 square feet. The term of the lease is three
years, from July 1, 1999 to June 30, 2003. The total rent for the two
suites is approximately $91,000 per year, or approximately $10.90 per
square foot.
The premises at Suite 1600, 777 Dunsmuir Street were previously
occupied by the law firm of Sutherland Johnston, in which our
Chairman, Grant Sutherland, is a partner. Sutherland Johnston and
BrainTech, Inc., a related party, continue to use a portion of Suite
1600, and are responsible for a portion of the costs relating to Suite
1600. We expect to recover approximately $15,000 per year from
Sutherland Johnston and BrainTech, Inc. for their use of Suite 1600.
ATLANTA, GEORGIA
Our Atlanta regional office occupies approximately 2,700 square feet.
The term of the lease is three years, from May 1, 2000 to April 30,
2003. The annual rent is $68,023 for the first year, and escalates by
approximately 3% per year.
SAN JOSE, CALIFORNIA
Our San Jose regional office consists of four office spaces. We pay
rent of $1,725 per month on a month-to-month basis.
13
We also have regional offices, consisting of one sales office each, in
Chicago, Los Angeles, and New York. Our aggregate rent costs for these
offices are approximately $6,000 per month.
REGISTERED OFFICE
Our registered and records offices and address for service of process
in Canada are Suite 1910, 777 Hornby Street, Vancouver, British
Columbia, V6Z 1S4.
ITEM 3. LEGAL PROCEEDINGS
As at the date of this annual report, we are not party to any material
legal proceedings.
During the fourth quarter of the fiscal year ended December 31, 2000 we
settled our outstanding legal disputes with previous management. In
settling those legal disputes, we:
- - paid approximately $20,000 to opposing parties, and returned
approximately $44,000 which we had received through foreclosure
proceedings from an opposing party;
- - issued a total of 80,000 shares to opposing parties; and
- - received cash payments from opposing parties totalling
approximately $165,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2000.
At our next annual meeting of shareholders, we intend to put forward a
resolution to change our corporate jurisdiction from British Columbia
to the Yukon Territory of Canada. Under the corporate law of British
Columbia, continuation of our corporate status into the Yukon
Territory will require a special resolution of shareholders, passed by
a 75% majority.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
NATURE OF TRADING MARKET
Our common shares currently trade on the Toronto Stock Exchange under
the symbol "SYD.U" and are quoted on the OTC Bulletin Board under the
symbol "SDWS". Trading on the Toronto Stock Exchange commenced
November 10, 2000. Quotation on the OTC Bulletin Board was authorized
to commence October 29, 1999.
Prior to November 20, 2000 our shares also traded on the Canadian
Venture Exchange. Up to November 4, 1999 trading on the Canadian
Venture Exchange was in Canadian dollars.
14
The following table sets forth the high and low sale prices for our
common shares for the quarters indicated. Figures quoted for the
third quarter of 1999 and all previous periods are in Canadian dollars
and are based on data from the Canadian Venture Exchange. Figures
quoted for the fourth quarter of 1999 and all subsequent periods are
in United States dollars and are based on data from the Canadian
Venture Exchange, the Toronto Stock Exchange, and the OTC Bulletin
Board. Prices stated for the OTC-Bulletin Board reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and may not
represent actual transactions.
CVE/TSE CVE/TSE OTC-BB OTC-BB
High Low High Low
($/C$) ($/C$) ($) ($)
2000
Fourth Quarter $2.40 $0.44 $2.31 $0.33
Third Quarter $4.25 $1.92 $4.06 $1.91
Second Quarter $10.35 $3.30 $10.25 $3.31
First Quarter $25.50 $7.05 $25.00 $7.00
1999
Fourth Quarter $10.15 $1.48 $10.19 $1.69
Third Quarter C$3.38 C$2.20
Second Quarter C$3.47 C$0.94
First Quarter C$0.85 C$0.45
On, March 15, 2001 the closing price for our shares on the Toronto
Stock Exchange and the OTC-Bulletin Board was $0.60.
DIVIDEND POLICY
We have never paid cash dividends on our capital stock. We currently
intend to retain all earnings, if any, to finance the growth and
development of our business. We do not anticipate paying any cash
dividends in the foreseeable future.
DESCRIPTION OF OUTSTANDING CAPITAL STOCK
Our authorized capital consists of 199,949,375 common shares without
par value. The holders of the common shares are entitled to receive
notice of, attend and vote at all shareholders' meetings. The common
shares carry one vote per share and have no par value. The holders of
the common shares are entitled to receive dividends if, as, and when
declared by our board of directors. The common shares carry no
preemptive rights, conversion rights, redemption provisions, sinking
fund provisions or liability to further calls or to assessment. There
are no restrictions on our ability to repurchase or redeem the common
shares except under applicable securities laws, and to the extent that
any such repurchase or redemption would render our company insolvent.
15
As of March 15, 2001 we have 66,116,167 common shares issued and
outstanding. Approximately 323 record holders of common shares
(including CEDE & Co., a US depository) are within the United States,
holding 20,688,400 shares (approximately 31% of the total shares
issued and outstanding). 40,797,581 million shares are registered in
the name of CDS & Co., a Canadian depository. 10,378,540 million
shares are registered in the name of CEDE & Co., a United States
depository.
Based on information we assembled to conduct our June 2000
shareholders' meeting, we believe that we have in excess of 20,000
beneficial shareholders. We do not have reliable information as to
the extent of beneficial ownership of our shares by United States
residents, but we believe that in excess of 50% of our shares are
owned beneficially by United States residents.
750,000 of our issued and outstanding shares are performance shares,
issued in September 1996 at $0.01 per share, and held by the following
individuals:
Name No. of Shares
Owen Jones 275,000
Grant Sutherland 275,000
Paco Nathan 50,000
Edward White 25,000
Paul Hildebrand 125,000
The performance shares will be held in escrow to be released, pro rata
to the holders of performance shares, on the basis of one share for
each $0.18 in cumulative cash flow, as defined in the escrow
agreement. As at the date of the annual report we have not had any
Cumulative cash flow for purposes of the escrow agreement, and none of
the 750,000 performance shares have been released from escrow. Any
performance shares not released by September 10, 2001 will be subject
to cancellation.
STOCK OPTIONS
From time to time we grant stock options to directors, officers,
employees, and consultants. As of March 15, 2001, we have 17,476,400
stock options outstanding as follows:
(1) options to acquire 348,000 shares at C$0.50 per share expiring
June 24, 2001;
(2) options to acquire 205,000 shares at C$0.70 per share expiring
December 16, 2002;
(3) options to acquire 250,000 shares at C$0.36 per share expiring
July 6, 2003;
(4) options to acquire 290,000 shares at C$1.14 per share expiring
April 14, 2004;
(5) options to acquire 78,500 shares at C$1.35 per share expiring
April 29, 2004;
(6) options to acquire 769,500 shares at C$2.33 per share expiring
June 17, 2004;
(7) options to acquire 305,500 shares at C$2.66 per share expiring
October 4, 2004;
(8) options to acquire 70,900 shares at C$2.78 per share expiring
October 20, 2004;
(9) options to acquire 1,000,000 shares at $8.69 per share expiring
January 14, 2005;
(10) options to acquire 889,500 shares at $11.08 per share expiring
January 21,2005;
(11) options to acquire 4,688,000 shares at $5.10 per share expiring
April 20, 2005;
(12) options to acquire 1,813,000 shares at $2.25 per share expiring
August 30, 2005;
(13) options to acquire 5,780,500 shares at $1.00 per share expiring
January 18, 2006;
(14) options to acquire 798,000 shares at $1.00 per share expiring
February 9, 2006; and
(15) options to acquire 190,000 shares at $1.00 per share expiring
February 22, 2006.
16
We have adopted two stock option plans. Effective February 11, 2000
we adopted our Stock Option Plan (2000), which reserved 5,700,000
shares for issuance pursuant to stock options. Effective April 20,
2000 we increased the number of shares reserved for issuance under our
2000 plan to 7,000,000. Of the options listed above, the following
were granted under the Stock Option Plan (2000):
- - all of the options listed under (11) and (12);
- - 150,000 of the options listed under (13);
- - 300,000 of the options listed under (14).
None of the options granted under the Stock Option Plan (2000) have
been exercised, but some have expired on the termination of employment
contracts.
Effective December 6, 2000 we adopted our Stock Option Plan (2001),
which reserved 6,000,000 shares for issuance pursuant to stock
options. Effective February 9, 2001, we increased the number of
shares reserved for issuance under our 2001 plan to 7,000,000. Of the
options listed above, the following were granted under the Stock
Option Plan (2001):
- - 5,688,500 of the options listed in (13);
- - 498,000 of the options listed in (14);
- - all of the options listed under (15).
None of the options granted under the Stock Option Plan (2001) have
been exercised, but some have expired on the termination of employment
contracts. Under the regulations of the Toronto Stock Exchange, our
Stock Option Plan (2001) is subject to shareholder approval, which we
intend to seek at our next shareholders' meeting.
Of the options listed above, our directors and executive officers hold
the following:
Optionee Number Exercise Expiry No. Exercisable
of Price Date within 60 days of
Shares February 28, 2001
James Speros 250,000 C$0.36 07/06/03 250,000
125,000 C$2.33 06/17/04 125,000
500,000 $1.00 02/09/06 250,000
Grant
Sutherland 198,000 C$0.50 06/24/01 198,000
75,000 C$0.70 12/16/02 75,000
125,000 C$2.33 06/17/04 125,000
170,000 C$2.66 10/10/04 170,000
150,000 $1.00 01/18/06 75,000
Peter Kozicki 50,000 C$0.50 06/24/01 50,000
25,000 C$0.70 12/16/02 25,000
25,000 C$2.33 06/17/04 25,000
25,000 $5.10 04/20/05 18,750
20,000 $1.00 01/18/06 10,000
Edward White 100,000 C$0.50 06/24/01 100,000
25,000 C$0.70 12/16/02 25,000
25,000 C$2.33 06/17/04 25,000
25,000 $5.10 04/20/05 18,750
17
20,000 $1.00 01/18/06 10,000
Jay Nussbaum 200,000 $11.08 01/21/05 200,000
200,000 $5.10 04/20/05 150,000
50,000 $1.00 01/18/06 25,000
150,000 $1.00 02/09/06 75,000
Jack Kemp 150,000 $1.00 02/09/06 75,000
John
Shoemaker 150,000 $1.00 02/09/06 75,000
Scott
Friedlander 1,000,000 $8.69 01/14/05 1,000,000
1,000,000 $5.10 04/20/05 750,000
500,000 $1.00 01/18/06 250,000
Rahul Bardhan 1,000,000 $2.25 08/30/05 400,000
500,000 $1.00 01/18/06 250,000
Stewart
Walchli 100,000 $11.08 01/21/05 100,000
200,000 $5.10 04/20/05 150,000
500,000 $1.00 01/18/05 250,000
The total number of common shares called for by all outstanding stock
options held by our directors and executive officers at March 15, 2001
is 7,578,000.
During the year ended December 31, 1999, Grant Sutherland exercised
options to purchase 102,000 shares at $0.50 per share and options to
purchase 148,000 shares at $0.36 per share. During the year ended
December 31, 2000, Grant Sutherland exercised options to purchase
80,000 shares at C$2.66 per share. No other options were exercised by
any other current directors or executive officers during either the
year ended December 31, 1999 or the year ended December 31, 2000.
No stock options have been exercised between December 31, 2000 and
March 15, 2001.
SHARE PURCHASE WARRANTS
As at March 15, 2001 we have 12,426,888 outstanding share purchase
warrants as follows:
(1) 197,882 share purchase warrants permit the holder to purchase one
share of common stock at a price of $0.383 per share up to March
26, 2001.
(2) 2,000,000 share purchase warrants permit the holder to purchase
one share of common stock at a price of C$0.63 per share up to
April 7, 2001.
(3) 1,417,254 share purchase warrants permit the holder to purchase
one share of common stock at a price of $1.89 per share up to
September 14, 2001.
(4) 1,901,271 share purchase warrants permit the holder to purchase
one share of common stock at a price of $1.89 per share up to
December 14, 2001.
(5) 900,000 share purchase warrants permit the holder to purchase one
share of common stock at a price of $1.00 per share up to April
13, 2002.
(6) 139,000 share purchase warrants permit the holder to purchase one
share of common stock at a price of $3.00 per share up to April
13, 2002.
(7) 45,000 share purchase warrants permit the holder to purchase on
share of common stock up to April 13, 2002 at a price of $10.00
up to April 13, 2001 or $11.50 from April 13, 2001 to April 13,
2002.
(8) 5,229,752 share purchase warrants permit the holder to purchase
one share of common stock at a price of $1.00 per share up to
February 22, 2004. Under the terms of these warrants, if the
18
trading price of our shares exceeds 200% of the exercise price
for 20 consecutive days, and if there is a registration statement
in effect qualifying sale of shares issued on exercise of the
warrants, we have the right to redeem the shares on 10 days
notice to the warrant holders.
The warrants listed in (5), (6), and (7), above, were all issued in a
private placement of 1,084,000 shares and 1,084,000 share purchase
warrants which we completed in April 2000. Initially, the exercise
prices for all of the warrants were as set out in (7). In October
2000, 810,000 of the warrants were re-priced under regulations of the
Canadian Venture Exchange, reducing the exercise prices to C$2.82 in
the first year and C$3.24 in the second year. In March 2001, there
was a further re-pricing of 1,039,000 warrants under regulations of
the Toronto Stock Exchange. The exercise price for 900,000 of the
warrants was reduced to $1.00. The exercise price for 139,000 of the
warrants was reduced to $3.00. Under regulations of the Toronto Stock
Exchange, as a condition of the re-pricing, the term of the warrants
will be reduced to 30 calendar days if the weighted average trading
price for our shares on the Toronto Stock Exchange exceeds 125% of
the reduced exercise price over any period of 20 consecutive trading
days. 45,000 of the warrants have not been re-priced, and the term
of those warrants is unaffected.
Of the share purchase warrants listed above, the following are held by
our directors and executive officers:
- - James Speros holds 1,000,000 of the warrants described in (2) and
60,000 of the warrants described in (4); and
- - Grant Sutherland holds 60,000 of the warrants described in (4)
and 1,250,000 of the warrants described in (8).
The total number of common shares called for by all outstanding share
purchase warrants held by our directors and executive officers as of
March 15, 2001 is 2,370,000.
During the fiscal year ended December 31, 2000, the following share
purchase warrants were exercised:
(1) 600,000 warrants at C$0.32 per share;
(2) 110,000 warrants at C$0.40 per share;
(3) 581,394 warrants at $0.333 per share;
(4) 700,000 warrants at C$0.55 per share;
(5) 1,329,579 warrants at $1.64 per share; and
(6) 598,729 warrants at $1.64 per share.
Of the warrants listed above, the following were exercised by our
directors and executive officers:
- - James Speros exercised the warrants described in (1); and
- - Grant Sutherland exercised the warrants described in (4).
No share purchase warrants have been exercised between December 31,
2000 and March 15, 2001.
BROKERS' WARRANTS
As consideration for private placement services, we have granted to
H.C. Wainwright & Co., Inc. and certain of its associates warrants to
purchase 526,316 units at a price of $0.76 per unit, with each unit
consisting of one share and one share purchase warrant. Each of the
share purchase warrants will permit
19
the holder to acquire one additional share at a price of $1.00 per share.
The brokers' warrants, and any share purchase warrants issued under them,
expire February 22, 2004.
RECENT SALES OF UNREGISTERED SECURITIES
Subsequent to December 31, 1999 we have issued the following
securities in private placements, pursuant to exemptions from
registration under section 4(2) of the Securities Act of 1933.
(1) Effective January 21, 2000, we issued 2,500,000 units at a price
of $1.64 per unit to 18 purchasers. Each unit consisted of one share
and one share purchase warrant. Each share purchase warrant entitled
the holder to purchase one additional share for a period of two years
at a price of $1.64 in the first year or $1.89 in the second year. We
paid a commission of $397,782 to BC Financial Services Inc. in
connection with the private placement. The purchasers of the units
included the following directors and executive officers:
Owen Jones 60,000 units
Grant Sutherland 60,000 units
Jim Speros 60,000 units
Other purchasers who acquired 5% or more of this offering included the
following:
Andrew Fisher 750,000 units
Brian C. Pennington 312,500 units
Joshua L. Mandell 125,000 units
Jeffrey Rosenbluth 166,667 units
Robert Stavis 166,667 units
William Montgomery 166,667 units
Titan Investment Group, LLC 182,925 units
Reicher Capital Management Co. Inc. 125,000 units
(2) Effective April 13, 2000 we issued 1,084,000 units at a price of
$10.00 per unit to 36 purchasers. Each unit consisted of one share
and one share purchase warrant. Each share purchase warrant entitled
the holder to purchase one additional share for a period of two years
at a price of $10.00 in the first year or $11.50 in the second year.
We paid a commissions totalling $442,900 to the following parties:
George Tsiolis $54,400
Golden Capital Securities Ltd. $50,000
Jeffrey Lubore $262,500
Brian Cohn $67,500
None of the units were purchased by our directors or executive
officers. Agora Partners of Markham, Ontario acquired 139,000 units.
No other purchaser acquired 5% or more of this offering. Certain of
the share purchase warrants issued in this offering have been re-
priced, as explained under "Share Purchase Warrants", above.
20
(3) Effective February 22, 2001 we issued 3,667,252 units at a price
of $0.76 per unit and 1,562,500 units at a price of $0.80 per unit.
Each unit consisted of one share and one share purchase warrant. Each
share purchase warrant entitled the holder to purchase one additional
share for a period of three years at a price of $1.00. We paid
commissions totalling $282,253 to H.C. Wainwright & Co., Inc. for
acting as placement agent in the private placement. In addition, we
issued to H.C. Wainwright warrants to acquire 526,316 units at a price
of $0.76 per unit, with each unit consisting of one share and one
share purchase warrant. The brokers' warrants, and any share purchase
warrants issued under them, expire February 22, 2004. The purchasers
of the units included the following directors and executive officers:
Grant Sutherland 1,250,000 units
Paul Hildebrand and Alder Enterprises Ltd. acquired, respectively,
187,500 and 125,000 units. Mr. Hildebrand is our corporate Secretary
and Alder Enterprises Ltd. is a private holding company in which Mr.
Hildebrand holds a 45% interest. Under regulations of the Toronto
Stock Exchange, Mr. Sutherland, Mr. Hildebrand, and Alder Enterprises
Ltd. were required to pay $0.80 per unit, as opposed to $0.76 per unit
for other purchasers.
Other purchasers who acquired 5% or more of this offering included the
following:
American High Growth Equities Retirement Trust 328,947 units
Michael Colen 263,158 units
SDS Merchant Fund 394,737 units
Welcome Opportunities Ltd. 500,000 units
(4) In addition to the foregoing, we have issue shares pursuant to
stock options and share purchase warrants. The number of shares
issued is set out in our financial statements and elsewhere in this
Form 10-K.
Proceeds from all of the securities listed above have been used as
general working capital, to finance our ongoing operations.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
We are unaware of any governmental laws, decrees or regulations in
force in Canada which restrict the export or import of capital, or the
remittance of dividends, interest, or other payments to US residents.
There are no limitations imposed by the laws of British Columbia, or
by our charter or other governing documents, on the right of a non-
resident to hold or vote our common shares. However, investments in
our commons shares could be affected by either the Investment Canada
Act (the "Investment Act") or the Competition Act of Canada.
INVESTMENT ACT REVIEW
The following summarizes the principal features of the Investment Act
for a non-resident who proposes to acquire common shares. The summary
is of a general nature only and is not intended to be more; nor is it
a substitute of independent advice from an investor's own advisor.
The summary does not anticipate statutory or regulatory amendments.
21
The Investment Act generally prohibits implementation of "reviewable"
investments by persons, including governments, who are not
"Canadians" as defined in the Investment Act. The prohibition does
not apply if the responsible cabinet Minster, after review, is
satisfied that the investment is likely to be of a net benefit to
Canada.
Whether an investment is "reviewable" under the Investment Act can
depend on the nationality of the investor. A US citizen qualifies as
a "World Trade Organization Investor." As a result, and subject to
the restrictions noted below, an investment in a Canadian business by
a US citizen is only reviewable if it is an investment to acquire
control of the Canadian business, and if the value of the assets of
the Canadian business, as shown on its financial statements, exceeds a
specified amount. For 2001 the specified amount is $209 million.
For an investor who does not qualify as a "World Trade Organization
Investor", when the target company is not controlled by a World Trade
Organization Investor, a more stringent standard applies. An
investment is reviewable if it is an investment to acquire control of
the Canadian business and the value of the assets of the Canadian
business, as shown on its financial statements, is $5 million or more.
A non-Canadian would acquire control of our company for purposes of
the Investment Act if the non-Canadian acquired a majority of the
common shares. The acquisition of less than a majority, but of one-
third or more of the common shares, would be presumed to be an
acquisition of control unless it could be established that, on
acquisition, the company would not be controlled in fact by the
acquirer through the ownership of common shares.
In addition to the review provisions, any transaction involving the
acquisition of control of a Canadian business, or the establishment of
a new business in Canada by a non-Canadian, is a notifiable
transaction, and must be reported to Industry Canada by the non-
Canadian making the investment either before or within thirty (30)
days after the investment.
Certain transactions relating to common shares are exempt from the
Investment Act, including:
- - an acquisition of common shares by a person in the ordinary
course of that person's business as a trader or dealer in
securities;
- - an acquisition of control of the company in connection with the
realization of security granted for a loan or other financial
assistance and not for a purpose related to the provisions of the
Investment Act; and
- - an acquisition of control of the company by reason of an
amalgamation, merger, consolidation or corporate reorganization,
following which the ultimate direct or indirect control in fact
of the company, through the ownership of common shares, remains
unchanged.
COMPETITION ACT REVIEW
Investments giving rise to the acquisition or establishment, directly
or indirectly, by one or more persons of control over, or a
significant interest in the whole or part of, a business of a
competitor, supplier, customer, or other person are subject to
substantive review by Canada's Competition Law Authority, the Director
of Investigation and Research (the "Director").
If the Director concludes that a merger, whether by purchase or lease
of shares or assets, by amalgamation or by combination, or otherwise,
prevents or lessens, or is likely to prevent or lessen competition
substantially, he may apply as may be necessary to eliminate the
substantial lessening or
22
prevention of competition. The substantive merger review power
applies to all mergers, whether or not they meet limits for pre-
notification under the Competition Act.
In addition to substantive merger review, the Competition Act provides
for a pre-notification regime respecting mergers of certain size. The
regime applies in respect of share acquisitions, asset acquisitions,
amalgamations, and combinations. This filing refers specifically to
share acquisition, although the pre-notification regime applies, with
the appropriate modification, to other types of acquisition of control
as well.
In order for a share acquisition transaction to be pre-notifiable, the
parties to the transaction (being the person or persons who proposed
to acquire shares, and the corporation the shares of which are to be
acquired), together with their affiliates (being all firms with a 50%
or more voting shares linkage up and down the chain), must have:
- - aggregate gross assets in Canada that exceed $400,000,000 in
value, as shown on their audited financial statements for the
most recently completed fiscal year (which must be within the
last fifteen (15) months); or
- - aggregate gross revenue from sales in, from, or into Canada that
exceed $400,000,000 for the most recently completed fiscal year,
as shown on the financial statements; and
- - the party being acquired or corporations controlled by that party
must have gross assets in Canada, or gross revenues from sales in
or from Canada, exceeding $35,000,000 as shown on the financial
statements.
Acquisition of shares carrying up to 20% of the votes of a publicly
traded corporation, or 35% of the votes in a private corporation,
will not be subject to pre-notification, regardless of the above
thresholds. However, exceeding the 20% or the 35% threshold, and
again exceeding the 50% threshold, gives rise to an obligation of
notification if the applicable size threshold is met.
If a transaction is pre-notifiable, a filing must be made with the
Director containing the prescribed information with respect to the
parties, and a waiting period, (either seven or twenty-one days,
depending on whether a long or short form filing is chosen) must
expire prior to closing.
As an alternative to pre-notification, the Director may grant an
Advance Ruling Certificate which exempts the transaction from pre-
notification. Advance Ruling Certificates are granted where the
Director concludes, based on the information provided to him, that he
would not have sufficient grounds on which to apply to the Competition
Tribunal to challenge the Merger.
TAXATION
The following summarizes the principal Canadian federal income tax
considerations applicable to the holding and disposition of common
shares in the capital of our company by a holder of our common shares
who is resident in the United States of America, who has never been a
resident of Canada, and who holds common shares solely as capital
property (a "U.S. Holder"). This summary is based on the current
provisions of the Income Tax Act (Canada) (the "ITA"), the regulations
thereunder, all amendments thereto publicly proposed by the government
of Canada to the date hereof, the published administrative practices
of Revenue Canada, Taxation, and on current provisions of the Canada-
United States Income Tax Convention, 1980, as amended (the "Treaty").
Except as otherwise expressly provided, this summary does not take
account of any provincial, territorial or foreign tax law or treaty.
It has been assumed that all currently proposed amendments will be
enacted substantially as proposed and
23
that there is no other relevant change in any governing law or practice,
although no assurance can be given in these respects.
This summary is not intended to include all circumstances in which a
disposition of common shares might occur. This summary does not
constitute, and should not be construed to constitute, tax advice to
any particular reader. Readers are, therefore, advised to consult
their own tax advisors with respect to their individual circumstances.
This summary contains information relating only to provisions of
Canadian federal income tax law, as set out above. This summary does
not include information relating to the provisions of any taxation
legislation of the United States of America or any state thereof.
Readers who are or may be subject to liability to tax under any
legislation of the United States of America, or any state thereof, are
advised to consult with their own tax advisors with respect to such
liability.
DIVIDENDS ON COMMON SHARES
Under the ITA, amounts paid or credited or deemed paid or credited on
account of dividends to holders of common shares that are resident in
a country other than Canada will be subject to withholding tax of 25%
of the amount of the dividend. The rate of withholding tax may be
reduced pursuant to the terms of a bilateral income tax treaty between
Canada and the country in which a holder of common shares is resident.
In certain circumstances, the purchase by us of our common shares may
result in a deemed dividend.
Under the Treaty, if the recipient of a dividend on the common shares
is the beneficial owner of such dividends and is considered to be a
resident of the United States for purposes of the Treaty, the rate of
Canadian withholding tax on such dividends will generally be reduced
to 15% of the amount of such dividends or, if the recipient is a
corporation which owns at least 10% of our voting stock, to 5% of the
amount of such dividends.
DISPOSITION OF COMMON SHARES
A holder of common shares who is not resident in Canada will not be
subject to tax under the ITA in respect of any capital gain, or be
entitled to deduct any capital loss, realized on a disposition of the
common shares unless at the time of such disposition such common
shares constitute "Taxable Canadian Property" of the holder for
purposes of the ITA and the holder is not entitled to relief under a
bilateral income tax treaty between Canada and the country in which
the holder of the common shares is resident. If the holder is not
entitled to relief under a tax treaty, one half of the gain arising on
a disposition of Taxable Canadian Property will be taxable at the
rates that approximate the rates applicable to residents of Canada.
Our common shares will not generally constitute "Taxable Canadian
Property" at a particular time if they are listed on a prescribed
stock exchange (which includes the Toronto Stock Exchange) at that
time. However, a holder's common shares and rights to acquire common
shares or interests in common shares will be considered "Taxable
Canadian Property" if the holder uses or holds, or is deemed to use or
hold, such shares in, or in the course of carrying on, a business in
Canada, or if at any time during the five year period immediately
preceding the disposition of such common shares, the non-resident
holder and persons with whom the non-resident holder did not deal at
arm's length owned, had rights to acquire, or had interests in, 25% or
more of the issued shares of any class.
24
Under the Treaty, any gain from a disposition of common shares by a
person who is considered a resident of the United States for purposes
of the Treaty may be exempt from Canadian tax even if the shares
constitute Taxable Canadian Property. This exemption will apply if,
at the time of disposition, the value of the common shares did not
derive principally from Canadian real property and such shares do not
form part of the business property of a permanent establishment of the
holder in Canada, or pertain to a fixed base available to the holder
in Canada for the purpose of performing independent personal services.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets out selected financial information for each
of the periods indicated, derived from our audited consolidated
financial statements. Information as at December 31, 2000 and 1999
and for the years ended December 31, 2000 and 1999, the eight months
ended December 31, 1998, and the year ended April 30, 1998 has been
extracted from audited financial statements presented elsewhere in
this annual report on Form 10-K. Information as at and for the other
periods presented has been extracted from financial statements not
included herein.
Prior to December 1998 we operated with an April 30 fiscal year end.
In December 1998, we changed our fiscal year end from April 30 to
December 31. Financial results for periods up to April 30, 1998 are
reported with an April 30 year end. Financial results for periods
subsequent to April 30, 1998 are reported with a December 31 year end.
Years ended December 31 8 months ended Year ended April 30
----------------------- December 31 ----------------------------
2000 1999 1998 1998 1997 1996
restated
(000's) (000's) (000's) (000's) (000's) (000's)
Sales Revenue $668 $33 $104 $19 $51 $20
Loss for the
period (28,447) (5,422) (1,383) (1,748) (1,469) (660)
Loss per
share (0.48) (0.15) (0.05) (0.08) (0.10) (0.11)
Total assets 10,459 7,537 1,125 1,806 1,003 (547)
Total Stockholders'
Equity 9,094 6,874 943 1,650 724 (430)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Prior to November 2000, we filed annual and other reports with the
Securities and Exchange Commission as a foreign private issuer, as
defined under the Securities Exchange Act of 1934. Beginning in
November 2000, we began to file our reports as a domestic issuer.
Reports which we filed prior to November 2000 contained financial
statements prepared in accordance with Canadian generally accepted
accounting principles. The financial statements contained in this
annual report were prepared in accordance with United States generally
accepted accounting principles, and we have restated the results from
prior periods in accordance with those principles. The discussion
below is solely in respect of our financial position and results of
operations determined in accordance with United States generally
accepted accounting principles.
25
All monetary amounts are stated in United States dollars, unless
stated to be in Canadian dollars (C$). As a substantial number of our
employees are stationed in Canada, a significant portion of our
operating costs are incurred in Canadian dollars. For purposes of
this annual report, other than amounts taken from our financial
statements, Canadian dollar amounts have been converted to United
States dollars using an exchange rate of C$1.00 = US$0.66.
OVERVIEW
Following a change in management in May 1995, new management commenced
rebuilding our business. The initial efforts of new management were
focused on raising sufficient financing to recommence business
operations and to permit our shares to resume trading. Our shares
resumed trading on September 10, 1996.
During the year ended December 31, 2000 we received our first material
revenue from our principal products. As a result, we ceased to be a
development stage enterprise. Our current focus is on the marketing
and continued development of the Sideware Enterprise Interaction
Suite. While we have begun to generate sales revenue, that revenue is
still small in relation to our operating expenses. Our principal
objective for 2001 is to increase sales revenue.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Total revenues increased from $33,389 for the year ended December 31,
1999 to $667,628 for the year ended December 31, 2000. Revenue for
2000 included:
- - $461,962 in license revenue from sales of our software products;
- - $96,217 for services rendered in installing our software
products, and for maintenance services; and
- - $109,449 in hardware and software re-sales.
Of the $109,449 in hardware and software re-sales, $81,945 came from
sales to related parties. We purchase computer equipment for
BrainTech, Inc., Techwest Management Inc., and Dunsmuir Management
Inc., owing to favourable prices available to us under the IBM
Business Partner Reseller Program. In our initial re-sales to related
parties during 1998 we charged a mark-up over our cost. The mark-up
was eliminated on subsequent transactions. Our current policy is to
sell equipment to related parties at cost.
In addition, we have recorded $168,661 in deferred revenue as at
December 31, 2000. Our deferred revenue consists of payments we have
received, and accounts receivable we have recorded, on account of:
- - future maintenance obligations; and
- - sales of our software products which were not sufficiently
completed by December 31, 2000 to comply with our revenue
recognition policy.
We expect to continue completing our obligations in these
transactions, so that the deferred revenue can be recognized as
revenue in future periods.
26
Cost of revenues for the year ended December 31, 2000 was $139,823.
Cost of revenues allocated to hardware and software re-sales was
$109,448, of which $81,945 resulted from sales to related parties. As
stated above, our re-sales to related parties are made at cost. Our
re-sales of hardware and software to arm's length parties are
generally included in sales of our software products. Our current
practice is to allocate:
- - an amount equal to the cost of hardware or software sold as
revenue attributed to the re-sale of hardware and software; and
- - the balance of the revenue from any sale to license revenue or
services.
Cost of revenues allocated to services and license revenue were,
respectively, $28,843 and $1,532. Gross margins on license and
service revenue were 99.7% and 70%, respectively. Substantially all
costs relating to license revenue were expensed in prior periods as
research and development costs.
We did not realize any revenue from sales of software during the year
ended December 31, 1999. Revenue from hardware and software re-sales
was $33,389, substantially all of which came from sales to related
parties. Cost of revenues was $32,900, substantially all of which
also came from sales to related parties. As at December 31, 1999 we
recorded no deferred revenue.
Interest income increased from $98,493 for the year ended December 31,
1999 to $550,533 for the year ended December 31, 2000. The reasons
for the increase were higher cash balances, and short term investments
in commercial paper, held during the year ended December 31, 2000.
Expenses increased in virtually all categories from the year ended
December 31, 1999 to the year ended December 31, 2000. The principal
reasons were the increase in our work force, the opening of additional
offices in the United States, and the increase in our sales and
marketing efforts.
In addition, we incurred large stock based compensation expenses
during 2000. We incur stock based compensation expenses when we grant
stock options to employees or to consultants having exercise prices
below the prevailing market prices for our shares. Total stock based
compensation expenses increased from $271,908 for the year ended
December 31, 1999 to $11,370,337 for the year ended December 31, 2000.
Over 60% of our 2000 stock based compensation expense arose from the
grant of 1,000,000 stock options on January 21, 2000. That grant
occurred in the following circumstances:
- - Under regulations of the Canadian Venture Exchange ("CDNX"),
where our shares were then trading, the minimum price for stock
options was based on the average closing price for our shares
during the 10 trading days preceding the grant of stock options.
- - We granted options to purchase 1,000,000 shares at $11.08 on
January 21, 2000. In accordance with CDNX regulations, the
$11.08 exercise price was based on the average closing price of
our shares on the 10 trading days preceding January 21, 2000.
- - The closing price for our shares on January 21, 2000 was $19.00.
We used this price in calculating the stock based expense
arising from this transaction, which was equal to $6,980,000.
- - The stock options granted on January 21, 2000 were subject to
approval of the CDNX, and could not be exercised before that
approval was obtained. We received CDNX approval on February 23,
2000. The closing price for our shares on that date was $10.00.
- - None of the options granted January 21, 2000 have been exercised.
27
Sales and marketing expenses increased from $2,281,827 for the year
ended December 31, 1999 to $16,807,001 for the year ended December 31,
2000. The principal factors which contributed to this increase
included the following:
- - Our charge for stock based compensation increased from $124,479
to $5,767,155.
- - Salaries and benefits allocated to sales and marketing, exclusive
of stock based compensation, increased from $841,032 to
$5,855,558. During 2000 we hired approximately 65 new sales and
marketing employees.
- - Trade show costs increased from $257,466 to $807,165. The
majority of our 2000 trade show expenses were incurred at the
Spring Internet World 2000 trade show, where we provided an
extensive display and demonstrations of our products.
- - Travel costs increased from $154,758 to $771,698, as a result of
the increase in our sales and marketing work force, and their
consequential travel expenses.
- - Advertising and marketing costs increased from $337,153 to
$1,729,939. Marketing expenses for the year ended December 31,
2000 consisted principally of costs incurred in preparing
marketing materials and in obtaining market studies.
- - Amortization charges allocated to sales and marketing increased
from $91,031 to $343,779.
- - Rent and facilities costs allocated to sales and marketing
increased from $128,392 to $674,596. This increase resulted
principally from the costs associated with our new head office in
Reston, and our additional regional sales offices.
Research and development expenses increased from $1,490,352 for the
year ended December 31, 1999 to $4,526,397 for the year ended December
31, 2000. Stock based compensation allocated to research and
development increased from $55,508 to $1,131,887. Salaries and
benefits, exclusive of stock based compensation, increased from
$985,426 to $2,087,980, due to the hiring of approximately 25 new
research and development employees. In addition, research and
development expenses for the year ended December 31, 2000 included
approximately $490,000 paid to Science Applications International
Corp., principally for work done in developing a demonstration for our
exhibit at Spring Internet World 2000 and for work relating to
telephony integration and VoIP features for potential incorporation
into our products. Travel costs allocated to research and development
increased from $42,737 to $188,085, principally as a result of travel
by our research and development personnel between our Reston and North
Vancouver offices.
General and administrative expenses increased from $1,978,298 for the
year ended December 31, 1999 to $7,533,958 for the year ended December
31, 2000. The principal factors which contributed to the increase
were as follows.
- - Our charge for stock based compensation increased from $91,921 to
$4,471,295.
- - Salaries and benefits allocated to general and administrative
expenses increased from $249,880 to $1,591,796 due to the hiring
of approximately 10 new administrative employees.
- - Professional fees increased from $683,887 to $739,949. Legal
expenses decreased from $443,378 to $349,662. Accounting and
auditing expenses increased from $170,114 to $210,000. During
1999, we also recorded an expense of $107,686, representing the
value of 250,000 shares issued to National Securities Corp. of
Chicago, Illinois in connection with the listing of our shares on
the OTC Bulletin Board.
28
- - Our bad debt expense increased from $6,146 to $136,503. The
majority of our bad debt allowance for the year ended December
31, 2000 related to one sales contract, in respect of which the
purchaser requested a deferral in payment to the second half of
2001. In addition, we made a general allowance in the amount of
10% of license and services revenue recognized during 2000.
- - During the year ended December 31, 2000 we recognized a foreign
exchange gain of $593,042, compared with a foreign exchange loss
of $184,179 for the year ended December 31, 1999. We incur
expenses, receive revenue, and hold short term financial
instruments, in both Canadian and United States dollars. Our
foreign exchange gains and losses result principally from
continuing to use the Canadian dollar as our functional currency,
while reporting our financial results in United States dollars.
Our increased expenses in all categories resulted principally from the
increase in our work force during the year ended December 31, 2000, as
well as the increase in our stock based compensation expense.
Exclusive of stock based compensation expenses, total operating costs
were $17,497,019 for the year ended December 31, 2000, compared with
$5,478,539 for the year ended December 31, 1999, representing a 219%
increase.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
During the year ended December 31, 1999 we recorded sales revenue of
$33,389, compared with $104,982 for the eight month period ended
December 31, 1998. The principal reasons for the decrease were as
follows:
- - Software sales decreased from $19,458 to $0. During the eight
month period ended December 31, 1998 we received revenue from the
sale of Tagalongs, our single user notation utility which has now
been discontinued. We did not realize revenue from the sale of
our Enterprise Interaction Suite, or its predecessor Dr. Bean,
during either 1998 or 1999.
- - Hardware re-sales decreased from $85,524 to $33,389. During
1998, all of our hardware re- sales were to BrainTech, Inc. and
Techwest Management Inc., related parties. During 1999, we sold
$2,533 in hardware to an arm's length party, and $30,856 to
BrainTech, Inc. and Techwest Management Inc.
Cost of revenues decreased from $92,986 for the eight month period
ended December 31, 1998 to $32,900 for the year ended December 31,
1999. Cost of hardware sold (including equipment sold to BrainTech,
Inc. and Techwest Management Inc.) decreased from $79,510 to $32,900.
Cost of software sold decreased from $13,476 to $0, as we did not
have any software sales during 1999.
Interest revenue earned on cash balances increased from $27,637 for
the eight month period ended December 31, 1998 to $98,493 for the year
ended December 31, 1999. The increase resulted from higher cash
balances during the period ended December 31, 1999.
With respect to our operating expenses, the general level of activity
within our company increased substantially during 1999. We opened a
new office in the United States, and began to hire employees in the
United States. We also hired new employees in Canada, and opened
additional office premises in Vancouver, British Columbia. In
addition, our results of operations for the period ended December 31,
1999 cover a full year, whereas the comparative period ended December
31, 1998 covered only eight months. As a result of these two factors,
expenditures in virtually all categories were substantially higher
during the period ended December 31, 1999.
29
Sales and marketing expenses increased from $491,287 for the eight
month period ended December 31, 1998 to $2,281,827 for the year ended
December 31, 1999. The principal factors which contributed to this
increase included the following:
- - Our charge for stock based compensation increased from $13,231 to
$124,479.
- - Salaries and benefits allocated to sales and marketing, exclusive
of stock based compensation, increased from $144,145 to $841,032,
due to the hiring of additional sales and marketing personnel.
- - Trade show costs increased from $161,723 to $257,466, principally
because we attended more trade shows, and rented larger display
booths.
- - Travel costs increased from $51,289 to $154,758, due principally
to costs associated with opening our Virginia office.
- - Marketing and advertising expenses increased from $64,240 to
$337,153. This increase was due in part to payments totaling
approximately $120,000 in 1999 to Big House Communications Ltd.,
for work in designing our Internet store front. There was no
corresponding expense during 1998.
- - Amortization charges allocated to sales and marketing increased
from $13,700 to $91,031.
- - Rent and facilities costs allocated to sales and marketing
increased from $6,300 to $128,392. During 1999, we opened our
United States head office, and also allocated additional office
space in our British Columbia premises to sales and marketing
personnel.
Research and development expenses increased from $349,434 for the
eight month period ended December 31, 1998 to $1,490,352 for the year
ended December 31, 1999. Stock based compensation allocated to
research and development increased from $12,349 to $55,508. Salaries
and benefits, exclusive of stock based compensation, increased from
$204,522 to $985,426, due to the hiring of additional research and
development personnel. Amortization costs allocated to research and
development increased from $63,687 to $129,887, and facilities costs
increased from $29,420 to $151,849. Research and development expenses
for the eight month period ended December 31, 1998 were reduced by
government grants in the amount of $17,039. There were no similar
receipts during 1999.
General and administrative expenses increased from $481,399 for the
eight month period ended December 31, 1998 to $1,978,298 for the year
ended December 31, 1999. In addition to the longer reporting period
covered by the period ended December 31, 1998, the principal factors
contributing to this increase included the following:
- - Our charge for stock based compensation increased from $3,822 to
$91,921.
- - Salaries and benefits allocated to general and administrative
expenses increased from $116,052 to $249,880.
- - Professional fees increased from $226,510 to $683,887.
Accounting and auditing costs increased from $53,351 to $170,114.
During 1999 we required substantial accounting and auditing work
in connection with the establishment of an offshore subsidiary,
compliance taxation matters, the installation of a new accounting
system, and the filing of public disclosure documents. Legal
costs increased from $146,233 to $443,378. During 1999, we
required substantial legal work in connection with private
placement financings we completed, registration of our shares
under United States securities laws, the establishment of an
offshore subsidiary, taxation issues relating to cross-border
transactions, and our outstanding court actions.
30
- - During 1999, we also recorded an expense of $107,686,
representing the value of 250,000 shares issued to National
Securities Corp. of Chicago, Illinois in connection with the
listing of our shares on the OTC Bulletin Board. There was no
corresponding expense during the eight month period ended
December 31, 1998.
- - Our bad debt expense decreased from $20,396 to $6,146.
- - During the year ended December 31, 1999 we recognized a foreign
exchange loss $184,179, compared with a foreign exchange gain of
approximately $93,402 for the eight month period ended December
31, 1998.
EIGHT MONTH PERIOD ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED
APRIL 30, 1998
During the eight month period ended December 31, 1998 we received
$104,982 in revenue compared with $19,054 during the twelve-month
period ended April 30, 1998. The principal reason for the increase
was an increase in hardware sales to related parties from $0 to
$85,524. The hardware sales were made to BrainTech, Inc. and Techwest
Management Inc.
Cost of sales increased from $12,933 for the fiscal year ended April
30, 1998 to $92,986 for the eight month period ended December 31,
1998. Cost of hardware sold (including equipment sold to BrainTech,
Inc. and Techwest Management Inc.) increased from $0 to $79,510. Cost
of software sold increased from $12,933 to $13,476.
Interest income increased from $19,847 to $27,637, as a result of
higher cash balances during the period ended December 31, 1998.
Sales and marketing expenses increased from $392,367 for the year
ended April 30, 1998 to $491,287 for the eight month period ended
December 31, 1998. The principal factors which contributed to this
increase included the following:
- - Salaries and benefits allocated to sales and marketing increased
from $17,767 to $144,145.
- - Trade show costs increased from $130,212 to $161,723.
- - Travel costs increased from $25,476 to $51,289.
- - These increases were offset in part by a reduction in marketing
and advertising expenses, which decreased from $180,245 to
$64,240. During the fiscal year ended April 30, 1998 we paid
approximately $111,000 to marketing agents in respect of our
previous products, NetNotions and Tagalongs. There were no
similar payments during the eight month period ended December 31,
1998.
Research and development expenses decreased from $434,246 for the year
ended April 30, 1998 to $349,434 for the eight month period ended
December 31, 1998. The principal reason for the decrease was the
shorter reporting period covered by the period ended December 31,
1998. On a per month basis, research and development expenses
increased from approximately $36,800 per month to approximately
$43,700 per month. Salaries and benefits allocated to research and
development decreased from $269,845 to $204,552, but were slightly
higher on a per month basis, increasing from approximately $22,500 per
month to approximately $25,600 per month. Research and development
expenses for the eight month period ended December 31, 1998 were
reduced by government grants in the amount of $17,039. There were no
similar receipts during the eight month period ended April 30, 1998.
31
General and administrative expenses decreased from $895,705 for the
year ended April 30, 1998 to $481,399 for the eight month period ended
December 31, 1998. In addition to the shorter reporting period
covered by the period ended December 31, 1999, the principal factors
contributing to this decrease included the following:
- - Salaries and benefits allocated to general and administrative
expenses decreased from $228,510 to $116,053.
- - Professional fees decreased from $398,260 to $226,510, due
principally to a reduction in our legal and accounting costs.
- - During the eight month period ended December 31, 1998 we realized
a foreign exchange gain of $93,402, compared to $23,818 for the
year ended April 30, 1998.
- - Our bad debt expense decreased from $25,860 to $20,397. During
the eight month period ended December 31, 1998 we wrote off the
balance of an account receivable from Intermark Corporation in
the amount of $20,397. Intermark Corporation acted previously as
our marketing agent for Tagalongs in the United States. In our
April 30, 1998 financial statements, we made a provision of
$25,860 in respect of the receivable from Intermark Corporation.
During the eight month period ended December 31, 1998, we
determined to write off the remaining balance owing by Intermark
Corporation, as it appeared that Intermark Corporation might be
in financial difficulty, such that legal proceedings against
Intermark Corporation to collect the amount owing might not be
worthwhile.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed operations primarily through the
private placement of common equity. From May 1995 to December 31, 2000,
we raised approximately $40.4 million in equity financing through
private placements, including the exercise of warrants issued pursuant
thereto, and the exercise of stock options.
In January 2000, we closed a private placement of 2,500,000 common
shares at a price of $1.64 per share, yielding net proceeds of
approximately $4.1 million. Additionally, we issued 2,500,000 share
purchase warrants. Each share purchase warrant entitled the holder to
purchase one additional common share at prices of $1.64 per share in
the first year and $1.89 per share in the second year. 598,729 of the
warrants have been exercised.
In April 2000, we closed a private placement of 1,084,000 common
shares at a price of $10.00 per share, yielding net proceeds of
approximately $10.5 million. Additionally, we issued 1,084,000 share
purchase warrants. Originally, each share purchase warrant entitled
the holder to purchase one additional common share for $10.00 in the
first year and $11.50 in the second year. We have subsequently
reduced the exercise price of some of these warrants, as explained
above under "Share Purchase Warrants". None of these warrants have
been exercised.
As at December 31, 2000 our cash and cash equivalents and short term
investments were $6.9 million, an increase of $1.0 million from
December 31, 1999. Working capital at December 31, 2000 was $6.7
million, an increase of $1.0 million from December 31, 1999. We
invest a portion of our excess funds in short-term money market funds,
commercial paper and short-term notes. As at December 31, 2000,
short-term investments held as available for sale totaled $6.0
million.
Net cash used in operating activities for the years ended December 31,
2000 and December 31, 1999 was $15.6 million and $4.5 million,
respectively. Cash used in operating activities in each period was
32
primarily the result of net losses, increases in accounts receivable,
and increased prepaid expenses, partially offset by increases in
accounts payable and deferred revenue.
Net cash provided by financing activities for the years ended December
31, 2000 and December 31, 1999 was $19.1 million and $11.0 million,
respectively. Cash provided by financing activities in each of the
periods was the result of the issuance of common equity, exercise of
share purchase warrants, and exercise of options.
Net cash used in investing activities for the years ended December 31,
2000 and December 31, 1999 was $7.9 million and $1.0 million,
respectively. Cash used in investing activities in each period was
primarily the result of the purchase of short-term investments and
capital assets. We incurred significant capital expenditures for the
year ended December 31, 2000 due to the expansion of our company and
the build out of our offices in the U.S.
In February 2001 we closed a private placement of 5,229,752 shares.
3,667,752 shares were issued at a price of $0.76 per share and
1,562,500 shares were issued at a price of $0.80 per share. Net
proceeds from the offering were approximately $3.7 million.
Additionally, we issued 5,229,752 share purchase warrants and 526,316
brokers' warrants. Each share purchase warrant entitles the holder
to purchase one additional share for three years at a price of $1.00
per share. Each brokers' warrant entitles the holder to purchase one
unit at a price of $0.76 per unit, with each unit consisting of one
share and one share purchase warrant. None of the warrants or
brokers' warrants have been exercised.
In the United States, we have approximately 59 employees as of March
15, 2001. The majority of our United States employees work in sales,
customer service, and related areas. Our monthly salary costs in the
United States are approximately $425,000 per month, exclusive of
commission or bonus payments. We expect to make substantial
commission and bonus payments only if we generate sales revenue.
We also have approximately 75 employees working in Canada. Of our
Canadian employees:
- - approximately half work in the development of our products or in
running our internal systems;
- - approximately one third work in sales, customer support, and
related areas; and
- - the remainder work in executive or administrative positions.
Salary costs in our Canadian offices are approximately $266,000 per
month.
Exclusive of salary costs, other cash expenditures during 2000 were
approximately:
- - $400,000 per month for sales and marketing;
- - $85,000 per month for research and development; and
- - $110,000 per month for general and administrative expenses.
During 2001, we plan to reduce some of theses expenditures
substantially. In sales and marketing, we plan to reduce our
participation in trade shows, and also our advertising and marketing
expenditures. Exclusive of salary costs, we plan to reduce our sales
and marketing expenses to approximately $150,000 per month. In total,
we expect that our non-salary cash expenditures will be approximately
$420,000 per month. Accordingly, at our current rate of operation, we
expect that total cash expenditures will be approximately $1,300,000
per month, inclusive of salary costs.
33
As of March 15, 2001, inclusive of the private placement financing
described above, our cash resources total approximately $6.9 million.
Accordingly, at an expenditure rate of $1,300,000 per month, our
present cash balance will be sufficient to pay ongoing cash expenses
until approximately the end of the third quarter of 2001. We are
continuing to seek ways to reduce our expenditures until we are able
to increase revenues substantially. Given our current cash balances
and expected cash requirements, we believe that it will be necessary
for us to raise additional funds through the issuance of securities of
the company.
RISK FACTORS
INVESTMENT IN OUR COMMON SHARES INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS, BEFORE PURCHASING OUR COMMON SHARES.
BECAUSE WE DO NOT YET EARN SUBSTANTIAL REVENUE, WE FACE A
RISK THAT OUR BUSINESS WILL FAIL.
We have never earned substantial operating revenue. We have been
dependent on equity financing to pay operating costs and to cover
operating losses.
We estimate that we have sufficient cash to pay ongoing operating
expenses, at their current level, until approximately the end of the
third quarter of 2001. To continue operation beyond that we will have
to generate operating revenue or raise additional capital. If we do
not, we face a risk that our business will fail.
The auditors' report on the December 31, 2000 financial statements
includes an additional paragraph that identifies conditions that raise
substantial doubt about our ability to continue as a going concern.
The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
BECAUSE WE HAVE A LIMITED OPERATING AND SALES HISTORY, WE DO
NOT HAVE A RELIABLE BASIS FOR PREDICTING THAT WE WILL EARN
REVENUE IN THE FUTURE.
Our products are relatively new, and are directed to a new and rapidly
changing market. We do not have a record of past sales from which we
can predict future revenues. As a result, our prospects for
generating revenue are speculative, and may change rapidly and without
warning. We have no assurance that we will earn substantial revenue
in the future, nor any basis for predicting the level of any future
revenues.
BECAUSE OF OUR LIMITED OPERATING AND SALES HISTORY, WE
CANNOT MAKE RELIABLE PROJECTIONS OF OUR FUTURE OPERATING
COSTS.
During 2000, we increased our work force and operating costs
substantially. In order to generate substantial sales revenue, we may
have to continue hiring additional personnel or incur substantial
advertising costs. As a result of our lack of historical sales, we
cannot make reliable projections of the number of additional personnel
we will require, the cost of employing those personnel, or the level
of marketing and overhead expenses we will incur. We thus have no
assurance that any revenue we earn will be sufficient to cover the
cost of earning that revenue, or to generate operating profits.
34
BECAUSE WE LACK PROVEN DISTRIBUTION CHANNELS, WE MAY BE
UNABLE TO REACH POTENTIAL CUSTOMERS FOR THE ENTERPRISE
INTERACTION SUITE.
We plan to market the Enterprise Interaction Suite through two
principal distribution channels, our direct sales force and value
added resellers. To date, we have not generated substantial sales
revenue through either channel. Accordingly, we have no assurance
that these methods of sale will be effective in reaching potential
customers for the Enterprise Interaction Suite.
If we do not achieve substantial revenue through our direct sales
force, we may be dependent on value added resellers to sell our
products. Failure to recruit a sufficient number of value added
resellers, or failure of our value added resellers to market our
products effectively, could prevent us from achieving substantial
sales revenue.
BECAUSE OUR PRODUCTS ARE OFFERED IN AN EMERGING MARKET, THE
POTENTIAL MARKET FOR OUR PRODUCTS IS UNCERTAIN.
Our products are intended for a new and emerging market for Web based,
interactive electronic business solutions. Our future success depends
on the widespread adoption of the Web as a medium for business
transactions. Many factors could hinder the development of this
market, including the following:
- - The Web has experienced, and is expected to continue to
experience, significant user and traffic growth. The Web
infrastructure may not be able to support the demands placed on
it by the continued growth upon which our success depends.
- - There are many unresolved legal and technical issues concerning
Web based commerce. They include issues of security, privacy,
reliability, cost, accessibility, and quality of service. If
these issues are not resolved, Web based commerce may not
continue to increase.
- - There is substantial uncertainty about how governments may
attempt to regulate use of the Web or tax Web based transactions.
The imposition of new government regulations or taxes may impede
use of the Web for business purposes.
If Web based commerce does not continue to increase, the market for
our products, and our prospects for generating sales, will be
impaired.
BECAUSE WE ARE NOT A LARGE COMPANY, WE MAY BE UNABLE TO
COMPETE.
Many of our competitors have longer operating histories, greater name
recognition, and substantially greater financial, technical,
marketing, and other resources than we have. Our competitors may be
able to expand and develop their technologies more quickly, to devote
greater resources to the development and marketing of their products,
or to respond more quickly to changing opportunities or technologies.
The market for computer software is dominated by large corporations
which have assets much greater than ours, and which might be able to
develop software duplicating the features of our products at modest
cost. We face a continual risk that market opportunities or product
features which we intend to exploit can, within a short period of
time, become dominated by much larger and financially stronger
corporations, rendering our products obsolete or non-competitive.
35
BECAUSE OUR MARKET IS HIGHLY COMPETITIVE AND CHANGING
RAPIDLY, OUR PRODUCTS MAY NOT GAIN MARKET ACCEPTANCE.
The market for interactive Web based electronic business solutions is
highly competitive and rapidly changing. Many types of changes in
either the demand side or the supply side of our market could render
our products non-competitive. Those types of changes include, but are
not limited to, the following:
- - We believe that barriers to entry in our market are relatively
small, so that new competitors could enter the market within a
short period of time.
- - Technological advance in the computer industry is rapid. Other
companies may develop new technologies which provide the same
functions as our products with greater efficiency or lower cost.
- - Industry consolidations, or formations of alliances among
industry participants, may give our competitors superior
marketing channels, economies of scale, or the benefit of
strategic alliances with major software companies. Competing
products may also be integrated or marketed with broader product
offerings, so that our products will be unattractive to customers
seeking those broader product offerings.
- - Customer preference may shift away from the kinds of products we
offer to products offered by other companies.
BECAUSE WE HAVE NOT ACHIEVED SUBSTANTIAL SALES REVENUE IN
THE PAST, WE MAY NOT HAVE ADEQUATE PERSONNEL OR SYSTEMS TO
COPE WITH A RAPID INCREASE IN SALES.
We could experience rapid growth in orders, sales, and revenue. We
cannot assure that we will be able to manage the strains that future
growth may place on our administrative infrastructure, systems, and
controls. Accordingly, increased sales of our products may require us
to hire additional personnel to install and support our products.
We may also be unable to hire additional personnel we need. Qualified
technical personnel are in great demand throughout the software
industry. Our success will depend, to a substantial degree, on our
ability to attract, train, motivate, and retain qualified personnel.
We have no assurance that we will be able to compete successfully in
the job market, to attract or keep the qualified employees we need.
BECAUSE MUCH OF OUR WORK FORCE HAS BEEN HIRED RECENTLY, WE
ARE VULNERABLE TO LOSS OF KEY EMPLOYEES.
We have increased our work force substantially during 2000. As a
result, a substantial number of our employees are relatively new, and
have worked together for only a short period of time.
The success of our marketing efforts is substantially dependent on our
President and our Executive Vice President / General Manager of United
States Operations. Continued development of our products is
substantially dependent on our Chief Technology Officer.
The departure of a single employee or a small number of employees
could hurt our business. We cannot assure that we will be able to
attract and retain qualified personnel on acceptable terms. We do not
have key man insurance on any of our employees.
36
BECAUSE OUR BUSINESS IS DEPENDENT ON PROPRIETARY TECHNOLOGY,
WE ARE VULNERABLE TO MISAPPROPRIATION OF OUR TECHNOLOGY.
We rely heavily on our proprietary software technology. To protect
our proprietary technology we rely on confidentiality agreements with
key employees and third parties, and on trade secret, trademark, and
copyright laws. Although we attempt to maintain confidentiality of
our software technology, we cannot assure that we have adequately
protected our technology from misappropriation.
In addition, others may attempt to "reverse engineer" our products, to
determine their method of operation and to develop competing products.
Sophisticated technology has been developed to facilitate reverse
engineering of computer software, increasing the risk that our
products could be duplicated by others at modest cost.
BECAUSE WE OPERATE IN A HIGH TECHNOLOGY FIELD, WE FACE A
RISK OF INFRINGEMENT CLAIMS FROM OTHER COMPANIES.
If any of our products violate third party proprietary rights we may
be required to re-engineer our products or seek licenses from third
parties. We have no reason to believe that any of our products
infringe the proprietary rights of third parties. However, we do not
conduct comprehensive patent searches to determine whether the
technology used in our products infringes any third party patents.
High tech markets are characterised by the existence of a large number
of patents with broad, and questionable, application. As the market
for our products develops, and the functionality of those products
grows and overlaps with products offered by competitors, our products
may become increasingly subject to infringement claims. Although we
have no reason to believe that any of our products infringe the
proprietary rights of third parties, there can be no assurance that
infringement claims will not be asserted against us, or that such
claims will not require us to enter into royalty arrangements or
result in costly litigation.
BECAUSE OUR PRODUCTS RELY ON THIRD PARTY TECHNOLOGIES, WE
MAY NOT HAVE ACCESS TO REQUIRED TECHNOLOGY.
Our Enterprise Interaction Suite incorporates software licensed from
third parties. We have no reason to believe that our existing license
rights will cease to be available, but we cannot assure that they will
continue.
In addition, we expect that we will have to license additional third
party technology to continue development of our products. We can not
assure that the third party technology we require will be available,
or that it will be available on acceptable commercial terms.
Inability to obtain required technology from third parties could
require us to develop software performing the required functions
independently, or to re-engineer our products to operate without the
licensed software. This could result in interruptions or delays in
our ability to sell or continue development of our products, in loss
of important features of our products, or in increased costs for our
products.
BECAUSE OUR PRODUCTS ARE COMPLEX, THEY MAY CONTAIN ERRORS.
Software products are complex, and frequently contain errors, or
"bugs". Our products may contain such errors, which could cause
product failures. Our products have not had extensive use under actual
37
operating conditions, and accordingly, we have no assurance
that they will operate free of material errors or defects. Product
failures could result in loss of revenues, loss of market share,
failure to achieve market acceptance, or injury to our reputation.
BECAUSE WE HAVE NOT COMPLETED ANY LARGE INSTALLATIONS OF THE
ENTERPRISE INTERACTION SUITE, WE DO NOT KNOW HOW WELL IT
WILL OPERATE IN LARGE INSTALLATIONS.
To date, most of our installations of the Enterprise Interaction Suite
and its predecessor products have been small, involving only a few
customer service representative workstations. Our internal testing of
the Enterprise Interaction Suite indicates that it can support large
installations. However, we have never completed a large installation
of any of our products, or secured a contract for a large
installation. Owing to our lack of experience with large
installations, we do not know how well the Enterprise Interaction
Suite will run in large installations.
BECAUSE WE HAVE LIMITED EXPERIENCE USING OUR PRODUCTS UNDER
ACTUAL OPERATING CONDITIONS, WE COULD FACE SUBSTANTIAL
PRODUCT LIABILITY CLAIMS.
Because of our limited operating history with the Enterprise
Interaction Suite, we have no assurance that it will not experience
failures under actual operating conditions. If any of our products
fail, a customer may assert a claim for substantial damages against
us, regardless of whether we are responsible for the failure. Product
liability claims could require us to spend significant time and money
in litigation, or to pay significant damages.
We currently carry limited insurance, which may not cover claims
against us for financial losses, and which will not be sufficient in
amount to cover large claims. In addition, there can be no assurance
that any insurance coverage will be available in the future on
reasonable terms, that insurance we purchase will be sufficient to
cover any claims against us, or that insurers will not deny coverage
with respect to any future claim.
BECAUSE WE HAVE NOT GENERATED SUBSTANTIAL REVENUE AND
BECAUSE OUR BUSINESS HAS NOT BEEN PROFITABLE, WE MAY NOT BE
ABLE TO RAISE ADDITIONAL CAPITAL WE NEED.
We will likely require additional capital to continue the development
of our products, to pay the costs of marketing those products, or to
cover operating losses until we are able to become profitable. As we
have never generated operating profits or substantial sales revenue,
we may not be able to raise the amount of capital we require.
Several other factors may also hinder our efforts to raise capital.
They include the following:
- - Our share price has been highly volatile during 2000 and the
first part of 2001. The volatility of our share price may deter
potential investors.
- - Subsequent to the first quarter of 2000, many technology
companies have experienced financial difficulties and rapidly
declining share prices. As a result, potential investors may be
less willing to invest in technology companies generally.
- - Subsequent to the first quarter of 2000, capital markets have
become tighter generally, with less financing available for
technology companies generally.
38
BECAUSE WE MAY HAVE TO RAISE ADDITIONAL CAPITAL, THE
INTERESTS OF SHAREHOLDERS MAY BE DILUTED.
To raise additional capital we may have to issue additional shares,
which may dilute the interests of existing shareholders substantially.
Alternatively, we may have to borrow large sums, and assume
obligations to make substantial interest and capital payments. We may
also have to sell significant interests in some or all of our
products. If we are able to raise additional capital, we cannot
assure that it will be on terms that enhance the value of our common
shares.
BECAUSE WE HAVE NON-ARM'S LENGTH AGREEMENTS WITH
SUBSIDIARIES, GOVERNMENTS MAY CHALLENGE OUR TAX RETURNS.
We have non-arm's length agreements with our subsidiaries Sideware
Corp. and Sideware International SRL, which operate in jurisdictions
outside Canada. We believe that these agreements have been implemented
in accordance with taxation laws, regulations, treaties, and
assessment practices prevailing in Canada, the United States, and the
other jurisdictions involved. However, Canadian or U.S. taxation
authorities may challenge the terms or tax effect of these agreements,
and issue taxation assessments requiring us to pay additional income
taxes beyond the amounts we consider to be owing. Such assessments
could lead to tax liabilities substantially greater than we expect, or
to duplicate tax liabilities in different jurisdictions on the same
income.
BECAUSE THE MARKET PRICE OF OUR COMMON SHARES HAS BEEN
PARTICULARLY VOLATILE, INVESTORS IN OUR COMMON SHARES FACE A
HIGH DEGREE OF MARKET RISK.
The stock market in general has recently experienced extreme price and
volume fluctuations. The stock prices of technology companies,
particularly Web-related companies, have been extremely volatile, and
have experienced price fluctuations that have often been unrelated or
disproportionate to the operating performance of these companies.
The price of our common shares has also experienced substantial
fluctuations. Between January 1, 2000 and March 15, 2001 our share
price has fluctuated between a high of $25.50 and a low of $0.33. The
susceptibility of our stock price to fluctuation exposes purchasers of
our stock to a high degree of risk.
As we have not at any time announced material earnings, we believe
that the fluctuations in our stock price have resulted primarily from
market perceptions of the speculative value of our business
opportunities. The price of our common shares could fall
substantially if we do not generate future earnings that meet the
expectations of investors.
BECAUSE OUR STOCK MAY BE SUBJECT TO "LOW PRICE STOCK"
RULES, THE MARKET FOR OUR STOCK MAY BE LIMITED.
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a
market price less than $5.00. Our stock is currently subject to those
rules, and may remain so indefinitely. The penny stock rules require
broker-dealers to make a special suitability determination before
selling our stock to investors who are not either regular customers or
accredited investors. As a result, the potential market for our
stock may be limited.
39
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES AND INFLATION
We have reported our financial results for the year ended December 31,
2000 in United States dollars. However, through most of 2000 we were
headquartered in Canada. Accordingly, we used the Canadian dollar as
our functional currency during 2000, and recorded our transactions in
Canadian dollars. To prepare our year end financial statements, we
were required to convert Canadian dollar amounts into United States
dollars, which we did using an exchange rate of US$1.00 = C$1.4900.
For fiscal periods prior to 2000, we previously reported our financial
results in Canadian dollars. For purposes of this annual report, we
have converted the results from prior periods into United States
dollars. In doing, we used the following exchange rates:
Year ended December 31, 1999: US$1.00 = C$1.4858
Eight month period ended December 31, 1998: US$1.00 = C$1.5101
Year ended April 30, 1998: US$1.00 = C$1.4056
We have reported foreign exchange gains and losses, which result from
adjusting entries made in the process of converting between
currencies. For the year ended December 31, 2000, we incurred a
foreign exchange gain of $593,042. For the fiscal year ended December
31, 1999, we reported a foreign exchange loss of $184,179. We expect
that our reported foreign exchange gains and losses will be smaller in
future years, when we expect to use the United States dollars as both
our functional and reporting currency, thereby reducing the number of
transactions requiring exchange rate conversions.
We continue to incur a substantial portion of our expenses in Canadian
dollars. As a result, fluctuations in exchange rates between the
United States dollar and the Canadian dollar could materially affect
our results of operations in the future. As at March 15, 2001 we have
not engaged in exchange rate hedging activities. To the extent we
implement such hedging activities in the future, there can be no
assurance that we will be successful.
While we believe that inflation has not had a material adverse affect
on our results of operations, there can be no assurance that inflation
will not have a material adverse effect on our results of operations
in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As at December 31, 2000 we have not entered into or acquired financial
instruments that have a material market risk. We have no financial
instruments for trading or other purposes or derivative or other
financial instruments with off balance sheet risk. All financial
assets and liabilities are due within the next twelve months and are
classified as current assets or liabilities in the consolidated
balance sheet provided with this prospectus. The fair value of all
financial instruments at December 31, 2000 is not materially different
from their carrying value.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Appended hereto are the following financial statements:
(1) Consolidated balance sheets as of December 31, 2000 and December
31, 1999;
(2) Consolidated statements of operations and comprehensive loss for
the fiscal years ended December 31, 2000 and 1999, the eight
month period ended December 31, 1998, and the fiscal year ended
April 30, 1998;
(3) Consolidated statement of stockholders equity for the fiscal
years ended December 31, 2000 and 1999, the eight month period
ended December 31, 1998, and the fiscal year ended April 30,
1998;
(4) Consolidated statements of cash flows for the fiscal years ended
December 31, 2000 and 1999, the eight month period ended December
31, 1998, and the fiscal year ended April 30, 1998; and
(5) the auditors' report of KPMG LLP thereon.
Supplementary financial data showing revenues, gross margin, net loss and
net loss per share on a quarterly basis during our two most recent fiscal
years is contained in Note 14 to the audited consolidated financial
statements appended to this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The following table states information with respect to our directors
and executive officers:
Name Age Position
James L. Speros 42 President, Chief Executive
Officer, and Director
W. Grant
Sutherland 54 Chairman of the Board of
Directors
Jay H. Nussbaum 57 Director
Jack Kemp 65 Director
John Shoemaker 58 Director
Peter Kozicki 67 Director
Edward A. White 56 Director
Scott Friedlander 41 Executive Vice President -
General Manager of US Operations
Rahul Bardhan 36 Chief Technology Officer
Stewart Walchli 29 Chief Financial Officer
41
JAMES L. SPEROS. Director, President, and Chief Executive Officer.
Mr. Speros was appointed our President and Chief Executive Officer
effective October 15, 2000. Mr. Speros has also been the President
and Chief Operating Officer of Sideware Corp. since August 5, 1998.
From June 1993 to January 1997 Mr. Speros was the President and owner
of two professional sports franchises, the Baltimore Stallions and
Montreal Alouettes of the Canadian Football League. From January 1997
to February 1999 Mr. Speros was the President of Exploration Mirandor,
a mining exploration company. Mr. Speros is a director of
Consolidated Maymac Petroleum Corp., a public company trading on the
Canadian Venture Exchange. Mr. Speros is also a director of
BrainTech, Inc.
W. GRANT SUTHERLAND. Director and Chairman of the Board. Mr.
Sutherland has been a director since May 1993. Since May 3, 1995 Mr.
Sutherland has held the position of Chairman of the Board. Since
December 1995 Mr. Sutherland has also been a director and the Chairman
of the Board of BrainTech, Inc. Mr. Sutherland is a licensed lawyer
in the Province of British Columbia, and has been engaged in the
private practice of law for 26 years. Mr. Sutherland is a partner in
the law firm Sutherland Johnston, but currently devotes the
substantial majority of his time to our affairs.
JAY H. NUSSBAUM. Director. Mr. Nussbaum was appointed a director on
June 14, 1999. Mr. Nussbaum is the Executive Vice President of Oracle
Service Industries and a member of the Executive Committee of Oracle.
Mr. Nussbaum joined Oracle after a 24-year career with Xerox Corp.
that culminated with his position as President, Integrated Systems
Operations. While at Xerox, Mr. Nussbaum was responsible for
integration and consulting services in commercial and federal
government markets. Mr. Nussbaum joined Oracle in 1992 as the Senior
Vice President and General Manager of what was then Oracle Federal.
Mr. Nussbaum received a bachelor's degree in business from the
University of Maryland. He is a member of the University's
Chancellor's Advisory Board and also serves on the advisory board of
James Madison University. Mr. Nussbaum is on the board of directors
of the Armed Forces Communications and Electronics Association and is
active in several other business and charitable organizations in the
Washington area.
JACK KEMP. Director. Mr. Kemp was appointed a director on February 9,
2001. Mr. Kemp is a co-founder of Empower America, an organization
devoted to ensuring that government actions foster growth, economic
well-being, freedom, and individual responsibility. In 1996, Mr. Kemp
was the Vice-Presidential candidate for the Republican Party. Prior
to founding Empower America, Mr. Kemp served for four years as U.S.
Secretary of Housing and Urban Development, and for 18 years in the
U.S. House of Representatives. Mr. Kemp also serves as a director of
Oracle Corp., Hawk Corporation, Proxicom, Inc., and Speedway
Motorsports Inc.
JOHN SHOEMAKER. Director. Mr. Shoemaker was appointed a director on
February 9, 2001. For the past 10 years, Mr. Shoemaker has held a
variety of senior executive positions with Sun Microsystems. Since
July 2000, he has served as executive vice president of Sun's systems
product group. Prior to joining Sun Microsystems, Mr. Shoemaker was
the senior vice president of electronic printing and the vice
president and general manager of the document systems business at
Xerox Corporation.
PETER KOZICKI. Director. Mr. Kozicki was elected a director on May
3, 1995. Mr. Kozicki is a retired engineer. Prior to his retirement,
Mr. Kozicki was a private engineering consultant for over 12 years,
specializing in the installation of deep foundations and vertical
barriers for containment of hazardous wastes. He obtained his B.Sc.
degree in Civil Engineering from the University of Saskatchewan and a
M.Sc. degree in Soil Mechanics from the University of Alberta.
42
EDWARD A. WHITE. Director. Mr. White was appointed a director on
October 14, 1995. Mr. White is a member of the British Columbia
Institute of Chartered Accountants, and practiced as a self-employed
chartered accountant for over 20 years. Mr. White has been a director
and officer of Oro Bravo Resource Partners Ltd. since February 1987,
and a director of West African Venture Exchange Corp. since March 1993.
In November 2000, Mr. White also became a director and Chief Financial
Officer of BrainTech, Inc. Mr. White currently works full time for
BrainTech, Inc.
SCOTT W. FRIEDLANDER. Executive Vice President and General Manager of
US Operations. Mr. Friedlander joined us in February 2000, after a
successful 18 year career with Xerox Corp. At Xerox, Mr. Friedlander
held the position of Vice President of Public Sector Operations (North
American Solutions Group), and oversaw a division earning $165 million
in revenue.
RAHUL BARDHAN. Chief Technology Officer. Mr. Bardhan joined us in
September 2000. Mr. Bardhan was previously employed by Oracle Corp.,
in the capacity of Senior Practice Director. While employed by Oracle
Corp., Mr. Bardhan was also involved in establishing Oracle's national
e-commerce accounting practice and in opening Oracle's office in
India. Mr. Bardhan holds a Bachelor in Engineering in Computer
Science and Engineering from the University of Mysore, India, and a
Masters Degree in Business Administration from Virginia Tech.
STEWART F. WALCHLI. Chief Financial Officer. Mr. Walchli joined us
in March 2000. Mr. Walchli worked previously for three years as an
investment banker with CIBC World Markets, focusing on technology
companies, particularly in the Internet and e-commerce spaces. Prior
to CIBC World Markets, Mr. Walchli worked in the Corporate Finance and
Financial Assurance Groups with KPMG. Mr. Walchli is a member of the
Institute of Chartered Accountants of British Columbia.
ITEM 11. EXECUTIVE COMPENSATION
Apart from stock options, we do not presently compensate our directors
for services provided as directors. We provide compensation to our
directors who are also officers or employees, for services rendered as
officers or employees. We provide the following compensation to our
directors and executive officers.
JAMES L. SPEROS. We currently pay Mr. Speros an annual salary of
$250,000. During 2000 Mr. Speros' salary was $225,000 per year.
During November and December 1999, Mr. Speros' salary was $15,000
per month. Between April 1999 and November 1999, Mr. Speros' salary
was $11,500 per month. Between August 1998 and April 1999, Mr.
Speros' salary was $8,000 per month. In October and November 1999,
Mr. Speros received bonus payments totaling $50,000. In addition,
Mr. Speros holds stock options to acquire 875,000 shares.
GRANT SUTHERLAND. Effective September 1, 2000 we pay Mr. Sutherland
an annual salary of $100,000. Between January 1, 2000 and August 31,
2000 Mr. Sutherland's salary was $200,000 per year. Between June 1,
1998, and December 31, 1999, Mr. Sutherland's salary was $6,600 per
month, which we shared with BrainTech, Inc., paying 80% during 1999
and 50% during 1998. Prior to June 1, 1998, we paid Mr. Sutherland
$3,300 per month. Mr. Sutherland exercised stock options to acquire
250,000 shares in 1999 and options to acquire 80,000 shares in 2000.
Mr. Sutherland holds additional stock options to acquire 718,000
shares. At the end of the first quarter of 2000 we paid Mr. Sutherland
a discretionary bonus of $85,140, in respect of services rendered
during 1999.
43
SCOTT FRIEDLANDER. Effective January 1, 2001 we pay Mr. Friedlander
an annual salary of $250,000. Between September 1, 2000 and December
31, 2000 Mr. Friedlander's annual salary was $200,000. Between
February 1, 2000 and August 31, 2000 Mr. Friedlander's annual salary
was $175,000. We paid Mr. Friedlander a bonus of $16,800 as an
inducement to accept employment with our company. We also accrued an
additional payment for Mr. Friedlander in the amount of $200,000 as
at December 31, 2000, as an adjustment to Mr. Friedlander's
compensation in recognition of additional executive and administrative
responsibilities undertaken by Mr. Friedlander, beyond his initial
responsibilities in managing our US sales operations. We expect to
make that payment in April 2001. Mr. Friedlander will be entitled
to receive bonuses equal to:
- - 75% of his base salary if our revenue exceeds $20 million during
2001; and
- - 200% of his base salary if our revenue exceeds $26.7 million
during 2001.
We have also entered into a Change of Control Severance Agreement with
Mr. Friedlander, entitling Mr. Friedlander to receive up to three
years salary and bonus payments if we terminate his employment
following a change in control of the company. Mr. Friedlander holds
options to purchase 2,500,000 shares.
RAHUL BARDHAN. We currently pay Mr. Bardhan an annual salary of
$250,000. We also accrued a bonus in the amount of $60,000 for Mr.
Bardhan as at December 31, 2000, which we agreed to at the time Mr.
Bardhan commenced employment, as an inducement to join our company.
We expect to pay that bonus in April 2000. Mr. Bardhan will
also be entitled to receive bonuses equal to:
- - 75% of his base salary if our revenue exceeds $20 million during
2001;
- - 200% of his base salary if our revenue exceeds $26.7 million
during 2001;
- - 75% of his base salary if our revenue exceeds $33 million during
2002; and
- - 200% of his base salary if our revenue exceeds $40 million during
2002.
We have entered into a Change of Control Severance Agreement with Mr.
Bardhan, entitling Mr. Bardhan to receive up to three years salary and
bonus payments if we terminate his employment following a change in
control of the company. Mr. Bardhan holds options to purchase
1,500,000 shares.
STEWART WALCHLI. We currently pay Mr. Walchli a salary of $132,000
per year. Prior to December 31, 2000, Mr. Walchli's salary was
$100,000 per year. We also accrued an additional payment for Mr. Walchli
in the amount of $50,000 as at December 31, 2000, as an adjustment
to Mr. Walchli's compensation in recognition of additional duties and
responsibilities undertaken by Mr. Walchli in assuming the role of
Chief Financial Officer, after accepting employment with us as Vice-
President Finance. We expect to make that payment in April
2001. Mr. Walchli will be entitled to receive bonuses equal to:
- - 75% of his base salary if our revenue exceeds $20 million during
2001; and
- - 200% of his base salary if our revenue exceeds $26.7 million
during 2001.
We have entered into a Change of Control Severance Agreement with Mr.
Walchli, entitling Mr. Walchli to receive up to three years salary and
bonus payments if we terminate his employment following a change in
control of the company. Mr. Walchli also holds options to purchase
800,000 shares.
44
The following table summarizes compensation paid to our directors and
named executive officers for the fiscal years ended December 31, 2000
and December 31, 1999, the eight month period ended December 31, 1998,
and the fiscal year ended April 30, 1998.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Name and Awards Payouts All other
Principal Period Restricted Securities Compensation
Position Ended Salary Bonus Other Stock Underlying
mm/dd/yy Awards Optons/SARs
James Speros, 12/31/00 $225,000 $ 0 $ 0 0 0 $0 $54,000 (1)
President, CEO 12/31/99 $136,250 $ 50,000 $ 0 0 125,000 $0 $ 0
(since Oct. 12/31/98 $ 44,000 $ 0 $ 0 0 250,000 $0 $ 0
15, 2000)
Grant 12/31/00 $167,000 $ 0 $ 0 0 0 $0 $ 0
Sutherland, 12/31/99 $ 63,400 $ 85,140 $ 0 0 375,000 $0 $ 0
Chairman 12/31/98 $ 39,600 $ 0 $ 0 0 25,000 $0 $ 0
04/30/98 $ 39,600 $ 0 $ 0 0 75,000 $0 $ 0
Owen Jones, 12/31/00 $126,000 $ 0 $ 0 0 0 $0 $ 0
President, CEO 12/31/99 $ 80,000 $117,480 $ 0 0 125,000 $0 $ 0
(up to Oct. 15, 12/31/98 $ 31,350 $ 66,000 $ 0 0 55,000 $0 $ 0
2000) 04/30/98 $ 20,000 $ 66,000 $ 0 0 75,000 $0 $ 0
Jay Nussbaum, 12/31/00 $ 0 $ 0 $ 0 0 400,000 $0 $ 0
Director 12/31/99 $ 0 $ 0 $ 0 0 0 $0
Jack Kemp, 12/31/00 $ 0 $ 0 $ 0 0 0 $0 $ 0
Director
John Shoemaker, 12/31/00 $ 0 $ 0 $ 0 0 0 $0 $ 0
Edward White, 12/31/00 $ 0 $ 0 $ 0 0 0 $0 $ 0
Director 12/31/99 $ 0 $ 0 $ 0 0 25,000 $0 $ 0
12/31/98 $ 0 $ 0 $ 0 0 25,000 $0 $ 0
04/30/98 $ 4,600 $ 0 $ 0 0 25,000 $0 $ 0
Peter Kozicki, 12/31/00 $ 0 $ 0 $ 0 0 0 $0 $ 0
Director 12/31/99 $ 0 $ 0 $ 0 0 25,000 $0 $ 0
12/31/98 $ 0 $ 0 $ 0 0 25,000 $0 $ 0
Scott 12/31/00 $172,600 $ 16,800 $200,000 0 2,000,000 $0 $ 0
Friedlander,
Exec. VP
Rahul Bardhan, 12/31/00 $ 63,550 $ 60,000 $ 0 0 1,000,000 $0 $ 0
Chief
Technology
Officer
Stewart Walchli 12/31/00 $ 83,917 $ 0 $ 50,000 0 300,000 $0 $ 0
Chief
Financial
Officer
1. This amount represents a club membership purchased for Mr. Speros.
We do not have a long term incentive plan.
45
The following table summarizes options granted to our directors and
executive officers during the year ended December 31, 2000.
OPTION / SAR GRANTS IN LAST FISCAL YEAR
Name Number of Percent of Exercise or Expiration Grant date
securities total options / base price date present
underlying SARs granted to (mm/dd/yy) value (1)
Options / employees in
SARs granted fiscal year
James Speros Nil 0.0% N/A N/A N/A
Grant
Sutherland Nil 0.0% N/A N/A N/A
Owen Jones Nil 0.0% N/A N/A N/A
Jay Nussbaum 200,000 2.2% $11.08 01/21/05 $1,644,000
200,000 2.2% $5.10 04/20/05 $ 200,000
Jack Kemp Nil 0.0% N/A N/A N/A
John
Shoemaker Nil 0.0% N/A N/A N/A
Peter Kozicki 25,000 0.3% $5.10 04/20/05 Nil
Edward White 25,000 0.3% $5.10 04/20/05 Nil
Scott Friedlander 1,000,000 11.3% $8.69 01/14/05 $ 760,000
1,000,000 11.3% $5.10 04/20/05 $1,000,000
Rahul Bardhan 1,000,000 11.3% $2.25 08/30/05 $ 400,000
Stewart Walchli 100,000 1.1% $11.08 01/21/05 $ 822,000
200,000 2.2% $5.10 04/20/05 $ 200,000
(1) Grant date present value was calculated by multiplying the number
of option shares by the difference between the exercise price and the
closing trading price on the date of grant.
In addition to the foregoing, we granted the following options to our
directors and executive officers in January and February 2001:
Grant Sutherland 150,000 options
James Speros 500,000 options
Jay Nussbaum 200,000 options
Jack Kemp 150,000 options
John Shoemaker 150,000 options
Peter Kozicki 20,000 options
Edward White 20,000 options
Scott Friedlander 500,000 options
Rahul Bardhan 500,000 options
Stewart Walchli 500,000 options
The exercise price for these options was $1.00, and the term was five
years. None of these options have been exercised as at the date of
this annual report.
The following table summarizes options exercised by our directors and
executive officers during the year ended December 31, 2000.
46
Aggregated Option / SAR Exercises in Last Fiscal Year and FY-End
Option / SAR Values
Shares acquired Value realized Number of securities Value of unexercised
Name on exercise underlying unexercised in-the-money options /
options / SARS at end SARs at end of fiscal
of fiscal year year
---------------------- ---------------------
Exercisable /
Unexercisable
James Speros 0 0 375,000 / 0 $65,600 / 0
Grant Sutherland 80,000 $638,052 568,000 / 0 $36,510 / 0
Jay Nussbaum 0 0 400,000 / 0 0
Jack Kemp 0 0 0 0
John Shoemaker 0 0 0 0
Peter Kozicki 0 0 112,500 / 12,500 $9,450 / 0
Edward White 0 0 162,500 / 12,500 $17,950 / 0
Scott Friedlander 0 0 1,500,000 / 500,000 0
Rahul Bardhan 0 0 200,000 / 800,000 0
Stewart Walchli 0 0 300,000 /0 0
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND
MANAGEMENT
To the best of our knowledge, we are not controlled directly or
indirectly by any other corporation or by any foreign government.
The following table sets forth certain information regarding the
beneficial ownership of our outstanding common shares as of February
28, 2001 by (i) our directors and executive officers, and (ii) all of
our directors and executive officers as a group. To the best of our
knowledge, no person other than Grant Sutherland is the beneficial
owner of more than 5% of our issued and outstanding common shares.
Title Name and Address of Amount and Percent of
of Beneficial Owner Nature of Beneficial Class (1)
Class Ownership
Common James Speros, 2,462,400(2) 3.6%
President, CEO
1810 Samuel Morse Drive
Reston, VA 20190-5316
Common Grant Sutherland, Chairman 4,554,100(3) 6.7%
1600 - 777 Dunsmuir St.
Vancouver, B.C. V7Y 1K4
Common Jay Nussbaum, Director 450,000(4) 0.7%
1910 Oracle Way
Reston, VA 20190
Common Jack Kemp, Director 75,000(5) 0.1%
1701 Pennsylvania Avenue
47
Washington, DC 20006
Common John Shoemaker, Director 75,000(6) 0.1%
10 Network Circle
MPK 10-212
Menlow Park, CA 94025
Common Peter Kozicki, Director 702,850(7) 1.1%
45 Grovetree Road
Toronto, Ontario M9V 2Y4
Common Edward White, Director 344,530(8) 0.5%
113 - 980 West 1st Street
North Vancouver, BC
V7P 3N4
Common Scott Friedlander, 2,002,300(9) 2.9%
Executive Vice-President
1810 Samuel Morse Drive
Reston, VA 20190-5316
Common Rahul Bardhan, Chief 650,000(10) 1.0%
Technology Officer
1810 Samuel Morse Drive
Reston, VA 20190-5316
Common Stewart Walchli, Chief 500,000(11) 0.8%
Financial Officer
1810 Samuel Morse Drive
Reston, VA 20190-5316
Common All Directors and 11,816,180(12) 16.0%
Executive Officers
(1) Percentage ownership figures are calculated using data as at
February 28, 2001. As at February 28, 2001 we had 66,116,167 shares
issued and outstanding. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission
and generally includes voting or investment power with respect to
securities. Shares of Common Stock subject to options or warrants
currently exercisable or convertible, or exercisable or convertible
within 60 days, are deemed outstanding for computing the percentage
of the person or group of persons holding such option or warrant
but are not deemed outstanding for computing the percentage of any
other person. Except as indicated in the footnotes to this table
and pursuant to applicable community property laws, the persons
named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned.
(2) Includes shares issuable under the following securities:
- 625,000 shares issuable under stock options exercisable within 60
days; and
- 1,060,000 shares issuable under outstanding share purchase
warrants exercisable within 60 days.
(3) Includes shares issuable under the following securities:
- 643,000 shares issuable under stock options exercisable within 60
days; and
- 1,310,000 shares issuable under outstanding share purchase
warrants exercisable within 60 days.
(4) Includes shares issuable under the following securities:
- 450,000 shares issuable under stock options exercisable within 60
days.
(5) Includes shares issuable under the following securities:
- 75,000 shares issuable under stock options exercisable within 60
days.
(6) Includes shares issuable under the following securities:
- 75,000 shares issuable under stock options exercisable within 60
days.
(7) Includes shares issuable under the following securities:
- 128,750 shares issuable under stock options exercisable within 60
days.
(8) Includes shares issuable under the following securities:
48
- 178,750 shares issuable under stock options exercisable within 60
days.
(9) Includes shares issuable under the following securities:
- 2,000,000 shares issuable under stock options exercisable within
60 days.
(10) Includes shares issuable under the following securities:
- 650,000 shares issuable under stock options exercisable within 60
days.
(11) Includes shares issuable under the following securities:
- 500,000 shares issuable under stock options exercisable within 60
days.
(12) Includes shares issuable under the following securities:
- 5,325,500 shares issuable under stock options exercisable within
60 days; and
- 2,370,000 shares issuable under outstanding share purchase
warrants exercisable within 60 days.
We are unaware of any arrangements, the operation of which may at a
subsequent date result in a change of corporate control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Within the last three fiscal years, we have entered into the
transactions set out below in which our current directors or officers
were interested.
TRANSACTIONS WITH BRAINTECH, INC. AND TECHWEST MANAGEMENT INC.
We have had several transactions with BrainTech, Inc. and Techwest
Management Inc.
BrainTech is a public company engaged in the business of developing
and marketing vision systems and related hardware and software
products. The directors of BrainTech are Owen Jones, Grant
Sutherland, James Speros, and Edward White. BrainTech common shares
are quoted on the OTC-Bulletin Board. As at the date of this annual
report, inclusive of options and warrants exercisable within 60 days,
Mr. Sutherland, Mr. Speros and Mr. White own the following shares in
BrainTech, Inc.:
Name Number of Shares % of Issued and Outstanding
Grant Sutherland 5,542,499 10.2%
James Speros 300,000 0.5%
Edward White 1,125,001 2.1%
Techwest is a private management company in which Owen Jones and Grant
Sutherland each hold 50% interests.
COST SHARING
Up to November 2000 we operated under a cost sharing arrangement with
BrainTech, pursuant to which we shared the following costs:
- - costs of our North Vancouver premises, which we shared with
BrainTech;
- - salary costs of certain personnel including, inter alia, the
salary costs of our accounting personnel; and
- - miscellaneous office charges, such as office supplies and
telephone and fax charges.
49
Prior to October 1999, we shared the common costs equally with
BrainTech. By a Cost Sharing and Allocation Agreement executed in
October 1999, we agreed with BrainTech to re-allocate the common costs
80% to us and 20% to BrainTech effective from January 1, 1999. The
reason for the reallocation of costs was the substantially greater
level of our business, and our corresponding greater use of the common
premises and personnel.
Shared costs under the Cost Sharing and Allocation Agreement were
administered by Techwest. Techwest passed shared costs on to us and
to BrainTech at its costs, without any markup.
From time to time, either our payments or those of BrainTech exceeded
the proportionate share required under the cost sharing arrangement,
giving rise to indebtedness as between us, BrainTech and Techwest
Management. Accordingly, the payments were reconciled and adjusted
from time to time as required. Through much of 1999, BrainTech was
indebted to us (either directly or indirectly through Techwest) as a
result of BrainTech not paying its proportionate share of the common
operating costs, during periods when BrainTech did not have cash
available to do so. There was no material indebtedness among
Sideware, BrainTech, or Techwest during 2000.
In the summer of 2000, BrainTech, Inc. began to move its operations to
separate premises. On November 6, 2000 we entered into a letter
agreement with BrainTech, Inc. under which we agreed that BrainTech,
Inc. could continue to use a portion of our North Vancouver office, as
well as certain services provided by our personnel, during a
transitional period not to exceed six months. As at the date of this
annual report, BrainTech, Inc. no longer occupies any portion of those
premises or makes any use of our personnel.
The lease for our downtown Vancouver premises was originally taken in
the name of Techwest. By agreement dated January 19, 2001, Techwest
assigned its interest in the premises to us.
PURCHASE OF COMPUTER EQUIPMENT
We purchase computer equipment for BrainTech, Inc. and Techwest
Management Inc., owing to favorable equipment pricing available to us,
and is currently being passed on at cost to BrainTech, Inc. or
Techwest Management Inc. Hardware sales to BrainTech and Techwest
totaled $81,945 during the fiscal year ended December 31, 2000,
$30,856 during the fiscal year ended December 31, 1999, and $85,524
during the eight month period ended December 31, 1998.
WIZMASTER
In September 1999, we entered into a Software Development and License
Agreement with BrainTech. Under that agreement, BrainTech developed a
program named "Wizmaster", which enables the user, through a drop-
and-drag procedure, to construct customized knowledge trees. We
incorporated Wizmaster into version 3.1 of Dr. Bean, but we no longer
make any use of the Wizmaster program. We paid approximately $11,400
to BrainTech for the development of Wizmaster.
KOSTIUK LITIGATION
Effective October 31, 1998 we purchased an interest in the proceeds of
a judgment which BrainTech had obtained against John Kostiuk, in the
amount of $300,000, in the Supreme Court of British Columbia. We paid
$132,000 on account of the purchase price, which was subject to
adjustment depending on the
50
benefit we ultimately received from the judgment. On March 18, 1999
the British Columbia Court of Appeal allowed an appeal from the judgment,
and BrainTech repaid the $132,000.
PARTNER PROGRAM
BrainTech is a participant in the Sideware Partner Program.
PRIVATE PLACEMENTS
In addition to transactions disclosed under "Recent Sales of
Unregistered Securities", our directors and executive officers have
acquired the following securities in private placements during the
last three fiscal years.
(1) In a private placement completed January 14, 1999 James
Speros acquired 600,000 Special Warrants at a price of $0.28 per
Special Warrant. Each Special Warrant was exercisable at any time
within one year, without additional consideration, into one unit
comprised of one share and one non-transferable share purchase
warrant. Each share purchase warrant would entitle the holder thereof
to purchase one additional share for a period of two years at a price
of $0.28 per share for the first year and $0.32 per share in the
second year. The Special Warrants were exercised on June 4, 1999.
(2) In a private placement completed January 7, 1999, the
following directors and executive officers acquired Special Warrants
at a price of $0.35 per Special Warrant:
Owen Jones 250,000 Special Warrants
Grant Sutherland 297,500 Special Warrants
Peter Kozicki 50,000 Special Warrants
Each Special Warrant was exercisable at any time within a period of
one year, without additional consideration, into 1.1 units, with each
unit comprised of one share and one non-transferable share purchase
warrant. Each share purchase warrant would entitle the holder to
purchase one additional share for a period of two years at a price of
$0.35 per share for the first year and $0.40 per share in the second
year. The Special Warrants were exercised on June 4, 1999.
(3) In a private placement completed April 14, 1999, the
following directors and executive officers acquired Special Warrants
at a price of $0.55 per Special Warrant:
Owen Jones 1,000,000 Special Warrants
Grant Sutherland 1,000,000 Special Warrants
Jim Speros 1,000,000 Special Warrants
Each Special Warrant was exercisable at any time within a period of
one year, without additional consideration, into one unit comprised of
one share and one non-transferable share purchase warrant. Each share
purchase warrant would entitle the holder thereof to purchase one
additional share for a period of two years at a price of $0.55 per
share for the first year and $0.63 per share in the second year. The
Special Warrants were exercised on June 4, 1999.
<PAGE
51
OTHER TRANSACTIONS
We have acquired legal services from the law firm Sutherland Johnston,
of which Grant Sutherland is a partner. The amount of those legal
services prior to December 31, 1998 was not material. During the
years ended December 31, 1999 and December 31, 2000, we paid legal
fees to Sutherland Johnston of approximately $138,000 and $258,000,
respectively. In addition, we have sold approximately $24,000 in
computer equipment at cost to Dunsmuir Management Ltd., a management
company owned by Sutherland Johnston.
We acquired our interest in the premises at 1600 - 777 Dunsmuir
Street, Vancouver, British Columbia through an assignment from SJM
Management Ltd., a management company for the law firm Sutherland
Johnston. The assignment covered the period from July 1, 1999 to
December 31, 2000. Under the assignment, SJM Management Ltd. assigned
its interest in respect of the premises at Suite 1600 to Techwest
Management Inc., which agreed to perform all of the obligations of the
tenant under the lease. We signed the lease as an indemnifier, and
were liable to perform all of the obligations of the assignee,
including the payment of rent. The term covered by the assignment has
expired.
Paul Hildebrand is our corporate Secretary, and has been an employee
of Sideware Systems Inc. since January 1, 2000. Prior to December 31,
1999 we have acquired legal services from Dale W. Wilcox, a Law
Corporation, a law firm with which Mr. Hildebrand is associated.
Between May 3, 1995 and December 31, 1999, Dale W. Wilcox, a Law
Corporation has received payments totaling $377,000 in fees (exclusive
of taxes and disbursements) for legal services.
We have granted the following stock options to Mr. Hildebrand:
(1) options to purchase 100,000 shares at C$0.50 per share expiring
May 1, 2001;
(2) options to purchase 75,000 shares at C$0.70 per share expiring
December 16, 2002;
(3) options to purchase 55,000 shares at C$1.35 per share expiring
April 29, 2004;
(4) options to purchase 100,000 shares at C$2.33 per share expiring
June 17, 2004;
(5) options to purchase 25,000 shares at C$2.78 per share expiring
October 20, 2004;
(6) options to purchase 300,000 shares at $11.08 per share expiring
Januay 21, 2005;
(7) options to purchase 300,000 shares at $5.10 per share expiring
April 20, 2005; and.
(8) options to purchase 150,000 shares at $1.00 per share expiring
January 18, 2006.
In addition to transactions disclosed under "Recent Sales of
Unregistered Securities", Mr. Hildebrand and Alder Enterprises Ltd., a
private company in which Mr. Hildebrand owns a 45% interest, have also
acquired the following shares, special warrants, and share purchase
warrants pursuant to private placements:.
(1) In a private placement completed November 19, 1998, Mr.
Hildebrand acquired 90,000 Special Warrants at a price of $0.32 per
Special Warrant. Each Special Warrant was exercisable at any time
within a period of one year, without additional consideration, into
one unit comprised of one share and one non-transferable share
purchase warrant. Each share purchase warrant would entitle the
holder thereof to purchase one additional share for a period of two
years from the date of issuance of the Special Warrants at a price of
$0.32 per share for the first year and $0.37 per share in the second
year. The Special Warrants were exercised on June 4, 1999.
(2) In a private placement completed January 7, 1999, Mr.
Hildebrand and Alder Enterprises Ltd. acquired, respectively, 30,000
and 277,500 Special Warrants. Each Special Warrant was exercisable at
52
any time within a period of one year, without additional
consideration, into 1.1 units, with each unit comprised of one share
and one non-transferable share purchase warrant. Each share purchase
warrant would entitle the holder to purchase one additional share for
a period of two years at a price of $0.35 per share for the first year
and $0.40 per share in the second year. The Special Warrants were
exercised on June 4, 1999.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
During the year ended December 31, 2000 we filed reports on Form 8-K on
October 25, 2000, and November 30, 2000.
Index to Exhibits
Number Exhibit
3.1(1) Memorandum of Incorporation dated March 30, 1983
3.2(1) Articles of Incorporation dated March 30, 1983
3.3(1) Special Resolution dated January 12, 1984
3.4(1) Special Resolution dated June 15, 1989
3.5(1) Special Resolution dated September 27, 1990
3.6(1) Special Resolution dated December 18, 1996
3.7(1) Articles of Incorporation
3.8(1) Special Resolution dated January 29, 1998
3.9(5) Special Resolution dated June 28, 2000
4.1(1) Escrow Agreement dated June, 1996
4.2(4) 2000 Stock Option Plan
4.3(4) Amended 2000 Stock Option Plan
4.4 Stock Option Plan (2001)
10.1(1) Operating Agreement between the Company and
BrainTech, Inc., dated October 18, 1996
10.2(2) Software Development and License Agreement dated
September 20, 1999 between the Company and
BrainTech, Inc.
10.3(2) Software Development License Agreement between
the Company and Sideware International SRL
effective August 27, 1999
10.4(2) Research and Development Cost Sharing Agreement
between the Company and Sideware International
SRL effective August 27, 1999
10.5(2) Distribution and Sales Agreement between the
Company and Sideware Corp. effective January 1,
1999
10.6(1) Assignment of Lease and Modification of Lease
Agreement dated August 17, 1998 between HOOPP
Realty Inc., Techwest Management Inc., Sideware
Systems Inc., and BrainTech, Inc.
10.7(1) Lease Agreement dated January 25, 1999 between
Sideware Corp. and Elden Investments, LLC with
Addendum dated February 8, 1999
10.8(2) Agreement between the Company and IBM for
participation in the Enterprise Growth
Opportunity program
10.9(2) Reseller agreement between the Company and
Enterprise Soft
10.10(2) Software license agreement between the Company
and ICEsoft AS
10.11(2) Lease effective as of July 1, 1999 between the
Company, Techwest
53
Management Ltd., BrainTech, Inc. and Pacific
Centre Leaseholds Ltd.
10.12(2) Assignment Agreement effective as of July 1,
1999 between the Company, Techwest Management
Ltd., BrainTech, Inc., and SJM Management Ltd.
10.13(2) Cost Sharing and Allocation Agreement dated
October 29, 1999 between the Company and
BrainTech, Inc.
10.14(2) Agreement between the Company and Advanced
Contact Solutions Inc.
10.15(2) Contract Agreement No. SDW001 between the
Company and Science Applications International
Corp.
10.16(2) IBM International Independent Software Vendor
Agreement
10.17(2) Distribution and Sales Agreement between
Sideware Corp. and Sideware International SRL
10.18(3) Lease Agreement dated March 6, 2000 between
Sideware Corp. and Reston L.L.C.
10.19(3) Lease Agreement between Sideware Corp. and
Sanctuary Park Realty Holding Company
10.20(3) Sub-Lease Agreement dated January 15, 2000
between San Jose State University Foundation and
Sideware Systems Inc.
10.21(3) Lease Agreement dated February 24, 2000 between
CEO Suites, Inc. and Sideware Corp.
10.22(4) Alliance Agreement with Siebel Systems, Inc.
10.23 Change of Control Severance Agreement with Rahul
Badhan
10.24 Change of Control Severance Agreement with Scott
Friedlander
10.25 Change of Control Severance Agreement with
Stewart Walchli
10.26 ASP Software Products Distribution and License
Agreement dated January 21, 2001 between
Sideware International SRL and Sideware Corp.
10.27 End User Software Products Distribution and
License Agreement dated January 21, 2001 between
Sideware International SRL and Sideware Corp.
10.28 Assignment of Lease dated January 19, 2001 from
Techwest Management Inc.
11.1 Computation of net loss per share
21.1 List of Subsidiaries
(1) Exhibit already on file - exhibit to our Form 20-F
registration statement filed in May 1999.
(2) Exhibit already on file - exhibit to our Form F-1
registration statement 333-90893 filed in December 1999.
(3) Exhibit already on file - exhibit to our Form 20-F annual
report covering the year ended December 31, 1999.
(4) Exhibit already on file - exhibit to our Form F-3
registration statement no. 333-34984 filed in April 2000.
(5) Exhibit already on file - exhibit to our Form 10-Q filed in
October 2000.
54
SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of 1934,
the registrant caused this annual report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: March 22, 2001 Sideware Systems Inc.
"Grant Sutherland"
By:
W. Grant Sutherland
Chairman of the Board
of Directors
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Grant Sutherland as such
person's true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for such person and in such
person's name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this
annual report, and to file same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite
and necessary to be done in connection therewith, as fully to all
intents and purposes as such person might or could do in person,
hereby ratifying and confirming all that said attorney's-in-fact ad
agent, or his subititutes, may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this annual report has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
"James Speros" Chief Executive Officer, March 22, 2001
- -------------------- President, and Director
James L. Speros (Principal Executive Officer)
"Grant Sutherland" Chairman of the Board of March 22, 2001
- -------------------- Directors, Director
W. Grant Sutherland
"Edward White" Director March 22, 2001
- --------------------
Edward A. White
"Peter Kozicki" Director March 22, 2001
- --------------------
Peter Kozicki
55
"Stewart Walchli" Chief Financial Officer March 22, 2001
- -------------------- (Principal Financial and
Stewart F. Walchli Accounting Officer)
Consolidated Financial Statements
(Expressed in U.S. dollars)
SIDEWARE SYSTEMS INC.
(Prepared in accordance with generally accepted
accounting principles in the United States)
Years ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
AUDITORS' REPORT TO THE STOCKHOLDERS
We have audited the consolidated balance sheets of Sideware Systems
Inc. as at December 31, 2000 and 1999 and the consolidated
statements of operations and comprehensive loss, stockholders'
equity and cash flows for the years ended December 31, 2000 and
1999, eight months ended December 31, 1998 and year ended April 30,
1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States 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 audits provide a reasonable basis
for our opinion.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as at December 31, 2000 and 1999 and the results of its
operations and comprehensive loss and its cash flows for the years
ended December 31, 2000 and 1999, eight months ended December 31,
1998 and year ended April 30, 1998 in accordance with generally
accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
note 1 to the financial statements, the Company has suffered
recurring losses from operations and has had negative cash flows
from operating activities for each of the periods presented which
raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also
described in note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
On January 26, 2001, except for note 9(b) and 12 which are as of
February 22, 2001, we reported separately to the stockholders of
the Company on consolidated financial statements for the same
period prepared in accordance with Canadian generally accepted
accounting statements.
(signed) "KPMG LLP"
Chartered Accountants
Vancouver, Canada
January 26, 2001, except for note 9(b) and note 13
which are as of February 22, 2001
SIDEWARE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
December 31, 2000 and 1999
============================================================================
2000 1999
- ----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 949,999 $ 5,929,801
Short-term investments (note 6) 5,982,588 -
Accounts receivable:
Trade, less allowance for
doubtful accounts of $142,047
(1999 - nil) 467,783 -
Other 126,842 123,297
Due from related parties (note 4) 29,859 -
Current portion of long-term
receivables (note 7) 6,849 14,041
Inventory 46,829 73,895
Prepaid expenses 549,639 243,044
--------------------------------------------------------------------------
8,160,388 6,384,078
Deposit on lease 129,926 20,212
Long-term receivables (note 7) 105,587 108,655
Deferred finance charges (note 7) 95,583 100,763
Fixed assets (note 8) 1,967,818 923,536
- ----------------------------------------------------------------------------
$ 10,459,302 $ 7,537,244
============================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 1,246,683 $ 623,636
Due to related parties (note 4) - 39,340
Deferred revenue 168,661 -
--------------------------------------------------------------------------
1,415,344 662,976
Stockholders' equity:
Common stock (note 9):
Authorized: 199,949,375 common shares,
no par value
Issued and outstanding: 60,886,415
(1999 - 51,769,238) 40,660,382 21,414,477
Additional paid-in capital 12,146,732 315,500
Deferred stock-based compensation (460,895) -
Accumulated other comprehensive income (503,685) 148,479
Deficit (42,798,576) (15,004,188)
--------------------------------------------------------------------------
9,043,958 6,874,268
- ----------------------------------------------------------------------------
$ 10,459,302 $ 7,537,244
============================================================================
Future operations (note 1)
Commitments (note 11)
Subsequent events (notes 9(a), 9(b) and 13)
The accompanying notes are an integral part of these consolidated
financial statements.
On behalf of the Board:
"Grant Sutherland" "Edward White"
- --------------------- Director ------------------- Director
SIDEWARE SYSTEMS INC.
Consolidated Statements of Operations and Comprehensive Loss
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
=================================================================================================
Eight
months ended Year ended
Year ended December 31, December 31, April 30,
-----------------------
2000 1999 1998 1998
- -------------------------------------------------------------------------------------------------
Revenue:
Licenses $ 461,962 $ - $ 19,458 $ 19,054
Services 96,217 - - -
Hardware and software resales 27,504 2,533 - -
Hardware resales to related
parties (note 4(a)) 81,945 30,856 85,524 -
------------------------------------------------------------------------------------------------
667,628 33,389 104,982 19,054
Cost of revenues:
Licenses 1,532 - 13,476 12,933
Services 28,843 - - -
Hardware and software resales 27,504 2,044 - -
Hardware resales to related
parties (note 4(a)) 81,945 30,856 79,510 -
------------------------------------------------------------------------------------------------
139,824 32,900 92,986 12,933
- --------------------------------------------------------------------------------------------------
Gross margin 527,804 489 11,996 6,121
Operating expenses:
Sales and marketing (including
stock-based compensation of
$5,767,155, $124,479, $13,231,
and nil) 16,807,001 2,281,827 491,287 392,367
Research and development (including
stock-based compensation of
$1,131,887, $55,508, $12,349,
and nil) 4,526,397 1,490,352 349,434 434,246
General and administrative (including
stock-based compensation of
$4,471,295, $91,921, $3,822,
and nil) 7,533,958 1,978,298 481,399 895,705
-------------------------------------------------------------------------------------------------
28,867,356 5,750,477 1,322,120 1,722,318
- ---------------------------------------------------------------------------------------------------
Operating loss (28,339,552) (5,749,988) (1,310,124) (1,716,197)
Non-operating:
Interest income 550,533 98,493 27,637 19,847
Write-off of fixed assets - (35,973) - -
Proceeds on settlement of legal
claim (note 5) 147,651 - - -
Value assigned to shares issued
in satisfaction of a legal
claim (note 5) (153,020) - - (17,786)
-------------------------------------------------------------------------------------------------
545,164 62,520 27,637 2,061
- ---------------------------------------------------------------------------------------------------
Net loss (27,794,388) (5,687,468) (1,282,487) (1,714,136)
Other comprehensive income (loss):
Net unrealized holding gain on
short-term investments (note 6) 136,550 - - -
Foreign currency translation
adjustments (788,714) 265,859 (100,935) (33,889)
-------------------------------------------------------------------------------------------------
(652,164) 265,859 (100,935) (33,889)
Comprehensive loss $ (28,446,552) $ (5,421,609) $ (1,383,422) $ (1,748,025)
====================================================================================================
Basic and diluted loss per share:
Net loss $ (0.48) $ (0.15) $ (0.05) $ (0.08)
Weighted average shares used in
computing net loss per share,
basic and diluted 58,078,005 37,391,211 25,878,357 20,400,346
====================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
SIDEWARE SYSTEMS INC.
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
================================================================================================================================
Accumulated
Additional Deferred other Total
Share capital Special warrants paid-in stock-based comprehensive stockholders
Number Assigned Number Assigned capital compensation loss Deficit equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, April
30, 1997 17,317,859 $6,064,036 3,450,000 $ 948,775 $ 14,190 $ - $ 17,444 $(6,320,097) $ 724,348
Shares issued
on exercise of
non-transferable
warrants 4,203,100 1,498,648 - - - - - - 1,498,648
Shares issued
on exercise of
options 699,000 250,442 - - - - - - 250,442
Shares issued in
satisfaction of
a royalty claim 100,000 17,786 - - - - - - 17,786
Special warrants
issued - - 1,500,000 853,728 - - - - 853,728
Special warrant
subscriptions - - - 53,358 - - - - 53,358
Shares issued
on exercise of
special warrants 4,450,000 1,489,577 (4,450,000) (1,489,577) - - - - -
Foreign currency
translation
adjustment - - - - - - (33,889) - (33,889)
Net loss - - - - - - - (1,714,136) (1,714,136)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, April
30, 1998 26,769,959 9,320,489 500,000 366,284 14,190 - (16,445) (8,034,233) 1,650,285
Special warrant
subscriptions - - 90,000 647,031 - - - - 647,031
Shares issued
on exercise of
special warrant
subscriptions 500,000 264,883 (500,000) (264,883) - - - - -
Deferred stock-
based
compensation - - - - 29,402 (29,402) - - -
Amortization
of deferred
stock-based
compensation - - - - - 29,402 - - 29,402
Foreign currency
translation
adjustment - - - - - - (100,935) - (100,935)
Net loss - - - - - - - (1,282,487) (1,282,487)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
1998 27,269,959 9,585,372 90,000 748,432 43,592 - (117,380) (9,316,720) 943,296
Shares issued
on exercise of
non-transferable
warrants 10,434,335 3,418,136 - - - - - - 3,418,136
Shares issued
on exercise of
options 1,343,500 806,508 - - - - - - 806,508
Special warrants
issued - - 9,326,332 2,084,911 - - - - 2,084,911
Shares issued
on exercise of
special warrants 9,724,611 2,833,343 (9,416,332) (2,833,343) - - - - -
Shares issued
for cash 2,746,833 4,514,656 - - - - - - 4,514,656
Shares issued
for services
rendered 250,000 107,686 - - - - - - 107,686
Deferred stock-
based
compensation - - - - 271,908 (271,908) - - -
Amortization of
deferred
stock-based
compensation - - - - - 271,908 - - 271,908
Share
subscriptions
receivable
(243,900 common
shares) - 396,619 - - - - - - 396,619
Share issue costs - (27,843) - - - - - - (247,843)
Foreign currency
translation
adjustment - - - - - - 265,859 - 265,859
Net loss - - - - - - - (5,687,468) (5,687,468)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December
31, 1999,
carried forward 51,769,238 21,414,477 - - 315,500 - 148,479 (15,004,188) 6,874,268
SIDEWARE SYSTEMS INC.
Consolidated Statements of Stockholders' Equity, continued
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
================================================================================================================================
Accumulated
Additional Deferred other Total
Share capital Special warrants paid-in stock-based comprehensive stockholders
Number Assigned Number Assigned capital compensation loss Deficit equity
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December
31, 1999,
brought forward 51,769,238 $21,414,477 - $ - $ 315,500 $ - $ 148,479 $(15,004,188) $6,874,268
Shares issued
on exercise of
non-transferable
warrants 3,919,702 3,803,797 - - - - - - 3,803,797
Shares issued
on exercise of
options 1,584,100 1,469,279 - - - - - - 1,469,279
Shares issued
for cash 3,340,100 14,557,888 - - - - - - 14,557,888
Shares issued
for
subscriptions
previously
received 243,900 - - - - - - - -
Shares issued
on settlement
of legal claim 80,000 153,020 - - - - - - 153,020
Share issue costs (738,079) - - - - - - - (738,079)
Cancelled shares (50,625) - - - - - - - -
Stock-based
compensation - - - - 247,758 - - - 247,758
Deferred stock-
based
compensation - - - - 11,583,474 (11,583,474) - - -
Amortization
of deferred
stock-based
compensation - - - - - 11,122,579 - - 11,122,579
Net unrealized
holding gain
on short-term
investments,
net of tax
effect of nil - - - - - - 136,550 - 136,550
Foreign currency
translation
adjustment - - - - - - (788,714) - (788,714)
Net loss - - - - - - - (27,794,388) (27,794,388)
- --------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31,
2000 60,886,415 $40,660,382 - $ - $12,146,732 $ (460,895) $ (503,685) $(42,798,576) $ 9,043,958
The accompanying notes are an integral part of these consolidated
financial statements.
SIDEWARE SYSTEMS INC.
Consolidated Statements of Cash Flows
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
=================================================================================================
Eight
months ended Year ended
Year ended December 31, December 31, April 30,
-----------------------
2000 1999 1998 1998
- -------------------------------------------------------------------------------------------------
Cash flows used in operating
activities:
Net loss $ (27,794,388) $ (5,687,468) $ (1,282,487) $ (1,714,136)
Items not involving cash:
Amortization 704,044 284,472 90,982 108,377
Stock-based compensation 11,370,337 271,908 29,402 -
Write off of fixed assets - 35,973 - -
Investment advisory services
settled by equity instruments - - - 53,358
Value assigned to shares
issued for financial
advisory services - 107,686 - -
Value assigned to shares
issued in satisfaction of
legal claim 153,020 - - 17,786
Changes in non-cash operating
working capital:
Accounts receivable (479,183) 38,514 (121,741) 57,965
Due (to) from related parties (68,166) 290,816 (247,055) 123,529
Inventory 24,435 (42,096) (29,207) 5,443
Prepaid expenses (317,901) (169,860) 22,976 (65,339)
Accounts payable and accrued
liabilities 650,961 418,197 37,234 (119,026)
Deferred revenue 169,793 - - -
- -------------------------------------------------------------------------------------------------
Net cash used in operating activities (15,587,048) (4,451,858) (1,499,896) (1,532,043)
Cash flows from financing activities:
Special warrants issued for cash - 2,084,911 647,032 853,728
Shares issued for cash, net of share
issue costs 19,092,885 8,494,337 - 1,749,146
Share subscriptions receivable - 396,619 - -
- -------------------------------------------------------------------------------------------------
Net cash provided by financing
activities 19,092,885 10,975,867 647,032 2,602,874
Cash flows from investing activities:
Purchase of short-term investments
available for sale (6,052,335) - - -
Long-term receivables and deferred
charges 7,040 (217,068) - -
Purchase of fixed assets (1,790,479) (782,425) (153,980) (239,615)
Deposit on lease, net (111,219) (14,106) - -
-----------------------------------------------------------------------------------------------
Net cash used in investing activities (7,946,993) (1,013,599) (153,980) (239,615)
- -------------------------------------------------------------------------------------------------
Effect of exchange rates on cash and
cash equivalents (538,646) 212,423 (70,450) (25,933)
- -------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents (4,979,802) 5,722,833 (1,077,294) 805,283
Cash and cash equivalents,
beginning of period 5,929,801 206,968 1,284,262 478,979
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 949,999 $5,929,801 $ 206,968 $ 1,284,262
=================================================================================================
Supplemental information:
Non-cash financing and investing
activities:
Shares issued in satisfaction
of legal claim $ 153,020 $ - $ - $ 17,786
Shares issued for services
rendered - 107,686 - -
Shares issued on exercise
of special warrants - 657,613 - -
Shares issued for investment
advisory services - - - 53,358
Net unrealized holdings gain
on short-term investments 136,550 - - -
=================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
1. DESCRIPTION OF BUSINESS AND FUTURE OPERATIONS:
Sideware Systems Inc. (the "Company") is a leading provider of
Electronic Customer Relationship Management ("eCRM") software.
The Company's collaborative solutions enable companies to better
manage their customer interactions by providing enhanced
Internet-based customer service. Substantially all of the
Company's sales were generated in the United States and Canada.
These consolidated financial statements have been prepared on the
going concern basis under which an entity is considered to be
able to realize its assets and satisfy its liabilities in the
ordinary course of business. Through the date of these
consolidated financial statements the Company has not generated
significant revenues, has incurred operating losses and negative
cash flow from operating activities. Operations to date have
been primarily financed by equity transactions. The Company's
future operations and its continuation as a going concern are
dependent upon its ability to obtain market acceptance of its
product, to increase sales of its product by penetrating markets
within North America, generating positive cash flows from
operations and ultimately attaining profitability.
Depending on the Company's ability to develop sales and related
cash flows, the Company may need to raise additional capital
through public or private financings which may not be available
on reasonable terms. Subsequent to year-end, the Company secured
private financing with net proceeds of approximately $3,800,000
(note 13). The consolidated financial statements do not include
any adjustments relating to the recoverability of assets and
classification of assets and liabilities that might be necessary
should the Company be unable to continue as a going concern.
2. BASIS OF PRESENTATION:
These financial statements have been prepared using generally
accepted accounting principles in the United States of America.
They include the financial statements of Sideware Systems Inc.
and its subsidiaries, all of which are wholly-owned. All
material intercompany balances and transactions have been
eliminated in consolidation.
3. SIGNIFICANT ACCOUNTING POLICIES:
(a) Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the 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. Actual results could differ from
those estimates.
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 2
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(b) Cash equivalents:
Cash equivalents consists of highly liquid investments having
terms to maturity at the date of acquisition of not more than
three months.
(c) Short-term investments:
The Company classifies its investments in marketable
securities as "available-for-sale." Such investments are
recorded at fair value based on quoted market prices, with
unrealized gains and losses recorded as other comprehensive
income (loss) until realized.
(d) Fixed assets:
Fixed assets are carried at cost less accumulated
amortization. Amortization is calculated annually as follows:
===============================================================
Asset Basis Rate
- ---------------------------------------------------------------
Furniture and fixtures declining-balance 20%
Computer equipment straight-line 33 1/3%
Trade show assets straight-line 33 1/3%
Computer software straight-line 50%
Leasehold improvements straight-line lease term
===============================================================
During the year, the Company changed its amortization policy
for trade show assets and computer equipment to better
approximate the useful life of the assets. The adoption of
this policy did not have a material effect on the Company's
financial position or results of operations.
(e) Deferred charges:
Deferred charges represent the discount on notes receivable
and are being recognized by the yield method over the term of
the note.
(f) Impairment of long-lived assets:
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company monitors the recoverability of long-lived assets,
which include property and equipment and other assets, based
on factors such as future asset utilization, business climate
and future undiscounted cash flows expected to result from the
use of the related assets. The Company's policy is to record
an impairment loss in the period when it is determined that
the carrying amount of the asset may not be recoverable, at
which time the asset is written down to fair market value.
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 3
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(g) Income taxes:
The Company accounts for income taxes under the asset and
liability method in accordance with SFAS No. 109, "Accounting
for Income Taxes". Deferred tax assets and liabilities are
recognized for the estimated future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is
recognized in the statement of operations in the period that
includes the enactment date. A valuation allowance is recorded
to reduce deferred tax assets to an amount where realization
is not considered to be more likely than not.
(h) Stock-based compensation:
The Company accounts for its stock-based employee compensation
arrangements in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees" and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". Deferred stock-based compensation is recorded
on the measurement date, which is generally the date of grant,
when the market value of the underlying common stock exceeds
the exercise price for stock options or the purchase price for
the shares of common stock. Non-employee options are
accounted for under SFAS No. 123 and are recognized at the
fair value of the options as determined by an option pricing
model as the related services are provided.
Stock-based compensation resulting from employee option grants
is recognized on an accelerated basis over the vesting period
of the individual options in accordance with Financial
Accounting Standards Board Interpretation ("FASB") No. 28.
Non-employee grants with future service requirements are not
recognized until the service is performed and the options
vest.
(i) Comprehensive income (loss):
In accordance with the provisions of SFAS No. 130, "Reporting
Comprehensive Income", the Company reports comprehensive
income, which includes net earnings as well as changes in
equity from other non-owner sources specifically the foreign
currency cumulative translation adjustments and unrealized
holding gain on short-term investments.
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 4
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(j) Research and development:
In accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed",
software development costs are expensed as incurred until
technological feasibility of the underlying software product
is achieved, at which time any additional costs will be
capitalized and amortized prospectively over their estimated
economic life. To date, technological feasibility and general
availability of such software have occurred simultaneously and
software development costs qualifying for capitalization have
been insignificant. Accordingly, the Company has not
capitalized any software development costs.
(k) Advertising costs:
Advertising costs are expensed as incurred and totaled
$1,044,012, $68,941, nil and $45,185 during the years ended
December 31, 2000 and 1999, the eight months ended December
31, 1998 and the year ended April 30, 1998, respectively.
(l) Revenue recognition:
SOP 97-2, "Software Revenue Recognition", as amended,
generally requires revenue from software arrangements
involving multiple elements to be allocated to each element of
the arrangement based on the relative fair values of the
elements, such as software products, post contract customer
support, installation, or training and recognized as the
element is delivered and the Company has no significant
remaining performance obligations. The determination of fair
value is based on objective evidence that is specific to the
vendor. If evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement
is deferred until such time as evidence of fair value does
exist or until all elements of the arrangement are delivered.
License revenue is recognized when there is persuasive
evidence of an arrangement and delivery to the customer has
occurred, provided the arrangement does not require
significant customization of the software, the fee is fixed
and determinable, and collectibility is considered probable.
Service revenue from maintenance contracts is recognized
ratably over the term of the maintenance contract, on a
straight-line basis. Other service revenue is recognized at
the time the service is performed.
The Company recognizes sales of equipment to external and
related parties in revenues and the related costs of the sale
in cost of revenues. The Company takes title to and holds the
equipment, bearing all of the risks and rewards of ownership,
prior to sale.
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 5
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(m) Foreign currency translation:
Effective for the fiscal year ended December 31, 2000, the
Company adopted the U.S. dollar as its reporting currency.
Historical figures previously reported in Canadian dollars
have been translated into U.S. dollars as follows: assets and
liabilities are translated into U.S. dollars at the rate of
exchange in effect at each balance sheet date and revenue and
expense items are translated at the average rates for the
applicable period. Unrealized gains and losses resulting from
the translation to U.S. dollars are accumulated in a separate
component of stockholders' equity described as accumulated
other comprehensive income.
The Company's functional currency is the Canadian dollar. The
Company's financial statements are prepared in Canadian
dollars before translation to the U.S. dollar reporting
currency. Accordingly, foreign currency denominated balances
of the Company are remeasured in Canadian dollars. Under this
method, monetary assets and liabilities denominated in a
foreign currency are remeasured in Canadian dollars at the
rate of exchange in effect at the balance sheet date. Other
assets, revenue and expense items are measured using the rate
of exchange prevailing at their respective transaction dates.
Exchange gains and losses resulting from the remeasurement of
foreign denominated monetary assets and liabilities in
Canadian dollars are reflected in earnings for the period.
(n) Net loss per share:
Net loss per share is calculated in accordance with SFAS No.
128, "Earnings per Share". Under SFAS No. 128, basic net
loss per share is computed using the weighted-average number
of outstanding shares of common stock, excluding common stock
subject to repurchase. Diluted net loss per share is computed
using the weighted-average number of outstanding shares of
common stock and, when dilutive, potential common shares from
options and warrants to purchase common stock and common stock
subject to repurchase using the treasury stock method, and
from convertible securities using the as-if converted basis.
All potential common shares have been excluded from the
computation of diluted net loss per share for all periods
presented because the effect would have been anti-dilutive.
All performance escrow shares as disclosed in note 9(a) are
excluded from the calculation.
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 6
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
3. SIGNIFICANT ACCOUNTIN POLICIES (CONTINUED):
(o) Recent accounting pronouncements:
The FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which established
standards relating to the recognition and disclosure of all
aspects of derivative instruments and hedging activities. To
date, the Company has not engaged in hedging activities.
Accordingly, the Company has evaluated the impact of adopting
SFAS 133 and determined that it will not have a material
effect on its financial position, results of operations or
cash flows. The Company will implement SFAS No. 133 in its
fiscal year ending December 31, 2001.
(p) Comparative figures:
Certain comparative figures have been reclassified to conform
to the financial statement presentation adopted in the current
year.
4. RELATED PARTY TRANSACTIONS:
(a) Transactions with related parties:
The following table summarizes the Company's related party
transactions with certain directors of the Company:
=============================================================================
Eight months
Year ended Year ended ended Year ended
December 31, December 31, December 31, April 30,
2000 1999 1998 1998
- -----------------------------------------------------------------------------
Services rendered $ 257,860 $ 445,296 $ 70,776 $ 152,672
Settlement of claims - - - 17,786
=============================================================================
Hardware resales to related parties are to companies with
certain common directors to the Company.
(b) Due (to) from related parties:
At December 31, 2000, the Company was owed $29,859 with
respect to costs incurred by the Company on behalf of
BrainTech Inc. and TechWest Management Inc., companies with
directors in common.
At December 31, 1999, the Company owed $ 39,340 with respect
to costs incurred by TechWest Management Inc., a company with
directors in common, on behalf of the Company.
These amounts are unsecured, payable on demand and bear no
interest.
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 7
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
5. SETTLEMENT OF LEGAL CLAIM:
During the year ended December 31, 2000, the Company settled its
outstanding legal disputes with former management. The Company
made a cash payment of $20,135 and issued 80,000 shares to
opposing parties. The Company also received cash payments
totaling $167,786 from opposing parties.
6. SHORT-TERM INVESTMENTS:
The amortized cost, gross unrealized holding gain and fair value
of available-for-sale securities at December 31, 2000 is as
follows:
===============================================================================
Gross
unrealized
Amortized holding Fair
cost gain value
- -------------------------------------------------------------------------------
Available-for-sale commercial paper $ 5,846,038 $ 136,550 $ 5,982,588
===============================================================================
There were no short-term investments in 1999.
7. LONG-TERM RECEIVABLES:
======================================================================
2000 1999
----------------------------------------------------------------------
Employee loan, maturing September 30, 2024,
bearing interest at 1% per annum,
repayable in bi-monthly blended
instalments of $376, except if employment
is terminated in which case it is
repayable immediately, real estate has
been pledged as security, net of
unamortized discount of $95,583 (1999 -
$100,763) $ 98,593 $ 104,111
Employee loans, maturing September 30,
2002, bearing interest at prime plus 1%
per annum. 13,843 18,585
-----------------------------------------------------------------------
112,436 122,696
Current portion 6,849 14,041
-----------------------------------------------------------------------
$ 105,587 $ 108,655
=======================================================================
The employee loan secured by real estate has been discounted to
fair market value calculated at prime plus 1%, which is the
prevailing rate of similar financial instruments, over 25 years.
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 8
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
8. Fixed assets:
===========================================================
2000 1999
- -----------------------------------------------------------
Furniture and fixtures $ 710,518 $ 336,234
Computer equipment 1,553,279 696,195
Trade show assets 150,193 85,928
Computer software 289,881 93,592
Leasehold improvements 843,452 626,319
- -----------------------------------------------------------
3,547,323 1,838,268
Less accumulated amortization (1,579,505) (914,732)
- -----------------------------------------------------------
Net book value $1,967,818 $ 923,536
===========================================================
9. STOCKHOLDERS' EQUITY:
(a) Performance shares and escrow securities:
Included in issued shares at December 31, 2000 are 750,000
performances and 220,378 escrow securities (December 31, 1999
and 1998 and April 30, 1998 - 750,000 and 280,378,
respectively) held in escrow to be released based on
achievement of a cash flow formula. If any of the 750,000
performance shares are not released by September 10, 2001,
they will be subject to cancellation. Subsequent to December
31, 2000, 220,378 escrow securities were subject to
cancellation on January 11, 2001 due to the conditions in the
escrow agreement not being fulfilled.
(b) Stock compensation plans:
Effective February 8, 2000, the Company adopted its 2000 Stock
Option Plan ("the 2000 Plan"), which reserved 7,000,000
shares for issuance pursuant to stock options to be granted to
directors, officers, employees, and consultants. The
Company's Board of Directors have discretion to set the price,
term, vesting schedules, and other terms and conditions for
options granted under the 2000 Plan, subject to the
requirements of any stock exchange on which the Company's
shares are listed. Effective April 20, 2000, the Company
granted 4,912,000 options at $5.10 per share under the 2000
Plan. Effective August 30, 2000, the Company granted a
further 1,948,000 options at $2.25 per share pursuant to the
2000 Plan.
Subsequent to year-end, effective January 18, 2001 and
February 9, 2001 the Company granted 150,000 and 308,000
options, respectively, at $1.00 per share pursuant to the 2000
plan. All options were for terms of five years and subject to
vesting schedules up to 24 months. The 2000 Plan was approved
by the Company's shareholders at the Company's June 28, 2000
general meeting.
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 9
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
9. STOCKHOLDERS' EQUITY (CONTINUED):
(b) Stock compensation plans (continued):
Effective December 6, 2000, the Company adopted its 2001 Stock
Option Plan ("the 2001 Plan"), which reserved 6,000,000
shares for issuance pursuant to stock options to be granted to
directors, officers, employees, and consultants. On February
9, 2001, the Board of Directors approved an increase of the
reserved amount to 7,000,000 shares pursuant to the 2001 plan.
The Company's Board of Directors have discretion to set the
price, term, vesting schedules, and other terms and conditions
for options granted under the plan, subject to the
requirements of any stock exchange on which the Company's
shares are listed.
Subsequent to year-end, effective January 18, 2001, February
9, 2001 and February 22, 2001 the Company granted 5,680,500,
490,000 and 190,000 options, respectively, at $1.00 per share.
All options are exercisable for five years and subject to
vesting schedules of up to 18 months. The 2001 Plan, and all
options granted under it, are subject to approval by the
Company's shareholders. The Company intends to seek that
approval at its next general stockholders' meeting. For
accounting purposes, these options will not be deemed to have
been granted until approved by the stockholders and
compensation, if any, will be measured based on market values
at that date.
As at December 31, 2000, no options granted under either the
2000 or 2001 Plans have been exercised.
(i) A summary of the Company's stock option activity is as
follows:
================================================================
Weighted
Number average
of shares exercise price
- ----------------------------------------------------------------
Balance, April 30, 1997 2,065,000 $ 0.36
Options granted 800,000 0.50
Options exercised (699,000) 0.37
Options cancelled / expired (45,000) 0.48
- ----------------------------------------------------------------
Balance, April 30, 1998 2,121,000 0.41
Options granted 555,000 0.24
Options cancelled / expired (86,000) 0.40
- ----------------------------------------------------------------
Balance, December 31, 1998 2,590,000 0.37
Options granted 2,960,000 1.38
Options exercised (1,343,500) 0.61
Options cancelled / expired (100,000) 0.45
- ----------------------------------------------------------------
Balance, December 31, 1999 4,106,500 1.02
Options granted 8,860,000 5.55
Options exercised (1,584,100) 0.92
Options cancelled / expired (470,000) 4.60
- ----------------------------------------------------------------
Balance, December 31, 2000 10,912,400 $ 4.56
================================================================
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 10
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
9. STOCKHOLDERS' EQUITY (CONTINUED):
(b) Stock compensation plans (continued):
(ii) Additional information regarding options outstanding as
at December 31, 2000 is as follows:
==============================================================================
Outstanding Exercisable
- ------------------------------------------------------------------------------
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercise Number exercise
exercise prices of shares life (years) price of shares price
- ------------------------------------------------------------------------------
$ 0.24 - $ 0.90 1,171,500 2.06 $ 0.48 1,171,500 $ 0.48
$ 1.55 - $ 2.25 3,053,900 4.25 2.01 1,377,775 1.73
$ 5.10 4,794,500 4.30 5.10 1,946,000 5.10
$ 8.69 - $ 11.08 1,892,500 4.05 9.82 955,000 10.33
- ------------------------------------------------------------------------------
10,912,400 4.00 $ 4.56 5,450,275 $ 4.17
==============================================================================
(iii) Stock-based compensation:
With respect to the stock options granted from inception
through December 31, 2000, the Company recorded stock-based
compensation of $11,671,647.
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 11
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
9. STOCKHOLDERS' EQUITY (CONTINUED):
(b) Stock compensation plans (continued):
(iii) Stock-based compensation (continued):
Pursuant to SFAS No. 123, the Company is required to
disclose the pro-forma effects on net loss and net loss per
share data as if the Company had elected to use the fair
value approach to account for its employee stock-based
compensation plans. If this approach had been applied, the
Company's net loss and net loss per share would have been as
indicated below:
=============================================================================
Eight months
Year ended Year ended ended Year ended
December 31, December 31, December 31, April 30,
2000 1999 1998 1998
- -----------------------------------------------------------------------------
Net loss:
As reported $27,794,388 $5,687,468 $1,282,487 $1,714,136
Proforma 43,301,838 7,680,247 1,342,505 1,891,150
=============================================================================
Basic and diluted net
loss per share:
As reported $ 0.48 $ 0.15 $ 0.05 $ 0.08
Proforma 0.75 0.21 0.05 0.09
=============================================================================
The fair value for the options was estimated using the
Black-Scholes option pricing model assuming no expected
dividends and the following weighted average assumptions:
======================================================================
Options
---------------
Interest
rate Term Volatility
- ----------------------------------------------------------------------
Year ended December 31, 2000 6.55% 3 yrs 70%
Year ended December 31, 1999 5.88% 3 yrs 70%
Eight months ended December 31, 1998 5.42% 3 yrs 70%
Year ended April 30, 1998 5.34% 3 yrs 70%
======================================================================
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 12
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
9. STOCKHOLDERS' EQUITY (CONTINUED):
(b) Stock compensation plans (continued):
(iii) Stock-based compensation (continued):
The weighted-average fair value of stock options granted for
the year ended December 31, 2000 and 1999, the eight months
ended December 31, 1998 and the year ended April 30, 1998,
are as follows:
==============================================================================================================
Weighted average Weighted average
exercise price fair value
------------------------------------------ ---------------------------------------
Eight Eight
Year ended months ended Year ended Year ended months ended Year ended
December 31, December 31, April 30, December 31, December 31, April 30,
-------------- --------------
2000 1999 1998 1998 2000 1999 1998 1998
================================================================================================================
Exercise price is
less than fair
value on
grant date $ - $ 1.30 $ - $ 0.50 $ - $ 0.62 $ - $ 0.22
Exercise price
exceeds fair
value on
grant date 5.55 1.40 0.24 - 4.12 0.79 0.16 -
- ----------------------------------------------------------------------------------------------------------------
Total options $ 5.55 $ 1.38 $ 0.24 $ 0.50 $ 4.12 $ 0.77 $ 0.16 $ 0.22
================================================================================================================
(c) Share purchase warrants:
A summary of the Company's warrant activity for the year ended
December 31, 2000 is as follows:
================================================================================================================
Outstanding Outstanding
Exercise December 31, December 31,
Expiry date price per share 1999 Granted Exercised Expired 2000
- ----------------------------------------------------------------------------------------------------------------
July 22, 2000 CDN 0.32 600,000 - (600,000) - -
December 23, 2000 CDN 0.40 286,000 - (110,000) (176,000) -
March 26, 2000/2001 U.S. 0.333/0.383 779,276 - (581,394) - 197,882
April 7, 2000/2001 CDN 0.55/0.63 2,700,000 - (700,000) - 2,000,000
September 14, 2000/2001 U.S. 1.64/1.89 2,746,833 - (1,329,579) - 1,417,254
December 14, 2000/2001 U.S. 1.64/1.89 - 2,500,000 - (598,729) 1,901,271
April 13, 2001/2002 U.S. 10.00/11.50 - 274,000 - - 274,000
April 13, 2001/2002 U.S. 2.82/3.24 - 810,000 - - 810,000
- ----------------------------------------------------------------------------------------------------------------
7,112,109 3,584,000 (3,919,702) (176,000) 6,600,407
================================================================================================================
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 13
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
9. STOCKHOLDERS' EQUITY (CONTINUED):
(c) Share purchase warrants (continued):
The share purchase warrants issued in consideration for
financing, outstanding at December 31, 2000 having an exercise
price of U.S.$2.82 in the first year and U.S.$3.24 in the
second year expiring April 13, 2001/2001 were repriced from
U.S.$10.00 in the first year and U.S.$11.50 in the second year
on September 7, 2000. The term of the re-priced warrants will
be reduced to 30 days if, for ten consecutive days, the
closing trading price of the company's shares exceeds either
U.S.$2.82 in the first year, or U.S.$3.24 in the second year.
The 30-day term commences seven days after the ten-day trading
threshold has been met.
10. Income taxes:
Deferred income taxes reflect the tax effects of temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes, as well as net operating loss and tax credit
carryforwards.
The Company's deferred income tax assets are comprised of the
following at December 31:
==========================================================================================
2000 1999
- ------------------------------------------------------------------------------------------
Net deferred tax assets and liabilities:
Net operating loss carryforwards $ 10,553,386 $ 4,905,941
Share issue costs (186,442) (88,039)
Excess of amortization recorded for accounting over tax 695,703 391,321
- -------------------------------------------------------------------------------------------
Total deferred tax assets 11,062,647 5,209,223
Valuation allowances (11,062,647) (5,209,223)
- -------------------------------------------------------------------------------------------
Net deferred tax assets $ - $ -
===========================================================================================
Deferred income taxes reflect the tax effects of temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes, as well as non-operating losses and tax credit
carryforwards.
At December 31, 2000, management believes that sufficient
uncertainty exists as to whether the deferred tax assets will be
realized, and accordingly, a valuation allowance is required.
As of December 31, 2000, the Company had net operating losses of
$13,468,489 available to offset taxable income earned in Canada
to 2007 and $10,193,813 available to offset taxable income earned
in the United States to 2015.
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 14
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
11. COMMITMENTS:
The Company has obligations under operating lease arrangements
which require the following minimum annual payments:
==================================================================
2001 $ 997,000
2002 947,000
2003 797,000
2004 531,000
2005 534,000
2006 and thereafter 2,850,000
- ------------------------------------------------------------------
$ 6,656,000
==================================================================
12. FINANCIAL INSTRUMENTS:
(a) Fair values of financial instruments:
The Company's short-term financial instruments consist of cash
and cash equivalents, short-term investments, accounts
receivable, due from related parties, accounts payable and
accrued liabilities. The fair value of these financial
instruments approximate their carrying values due to their
short term maturity.
The fair value of the long-term receivables, calculated using
the current market rate for such instruments of the same
remaining maturity term and credit risk, approximate their
carrying value.
(b) Foreign currency risk:
Foreign currency risk reflects the risk that the Company's net
assets or operations will be negatively impacted due to
fluctuations in exchange rates. Revenues and expenses of the
Company denominated in foreign currencies come due in the
short-term and accordingly, management of the Company believes
there is no significant exposure to foreign currency
fluctuations. The Company does not have foreign currency
hedges in place.
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements, page 15
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000 and 1999
Eight months ended December 31, 1998
Year ended April 30, 1998
12. FINANCIAL INSTRUMENTS (CONTINUED):
(c) Credit risk:
Financial instruments subjecting the Company to concentrations
of credit risk consist primarily of cash and cash equivalents,
short-term investments and trade accounts receivable. The
Company maintains cash and cash equivalents with high quality
financial institutions.
The Company's customers are currently concentrated in the
United States and Canada. The Company performs ongoing credit
evaluations, generally does not require collateral and
establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of customers, historical
trends and other information.
13. SUBSEQUENT EVENTS:
Subsequent to December 31, 2000, the Company issued, through a
private placement, 5,229,752 common shares, for net proceeds of
approximately $3,800,000. Additionally, the Company issued
5,229,752 share purchase warrants. The Company also issued
brokers' warrants, permitting the holders to acquire 526,316
units at a price of $0.76 per unit, with each unit consisting of
one share and one share purchase warrant. Each share purchase
warrant entitles the holder to purchase one additional common
share of the Company, for a period of three years, at a price of
$1.00 per share.
14. UNAUDITED QUARTERLY FINANCIAL INFORMATION:
The following table sets forth selected unaudited quarterly
information for the Company's last eight fiscal quarters (in
thousands):
==========================================================================================
Fiscal 2000 Quarter End
--------------------------------------------------
December 31 September 30 June 30 March 31
------------------------------------------------------------------------------------------
Revenues 288 191 183 6
Gross margin 255 164 109 -
Net loss for the period (4,721) (7,473) (12,983) (2,617)
Net loss per share (0.08) (0.13) (0.22) (0.05)
==========================================================================================
Fiscal 1999 Quarter End
--------------------------------------------------
December 31 September 30 June 30 March 31
------------------------------------------------------------------------------------------
Revenues 9 - (21) 46
Gross margin - - (1) 1
Net loss for the period (2,737) (1,731) (1,091) (488)
Net loss per share (0.08) (0.03) (0.02) (0.02)
==========================================================================================