As filed with the Securities and Exchange Commission on January 11, 2002
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
Form S - 4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SIDEWARE SYSTEMS INC.
-------------------------------------
(Exact name of Registrant as specified in its charter)
YUKON TERRITORY, CANADA
-------------------------------------
(State or other Jurisdiction of incorporation or organization)
9999
-------------------------------------
(I.R.S. Employer Identification No.)
7373
-------------------------------------
(Primary Standard Industrial Classification Code Number)
7900 Westpark Drive, Suite T300, McLean, VA 22102
Telephone (703) 437-9002
-------------------------------------
(Address, and telephone number of registrant's principal executive
offices)
James L. Speros, Chief Executive Officer
Sideware Systems Inc.
7900 Westpark Drive, Suite T300, McLean, VA 22102
Telephone (703) 437-9002
Fax (703) 437-9065
-------------------------------------
(Name, address, and telephone number of agent for service)
Copies to:
Kenneth Thornton, Joseph W. Conroy, Esq.
Chairman Darren K. DeStefano, Esq.
Sideware Systems Inc. Cooley Godward LLP
1600 - 777 Dunsmuir St. 11951 Freedom Drive
Vancouver, B.C. Canada V7Y 1K4 Reston, VA 20190
Telephone (604) 688-0047 Telephone (703) 456-8000
Facsimile (604) 688-0094 Facsimile (703) 456-8100
Approximate date of commencement of proposed sale of the
securities to the public: As soon as practicable after this
registration statement becomes effective and all other conditions
to the proposed merger described herein have been satisfied or
waived.
If the only securities being registered on this Form are
being offered in connection with the formation of a holding
company and there is compliance with General Instruction G, check
the following box. [ ]
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
Title of Each Amount to be Proposed Proposed Amount of
Class of Registered(1) Maximum Maximum Registration Fee(2)
Securities to Offering Price Aggregate
be Registered Per Share (2) Offering
Price (2)
Common stock,
par value $0.001 205,457,231 $0.07 $14,382,006.17 $3,437.29
per share
(1) Based upon the estimated maximum number of shares of common
stock, par value $0.001 per share, of Sideware Systems Inc. to
be issued upon the domestication of Sideware Systems Inc. under
the General Corporation Law of Delaware and the consummation of
the merger of KM Acquisition Corp., a wholly owned subsidiary of
Sideware Systems Inc., with KnowledgeMax, Inc. In the merger,
each share of KnowledgeMax, Inc. common stock will be exchanged
for shares of Sideware Systems Inc. common stock. For purposes
of calculating the registration fee only, a conversion ratio of
27 shares of Sideware Systems Inc. common stock for each share
of KnowledgeMax, Inc. common stock has been used. The number of
shares being registered also includes (i) shares of Sideware
Systems Inc. common stock which may be issued as a result of the
exercise of share purchase warrants which are in the money,
and (ii) shares which may be issued in exchange for shares of
common stock of KnowledgeMax, Inc. which may be issued on the
exercised of outstanding stock options of KnowledgeMax, Inc.
(2) Estimated solely for calculating the registration fee.
Pursuant to Rules 457(f)(1), 457(f)(2), and 457(c), and solely
for purposes of calculating the registration fee, the proposed
maximum offering price is equal to the sum of (i) the maximum
number of shares of common stock of Sideware Systems Inc. to be
issued to stockholders of Sideware Systems Inc. on the
domestication of that company, multiplied by the average of the
high and low trading prices for Sideware Systems Inc. common
stock as reported by the OTC Bulletin Board on January 10, 2002,
plus (ii) one third of the par value of all shares of
KnowledgeMax, Inc. common and preferred stock to be cancelled or
exchanged in the merger (including those issuable on the
exercise of options), as KnowledgeMax, Inc. has a capital
deficiency. The proposed maximum offering price per share is
equal to the proposed maximum aggregate offering price,
calculated as set out above, divided by the maximum number of
shares to be issued on consummation of the domestication and
merger.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE
UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), SHALL DETERMINE.
[Sideware Systems Inc. and KnowledgeMax, Inc. letterhead]
January [ ], 2002
Dear Sideware Systems Inc. and KnowledgeMax, Inc. Stockholders:
We are writing to you about a proposed merger of Sideware Systems
Inc. and KnowledgeMax, Inc. KnowledgeMax is a private company
that has developed a supply chain management system for the
enterprise knowledge and eLearning environment, through which
employees of corporations can purchase business, technical, and
professional books, and learning resources. Sideware is a public
company whose principal business is its majority interest in the
Chalk Group of companies. The Chalk Group produces educational
television programs and customized Internet eLearning and
eTraining content. The common stock of Sideware is listed on the
Toronto Stock Exchange under the symbol "SYD.U", and trades
through the OTC Bulletin Board under the symbol "SDWS".
In the merger, each share of KnowledgeMax common stock will be
converted to shares of Sideware common stock. The conversion
ratio will depend on the number of shares each company has
outstanding at the time of closing. Based on current outstanding
share totals, the estimated conversion ratio is 24.5 Sideware
shares for each KnowledgeMax share. Using the closing price for
Sideware shares on January 10, 2002, the total value of the
Sideware stock that will be issued to KnowledgeMax stockholders
on closing will be approximately $14.6 million. Allowing for
outstanding stock options, KnowledgeMax stockholders will own
approximately 55% of Sideware following the merger.
Sideware has called an extraordinary meeting of stockholders, at
which Sideware stockholders will be asked to approve the merger
agreement. The meeting will be held on [ ], at [ ]. At the
same meeting Sideware stockholders will also be asked to approve:
1. the continuation of Sideware to Delaware, as a corporation
under the General Corporation Law of Delaware;
2. an increase in the authorized capital of Sideware to
300,000,000 shares of common stock;
3. an amendment to Sideware's certificate of incorporation
after the continuation to Delaware, to change the corporate
name of Sideware to "KnowledgeMax, Inc." following the
merger; and
4. a new Sideware 2002 Equity Incentive Plan.
Some of these other proposals are important to the merger. The
merger agreement provides that Sideware must continue as a
Delaware corporation before the merger can close, and that
Sideware must change its corporate name to KnowledgeMax, Inc.
The Equity Incentive Plan will help Sideware provide proper
incentives to directors, employees, and consultants of the merged
entity after the merger is completed. The proposal to increase the
authorized capital is a separate proposal, and will only be important
if the merger does not proceed, and if Sideware remains a Yukon corporation.
KnowledgeMax has called a special meeting of stockholders, at
which KnowledgeMax stockholders will be asked to approve the
merger and also the merger agreement. KnowledgeMax preferred
stockholders will also be asked to approve a proposal to convert
all outstanding shares of preferred stock into common stock.
Both of these proposals must be approved for the merger to occur.
The meeting will be held on [ ] at [ ].
Further information about the merger and the stockholder meetings
is contained in the accompanying joint proxy statement -
prospectus. You are urged to read the joint proxy
ii
statement - prospectus in its entirety, especially the section describing
risk factors that begins on page 18.
The Boards of Directors of Sideware and KnowledgeMax believe that
the merger is an opportunity to create long term value for both
Sideware and KnowledgeMax stockholders, and recommend that you
vote for the merger and the other proposals.
Sincerely,
James L. Speros, President and E. Linwood Pearce, Chairman and
Chief Executive Officer co-Chief Executive Officer
Sideware Systems Inc. KnowledgeMax, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENCE.
This joint proxy statement - prospectus is dated as of January [ ], 2002,
and is first being mailed to stockholders on or about [ ], 2002.
ADDITIONAL INFORMATION
Sideware is subject to the reporting requirements of the
Securities Exchange Act of 1934. In accordance with those
requirements, Sideware files annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K,
proxy statements, and other information with the Securities and
Exchange Commission. The reports and other information filed by
Sideware can be inspected and copied at the Public Reference Room
of the SEC, 450 Fifth Street, N.W., Washington D.C. 20549. You
can obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a web site that contains reports and other information
that Sideware files electronically. The address of the web site
is http://www.sec.gov.
KnowledgeMax is a private company, and is not subject to the
reporting requirements of the Securities Exchange Act of 1934.
Accordingly, there are no filings of KnowledgeMax available
through the SEC.
Sideware supplied all information contained in this joint proxy
statement - prospectus relating to Sideware and KnowledgeMax
supplied all information contained in this joint proxy statement
- - prospectus relating to KnowledgeMax.
iii
SIDEWARE SYSTEMS INC.
7900 Westpark Drive, Suite T300
McLean, VA 22102
VANCOUVER, BC, CANADA V7Y 1K4
NOTICE OF EXTRAORDINARY GENERAL MEETING OF STOCKHOLDERS
TO BE HELD ON [_____], 2002
To The Sideware Stockholders:
NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting of
Stockholders of Sideware Systems Inc., will be held on [ ],
2002 at [____], at [____] for the following purposes:
1. To consider and, if thought fit, to pass a special
resolution approving and adopting the Agreement and Plan of
Merger and Reorganization dated December 7, 2001 between Sideware
Systems Inc., KnowledgeMax Inc., and KM Acquisition Corp.;
2. To consider and, if thought fit, to pass a special
resolution approving the continuation of Sideware to the State of
Delaware, as a corporation under the Delaware General Corporation
Law;
3. To consider and, if thought fit, to pass a special
resolution increasing the authorized capital of Sideware to
300,000,000 common shares without par value;
4. To consider and, if thought fit, to pass a resolution
approving an amendment to the certificate of incorporation of
Sideware Systems Inc. to change the corporate name to
"KnowledgeMax, Inc.";
5. To consider and, if thought fit, to pass a resolution
approving the Sideware 2002 Equity Incentive Plan; and
6. To transact such other business as may be brought before
the meeting or any adjournment or postponement of the meeting.
Only stockholders of record at the close of business on [____],
2002 will be entitled to notice of and to vote at the meeting or
any adjournment or postponement of the meeting.
A STOCKHOLDER ENTITLED TO ATTEND AND VOTE AT THE MEETING MAY
APPOINT A PROXYHOLDER TO ATTEND AND VOTE IN HIS STEAD. WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON, SIDEWARE URGES
YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS
POSSIBLE BEFORE THE MEETING. THE ENCLOSED PROXY IS SOLICITED BY
MANAGEMENT, BUT YOU MAY AMEND IT, IF YOU WISH, BY STRIKING OUT
THE NAMES LISTED IN THE PROXY AND INSERTING THE NAME OF THE
PERSON YOU WISH TO REPRESENT YOU AT THE MEETING. AN ADDRESSED
ENVELOPE, FOR WHICH NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES OR CANADA, IS ENCLOSED FOR YOU TO RETURN THE PROXY.
SENDING IN YOUR PROXY WILL NOT PREVENT YOU FROM VOTING YOUR STOCK
AT THE MEETING IF YOU DESIRE TO DO SO, AS YOUR PROXY IS REVOCABLE
AT YOUR OPTION.
THE PROXIES SOLICITED WITH THIS JOINT PROXY STATEMENT -
PROSPECTUS WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS
INDICATED, THIS PROXY WILL BE VOTED FOR EVERY ITEM LISTED IN THE
PROXY CARD.
iv
THE RESOLUTIONS TO APPROVE THE MERGER AGREEMENT WITH
KNOWLEDGEMAX, INC., TO CONTINUE SIDEWARE TO DELAWARE, AND TO
INCREASE THE AUTHORIZED CAPITAL OF SIDEWARE ARE SPECIAL
RESOLUTIONS, WHICH MUST BE APPROVED BY AT LEAST TWO-THIRDS OF THE
VOTES CAST.
UNDER THE BUSINESS CORPORATIONS ACT OF THE YUKON TERRITORY YOU
MAY, AT ANY TIME UP TO THE MEETING, GIVE SIDEWARE NOTICE OF
DISSENT WITH RESPECT TO THE PROPOSED RESOLUTIONS APPROVING THE
PROPOSED MERGER WITH KNOWLEDGEMAX AND THE CONTINUATION OF
SIDEWARE TO DELAWARE. BY GIVING NOTICE OF DISSENT YOU MAY, IF
MANAGEMENT OF SIDEWARE PROCEEDS WITH ANY RESOLUTION FROM WHICH
YOU DISSENT, REQUIRE SIDEWARE TO PURCHASE YOUR SHARES IN SIDEWARE
FOR THEIR FAIR VALUE IN CASH.
YOUR VOTE IS VERY IMPORTANT. PLEASE ACT PROMPTLY.
For the Board of Directors
SIDEWARE SYSTEMS INC.
KENNETH R. THORNTON
Chairman of the Board
Vancouver, British Columbia
[ ], 2002
v
KNOWLEDGEMAX, INC.
6110 EXECUTIVE BLVD.
N. BETHESDA, MD 20852
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON _____, 2002
To the KnowledgeMax Stockholders:
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of
KnowledgeMax, Inc. (the "KnowledgeMax Special Meeting") will be
held on [_______], 2002, at 10:00 a.m. local time, at [_______]
for the following purposes:
1. The holders of Common Stock, Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock of KnowledgeMax,
voting together as a class, to consider and vote on the proposal
to approve and adopt the Agreement and Plan of Merger and
Reorganization dated as of December 7, 2001 (the "Merger
Agreement") by and among KnowledgeMax, Sideware Systems, Inc.
("Sideware") and KM Acquisition Corp., a wholly owned subsidiary
of Sideware, a copy of which is attached as Appendix A to the
accompanying joint proxy statement - prospectus, and to approve the
merger of KnowledgeMax with KM Acquisition Corp., whereby holders
of KnowledgeMax stock will receive, in exchange for each of their
shares of KnowledgeMax stock, a number of shares of Sideware
common stock-based on the formula described in the attached joint
proxy statement - prospectus and in the Merger Agreement;
2. The holders of Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock of KnowledgeMax, voting
together as a class, to consider and vote on a proposal to
convert all shares of Series A Preferred Stock and Series B
Preferred Stock into shares of KnowledgeMax common stock
immediately prior to the effective time of the merger; and
3. To transact such other business as may properly come before
the special meeting or any adjournment or postponement thereof.
KnowledgeMax's Board of Directors has approved the Merger
Agreement and unanimously recommends that you vote to approve and
adopt the Merger Agreement and to approve the merger of
KnowledgeMax with and into KM Acquisition Corp. We describe the
merger more fully in the accompanying joint proxy
statement - prospectus, which we urge you to read.
Only KnowledgeMax stockholders of record at the close of business
on [_______] are entitled to notice of and to vote at the
KnowledgeMax special meeting or any adjournment or postponement
thereof.
Your vote is important. To assure that your shares are
represented at the KnowledgeMax Special Meeting, you are urged to
complete, date and sign the enclosed proxy card and mail it
promptly in the postage-paid envelope provided. We encourage you
to do this whether or not you plan to attend the KnowledgeMax
Special Meeting in person. You may revoke your proxy in the
manner described in the accompanying joint proxy
statement - prospectus at any time before it has been voted at the
KnowledgeMax Special Meeting. It may be possible for you to vote
in person at the KnowledgeMax Special Meeting even if you have
returned a proxy. Please review the joint proxy
statement - prospectus for more information.
By order of the Board of Directors of KnowledgeMax, Inc.
______________________
E. Linwood Pearce
Chairman and co-Chief Executive Officer
N. Bethesda, Maryland
[ ]
vi
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE MERGER 1
SUMMARY 4
Introduction 4
Information about Sideware 5
Information about KnowledgeMax 6
Market value of shares being issued 6
Opinion of Sideware's financial advisor 7
Management 7
The Sideware meeting 7
The KnowledgeMax meeting 8
Board recommendations 8
Shares owned by insiders 8
Interested parties 9
Income tax consequences 10
Dissent and appraisal rights 12
Comparative per share data 13
SELECTED HISTORICAL FINANCIAL DATA FOR SIDEWARE 14
SELECTED HISTORICAL FINANCIAL DATA FOR THE CHALK GROUP 15
SELECTED HISTORICAL FINANCIAL DATA FOR KNOWLEDGEMAX 15
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION 16
STOCK PRICE AND DIVIDEND INFORMATION 17
RISK FACTORS 18
Risks relating to the merger 18
Risks relating to the continuation of Sideware
to Delaware 20
Risks relating to Sideware 22
Risks relating to KnowledgeMax 23
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 28
SHARES BEING REGISTERED 29
DESCRIPTION OF SIDEWARE CAPITAL STOCK 29
THE MERGER 30
General overview of the merger 30
Background of the merger 30
Sideware's reasons for the merger - Recommendation
of the Sideware Board of Directors 32
KnowledgeMax's reasons for the merger -
Recommendation of the KnowledgeMax Board of
Directors 33
vii
Opinion of Paradigm Capital Inc. 34
Consideration to be received in the merger 36
Conduct of business prior to the merger 40
Management after the merger 40
Executive and director compensation 44
Authorized capital of Sideware after the merger 44
Principal stockholders after the merger 44
Interests of insiders 46
Accounting treatment 47
Tax consequences of the merger 47
Restrictions on resale of Sideware stock by
KnowledgeMax affiliates 47
Dissent rights for Sideware stockholders 48
Appraisal rights for KnowledgeMax stockholders 48
Conditions to completion of the merger 48
Representations and warranties 49
Requirement recommendations to stockholders 49
Waiver and amendment 49
Termination, loan repayment, and liquidated damages 49
Director and officer indemnification 50
Exchange of share certificates 50
Voting agreements 50
Proposed resolution for Sideware stockholders 50
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS 51
Pro forma balance sheets 52
Pro forma statements of operations 54
Notes to pro forma statements 55
SIDEWARE STOCKHOLDERS' MEETING 59
Date, time, and place of the Sideware meeting 59
Voting rights; Record date; Outstanding shares 59
Purposes of the Sideware meeting 59
Votes required for approval 60
Appointment and revocation of proxies 60
Voting procedures 61
Effect of an abstention and broker non-votes;
voting discretion 61
Persons making the solicitation 62
Voting shares and principal holders thereof 62
Dissent rights 63
PROPOSAL FOR CONTINUATION OF SIDEWARE TO DELAWARE 65
Stockholder rights 66
Dissent rights 66
Tax consequences of continuation 66
Proposed resolution 66
PROPOSAL FOR INCREASE IN AUTHORIZED CAPITAL OF
SIDEWARE 67
Proposed resolution 67
PROPOSAL FOR SIDEWARE NAME CHANGE 68
Proposed resolution 68
viii
PROPOSAL FOR APPROVAL OF THE SIDEWARE 2002
EQUITY INCENTIVE PLAN 68
Features of the plan 68
Federal income tax information 73
Other options outstanding 74
Disinterested stockholder approval 75
Proposed resolution 75
KNOWLEDGEMAX STOCKHOLDERS' MEETING 76
Date, time, and place of the KnowledgeMax meeting 76
Voting rights; Record date; Outstanding shares 76
Purposes of the KnowledgeMax special meeting 76
Vote required; KnowledgeMax voting agreements 77
Quorum; abstentions 77
Solicitation of proxies; expenses 77
Voting of proxies 77
Revocation of proxies 78
Beneficial ownership of KnowledgeMax 78
Appraisal rights 80
PROPOSAL TO APPROVE THE CONVERSION OF ALL OUTSTANDING
KNOWLEDGEMAX PREFERRED STOCK TO COMMON STOCK 83
COMPARISON OF STOCKHOLDER RIGHTS 84
Sideware stockholders 84
KnowledgeMax stockholders 91
MATERIAL TAX CONSEQUENCES OF THE TRANSACTIONS 95
General 95
United States federal income tax consequences 95
Canadian federal income tax consequences 103
INFORMATION ABOUT SIDEWARE 107
Description about business activities 107
Business of the Chalk Group 108
Management's discussion and analysis of
financial condition and results of
operations - Sideware 111
Management's discussion and analysis of
financial condition and results of
operations - The Chalk Group 123
Qualitative and quantitative disclosure
about market risk 127
Description of property 127
Legal proceedings 128
Exchange controls and other limitations
affecting security holders 128
Taxation 130
INFORMATION ABOUT KNOWLEDGEMAX 132
Overview 132
Products and services 134
Sales and marketing 135
Clients 135
Intellectual property 135
Suppliers and strategic partners 136
Competition 136
ix
Employees 137
Facilities 137
Legal proceedings 137
Management's discussion and analysis of
financial condition and results of operations 137
Qualitative and quantitative disclosure
about market risk 142
MATERIAL CONTRACTS BETWEEN SIDEWARE AND KNOWLEDGEMAX 142
EXECUTIVE AND DIRECTOR COMPENSATION 142
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 147
Sideware 147
KnowledgeMax 149
LEGAL AND TAX MATTERS 151
EXPERTS 151
STOCKHOLDER PROPOSALS 152
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY
FINANCIAL DATA 152
Sideware 152
The Chalk Group 153
KnowledgeMax 153
APPENDICES
Appendix A Merger agreement
Appendix B Opinion of Paradigm Capital Inc.
Appendix C Form of Sideware (Delaware) Certificate of
Incorporation
Appendix D Form of Sideware (Delaware) Bylaws
Appendix E Section 193 of the Yukon Business Corporations
Act
Appendix F Section 262 of the Delaware General Corporation
Law
Appendix G Sideware 2002 Equity Incentive Plan
x
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q. WHY DO SIDEWARE AND KNOWLEDGEMAX WANT TO MERGE?
A. Sideware and KnowledgeMax want to merge because they
believe that a merger will allow them to develop a profitable
business together. KnowledgeMax has developed a supply chain
management system for the enterprise knowledge and eLearning
environment, through which employees of corporations can purchase
business, technical, and professional books, and learning
resources. However, KnowledgeMax needs additional capital to
develop its business further. By merging with Sideware, an
existing public company, KnowledgeMax believes that it will
improve its access to capital, and that it will benefit from the
expertise and business contacts of Sideware management.
Sideware's principal business consists of its majority
interest in the Chalk Group, whose operations are centered in
British Columbia, Canada. As a Canadian business, the Chalk
Group is unable to take full advantage of the experience and
business contacts of Sideware management, which are centered in
the eastern United States. To complete the merger, Sideware will
likely have to sell most of its interest in the Chalk Group.
Funds from the sale of the Chalk Group will be used to develop
the business of KnowledgeMax. Sideware believes that it can
enhance stockholder value by selling some or all of its interest
in the Chalk Group and acquiring, and further developing, the
business of KnowledgeMax.
Q. WHAT WILL I RECEIVE IN THE MERGER?
A. KnowledgeMax stockholders will receive shares of the common
stock of Sideware, which will be a Delaware corporation by the
time the merger is completed. The merger agreement between
Sideware and KnowledgeMax contains a formula setting the number
of shares of Sideware common stock that will be issued for each
share of KnowledgeMax common stock. The companies estimate that
the conversion ratio will be approximately 24.5 shares of
Sideware for each share of KnowledgeMax, although the precise
ratio will depend on conditions that exist at the time of
closing.
Sideware stockholders will continue to own shares of
Sideware common stock, although Sideware will be a Delaware
corporation, rather than a Yukon, Canada corporation, by the time
of closing. For U.S. federal income tax purposes, Sideware
stockholders will be deemed to have exchanged their stock in the
Canadian corporation for shares of the Delaware corporation.
Certain Sideware stockholders may be liable for tax as a result
of this exchange.
Q. WHEN DO THE COMPANIES EXPECT THE MERGER WILL BE COMPLETED.
A. Sideware and KnowledgeMax expect to complete the merger
soon after the Sideware and KnowledgeMax stockholder meetings.
Q. What do I need to do now?
A. After carefully reading and considering the information
contained in this joint proxy statement - prospectus, please
respond by completing, signing, and dating your proxy card, and
returning it in the enclosed postage-paid envelope as soon as
possible, so that your shares can be represented at your
company's stockholder meeting. YOUR VOTE IS IMPORTANT. WHETHER
OR NOT YOU PLAN TO ATTEND YOUR COMPANY'S MEETING, PLEASE VOTE
PROMPTLY.
Q. WHAT IF I DON'T VOTE?
A. If you are a Sideware stockholder and you do not respond,
your shares will not be voted either for or against:
1
- - the merger;
- - the continuation to Delaware;
- - the increase in authorized capital; or
- - the Sideware 2002 Equity Incentive Plan.
You will be leaving those decisions up to the other Sideware
stockholders.
The situation is different with respect to the change of
Sideware's corporate name. That will take place after Sideware
is a Delaware corporation. Under the Delaware General
Corporation Law, if you do not vote, that will have the same
effect as a vote against the name change.
Sideware stockholders should note that if they return a
properly executed proxy card which contains no direction as to
how their shares should be voted on a particular proposal, their
shares will be voted in favor of that proposal. If they return a
properly executed proxy card, but wish to abstain from voting on
a particular proposal, they must mark the "abstain" box.
If you are a KnowledgeMax stockholder and you do not
respond, it will have the same effect as a vote against the
merger.
If your shares are held in street name with a broker, your
broker will vote your shares on the merger agreement proposal
only if you give your broker instructions on how to vote.
Q. WHAT WILL HAPPEN IF THE SIDEWARE OR KNOWLEDGEMAX
STOCKHOLDERS DO NOT APPROVE SOME OF THE OTHER PROPOSALS BEING PUT
FORWARD?
A. If the Sideware or KnowledgeMax stockholders do not approve
some of the other proposals that are being put forward, that
could prevent the merger from being completed. For example, it
is a condition of the merger that Sideware be continued as a
Delaware corporation. It is also a condition of the merger that
prior to the merger, the holders of KnowledgeMax Series A and
Series B Preferred Stock convert all shares of that stock into
shares of KnowledgeMax common stock. The merger agreement
provides that the merger will not close if these and other
specified conditions are not either satisfied or waived. This
joint proxy statement - prospectus explains how each of the
proposals relates to the merger.
Q. CAN I CHANGE MY VOTE AFTER I HAVE DELIVERED MY PROXY?
A. Yes. If you are a stockholder of record in Sideware, you
can change your vote in one of three ways:
- - by providing a new proxy card, with a later date;
- - by providing written notice to Sideware before the Sideware
meeting that you are revoking your proxy; or
- - by attending the Sideware meeting in person, and
registering as a stockholder in attendance.
A new proxy card or notice of revocation must be delivered prior
to the Sideware stockholders' meeting, in the manner described in
this joint proxy statement - prospectus.
If you are a KnowledgeMax stockholder, you can also change
your vote in one of three ways:
- - by providing a new proxy card with a later date;
- - by providing written notice to KnowledgeMax before the
KnowledgeMax meeting that you are revoking your proxy; or
- - by attending the KnowledgeMax special stockholders' meeting
in person and voting at the meeting.
2
If your shares are held with a bank, broker or other third
party, you should contact the holder of your shares to change
your vote.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. When the merger is completed, you will receive written
instructions on how to exchange your stock certificates for
shares of the new company. Please do not send in your stock
certificates with your proxy card.
Q. WHO SHOULD I CONTACT IF I HAVE QUESTIONS ABOUT THE MEETINGS
OR THE PROPOSALS?
A. If you have any questions about the meetings or the
proposals, you should contact:
if you are a Sideware stockholder:
Sideware Systems Inc.
James L. Speros
President
7900 Westpark Drive
McLean, VA 22102
(703) 437-9002
if you are a KnowledgeMax stockholder:
KnowledgeMax Inc.
E. Linwood Pearce
Chairman and co-Chief Executive Officer
6110 Executive Boulevard, Suite 202
N. Bethesda, MD 20852
(301) 468-8000
3
SUMMARY
This section highlights selected information in this joint proxy
statement - prospectus. The summary may not contain all of the
information important to you. To understand the merger more
fully, and for a more complete description of its legal terms,
you should read this entire document carefully, including the
appendices.
All figures in this joint proxy statement - prospectus are stated
in United States dollars unless expressly stated to be in
Canadian dollars (C$). For purposes of this joint proxy
statement - prospectus, Canadian dollar amounts have been
converted to United States dollars using an exchange rate of
C$1.00 = US$0.66.
INTRODUCTION
On December 7, 2001, Sideware entered into an Agreement and Plan
of Merger and Reorganization with KnowledgeMax, Inc.
KnowledgeMax is a Delaware corporation with its principal
executive offices in N. Bethesda, Maryland, a suburb of
Washington, D.C. If the merger proceeds, the business of
KnowledgeMax will become the business of Sideware, and Sideware
will change its name to "KnowledgeMax, Inc."
To complete the merger, Sideware has established a wholly owned
Delaware subsidiary corporation, KM Acquisition Corp. KM
Acquisition Corp. will merge with and into KnowledgeMax, making
KnowledgeMax a wholly owned subsidiary of Sideware. KnowledgeMax
stockholders will receive shares of Sideware common stock, and
Sideware will assume the existing stock options of KnowledgeMax,
by issuing shares of Sideware common stock when the options are
exercised. Prior to completing the merger, Sideware will change
its corporate jurisdiction from the Yukon Territory of Canada to
Delaware, by continuing as a corporation under the General
Corporation Law of Delaware. Sideware stockholders will still
own Sideware shares, but they will be shares of common stock of a
Delaware corporation, rather than shares in a Yukon corporation.
The merger agreement includes a method for calculating the
conversion ratio, which will set the number of shares of Sideware
common stock that will be issued for each share of KnowledgeMax
common stock. The conversion ratio is calculated by dividing the
number of outstanding Sideware shares by the number of
outstanding KnowledgeMax shares, and then multiplying the result
by 55/45. The merger agreement also provides that the conversion
ratio will be adjusted for certain outstanding warrants and
options. Based on outstanding share totals and trading prices as
of January 10, 2002, Sideware and KnowledgeMax estimate that:
- - approximately 24.5 shares of Sideware common stock will be
issued for each share of KnowledgeMax common stock;
- - approximately 93.9 million shares of Sideware common stock
will be issued to KnowledgeMax stockholders on closing;
- - the total value of the Sideware shares issued to
KnowledgeMax stockholders on closing will be approximately
$14.6 million; and
- - an additional 14.4 million shares of Sideware common stock
will be reserved for issuance under KnowledgeMax stock
options, which Sideware will assume on closing.
A detailed explanation of how the conversion ratio will be
calculated is included in this joint proxy statement -
prospectus, under "THE MERGER - Consideration to be received in
the merger". IMMEDIATELY FOLLOWING THE MERGER, CURRENT
KNOWLEDGEMAX STOCKHOLDERS WILL OWN APPROXIMATELY 52% OF SIDEWARE.
INCLUDING KNOWLEDGEMAX STOCK OPTIONS THAT ARE IN THE MONEY AND
WILL BE ASSUMED BY SIDEWARE, KNOWLEDGEMAX STOCK AND OPTION
HOLDERS WILL OWN OR HAVE THE RIGHT TO ACQUIRE APPROXIMATELY 55%
OF SIDEWARE.
The merger agreement contains several conditions which must be
fulfilled or waived before the
4
merger can be completed. These conditions are set out in the
merger agreement, which is attached as Appendix A to this joint
proxy statement - prospectus. The principal conditions include
the following:
- - The merger agreement must be approved by the stockholders
of both Sideware and KnowledgeMax.
- - Sideware must complete its continuation to Delaware,
becoming a Delaware corporation.
- - Sideware must raise an additional $2,000,000 in financing
through the sale of some or all of its interest in the
Chalk Group, and have the proceeds placed in escrow prior
to the closing of the merger.
- - All shares of KnowledgeMax Series A and Series B Preferred
Stock must be converted to shares of KnowledgeMax common
stock.
In addition, although they are not explicit conditions of the
merger, Sideware management will put forward resolutions to:
- - increase the authorized capital of Sideware to 300,000,000
common shares; and
- - approve the Sideware 2002 Equity Incentive Plan, which
reserves 10,000,000 shares for issuance under plan awards.
Sideware is currently authorized to issue 198,978,997 common
shares. If the continuation to Delaware proceeds, the authorized
capital of Sideware following the continuation will be
300,000,000 shares of common stock plus 50,000,000 shares of
preferred stock, as that is the authorized capital stated in the
proposed certificate of incorporation for Sideware. Management
of Sideware also believes that the authorized capital of Sideware
should be increased even if the merger and continuation do not
proceed, so that Sideware will be better positioned to proceed
with other merger or acquisition transactions. The resolution to
increase the authorized capital of Sideware is a separate
proposal, applicable to Sideware as a Yukon corporation, and will
only be of importance if the merger and continuation to Delaware
do not proceed.
The 2002 Equity Incentive Plan will permit Sideware to offer a
range of equity based incentives, including stock options and
restricted stock awards, to directors, employees, and
consultants. If the merger proceeds, all new stock options will
be issued under the 2002 Equity Incentive Plan. If the merger
does not proceed, Sideware management does not believe that the
new 2002 Equity Incentive Plan will be needed. Accordingly, the
proposed resolution to approve the 2002 Equity Incentive Plan is
conditional on the merger being completed. A copy of the 2002
Equity Incentive Plan is attached as Appendix G to this joint
proxy statement - prospectus.
During December 2001, Sideware raised $1,350,000 in private
placement financing, by issuing 13,500,000 shares of common stock
at $0.10 per share. Under the merger agreement, those funds are
being used to fund the operations of both companies, according to
a budget developed jointly. The merger agreement provides that
funds which Sideware provides to KnowledgeMax constitute
unsecured loans from Sideware to KnowledgeMax, and specifies the
conditions under which the loans must be repaid if the merger
does not close. Additional information on the terms of the loans
is contained under "THE MERGER - Conduct of business prior to the
merger" and "THE MERGER - Termination, loan repayment, and
liquidated damages."
INFORMATION ABOUT SIDEWARE
In December 2001, Sideware closed its previous principal
executive offices at 1810 Samuel Morse Drive, Reston, VA 20190-
5316. is in the process of moving to premises at:
7900 Westpark Drive, Suite T300
Mclean, VA 22102
(703) 437-9002
5
KnowledgeMax has entered into a lease for these premises, which are
intended to serve as the principal executive offices for the combined
company following the merger.
Sideware's present principal business is its ownership interest
in the Chalk Group of companies. Sideware owns 80.7% of the
outstanding shares of Chalk.com Network (Holding) Corp., the
parent company of the Chalk Group. The Chalk Group is the
producer of the television show "Dave Chalk's Computer Life", and
also produces customized internet video content for use in
corporate eTraining and eLearning environments. TO COMPLETE THE
MERGER, SIDEWARE WILL LIKELY HAVE TO SELL ALL OR MOST OF ITS
INTEREST IN THE CHALK GROUP. STOCKHOLDERS VOTING TO APPROVE THE
MERGER SHOULD REALIZE THAT IT WILL RESULT IN SIDEWARE DISPOSING
OF MOST OR ALL OF THAT INTEREST. Additional information on the
business of the Chalk Group is given below, under "INFORMATION
ABOUT SIDEWARE."
INFORMATION ABOUT KNOWLEDGEMAX
KnowledgeMax's principal executive offices are currently located at:
6110 Executive Blvd., Suite 202
N. Bethesda, MD 20852
(301) 468-8000
KnowledgeMax is a privately held Delaware corporation that has
developed a supply chain management system for the enterprise
knowledge and eLearning environment, which it believes will
significantly change the way corporations and other organizations
select, purchase, and deliver knowledge resources and education
to their professional employees. Through KnowledgeMax's
developing eLearning and knowledge management solution,
corporations can select and make available to employees
throughout the organization a wealth of inter-related learning
and knowledge resources at a measurable and controllable cost.
Additional information about the business of KnowledgeMax is
given below, under the heading "INFORMATION ABOUT KNOWLEDGEMAX".
MARKET VALUE OF SHARES BEING ISSUED
Sideware common shares trade on the Toronto Stock Exchange under
the symbol "SYD.U" and through the OTC Bulletin Board quotation
service under the symbol "SDWS". KnowledgeMax is a private
company. As a result, there is no comparative market trading
data for KnowledgeMax shares.
The following table shows the closing prices for Sideware shares,
and the equivalent price per share that KnowledgeMax stockholders
will receive, as of:
- - December 6, 2001, the last trading day prior to the
announcement of the merger; and
- - [ ], 2002, the last practicable date prior to mailing
this joint proxy statement - prospectus.
The equivalent per share price for KnowledgeMax shares was
calculated using an estimated conversion ratio of 24.5 Sideware
shares for each KnowledgeMax share. Calculations are given using
both Toronto Stock Exchange and OTC Bulletin Board trading
prices.
Sideware shares - Sideware shares - Equivalent price per Equivalent price per
TSE data OTC Bulletin Board KnowledgeMax share, based KnowledgeMax share, based
on TSE data on OTC BB data
December 6, 2001 $0.195 $0.205 $4.78 $5.02
[ ], 2002 [ ] [ ] [ ] [ ]
6
OPINION OF SIDEWARE'S FINANCIAL ADVISOR
In deciding to proceed with the merger, the Sideware board of
directors considered a fairness opinion provided by Paradigm
Capital Inc. The opinion of Paradigm Capital was that as of
December 5, 2001, the merger was fair to Sideware stockholders
from a financial point of view. The merger agreement does not
require, and Paradigm Capital accordingly has not delivered and
will not be delivering, an opinion updating its opinion dated
December 5, 2001.
Paradigm Capital has been paid fees totalling approximately
$23,000 for the preparation of its opinion. A copy of the
opinion is attached to this joint proxy statement - prospectus as
Appendix B. You should read this opinion in its entirety, as
well as the more detailed description of the opinion under "THE
MERGER - Opinion of Paradigm Capital Inc.", to understand the
assumptions made, matters considered, and limitations of the
review undertaken, by Paradigm Capital.
MANAGEMENT
The merger agreement provides that following the merger, Sideware
will have eleven directors:
E. Linwood Pearce
James L. Speros
Kenneth R. Thornton
Donna L. Lynn
Edwin S. Grosvenor
Alan R. Sultan
Jay H. Nussbaum
John Shoemaker
Jack Kemp
Edward H. Gross
Joseph J. Boivin, Jr.
Mr. Pearce, currently Chairman and co-CEO of KnowledgeMax, will
become Chairman and CEO of Sideware. Mr. Speros, currently
President and CEO of Sideware, will be President of Sideware.
The other senior management positions will be filled by a
combination of KnowledgeMax executives and Sideware executives.
Mr. Speros, Mr. Thornton, Mr. Nussbaum, Mr. Shoemaker, and Mr.
Kemp are currently directors of Sideware. Mr. Pearce, Ms. Lynn,
Mr. Grosvenor, Mr. Sultan, Mr. Gross, and Mr. Boivin are
currently directors of KnowledgeMax.
THE SIDEWARE MEETING
An extraordinary meeting of the stockholders of Sideware will be
held on [ ], at [ ]. Management of Sideware will put the
following resolutions forward at the Sideware meeting:
1. A special resolution to approve and adopt the Agreement and
Plan of Merger and Reorganization between Sideware,
KnowledgeMax, and KM Acquisition Corp.
2. A special resolution to approve the continuation of
Sideware as a corporation under the General Corporation Law
of the State of Delaware.
3. A special resolution to increase the authorized capital of
Sideware to 300,000,000 common shares.
4. A resolution to approve an amendment to the certificate of
incorporation of Sideware, to change the corporate name of
Sideware to "KnowledgeMax, Inc." following the merger.
5. A resolution to approve the Sideware 2002 Equity Incentive
Plan.
7
Under the Yukon Business Corporations Act, special resolutions
must be approved by at least two-thirds of the votes cast. This
applies to the resolutions to approve the merger agreement, to
approve the continuation to Delaware, and to increase the
authorized capital of Sideware.
The resolution to change the corporate name of Sideware will
require Sideware to file an amended certificate of incorporation
under the General Corporation Law of Delaware. Under the
Delaware General Corporation Law, this resolution must be
approved by the holders of the majority of outstanding shares of
Sideware.
Under regulations of the Toronto Stock Exchange, the Sideware
2002 Equity Incentive Plan must be approved by a majority of the
votes cast, excluding shares owned by Sideware insiders or their
affiliates who might receive awards under the plan. Sideware
estimates that approximately 9.3 million shares, or approximately
11% of the outstanding voting shares, will be excluded from
voting on this resolution.
You can vote if you owned shares of Sideware on the Sideware
record date, which was [ ].
A quorum for the Sideware meeting consists of holders of 5% of
the shares entitled to vote, present either in person or by
proxy.
THE KNOWLEDGEMAX MEETING
A special meeting of the stockholders of KnowledgeMax (the
"KnowledgeMax Special Meeting") will be held on [_______], 2002,
at 10:00 a.m. local time, at [_______]. At the KnowledgeMax
Special Meeting, the stockholders of KnowledgeMax will be asked
to consider and vote upon a proposal to approve the merger.
Additionally, the preferred stockholders of KnowledgeMax will be
asked to consider and vote upon a proposal to convert all
outstanding shares of KnowledgeMax preferred stock into
KnowledgeMax common stock immediately prior to the effective time
of the merger. Each of these proposals must be approved by the
affirmative vote of a majority of shares entitled to vote
thereon. KnowledgeMax stockholders who owned shares of
KnowledgeMax on [_______] are entitled to vote at the
KnowledgeMax Special Meeting.
BOARD RECOMMENDATIONS
To Sideware stockholders: The Sideware board of directors
believes that the merger and the other proposals being presented
at the Sideware meeting are fair to Sideware stockholders, and in
their best interests. The board voted unanimously to approve the
merger, and recommends that Sideware stockholders vote FOR the
merger and the other proposals being presented.
To KnowledgeMax stockholders: The KnowledgeMax board of
directors believes that the merger is fair to KnowledgeMax
stockholders, and in their best interests. The board voted
unanimously to approve the merger, and recommends that
KnowledgeMax stockholders vote FOR the merger and the other
proposals being presented.
SHARES OWNED BY INSIDERS
As of the Sideware record date, directors and executive officers
of Sideware, and their respective affiliates, beneficially owned
in the aggregate approximately 10 million, or approximately 12%,
of the voting shares of Sideware. Based on the closing prices of
Sideware shares on the Toronto Stock Exchange and the OTC
Bulletin Board on January 10, 2002, these shares had values of
approximately $1.4 million and $1.6 million, respectively.
As of the KnowledgeMax record date, directors, executive officers
of KnowledgeMax and their respective affiliates beneficially
owned in the aggregate approximately 2 million, or approximately
58%, of the voting shares of KnowledgeMax. Using a conversion
ratio of 24.5 Sideware shares for
8
each KnowledgeMax share, these shares will convert to approximately
49 million shares of Sideware. Based on the closing prices of Sideware
shares the Toronto Stock Exchange and the OTC Bulletin Board on January
10, 2002, these shares would have a value of approximately $6.8
million and $7.8 million, respectively, on that date.
None of the directors or executive officers of Sideware own any
KnowledgeMax shares, and none of the directors or executive
officers of KnowledgeMax own any Sideware shares.
Certain directors, executive officers, and large stockholders of
Sideware and KnowledgeMax have entered into voting agreements,
under which they have agreed to vote all of their shares in favor
of the merger and related matters, and that they will not
exercise any dissent or appraisal rights. Those voting
agreements cover over 50% of the voting shares of KnowledgeMax
and approximately 12% of the voting shares of Sideware.
INTERESTED PARTIES
Some directors and officers of Sideware and KnowledgeMax may have
interests in the merger that are different from your interests as
ordinary stockholders.
The following directors and officers are expected to remain as
salaried officers or employees of Sideware following the merger:
Expected position
with Sideware
Name Current position following the merger
E. Linwood Pearce Chairman and co-CEO of KnowledgeMax Chairman and CEO
James L. Speros President and CEO of Sideware President
Kenneth R. Thornton Chairman of Sideware Vice Chairman
Edwin S. Grosvenor Founder and co-CEO of KnowledgeMax Executive Vice President
Donna L. Lynn President and COO of KnowledgeMax COO
Alan R. Sultan VP, Business Development of KnowledgeMax Senior Vice President
Richard Luebkemann VP, Technology of KnowledgeMax VP for Technology
Rahul Bardhan Chief Technical Officer of Sideware VP for Engineering
The terms of employment for these individuals following the
merger, including compensation, have not yet been determined.
While employed by Sideware, Mr. Bardhan and Mr. Speros entered
into Change of Control Severance Agreements with Sideware, under
which they are each entitled to be paid up to two years' salary
and bonus if their employment is terminated in anticipation of,
or following, a change in control. Sideware believes that the
merger with KnowledgeMax would likely constitute a change in
control for purposes of these agreements. In December 2001 Mr.
Speros executed an amendment to his agreement reducing his
maximum cash compensation to $170,000 if his employment is
terminated. Mr. Bardhan executed a similar amendment, although
Mr. Bardhan's amendment is conditional on Sideware either
completing the merger or raising $5 million in additional
financing by June 30, 2002. Additional information on the
compensation paid to the individuals listed above is given under
"EXECUTIVE AND DIRECTOR COMPENSATION".
Sideware expects that Grant Sutherland, one of its directors,
will have an interest in the purchaser of the Chalk Group, if
Sideware is successful in selling its interest in the Chalk
Group. The board of directors of Sideware has authorized Mr.
Sutherland to find a purchaser for the Chalk Group, and expects
that a purchaser will likely require an investment from Mr.
Sutherland. Kris Sutherland, the son of Grant Sutherland, is the
Executive Vice President of the Chalk Group.
9
Anne Grosvenor, mother of Edwin Grosvenor, has loaned
approximately $15,000 to KnowledgeMax and personally guaranteed
KnowledgeMax's $100,000 line of credit. In connection with the
merger, Ms. Grosvenor will be repaid and her liability on the
line of credit revoked.
E. Linwood Pearce, KnowledgeMax Chairman and co-CEO, holds an
option to purchase 150,000 shares of KnowledgeMax common stock
which will vest upon completion of the merger.
The members of the boards of directors of Sideware and
KnowledgeMax knew about and considered these additional interests
when they approved the merger.
Further information on interested parties is given below, under
"THE MERGER - Interests of insiders".
To the best of the knowledge of Sideware and KnowledgeMax,
neither company is required to comply with any federal or state
anti-trust or similar regulatory requirements in relation to the
merger.
INCOME TAX CONSEQUENCES
Some of the transactions described in this joint proxy statement
- - prospectus will have income tax consequences for Sideware,
KnowledgeMax, and their respective stockholders. In the
following discussion of these tax consequences, the term
"Sideware Canada" means Sideware as it presently exists, as a
Yukon corporation, and the term "Sideware Delaware" refers to
Sideware Systems Inc., a Delaware corporation that will succeed
to the assets, liabilities, and business of Sideware Canada
following the effective date of the continuation.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
CONTINUATION TO DELAWARE; POST-CONTINUATION.
The continuation of Sideware to Delaware will result in the
following U.S. tax consequences:
- - Neither Sideware Canada nor Sideware Delaware should
recognize any gain or loss for U.S. federal income tax
purposes as a result of the continuation of Sideware to
Delaware.
- - Sideware Canada will be deemed to distribute shares of
Sideware Delaware to its stockholders in cancellation of
their shares of Sideware Canada on the effective date of
the continuation. As a result, the U.S. holders and
certain non-U.S. holders of Sideware stock will recognize
capital gain or loss on the deemed receipt of the Sideware
Delaware stock. The amount of capital gain or loss
recognized will equal the difference between the fair
market value of the Sideware stock held on the effective
date of the continuation and the adjusted tax basis in the
holder's shares of Sideware stock deemed to be cancelled in
the continuation. Any capital gains recognized by
individual U.S. holders and certain non-U.S. holders of
Sideware stock will be taxed at federal rates of up to 20
percent, while corporate holders will pay tax at regular
corporate rates on any capital gains they recognize in the
continuation. The deductibility of capital losses
recognized on the continuation transaction will depend upon
whether the holder is an individual or corporate holder and
the availability of other capital gains to offset such
losses. A U.S. holder's (and certain non-U.S. holders')
adjusted tax basis in the shares of Sideware Delaware
constructively received in the deemed exchange will equal
the fair market value of the shares on the effective date
of the continuation. A U.S. holder's (and certain non-U.S.
holders') holding period in the shares of Sideware Delaware
received in the exchange will begin on the date following
the effective date of the continuation.
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- - Neither KnowledgeMax nor any of its stockholders that are
not holders of Sideware stock prior to the merger will have
any U.S. federal income tax consequences as a result of the
continuation transaction.
- - For Sideware, continuation to Delaware will result in
Sideware being taxed as a United States corporation, rather
than a Canadian corporation. Corporate income tax rates
prevailing in the United States are generally lower than
those prevailing in Canada. However, continuation to
Delaware will also result in Sideware being unable to
deduct its past net operating losses from future profits.
Accordingly, the continuation of Sideware to Delaware may
result in higher effective tax rates for Sideware after the
merger.
For a more complete discussion of the U.S. income tax
consequences of the continuation of Sideware to Delaware, please
see "MATERIAL TAX CONSEQUENCES OF THE TRANSACTIONS - United
States federal income tax consequences - Continuation
transaction".
MERGER TRANSACTION
The merger transaction will result in the following U.S. federal
income tax consequences:
- - No gain or loss will be recognized by Sideware or
KnowledgeMax as a result of the merger.
- - No gain or loss will be recognized by KnowledgeMax
stockholders upon the receipt of Sideware Delaware common
stock solely in exchange for KnowledgeMax common stock in
the merger.
- - The aggregate tax basis of the Sideware Delaware common
stock received by KnowledgeMax stockholders in the merger
will be the same as the aggregate adjusted tax basis of the
KnowledgeMax common stock surrendered in the exchange.
- - The holding period of Sideware Delaware common stock
received by each KnowledgeMax stockholder in the merger
will include the holding period of the KnowledgeMax common
stock surrendered in the exchange.
- - Sideware stockholders prior to the merger should not
recognize gain or loss as a result of the merger. The tax
consequences to the Sideware stockholders of the
continuation are described above.
For a more complete discussion of the U.S. federal income tax
consequences of the merger portion of the transactions, please
see "MATERIAL TAX CONSEQUENCES OF THE TRANSACTIONS - United
States federal income tax consequences - Merger transaction".
CANADIAN FEDERAL INCOME TAX CONSEQUENCES
CONTINUATION TRANSACTION; POST-CONTINUATION
- - On continuation to Delaware, Sideware will be deemed to
dispose of each property owned by it, at a price equal to
that property's fair market value. Any gains, taxable
capital gains or losses, and allowable capital losses
resulting from this deemed disposition of property will be
included in calculating Sideware's tax liability. At the
date of this joint proxy statement - prospectus, Sideware
management believes that its historic tax losses will be
sufficient to offset any income resulting from the deemed
disposition, so that no capital gains tax will be payable.
- - Sideware will also be required to pay a special branch tax
equal to 5% of the amount by which the fair market value of
its assets at the time of the continuation exceeds the aggregate
11
of its liabilities, including any liabilities under Part I
of the Canadian Income Tax Act, and the paid-up capital of
its issued and outstanding shares. At the date of this
joint proxy statement - prospectus, Sideware does not believe
that the fair market value of its assets will be sufficient
to cause any tax liability under the branch tax provisions.
- - The continuation of Sideware to Delaware will not give rise
to a deemed disposition of Sideware shares. As a result,
no capital gains or losses will be triggered for Sideware
stockholders.
- - Individual taxpayers in Canada will no longer be eligible
for the dividend tax credit on any dividends they receive
from Sideware following the continuation.
Merger transaction
- - The merger will not give rise to a deemed disposition of
Sideware shares. As a result, no capital gains or losses
will be triggered.
For a more complete discussion of the Canadian federal income tax
consequences of the continuation and merger, please see "MATERIAL
TAX CONSEQUENCES OF THE TRANSACTIONS - Canadian federal income
tax consequences".
INVESTORS ARE CAUTIONED THAT THE TAX INFORMATION IN THIS JOINT
PROXY STATEMENT - PROSPECTUS IS OF A SUMMARY NATURE ONLY. THE
TAX CONSEQUENCES FOR INDIVIDUAL INVESTORS MAY VARY, AND INVESTORS
ARE URGED TO SEEK INDEPENDENT ADVICE FROM A QUALIFIED TAX
PROFESSIONAL.
DISSENT AND APPRAISAL RIGHTS
Under the Yukon Business Corporations Act, Sideware stockholders
have dissent rights arising from both the merger and the
continuation to Delaware. To exercise those dissent rights,
Sideware stockholders must:
- - be stockholders of record; and
- - give written notice to Sideware that they are exercising
their dissent rights before the vote on the resolution from
which they dissent.
For more information, see "SIDEWARE STOCKHOLDERS' MEETING -
Dissent rights".
Under the Delaware General Corporation Law, KnowledgeMax
stockholders have appraisal rights arising from the merger. To
exercise those appraisal rights, KnowledgeMax stockholders must,
among other requirements:
- - deliver written demand for appraisal to KnowledgeMax before
the vote on the adoption of the merger agreement;
- - not vote in favor of the merger agreement (the return of a
signed proxy which does not specify a vote against the
merger agreement or a direction to abstain will constitute
a waiver of the stockholder's right or appraisal); and
- - continuously hold the KnowledgeMax shares from the date of
making the demand through the time the merger is completed.
For more information, see "KNOWLEDGEMAX STOCKHOLDERS' MEETING -
Appraisal rights".
A stockholder who exercises dissent or appraisal rights can
require the corporation in which he holds shares to purchase
those shares for cash at fair market value. Relevant sections of
the Yukon Business Corporations Act and the General Corporation
Law of the State of Delaware are attached as Appendices E and F
to this joint proxy statement - prospectus.
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DISSENT AND APPRAISAL RIGHTS ARE SUBJECT TO A NUMBER OF TECHNICAL
LEGAL REQUIREMENTS. STOCKHOLDERS WHO DO NOT COMPLY STRICTLY WITH
THOSE LEGAL REQUIREMENTS COULD LOSE THEIR RIGHTS. STOCKHOLDERS
WHO WISH TO EXERCISE THEIR DISSENT OR APPRAISAL RIGHTS SHOULD
SEEK QUALIFIED INDEPENDENT LEGAL ADVICE.
COMPARATIVE PER SHARE DATA
The tables below show:
- - the historical book value and net loss per share for
Sideware stock as at and for the periods ended December 31,
2000 and September 30, 2001 (unaudited);
- - the historical book value and net loss per share for
KnowledgeMax stock as at and for the periods ended December
31, 2000 and September 30, 2001 (unaudited);
- - the unaudited pro forma book value and net loss per share
for Sideware stock as at and for the periods ended December
31, 2000 and September 30, 2001, after giving effect to the
merger, and giving effect to a sale by Sideware of 100% of
its interest in the Chalk Group; and
- - the unaudited pro forma book value and net loss per share
for Sideware stock as at and for the periods ended December
31, 2000 and September 30, 2001, without giving effect to
either the merger or any sale of Sideware's interest in the
Chalk Group.
You should read the following tables in conjunction with the
unaudited pro forma consolidated financial statements of Sideware
included in this joint proxy statement - prospectus, and the
historical consolidated financial statements and related notes of
Sideware and KnowledgeMax, which are contained in this joint
proxy statement - prospectus.
HISTORICAL SIDEWARE PER SHARE DATA
As at January 10, 2002, Sideware has 85,514,735 common shares
outstanding. Per share data set out below has been calculated
using a weighted average number of shares outstanding, as set out
in the financial statements of Sideware included in this joint
proxy statement - prospectus.
As of and for the As of and for the
nine months ended year ended
September 30, 2001 December 31, 2000
Net loss
per share - basic
and diluted (0.19) (0.48)
Book value per
share 0.02 0.15
Weighted average no.
of shares 64,378,281 58,078,005
HISTORICAL KNOWLEDGEMAX PER SHARE DATA
Per share data set out below has been calculated using the weighted
average number of common shares outstanding.
As of and for the As of and for the
nine months ended year ended
September 30, 2001 December 31, 2000
Net loss
per share - basic
and diluted $(0.75) $(2.11)
Book value per
share $(1.03) $(1.27)
Weighted average no.
of shares 1,628,508 1,265,574
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PRO FORMA SIDEWARE PER SHARE DATA - INCLUDING THE MERGER
To complete the merger, Sideware will be required to sell some or
all of its interest in the Chalk Group. At the date of this
joint proxy statement - prospectus, Sideware does not know how
much of that interest will be sold, although Sideware expects to
sell most or all of its interest. The following table sets out
pro forma per share information calculated on the assumptions
that:
- - Sideware and KnowledgeMax are merged; and
- - Sideware has sold 100% of its interest in the Chalk Group.
As of and for the As of and for the
nine months ended year ended
September 30, 2001 December 31, 2000
Net loss
per share - basic
and diluted $(0.02) $(0.07)
Book value per
share $0.02 n/a
Weighted average no.
of shares 162,881,183 146,041,214
SELECTED HISTORICAL FINANCIAL DATA FOR SIDEWARE
The following table sets out selected financial information for
each of the periods indicated, derived from Sideware's
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 the audited consolidated financial statements for Sideware
contained in this joint proxy statement - prospectus.
Information as at and for the years ended April 30, 1996 and 1995
has been extracted from audited consolidated financial statements
for Sideware not included in this joint proxy statement -
prospectus. Information as at and for the nine month periods
ended September 30, 2001 and 2000 has been taken from the
condensed unaudited interim consolidated financial statements for
Sideware contained in this joint proxy statement - prospectus.
Although the financial information as at and for the nine months
ended September 30, 2001 and 2000 is unaudited, it reflects all
adjustments considered necessary for a fair presentation of the
information in accordance with generally accepted accounting
principles.
Prior to December 1998 Sideware operated with an April 30 fiscal
year end. In December 1998, Sideware changed its 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.
Eight
months
Nine months Year ended
ended ended December Year ended April 30,
September 30, December 31, 31,
-------------------- ----------------- --------- ------------------------------
2001 2000 2000 1999 1998 1998 1997 1996
(000's) (000's) (000's) (000's) (000's) (000's) (000's) (000's)
Sales revenue
continuing
operations $136 $0 $0 $0 $0 $0 $0 $0
Loss from
continuing
operations $(2,517) $(7,411) $(6,989) $(1,916) $(454) $(894) $(1,089) $(529)
14
Loss from
discontinued
operations $(9,965) $(15,662) $(20,806) $(3,772) $(829) $(820) $(355) $(93)
Comprehensive
loss $(12,601) $(23,780) $(28,447) $(5,422) $(1,383) $(1,748) $(1,444) $(622)
Loss per
share $(0.19) $(0.40) $(0.48) $(0.15) $(0.05) $(0.08) $(0.06) $(0.05)
Total assets $4,208 $14,608 $10,459 $7,537 $1,138 $1,676 $1,005 $549
Total
stockholders'
equity (deficit) $1,552 $13,505 $9,044 $6,874 $954 $1,531 $726 $430
SELECTED HISTORICAL FINANCIAL DATA FOR THE CHALK GROUP
The following table sets out selected financial information for
each of the periods indicated, derived from the consolidated
financial statements of Chalk.com Network (Holding) Corp., parent
company of the Chalk Group of companies.
Information as at August 31, 2001 and December 31, 2000 and 1999,
for the eight month period ended August 31, 2001, for the year
ended December 31, 2000, and for the eleven month period ended
December 31, 1999 has been extracted from the audited
consolidated financial statements the Chalk Group contained in
this joint proxy statement - prospectus. No audited financial
statements are available for any period prior to the eleven month
period ended December 31, 1999, and no interim statements are
available for any period prior to January 2001. Owing to the
small scale of the operation of the Chalk Group prior to 1999 and
to the substantial changes in its business since January 1999,
financial information from periods prior to January 1999 was not
considered meaningful or material for purposes of this joint
proxy statement - prospectus.
Eight months Year ended Eleven months ended
ended August 31, December 31, December 31,
2001 2000 1999
(000's) (000's) (000's)
Sales revenue $981 $1,080 $955
Loss for the
period $(2,298) $(7,905) $(304)
Total assets $800 $1,360 $562
Total stockholders'
equity (deficit) $(1,493) $(560) $(22)
SELECTED HISTORICAL FINANCIAL DATA FOR KNOWLEDGEMAX
The following table sets out selected financial information for
each of the periods indicated, derived from KnowledgeMax's
historical financial statements.
Information as at December 31, 2000 and 1999 and for the years
ended December 31, 2000, 1999,
15
and 1998 has been derived from the audited financial statements
for KnowledgeMax contained in this joint proxy statement -
prospectus, except as to book value per share, which is
unaudited. Information as at December 31, 1998, 1997, and
1996, for the year ended December 31, 1997, and for the period
from inception on June 13, 1996 (date of inception ) to December
31, 1996 has been derived from unaudited financial statements
for KnowledgeMax not included in this joint proxy statement -
prospectus. Information as at September 30, 2001 and
for the nine month periods ended September 30, 2001 and 2000 has
been derived from the condensed unaudited interim financial
statements for KnowledgeMax contained in this joint proxy
statement - prospectus. Information as at September 30, 2000 has
been derived from the condensed unaudited interim financial
statements for KnowledgeMax not included in this joint proxy
statement - prospectus. Although the financial information as at
December 31, 1998, 1997, and 1996, for the year ended December
31, 1997, for the period from inception from June 13, 1996 (date
of inception) to December 31, 1996, and as at and for the nine
months ended September 30, 2001 and 2000 is unaudited, it
reflects all adjustments considered necessary for a fair
presentation of the information in accordance with accounting
principles generally accepted in the United States. The results
of operations presented below are not necessarily indicative of
the results expected for any subsequent period.
Nine months
ended Period from June 13
September 30, Year ended December 31, to December 31,
---------------------- ----------------------------------------- ------------------
2001 2000 2000 1999 1998 1997 1996
Revenues $355,983 - - - - - -
Net loss $(1,073,003) $(2,134,481) $(2,606,982) $(1,399,704) $(785,342) $(210,407) $(60,692)
Total assets $317,887 $179,140 $88,563 $44,783 $130,242 $13,262 $44,336
Total
stockholders'
equity (deficit) $(1,676,721) $(1,217,002) $(1,613,466) $(1,993,731) $(594,026) $(169,001) $31,406
Book value
per share $(1.03) $(1.02) $(1.27) $(1.99) $(0.67) $(0.22) $0.04
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table shows selected consolidated unaudited pro
forma financial information for Sideware. This information has
been extracted from the pro forma consolidated financial
statements shown under "UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS".
Nine months ended Year ended
September 30, 2001 December 31, 2000
(000's) (000's)
Revenues $356 $0
Loss from continuing
operations $(3,458) $(9,596)
Total Assets $4,577 n/a
Total Stockholders'
Equity (Deficit) $2,735 n/a
16
STOCK PRICE AND DIVIDEND INFORMATION
Sideware common shares currently trade on the Toronto Stock
Exchange under the symbol "SYD.U" and are quoted on the OTC
Bulletin Board under the symbol "SDWS". Trading on the Toronto
Stock Exchange commenced November 10, 2000. Quotation on the OTC
Bulletin Board was authorized to commence October 29, 1999.
Prior to November 20, 2000, Sideware shares also traded on the
Canadian Venture Exchange. Up to November 4, 1999 trading on the
Canadian Venture Exchange was in Canadian dollars.
The following table sets forth trading information for the
quarters indicated. Figures quoted for the third quarter of 1999
and all previous periods are in Canadian dollars, and are based
on data from the Canadian Venture Exchange. Figures quoted for
the fourth quarter of 1999 and all subsequent periods are in
United States dollars, and are based on data from the Canadian
Venture Exchange, the Toronto Stock Exchange, and the OTC
Bulletin Board.
Figures stated for the Canadian Venture Exchange and the Toronto
Stock Exchange represent high and low trading prices. Figures
stated for the OTC Bulletin Board represent high and low bids.
Figures stated for the OTC Bulletin Board reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and may
not represent actual transactions.
CVE/TSE CVE/TSE OTC-BB OTC-BB
High Low High Low
($/C$) ($/C$) ($) ($)
2002
First Quarter $0.15 $0.14 $0.16 $0.1475
2001
Fourth Quarter $0.255 $0.105 $0.26 $0.10
Third Quarter $0.50 $0.12 $0.52 $0.13
Second Quarter $0.64 $0.11 $0.65 $0.15
First Quarter $1.80 $0.35 $1.69 $0.35
2000
Fourth Quarter $2.40 $0.44 $2.25 $0.44
Third Quarter $4.25 $1.92 $4.00 $1.91
Second Quarter $10.35 $3.30 $10.19 $3.28
First Quarter $25.50 $7.05 $24.88 $7.06
1999
Fourth Quarter $10.15 $1.48 $12.85 $1.38
Third Quarter C$3.38 C$2.20
Second Quarter C$3.47 C$0.94
First Quarter C$0.85 C$0.45
The last trading day before the merger was announced was December
6, 2001. On that date, the closing prices for Sideware shares on
the Toronto Stock Exchange and the OTC Bulletin Board were $0.195
and $0.205, respectively. On January 10, 2002, the closing prices
for Sideware shares on the Toronto Stock Exchange and the OTC Bulletin
Board were $0.14 and $0.16, respectively.
17
Sideware is 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.
Sideware has never paid cash dividends on its capital stock.
Sideware currently intends to retain all earnings, if any, to
finance the growth and development of its business. Sideware
does not anticipate paying any cash dividends in the foreseeable
future.
KnowledgeMax is a privately held company, and there is no
established public trading market for its stock. KnowledgeMax
has never paid, and does not anticipate paying, cash dividends on
its common stock.
RISK FACTORS
Both Sideware and KnowledgeMax are corporations of speculative
value, without a proven record of earnings. In addition, there
are risks attendant to the merger and the continuation of
Sideware to Delaware. Sideware and KnowledgeMax stockholders
should consider the following risks carefully when determining
how to vote their shares.
RISKS RELATING TO THE MERGER
BECAUSE KNOWLEDGEMAX IS NOT PROFITABLE, THE MERGER MAY NOT BE
BENEFICIAL TO SIDEWARE.
Following the merger, the business of KnowledgeMax will be the
core business of Sideware. KnowledgeMax has never generated
profits from its operations, and there is no assurance that
KnowledgeMax will be profitable in the future. As a result, the
merger may not be beneficial to Sideware. Specific risk factors
concerning the business of KnowledgeMax are set out below under
"Risks relating to KnowledgeMax".
BECAUSE THE MERGER WILL REQUIRE SIDEWARE TO DISPOSE OF MOST OR
ALL OF ITS INTEREST IN THE CHALK GROUP, THE MERGER MAY BE
DETRIMENTAL TO SIDEWARE.
Following the merger, Sideware will own the business of
KnowledgeMax, but will have disposed of most or all of its
interest in the Chalk Group. Both KnowledgeMax and the Chalk
Group are early stage businesses, and their potential values are
uncertain and speculative. KnowledgeMax may turn out to be less
profitable, or of less value, than Sideware's interest in the
Chalk Group. As a result, the merger may reduce the value of
Sideware.
BECAUSE THE MERGER WILL DILUTE EXISTING SIDEWARE STOCKHOLDERS, IT
MAY HAVE A NEGATIVE EFFECT ON THE VALUE OF THEIR SIDEWARE SHARES.
In addition to the sale of the Chalk Group, the merger will
result in Sideware issuing a large number of shares to
KnowledgeMax stockholders, which will dilute the positions of the
existing stockholders in Sideware. Following the merger,
existing Sideware stockholders will own less than 50% of
Sideware. This dilution may reduce the value of their Sideware
shares.
BECAUSE THE MERGER WILL DILUTE EXISTING KNOWLEDGEMAX
STOCKHOLDERS, IT MAY REDUCE THE VALUE OF THEIR HOLDINGS.
Following the KnowledgeMax merger, assuming that all of the
KnowledgeMax options are exercised, KnowledgeMax stockholders
will own approximately 55% of Sideware. Sideware will have no
substantial business other than the business of KnowledgeMax. As
a result, the effective ownership of the current KnowledgeMax
stockholders in the business of KnowledgeMax will be diluted.
The Sideware shares issued to the KnowledgeMax stockholders may
be of less value than the KnowledgeMax shares they currently own.
18
FAILURE TO COMPLETE THE MERGER MAY LEAVE SIDEWARE AND/OR
KNOWLEDGEMAX INSOLVENT.
Under the merger agreement, Sideware will advance a substantial
portion of its available cash by way of loan to KnowledgeMax
prior to closing. If the merger is not completed, KnowledgeMax
may be required to repay those funds. In addition, both
companies will incur substantial transaction costs, including
legal, accounting, and other professional fees, in anticipation
of completing the merger. If the merger is not completed:
- - KnowledgeMax may be heavily indebted to Sideware, without
the means to pay that debt;
- - Sideware may be left without significant cash resources,
and unable to recover any of the funds it has lent to
KnowledgeMax; and
- - both companies may be left with substantial liabilities,
and without the means to pay those liabilities.
FAILURE TO COMPLETE THE MERGER MAY LEAVE SIDEWARE AND
KNOWLEDGEMAX UNABLE TO MERGE WITH OTHER COMPANIES.
If the merger is not completed, Sideware and KnowledgeMax may
both be left with significant debts, and without significant cash
resources. In addition, failure of the merger may result in
legal disputes, which could include claims for large liquidated
damages under the merger agreement. These factors may make both
Sideware and KnowledgeMax unattractive merger partners for other
companies, or may prevent either company from raising new
financing or entering into other acquisition transactions.
BECAUSE THE MERGER MAY FAIL TO QUALIFY AS A REORGANIZATION,
KNOWLEDGEMAX STOCKHOLDERS MAY RECOGNIZE GAINS OR LOSSES AS A
RESULT OF THE MERGER.
Sideware and KnowledgeMax have structured the merger to qualify
as a tax-free reorganization under Section 368(a)(2)(E) of the
United States Internal Revenue Code. If the merger fails to
qualify as a tax-free reorganization for any reason, KnowledgeMax
stockholders generally would recognize capital gains or losses on
each KnowledgeMax share surrendered. The amount of the gain or
loss would equal the difference between the stockholders'
adjusted tax basis in the shares surrendered and the fair market
value of the Sideware Delaware stock received in exchange at the
effective time of the merger.
EXERCISE OF DISSENT OR APPRAISAL RIGHTS MAY EITHER PREVENT THE
MERGER, OR IMPOSE SIGNIFICANT CASH COSTS ON SIDEWARE.
The corporate laws governing both Sideware and KnowledgeMax give
appraisal rights to stockholders who dissent from the merger.
Dissenting stockholders can require cash payment for their
shares.
Under voting agreements, stockholders owning over 50% of the
KnowledgeMax shares and approximately 12% of the Sideware shares
have agreed that they will not exercise dissent or appraisal
rights. In addition, the merger agreement permits either party
to terminate the merger if the stock ownership percentages of
dissenting stockholders for Sideware and KnowledgeMax, added
together, exceed 6%. However, either company may still be
required to make substantial cash payments, depleting the cash
resources of the merged entity, if:
- - the stock ownership percentages of dissenting Sideware and
KnowledgeMax stockholders, added together, are less than
6%; or
- - the stock ownership percentages of dissenting Sideware and
KnowledgeMax stockholders, added together, exceed 6%, but
the parties decide to proceed with the merger in any event.
19
POST-MERGER SELLING BY KNOWLEDGEMAX STOCKHOLDERS COULD CAUSE THE
PRICE OF SIDEWARE SHARES TO FALL.
The merger will result in approximately 94 million Sideware
shares being issued to KnowledgeMax stockholders. KnowledgeMax
is a private company, and KnowledgeMax stockholders have not
previously had the ability to sell their shares in a public
market. Following the merger, KnowledgeMax stockholders may wish
to liquidate some or all of their investments. The market price
for Sideware shares may fall if the KnowledgeMax stockholders
sell, or are perceived as intending to sell, a substantial
portion of the Sideware shares issued to them in the merger.
MARKET SELLING BY SIDEWARE STOCKHOLDERS WHO DISAPPROVE OF THE
MERGER MAY AFFECT THE SIDEWARE STOCK PRICE.
Some existing Sideware stockholders may disapprove of the merger,
and may seek to sell their Sideware shares as a result. If a
substantial number of Sideware stockholders disapprove of the
merger, or are perceived as doing so, downward pressure on the
Sideware share price may result.
SIDEWARE MAY BE UNABLE TO SELL THE CHALK GROUP, WHICH MAY CAUSE
THE MERGER TO FAIL.
One of the conditions to the merger is that Sideware must raise
at least $2,000,000 by selling some or all of the Chalk Group.
The Chalk Group has never generated profits, and has only
speculative value. Sideware has no assurance that it will be
able to sell all or a sufficient portion of its holdings in the
Chalk Group for the requisite price, or at all.
FOLLOWING THE MERGER, SIDEWARE MAY BE UNABLE TO RAISE ADDITIONAL
CASH.
Following the merger, the business of KnowledgeMax will become
the core business of Sideware. KnowledgeMax's business has never
generated operating profits or positive cash flow. Accordingly,
Sideware will likely require additional capital to continue the
development of the KnowledgeMax services and products, to pay the
costs of marketing those products, or to cover operating losses
until Sideware is able to become profitable. To raise additional
capital, Sideware may have to issue additional shares, which may
dilute the interests of existing stockholders substantially.
There is no assurance that Sideware will be able to raise
additional capital on terms favourable to Sideware, or at all.
Sideware and KnowledgeMax estimate that their current cash
resources will be sufficient to pay anticipated operating
expenses until approximately the end of the first quarter of
2002. If the companies are not able either to raise additional
capital or commence generating substantial sales revenue prior to
then, they face a risk of insolvency.
THE MERGER MAY RESULT IN SIDEWARE SHARES BEING DE-LISTED FROM THE
TORONTO STOCK EXCHANGE
Under regulations of the Toronto Stock Exchange, in order to
maintain its listing following the merger, Sideware will have to
meet certain financial requirements. Sideware believes that it
is unlikely to meet those requirements. Accordingly, the merger
may result in Sideware shares being de-listed from the Toronto
Stock Exchange.
RISKS RELATING TO THE CONTINUATION OF SIDEWARE TO DELAWARE
SIDEWARE MAY OWE TAXES TO CANADIAN TAXING AUTHORITIES AS A RESULT
OF THE CONTINUATION.
For Canadian tax purposes, Sideware will be treated as though it
sold all of its property at the time of continuation, and
received the fair market value for those properties. Sideware
will be taxed on any income or gain realized on the deemed sale.
Sideware could be subject to an additional tax if the fair
20
market value of its assets, net of liabilities, exceeds the paid-up
capital of its issued and outstanding shares.
Sideware management has reviewed Sideware's assets, liabilities
and paid-up capital, and believes that it will not owe any
Canadian federal income taxes as a result of the continuation.
However, it is possible that Canadian taxing authorities could
disagree with the position of Sideware management on the value of
Sideware's properties, or on other factual or legal conclusions
of Sideware relating to its tax liabilities.
AS A RESULT OF THE CONTINUATION, SIDEWARE WILL BE UNABLE TO
DEDUCT PREVIOUS OPERATING LOSSES FOR INCOME TAX PURPOSES.
Sideware has incurred substantial operating losses during recent
years. As a Canadian corporation, subject to limitations
specified in Canadian income tax legislation, Sideware has the
ability to offset those losses against future profits, if it
should be able to generate profits in the future. After
continuing to Delaware, Sideware will become subject to the
United States income tax laws, which will not allow Sideware to
offset its previous losses incurred while Sideware was a Canadian
company and which were not incurred in the conduct of a U.S.
trade or business nor attributable to a U.S. permanent
establishment, against future profits earned as a Delaware
corporation. Accordingly, continuing to Delaware may subject
Sideware to higher effective tax rates in the future.
SIDEWARE STOCKHOLDERS MAY SUFFER ADVERSE U.S. TAX CONSEQUENCES AS
A RESULT OF THE CONTINUATION.
If Sideware sells all or substantially all of its ownership
interest in the Chalk Group immediately before or after the
continuation and prior to the completion of the merger, Sideware
believes that the continuation will not qualify as a tax-free
reorganization under Section 368(a)(1)(F) of the Internal Revenue
Code. As a result, on the effective date of the continuation,
Sideware Canada will be deemed to contribute its assets tax-free
to Sideware Delaware under Code Section 351 in exchange for
Sideware Delaware shares, followed by a deemed liquidating
distribution by Sideware Canada of the Sideware Delaware shares
to its stockholders who own Sideware Canada shares. U.S.
stockholders and certain non-U.S. stockholders will recognize
capital gain or loss on the receipt of Sideware Delaware shares
in the deemed distribution, measured by the difference between
the fair market value of Sideware shares on the effective date of
the continuation and the adjusted tax basis of the Sideware
Canada shares to those stockholders. This adverse tax
consequence may influence such stockholders to exercise their
appraisal rights and receive cash for their Sideware shares,
rather than agreeing to vote in favor of the continuation.
CANADIAN STOCKHOLDERS WHO HOLD SIDEWARE STOCK IN A RETIREMENT
SAVINGS PLAN COULD BE SUBJECT TO TAX FOLLOWING THE CONTINUATION.
Following the continuation to Delaware, Sideware shares will be
"foreign property" for purposes of the Canadian income tax
regulations relating to registered retirement savings plans and
other similar savings plans. Canadian income tax regulations
place limitations on the amount of "foreign property" that can be
held in these savings plans. Exceeding these limitations could
create income tax liabilities for Canadian stockholders of
Sideware.
In addition, Sideware shares may be de-listed from the Toronto
Stock Exchange. If this happens in combination with a
continuation to Delaware, Sideware shares could cease to be
qualified investments for registered retirement savings plans and
other similar savings plans. This could create additional income
tax liabilities for Canadian stockholders of Sideware who hold
Sideware shares in their registered retirement savings plans, or
other similar savings plans.
For additional information on these potential tax liabilities,
see "MATERIAL TAX CONSEQUENCES OF THE TRANSACTIONS - Canadian
federal income tax consequences - Canadian retirement plans".
Canadian stockholders of Sideware who hold Sideware shares in a
21
registered retirement savings plan or other similar savings plan
should consult their own tax advisors regarding the potential
consequences of the continuation to Delaware.
RISKS RELATING TO SIDEWARE
BECAUSE SIDEWARE HAS TERMINATED ITS ECRM BUSINESS, ITS HAS NO
BUSINESS OTHER THAN ITS INTEREST IN THE CHALK GROUP.
In September 2001, Sideware ceased development and marketing of
its electronic Customer Relationship Management software, which
was previously its core business. Following that, Sideware's
only substantial asset, and its only significant business
operation, was its interest in the Chalk Group. The Chalk Group
has never generated operating profits, and its value is
speculative.
The auditors' report on Sideware's December 31, 2000 consolidated
financial statements contains an explanatory paragraph that
states that Sideware's recurring losses from operations and
negative cash flows from operating activities raise substantial
doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
that might result from the outcome of that uncertainty.
BECAUSE THE MARKET PRICE OF SIDEWARE SHARES HAS BEEN PARTICULARLY
VOLATILE, INVESTORS IN SIDEWARE SHARES FACE A HIGH DEGREE OF
MARKET RISK.
The stock market in general has recently experienced extreme
price and volume fluctuations. In particular, the stock prices
of technology 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 Sideware common shares has also experienced
substantial fluctuations. Between January 1, 2000 and January 10,
2002 the Sideware share price has fluctuated between a high of
$25.50 and a low of $0.10. On January 10, 2002, the last
practicable day prior to mailing this joint proxy statement -
prospectus, the closing prices for Sideware shares were $0.14 and
$0.16 on the Toronto Stock Exchange and the OTC Bulletin Board,
respectively. The historical susceptibility of the Sideware stock
price to fluctuation may expose investors acquiring Sideware stock
to a high degree of risk.
The price of Sideware common shares could fall substantially
following the merger if KnowledgeMax does not generate future
earnings that meet the expectations of investors.
BECAUSE THE SIDEWARE STOCK PRICE HAS BEEN VOLATILE, SIDEWARE MAY
HAVE DIFFICULTY RAISING ADDITIONAL CAPITAL.
Sideware will likely have to raise additional capital, whether
the merger occurs or not. The historic volatility of the
Sideware stock price may deter potential investors.
BECAUSE SIDEWARE HAS SUB-LET PREMISES WHICH IT OCCUPIED
PREVIOUSLY, IT MAY INCUR ADDITIONAL CASH COSTS RELATING TO ITS
FORMER PREMISES.
From 1995 to the summer of 2001, Sideware occupied office
premises in North Vancouver, British Columbia. Sideware vacated
those premises in September 2001, and other tenants have assumed
occupancy of those premises. However, Sideware remains liable to
the landlord if the present tenants fail to pay the rent. The
term of the lease which Sideware executed ends in August 2003.
At present, Sideware has no reason to believe that the present
tenants will default in payment of the rent. If they do, the
resulting maximum liability for Sideware will be approximately
$300,000, based on the remaining rental payments to the end of
the lease.
22
BECAUSE SIDEWARE'S FORMER BUSINESS DID NOT SUCCEED, SIDEWARE MAY
BE SUBJECT TO INVOLUNTARY DE-LISTING FROM THE TORONTO STOCK
EXCHANGE.
In September 2001, Sideware terminated development and marketing
of its eCRM software. Sideware's principal asset and business
venture became its interest in the Chalk Group. To maintain its
listing on the Toronto Stock Exchange, Sideware is required to
meet certain financial and other requirements following a change
of business. Sideware does not presently meet those
requirements, and faces a risk that its shares will be de-listed
from the Toronto Stock Exchange.
De-listing from the Toronto Stock Exchange would not prevent
trading of Sideware shares through the OTC Bulletin Board, so
long as Sideware remains current in its filings with the
Securities and Exchange Commission. However, de-listing from the
Toronto Stock Exchange may limit the market for Sideware shares
among Canadian investors who are accustomed to trading on the
Toronto Stock Exchange.
BECAUSE SIDEWARE STOCK MAY BE SUBJECT TO "LOW PRICE STOCK" RULES,
THE MARKET FOR SIDEWARE 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 US$5.00. Sideware common 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 Sideware
stock to investors who are not either regular customers or
accredited investors. As a result, the potential market for
Sideware stock may be limited.
BECAUSE SIDEWARE SHARES TRADE IN RELATIVELY LIMITED VOLUMES, THE
LIQUIDITY OF INVESTORS IN SIDEWARE SHARES MAY BE LIMITED.
Sideware shares have historically traded in relatively limited
volumes, in relation to the total number of shares outstanding,
on both the Toronto Stock Exchange and the OTC Bulletin Board.
As a result, investors in Sideware shares may have difficulty in
selling Sideware shares.
RISKS RELATING TO KNOWLEDGEMAX
KNOWLEDGEMAX HAS A HISTORY OF LOSSES AND HAS NOT GENERATED ANY
SIGNIFICANT REVENUES TO DATE.
KnowledgeMax has a limited operating history and since its
inception has not generated any significant revenues, which makes
it difficult to predict future results on the basis of past
performance. KnowledgeMax has an accumulated retained deficit of
approximately $6.1 million for the period from inception in June
1996 to September 30, 2001, and is likely to continue to incur
operating losses for the foreseeable future. There can be no
assurance that KnowledgeMax will attain profitability or that its
revenues will grow. As a result investors in KnowledgeMax, or in
Sideware after the merger, could lose the entire amount of their
investment.
The auditors' report covering KnowledgeMax's December 31, 2000
financial statements contains an explanatory paragraph that
states that KnowledgeMax has incurred losses and negative cash
flows from operations and working capital and stockholders'
deficits and has been unable to repay certain obligations when
due that raise substantial doubt about its ability to continue as
a going concern. The financial statements do not include any
adjustments that might result from the outcome of that
uncertainty.
KNOWLEDGEMAX'S OPERATING RESULTS MAY BE UNPREDICTABLE AND
VOLATILE.
As an early stage business, KnowledgeMax's results of operations
are likely to fluctuate significantly from quarter-to-quarter and
year-to-year. Operating results can fluctuate as a result of a
number of
23
factors, including, but not limited to, the following:
- - timing of development and commercialization of the
KnowledgeMax platform;
- - commencement, delay, cancellation or completion of
contracts with clients;
- - risks associated with contract terms;
- - mix of products and services provided;
- - timing and amount of start-up expenses for new services;
and
- - timing and integration of new content.
KnowledgeMax's current and planned expense levels are based in
part on its estimate of future revenue. Consequently, revenue or
profits, if any, may vary significantly from period to period,
and revenue or profits, if any, in any period will not
necessarily be predictive of results in subsequent periods.
KNOWLEDGEMAX'S REVENUES ARE CURRENTLY CONCENTRATED AMONG A SMALL
NUMBER OF CLIENTS.
Historically, KnowledgeMax's revenues have been concentrated
among a small number of clients. In particular, IBM has
accounted for the majority of the company's revenues. The loss
of a significant client, such as IBM, could have a material
adverse effect on KnowledgeMax, or Sideware after the merger.
KnowledgeMax will need to expend significant resources to expand
its client base. There is no assurance that KnowledgeMax, or
Sideware after the merger, will have the financial and other
resources required to expand the client base of KnowledgeMax, or
that any efforts to expand that client base will succeed.
KNOWLEDGEMAX'S PERFORMANCE IS DEPENDENT ON KEY PERSONNEL.
KnowledgeMax depends on the principal members of its senior
management including, in particular, E. Linwood Pearce,
KnowledgeMax's Chairman and Co-Chief Executive Officer, who will
become the Chairman and CEO of Sideware following the merger,
Edwin S. Grosvenor, KnowledgeMax's Founder and Co-Chief Executive
Officer, who will become Executive Vice President following the
merger, Donna L. Lynn, KnowledgeMax's President and Chief
Operating Officer, who will become the Chief Operating Officer
following the merger, Alan Sultan, Sr. Vice President Business
Development, who will become a Senior Vice President after the
merger, and Richard Luebkemann, VP, Technology, who will serve in
the same capacity after the merger.
No assurance can be given that KnowledgeMax will be able to
retain these personnel. In addition, KnowledgeMax will need to
attract and retain more individuals to further develop its
eCommerce business. The failure to retain or attract necessary
technical, managerial, sales, and marketing professionals, or the
loss of one or more members of KnowledgeMax's senior management
could have a material adverse effect on the business of
KnowledgeMax, or the business of Sideware after the merger.
KNOWLEDGEMAX IS DEPENDENT ON ITS RELATIONSHIP WITH BAKER & TAYLOR
AND LEADSOFT.
KnowledgeMax has arrangements with Baker & Taylor for the use of
its book and video databases and for order fulfillment.
KnowledgeMax cannot ensure that Baker & Taylor will continue to
offer these services past the current stated contract maturities.
Likewise, KnowledgeMax's chief provider of technology for its
search engine and eCommerce capabilities, leadSOFT, may choose to
end its support of KnowledgeMax's platform. While KnowledgeMax
is confident that it could, if necessary, obtain similar quality
services to replace leadSOFT and Baker & Taylor, the disruption
caused by the termination of those relationships could have a
material adverse effect on the business of KnowledgeMax, or the
business of Sideware after the merger.
KnowledgeMax has entered into a number of other non-exclusive
relationships with publishers, educational firms, content
providers, and service fulfillment providers. KnowledgeMax also
plans to
24
pursue other similar opportunities. KnowledgeMax is
dependent on the ability of its suppliers to provide education
content, course materials, products, and services to
KnowledgeMax's clients and their employees. The failure of
current or future suppliers to fulfill their obligations to
KnowledgeMax would likely have a material adverse effect on the
business of KnowledgeMax, or the business of Sideware after the
merger.
KNOWLEDGEMAX IS DEPENDENT UPON THIRD PARTIES FOR CONTENT.
KnowledgeMax licenses content for its web-based services from
third parties, and intends to continue doing so. Some of this
content must be integrated with content that is developed
internally or licensed from other third parties. There can be no
assurance that these third party content licenses will continue
to be available on commercially reasonable terms, or that
KnowledgeMax will be able to integrate third party content
successfully. The inability to license or integrate required
third party content could result in delays in site enhancement or
end-user services until equivalent content can either be
developed or procured from other suppliers.
SYSTEM DEVELOPMENT AND FAILURE PRESENT ADDITIONAL RISKS.
KnowledgeMax's future revenues will depend in large part on the
number of consumers who use its web sites and web-based products,
and those of its partners. The reliability, availability, and
satisfactory performance of those web sites, and their related
transaction-processing systems and infrastructure, will be
critical to the business of KnowledgeMax. Disruptions or poor
technical performance of any of these websites or systems would
reduce sales and the attractiveness of KnowledgeMax's service and
product offerings. The sales, operating costs, and customer
relationships of KnowledgeMax could also be adversely affected if
KnowledgeMax's systems are not successfully integrated with those
of its partners.
KNOWLEDGEMAX OPERATES IN A HIGHLY COMPETITIVE INDUSTRY.
The market for KnowledgeMax's products and services is highly
competitive. Among others, KnowledgeMax competes with
traditional and online book selling and education and training
companies. Competition is based on a number of factors,
including, but not limited to, the following:
- - product performance, features, and reliability;
- - price;
- - relative expertise and sophistication;
- - technical support and service;
- - breadth of product line; and
- - sales and distribution capability.
Many of KnowledgeMax's competitors have greater financial
resources and more experience than KnowledgeMax. Smaller
companies may also prove to be significant competitors,
particularly through arrangements with large corporate
collaborators.
KnowledgeMax anticipates that it will face increased competition
in the future as new companies enter the market and advanced
technologies become available. KnowledgeMax's competitors may
develop more effective or more affordable technologies or
services than KnowledgeMax can provide, thus rendering
KnowledgeMax's technologies and/or services obsolete or
uneconomical.
EXPECTED RAPID TECHNOLOGICAL CHANGE IN KNOWLEDGEMAX'S INDUSTRY
MAY LEAD TO OBSOLESCENCE OF ITS PRODUCT AND SERVICE OFFERINGS.
Rapid and substantial technological changes are expected to
continue in the online learning and education fields.
Consequently, there can be no assurance that the products and
services of KnowledgeMax will not become obsolete or
noncompetitive, or that KnowledgeMax will be able to
25
keep pace with technological developments. KnowledgeMax's ability
to anticipate changes in technology and industry standards, and to
develop and successfully introduce new products that can gain
market acceptance on a timely basis, will be critical to
KnowledgeMax. The business of KnowledgeMax is unlikely to
succeed if it is unable, for technological or other reasons, to
develop products that are innovative, technologically
competitive, responsive to customer needs, and competitively
priced.
KNOWLEDGEMAX'S BUSINESS MAY NEED ADDITIONAL FINANCING FOLLOWING
THE MERGER.
KnowledgeMax believes that its revenues, in addition to the
financial resources of Sideware that it will gain access to
following the merger, will be sufficient to fund planned
operations and capital expenditures through the end of the year
2002. However, revenue shortfalls may require financing for
working capital sooner.
In addition, KnowledgeMax expects that its business will likely
require additional financing in the future to continue
development of its products and services, or to cover operating
losses until the business can become profitable. There can be no
assurance that the business of KnowledgeMax will be sufficiently
attractive to investors to raise the necessary funding on terms
that are acceptable to KnowledgeMax, or to Sideware after the
merger, or at all. Any future equity or convertible debt
financing could result in dilution to KnowledgeMax's current
stockholders, or to the then current stockholders of Sideware
after the merger. If adequate funds are not available, important
development and marketing efforts may have to be abandoned or
reduced, or existing technology rights may have to be sold or
relinquished.
KNOWLEDGEMAX'S SUCCESS IS DEPENDENT ON ITS ABILITY TO MANAGE
GROWTH.
KnowledgeMax's business model calls for a period of sustained
growth. This growth will place a significant strain on the
management and operations infrastructure of KnowledgeMax, or of
Sideware after the merger. Management of growth will depend on
the ability of KnowledgeMax or Sideware to, among others:
- - attract and deliver on new customer relationships;
- - attract, hire, and retain skilled managers and other
employees;
- - implement and improve operational, information, and
financial control systems;
- - increase technical development and delivery capabilities;
- - expand customer service and technical service resources;
and
- - attract and retain strategic partners.
Inability to anticipate, implement, and manage the changes
required to sustain growth could have a material adverse effect
on the business of KnowledgeMax, or of Sideware after the merger.
IF KNOWLEDGEMAX IS UNABLE TO FURTHER DEVELOP ITS SALES AND
MARKETING TEAM, IT MAY NOT BE ABLE TO ACHIEVE ITS GROWTH PLANS.
To date, KnowledgeMax has marketed its services and products
primarily through the efforts of its senior management staff and,
more recently, its newly hired Vice President of Sales and Vice
President of Client Services. To succeed, KnowledgeMax will need
to hire additional sales and marketing personnel and to expand its
sales and marketing activities. It may be difficult to attract and
maintain a sales force with sufficient technical expertise to
market KnowledgeMax's products and services effectively.
KNOWLEDGEMAX IS SUBSTANTIALLY DEPENDENT UPON ITS ABILITY TO
REALIZE REVENUES FROM ITS WEB-BASED SERVICES AND PRODUCTS.
KnowledgeMax expects that a substantial portion of its revenues
will come from electronic commerce
26
and intranet-based transactions from its client companies' employees.
There can be no assurance that service revenues, commissions, and
royalties from the sale of KnowledgeMax products will not decline in
the future, particularly as competition in the eLearning and online
education industry intensifies. A significant decline in service
revenues and sales commissions without a corresponding increase
in transaction volume would adversely impact revenue from
KnowledgeMax's business.
KNOWLEDGEMAX MAY NOT BE ABLE TO PROTECT ITS INTELLECTUAL PROPERTY
ADEQUATELY.
KnowledgeMax relies on confidentiality procedures, contractual
provisions, and intellectual property and trade laws to protect
its proprietary rights in its products, services, and technology.
KnowledgeMax generally enters into intellectual property
assignment and confidentiality agreements with its employees,
consultants, customers, and potential customers, and limits
access to, and distribution of, its proprietary information.
KnowledgeMax has investigated the possibility of filing patents
to protect certain of its technology, but to date has not made
any such filings.
KnowledgeMax believes that the foregoing measures afford only
limited protection. There can be no assurance that KnowledgeMax
will be successful in preventing misappropriation of its
technology or unauthorized copying or use of its services and
products. In addition, KnowledgeMax has no assurance that others
will not independently develop products or services which
duplicate the features of KnowledgeMax products and services.
KNOWLEDGEMAX COULD BE MATERIALLY HARMED BY POTENTIAL REGULATION
OF THE INTERNET.
KnowledgeMax and its partners are subject to rules, regulations,
and laws applicable to businesses generally and to rules,
regulations, and laws directly applicable to access to web-based
commerce and privacy. Although there are currently relatively
few laws and regulations directly applicable to the Internet and
online service providers, a number of laws and regulations are
under consideration by various legal bodies. Laws and
regulations may be adopted with respect to the Internet covering
issues such as user privacy, pricing, content, copyrights,
distribution, antitrust, and characteristics and quality of
products and services. Furthermore, the growth and development
of the market for eCommerce and web-based services may prompt
calls for more stringent consumer protection laws, which may
impose additional burdens on companies conducting business
online. The adoption of any additional laws or regulations may
decrease the growth of the Internet or commercial online
services, which could, in turn, decrease the demand for
KnowledgeMax's products and services and increase KnowledgeMax's
cost of doing business.
KNOWLEDGEMAX IS DEPENDENT ON INTERNET TRANSMISSION AND SECURITY
BREACHES COULD HAVE AN ADVERSE EFFECT ON ITS REVENUES.
A lack of security over the Internet may cause Internet use to
decline, and cause KnowledgeMax to expend capital and resources
to protect against security breaches. A significant barrier to
electronic commerce over the Internet has been the need for
secure transmission of confidential information. Internet use
could decline if any well-publicized compromise of security
occurs.
Additionally, computer "viruses" may cause interruptions or other
delays for KnowledgeMax's systems, which may materially impact
KnowledgeMax's ability to operate its business. If a computer
virus affecting the Internet in general is highly publicized or
particularly damaging, KnowledgeMax's customers may be unable or
unwilling to use the Internet, which would have an adverse effect
on KnowledgeMax's revenues. KnowledgeMax, or Sideware after the
merger, may be required to expend capital and resources to
protect against or to alleviate these problems.
KNOWLEDGEMAX COULD BE LIABLE FOR FRAUDULENT ACTIVITIES AND
BREACHES OF SECURITY ON ITS WEB SITE.
A fundamental requirement for e-commerce is the secure
transmission of confidential information over public networks.
KnowledgeMax depends upon the e-commerce systems of its payment
27
processor and other software and hardware technologies it
licenses to prevent fraud and other security breaches, but there
is no assurance that those systems and processes are infallible.
Failure to detect or prevent fraud could harm the business of
KnowledgeMax substantially. The law relating to the liability of
providers of online payment services is currently unsettled.
SYSTEM INTERRUPTION AND THE LACK OF INTEGRATION AND REDUNDANCY IN
KNOWLEDGEMAX'S SYSTEMS MAY AFFECT ITS SALES.
Client access to KnowledgeMax's web sites directly affects
revenue. KnowledgeMax experiences occasional system
interruptions that make its web site unavailable or prevent
efficient servicing of orders. These interruptions reduce sales
and the attractiveness of KnowledgeMax's products and services.
To prevent system interruptions, KnowledgeMax will need to
purchase additional software and hardware, and to upgrade systems
and network infrastructure. Additional improvements will be
required to accommodate increased traffic on the KnowledgeMax web
site and increased sales volume. KnowledgeMax does not at
present have adequate backup systems or a formal disaster
recovery plan, and may have inadequate insurance coverage or
insurance limits to compensate it for losses from a major
interruption.
Computer viruses, physical or electronic break-ins, fire, flood,
power loss, telecommunications, acts of terrorism, and similar
disruptions could also cause system interruptions or damage,
preventing KnowledgeMax from providing services and filling
customer orders, or destroying critical data. If any of these
were to occur the reputation and good will of KnowledgeMax could
be damaged. Additionally, KnowledgeMax relies on an outside
vendor to host its web site and servers and to provide site
security. A breach of security or other disruption at this
center could have a material adverse effect on KnowledgeMax's
operations. KnowledgeMax, and Sideware after the merger, will
need additional personnel and software resources to monitor the
site, and to install intrusion detection systems and other
devices and systems that help keep the site secure.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This joint proxy statement - prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act. These
forward-looking statements deal with the intentions, beliefs, and
expectations of Sideware and KnowledgeMax. The forward-looking
statements also include information regarding the financial
condition, results of operations, and businesses of Sideware and
KnowledgeMax, as they exist prior to the merger and as they are
expected to be after the merger. Forward-looking statements most
often contain words like "will", "shall", "believes," "does not
believe," "plans," "expects," "intends," "estimates,"
"anticipates," or other phrases of similar intent.
Sideware and KnowledgeMax believe the forward-looking statements
in this joint proxy statement - prospectus are reasonable.
However, undue reliance should not be placed on any forward-
looking statements. Neither Sideware nor KnowledgeMax can
guarantee their performance, or the results of their intended
merger. Forward-looking statements involve known and unknown
risks and uncertainties. Further, forward-looking statements
speak only as of the date they are made.
This joint proxy statement - prospectus includes many cautionary
statements, including those stated under the heading "RISK
FACTORS". You should read these cautionary statements as being
applicable to all related forward-looking statements wherever
they appear in this joint proxy statement - prospectus.
28
SHARES BEING REGISTERED
This joint proxy statement - prospectus covers:
- - 85,514,735 shares of Sideware common stock being issued to
existing stockholders of Sideware in connection with the
continuation of Sideware to Delaware; and
- - up to 110,000,000 shares of Sideware common stock to be
issued to existing stockholders of KnowledgeMax in
connection with the merger.
At the date of this joint proxy statement - prospectus,
KnowledgeMax has 3,401,893 shares of stock outstanding, including
both common stock and preferred stock which will be converted to
common stock prior to the merger. In addition, KnowledgeMax
estimates that prior to closing, it will issue approximately
374,095 additional shares of common stock and 54,414 additional
shares of preferred stock, with each share of preferred stock
converting to one share of common stock. Based on an estimated
conversion ratio of 24.5 shares of Sideware common stock for each
share of KnowledgeMax common stock, the KnowledgeMax stock will
convert to approximately 93,917,206 shares of Sideware common
stock. In addition, holders of KnowledgeMax stock options are
entitled to acquire a total of 587,962 additional shares of
KnowledgeMax common stock. Using the estimated conversion ratio
of 24.5 these will the KnowledgeMax options will be exercisable
following the merger into an additional 14,416,176 shares of
Sideware common stock. The number of shares of Sideware common
stock that will be issued on closing of the merger will depend on
how many, if any, KnowledgeMax options are exercised prior to
closing.
DESCRIPTION OF SIDEWARE CAPITAL STOCK
Following continuation to Delaware, the authorized capital of
Sideware will consist of:
- - 300,000,000 shares of common stock with par value $0.001 per
share; and
- - 50,000,000 shares of preferred stock with par value $0.001
per share.
Holders of Sideware common stock are entitled to receive notice
of, attend, and vote at all Sideware stockholder meetings.
Common stock carries one vote per share. The holders of the
common stock are entitled to receive dividends if, as, and when
declared by the Sideware board of directors. Shares of common
stock carry no pre-emptive rights, conversion rights, redemption
provisions, or sinking fund provisions.
Following the merger, Sideware's board of directors will be
authorized, without further stockholder approval, to issue up to
an aggregate of 50,000,000 shares of preferred stock in one or
more series. The board of directors may fix or alter the
designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series,
including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, redemption price or prices,
pre-emptive rights and liquidation preferences. The issuance of
preferred stock could:
- - adversely affect the voting power of holders of common
stock; and
- - adversely affect the likelihood that the holders of common
stock will receive dividend payments and payments upon
liquidation.
The ability to issue "blank check" preferred stock of this nature
may also be viewed as an anti-takeover provision, which may have
the effect of discouraging a proposal to acquire or otherwise
obtain control of Sideware. For instance, Sideware management
could issue preferred stock with preferential voting rights to
purchasers who would cooperate with Sideware management in
opposing an attempt by third parties to gain control of Sideware.
Although Sideware management does not currently anticipate
issuing preferred stock for this kind of purpose, Sideware
management reserves
29
the right to do so. Additional information about the capital stock
of Sideware is given under "COMPARISON OF STOCKHOLDER RIGHTS".
THE MERGER
The information in this joint proxy statement - prospectus
concerning the terms of merger is qualified in its entirety by
reference to the full text of the merger agreement, which is
attached as Appendix A and incorporated in this joint proxy
statement - prospectus by reference. You are urged to read the
merger agreement in its entirety.
GENERAL OVERVIEW OF THE MERGER
Sideware, KnowledgeMax, and KM Acquisition Corp. entered into the
merger agreement on December 7, 2001. KM Acquisition Corp., a
Delaware corporation, is a wholly owned subsidiary of Sideware
incorporated solely for the purposes of the merger.
The purpose of the merger is to combine Sideware and
KnowledgeMax. The basic structure of the merger is as follows:
- - Sideware will continue to the State of Delaware, becoming a
Delaware corporation.
- - KM Acquisition Corp. will merge into KnowledgeMax, with
KnowledgeMax as the surviving corporation. This will make
KnowledgeMax a wholly owned subsidiary of Sideware.
KnowledgeMax will adopt a new corporate name on completion
of the merger, so that Sideware can assume the name
"KnowledgeMax, Inc.".
- - All shares of KnowledgeMax common stock will be exchanged
for shares of Sideware common stock. Accordingly, the
existing KnowledgeMax stockholders will become Sideware
stockholders.
- - Sideware will change its corporate name to KnowledgeMax,
Inc. at the effective time of the merger.
- - Sideware will assume all outstanding KnowledgeMax stock
options.
- - At a subsequent date, KnowledgeMax and Sideware will merge.
The conversion ratio, setting the number of shares of Sideware
common stock that will be issued in exchange for each share of
KnowledgeMax common stock, will depend on the respective number
of Sideware and KnowledgeMax shares outstanding at closing.
Based on the number of Sideware and KnowledgeMax shares
outstanding at January 10, 2002, the estimated conversion ratio is
24.5 shares of Sideware common stock for each share of
KnowledgeMax common stock.
BACKGROUND OF THE MERGER
Prior to July 2001, the core business of Sideware was the
development and marketing of electronic Customer Relationship
Management (eCRM) software. On June 28, 2001, Sideware announced
a new strategic marketing agreement with IBM, through which
Sideware hoped to begin generating substantial sales revenue. In
July 2001, owing to its diminishing cash resources and the
failure of its independent sales activities, Sideware reduced its
sales and marketing force to approximately 12 employees,
expecting to concentrate its sales efforts on the IBM alliance.
Over the second quarter of 2001, Sideware management reviewed
sales prospects being generated through the IBM alliance, and
became concerned that the IBM alliance would not produce the
sales growth in the time frame that Sideware had hoped. As
Sideware did not have other distribution channels, Sideware
management concluded that if the IBM alliance did not result in
substantial sales revenue, it was unlikely that Sideware's eCRM
business would be viable. Accordingly, Sideware management began
to investigate opportunities for a merger or acquisition
transaction.
30
During the summer of 2001, KnowledgeMax began generating revenue
from its knowledge and learning platform. In order to continue
to grow its business and further develop the platform,
KnowledgeMax required additional capital. The KnowledgeMax board
of directors considered raising equity capital through private
placement and the possibility of a merger or acquisition to meet
capital needs.
Through contacts of its President, James Speros, Sideware was
introduced to KnowledgeMax in August 2001. Through contacts of
Sideware director Grant Sutherland, Sideware was also introduced
to the Chalk Group, in which Mr. Sutherland had made a personal
investment in October 2000. Sideware engaged in preliminary
discussions with each of these companies separately, concerning a
potential merger or acquisition transaction.
In September 2001, Sideware was successful in concluding a
transaction with the Chalk Group. Sideware invested $1,000,000,
excluding acquisition costs, to acquire a 66.7% interest in the
parent company of the Chalk Group. The funds for this
acquisition were provided by Mr. Sutherland, who acquired
2,941,176 shares of Sideware common stock, at a price of $0.34
per share, in a private placement.
Discussions also continued between KnowledgeMax and Sideware.
During September 2001, there were several meetings between the
companies, involving primarily E. Linwood Pearce and Edwin
Grosvenor as representatives of KnowledgeMax and Mr. Speros and
Kenneth Thornton as representatives of Sideware. KnowledgeMax
and Sideware discussed the relative business prospects of the two
companies, and began a preliminary due diligence review. During
the negotiations, KnowledgeMax identified its principal
objectives for a merger transaction:
- - KnowledgeMax wanted to merge with a company with at least
$3 million in cash that could be used to continue
operations.
- - KnowledgeMax wanted to merge with a public company, for
improved access to capital markets in the future, and to
create liquidity for its stockholders.
- - KnowledgeMax wanted to identify a merger partner with
management and technical personnel who could augment the
business of KnowledgeMax.
Sideware also identified its principal objectives for a merger
transaction:
- - Sideware wanted to merge with a company operating
principally in the eastern United States, where the
majority of Sideware's remaining personnel were located.
- - Sideware wanted to identify a merger partner in the
technology field, with an offering of scalable and
repeatable products, to pursue contracts with major
corporate customers.
To obtain funds to meet the cash requirements of KnowledgeMax,
Sideware management concluded that Sideware would likely have to
sell most or all of Sideware's interest in the Chalk Group.
Following negotiations through the month of September and the
first week of October, Sideware and KnowledgeMax representatives
concluded that if Sideware were able to raise at least $3,000,000
in financing, a merger that resulted in KnowledgeMax stockholders
owning 55% of the merged entity, with Sideware stockholders
owning 45% of the merged entity, would be fair.
On October 9, 2001, the board of directors of Sideware held a
meeting to consider a potential merger with KnowledgeMax. The
board received presentations from senior Sideware management
officials concerning the business prospects of KnowledgeMax, the
technical aspects of the product and service offerings of
KnowledgeMax, and financial data provided by KnowledgeMax. The
board of directors instructed the Executive Committee of
Sideware, consisting of Messrs. Speros, Thornton, and Sutherland,
to continue negotiations with KnowledgeMax. The board of
directors also authorized Mr. Sutherland to search for a
purchaser for the Chalk Group, and indicated that it wished to
obtain a fairness opinion concerning any merger agreement. Mr.
Sutherland advised the board that in his
31
opinion, it was likely that a purchaser for the Chalk Group would
require an investment from Mr. Sutherland, with the result that Mr.
Sutherland would likely be an interested party in any purchaser.
Following the October 9, 2001 board meeting, senior management
officials of Sideware continued their due diligence investigation
of KnowledgeMax. This review included:
- - a review of material contracts provided by KnowledgeMax;
- - a review of the corporate records and capitalization of
KnowledgeMax;
- - continued review of financial information being provided by
KnowledgeMax; and
- - discussions with senior management officials of
KnowledgeMax concerning KnowledgeMax's business, historical
and expected future financial condition, operating results,
and prospects.
Following the October 9, 2001 board meeting, Sideware also
retained Paradigm Capital Inc. to provide a fairness opinion on a
proposed merger with KnowledgeMax. In addition, there were
further negotiations between the parties concerning the structure
of a potential merger, giving consideration to the tax
consequences for the stockholders of both companies, and the
future management of any merged entity. The parties concluded
that the merger should complete only after Sideware continued to
Delaware, to avoid adverse income tax consequences to
KnowledgeMax stockholders.
On October 24, 2001, the board of directors of KnowledgeMax held
a meeting to consider the proposed merger with Sideware. At the
meeting, the board received presentations from Messrs. Pearce and
Grosvenor concerning the results of preliminary due diligence
investigations of Sideware. The board of directors then
authorized Messrs. Pearce and Grosvenor to continue discussions
with Sideware representatives in connection with a proposed
merger.
During November 2001 and the first week of December 2001, the
parties exchanged drafts of the merger agreement.
On December 5, 2001, the board of directors of Sideware met to
consider the proposed merger. The Sideware board of directors
received presentations from senior Sideware management officials
on their analysis of the business prospects for KnowledgeMax, and
from outside legal counsel on the terms of the proposed merger
agreement. The Sideware board of directors also received a
presentation from Paradigm Capital Inc., which provided its
written opinion that the proposed merger, from a financial point
of view, was fair to the Sideware stockholders. The board of
directors unanimously approved the merger, subject to the
Executive Committee of the board approving the form of written
merger agreement.
On December 6, 2001, the board of directors of KnowledgeMax met
to consider the proposed merger. The board received
presentations from senior KnowledgeMax management officials on
the results of discussions with Sideware and on the terms of the
proposed merger. The board of directors unanimously approved the
merger.
On December 7, 2001, after the written form of merger agreement
was approved by both parties, the agreement was signed.
SIDEWARE'S REASONS FOR THE MERGER - RECOMMENDATION OF THE
SIDEWARE BOARD OF DIRECTORS
The board of directors of Sideware recommends that Sideware
stockholders vote to approve the merger, and in favour of the
other resolutions being put forward.
The board of directors of Sideware believes KnowledgeMax presents
a valuable business opportunity, which can bring long term value
to Sideware stockholders. The board of directors sees the
following principal advantages to Sideware in the merger.
32
1. KnowledgeMax provides a business solution which is
repeatable and scalable. The business being developed by
KnowledgeMax has the potential to secure large contracts
with major corporations. If KnowledgeMax is able to
expand its customer base, it also has the potential to
develop and exploit economies of scale, to increase both
its revenue and profit potential.
2. The operations and management of Sideware have been
centered in the eastern United States, where KnowledgeMax
operates. The merger gives Sideware the opportunity to add
value through the business contacts and expertise of
Sideware's directors and officers. If the merger does not
proceed, Sideware will likely have to terminate its
remaining US employees, which could expose Sideware to
significant severance costs.
To complete the merger, Sideware will have to sell all or most of
its interest in the Chalk Group. The financial resources of
Sideware do not permit Sideware to pursue both ventures. The
board of directors of Sideware believes that the Chalk Group can
operate as an independent entity, and can thus be sold as such.
The operations of the Chalk Group are centred in British
Columbia, Canada. As such, the Sideware board of directors does
not believe that the Chalk Group can benefit from the business
contacts and expertise of Sideware management in the way
KnowledgeMax can. The board of directors of Sideware believes
that it is in the best interests of Sideware to sell its interest
in the Chalk Group to provide funds for the KnowledgeMax venture.
The Sideware board of directors unanimously determined that the
merger agreement and the merger are fair to, and in the best
interests of, Sideware and its stockholders, and has approved the
merger agreement and the transactions contemplated thereby. Some
directors of Sideware may be deemed to have a conflict of
interest in the Sideware board of directors' approval of the
merger and its recommendation that the Sideware stockholders
approve the merger. See "THE MERGER - Interests of insiders."
THE SIDEWARE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
SIDEWARE STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT AND THE OTHER PROPOSALS THAT WILL BE PRESENTED
AT THE SIDEWARE EXTRAORDINARY MEETING.
KNOWLEDGEMAX'S REASONS FOR THE MERGER - RECOMMENDATION OF
KNOWLEDGEMAX MANAGEMENT
The KnowledgeMax board of directors believes that the merger will
further KnowledgeMax's strategic objectives because:
1. The greater market float and liquidity represented by the
shares of the Sideware common stock after the merger should
provide the combined company with additional and better
alternatives to meet its capital needs to fund growth.
2. The public market for the combined company's stock will allow
for an equity incentive plan that should be helpful in
attracting and retaining talented employees.
3. The greater marketing and financial resources of the combined
company compared to KnowledgeMax alone and the opportunities
that should emerge from the business experience and
relationships of Sideware management.
4. By virtue of the appointment of E. Linwood Pearce as Chairman
and chief executive officer of the combined company following
the merger, and the large position of KnowledgeMax
stockholders in the combined company, former stockholders of
KnowledgeMax can expect to have a meaningful role in the
management and policies of the company after the merger.
5. The expected federal income tax treatment of the merger as a
tax-free reorganization to the parties and to KnowledgeMax's
stockholders.
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6. Closing the merger will allow KnowledgeMax stockholders
ultimately to receive freely tradable common stock, a medium
of investment that is considerably more liquid than their
current investment in KnowledgeMax.
The KnowledgeMax board of directors unanimously determined that
the merger agreement and the merger are fair to, and in the best
interests of, KnowledgeMax and its stockholders, and has approved
the merger agreement and the transactions contemplated thereby.
Some directors of KnowledgeMax may be deemed to have a conflict
of interest in the KnowledgeMax board of directors' approval of
the merger and its recommendation that the KnowledgeMax
stockholders approve the merger. See "THE MERGER - Interests of
Insiders."
THE KNOWLEDGEMAX BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
HOLDERS OF KNOWLEDGEMAX STOCK VOTE FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AT
THE KNOWLEDGEMAX SPECIAL MEETING.
OPINION OF PARADIGM CAPITAL INC.
The board of directors of Sideware retained Paradigm Capital Inc.
of Toronto, Ontario to review the fairness of the merger, from a
financial point of view, to the Sideware stockholders.
Paradigm Capital is a Canadian investment banking firm with a
sales, trading, research, and corporate finance focus providing
services for institutional investors. Paradigm Capital was
founded in 1999 and is a member of The Toronto Stock Exchange,
Canadian Venture Exchange and the Investment Dealers Association
of Canada. None of Paradigm Capital or any of its affiliates or
associates:
- - is an insider of Sideware;
- - has provided any financial advisory services to Sideware
within the last two years;
- - has participated in any equity financing of Sideware within
the last two years; or
- - is party to any understandings, agreements, or commitments
with respect to any future business dealings with Sideware.
During the final quarter of 2000 and the first half of 2001,
representatives of Sideware had several discussions with Paradigm
Capital with a view to locating financing for Sideware, although
no financing transactions resulted. Sideware chose Paradigm
Capital to provide a fairness opinion because Paradigm Capital
was familiar with Sideware, from its previous discussions with
Sideware personnel.
Paradigm Capital reviewed, and relied on, the following materials
and information:
- - draft Agreement and Plan of Merger and Reorganization;
- - draft directors' presentation for a board meeting held
December 5, 2001;
- - unaudited financial statements of KnowledgeMax for the
fiscal years ending December 31, 1999 and 2000 and for the
three, six, and nine month periods ended March 31, June 30,
and September 30, 2001;
- - internal management income statement estimates prepared by
KnowledgeMax for fiscal 2002 through 2004;
- - the Annual Reports to Stockholders including the audited
consolidated financial statements of Sideware for each of
the fiscal years ending December 31, 1999 and December 1,
2000 and the unaudited financial statements for three, six
and nine months ending March 31, June 30 and September 30,
2001, respectively;
- - the Annual Information Form of Sideware dated June 13,
2001;
- - discussions with senior management of Sideware;
- - forecasts of the financial and operating performance of
Sideware prepared by senior management;
34
- - discussions with management of Sideware with regard to,
among other things, the business, operations, financial
position, quality of assets, future potential and prospects
of Sideware;
- - other financial, operating, legal, corporate and other
information and projections, with respect to KnowledgeMax
and Sideware obtained from Sideware management;
- - relevant stock market and other trading information
relating to the common shares of Sideware and the
securities of comparable public companies to KnowledgeMax;
- - data with respect to merger and acquisition transactions
considered by Paradigm Capital to be relevant;
- - representations obtained from senior management of Sideware
as to matters of fact relevant to Paradigm Capital's
engagement; and
- - such other financial, market, technical and industry
information and such other analyses and reports as Paradigm
Capital considered relevant and appropriate in the
circumstances.
Paradigm Capital's opinion and financial analyses were only one
of many factors considered by the Sideware board of directors in
its evaluation of the merger, and should not be viewed as
determinative of the views of the Sideware board of directors or
management with respect to the merger or the merger
consideration.
The following is a summary of the material financial analyses
performed by Paradigm Capital in connection with the preparation
of its opinion and reviewed with the board of directors at a
meeting of the Sideware board of directors held on December 5,
2001.
Discounted Cash Flow Analysis. Paradigm Capital estimated the
present value of the stand-alone, unlevered, after-tax free cash
flows that KnowledgeMax could produce on a stand-alone basis over
the period January 1, 2002 to December 31, 2004. Estimated
financial data used in this analysis were based on internal
estimates of KnowledgeMax's management. Paradigm Capital also
estimated terminal values calculated based on a terminal multiple
of 3x estimated calendar year 2005 of free cash flow. The free
cash flows, as well as the estimated terminal values, were then
discounted to present value using a discount rate range of 30% to
35%.
Selected Company Analysis. Paradigm Capital compared financial
and stock market data of KnowledgeMax to corresponding data of a
comparable group of companies with a similar business mix. The
comparable group included the following companies:
COMPARABLES
Click2Learn
DigitalThink
Docent
SmartForce
Paradigm Capital reviewed equity value as a multiple of
enterprise value of sales for estimated fiscal year 2002. All
multiples were based on closing stock prices on December 3, 2001.
Estimated financial data for the selected companies was based on
publicly available securities research analysts' estimates, and
estimated financial data for KnowledgeMax was provided by
Sideware and KnowledgeMax management. Paradigm Capital applied a
range of selected multiples for the selected companies to
corresponding financial data of KnowledgeMax without taking into
account a control premium or any potential synergies to result
from the merger.
None of the selected companies is identical to KnowledgeMax.
Accordingly, an analysis of the results of the Selected Companies
Analysis involves complex considerations of the selected
companies and other factors that could affect the public trading
value of KnowledgeMax and the selected companies.
In analysing the value of Sideware, Paradigm Capital calculated
the 20, 30 and 60-day average share prices of Sideware and
compared these prices to the closing price on December 3, 2001.
In addition,
35
Paradigm Capital calculated net asset values for Sideware using
various assumptions. The following table summarizes Paradigm
Capital's analysis of Sideware and KnowledgeMax and compares the
resulting ratio to the proposed ownership ratio:
Scenario Ownership
Sideware KnowledgeMax
Paradigm Capital's
Low -Case 31% 69%
Paradigm Capital's
Mid-Case 40% 60%
Acquisition
Agreement Case 45% 55%
Paradigm Capital's
High Case 48% 52%
In performing its analysis, Paradigm Capital was constrained by
the relatively limited data available to value either Sideware or
KnowledgeMax, and was thus unable to use many of the methods
which are commonly used in evaluating merger transactions:
- - Neither KnowledgeMax or Sideware have generated earnings or
substantial sales revenue in the past. Accordingly,
Paradigm Capital was unable to apply valuation methods
relying on historical earnings or revenue.
- - KnowledgeMax is a private company, without an established
market for its shares. Accordingly, Paradigm Capital was
unable to apply valuation methods relying on comparative
stock trading values.
- - Comparable sales data for businesses similar to
KnowledgeMax was highly limited, and none of the companies
considered was identical to KnowledgeMax.
Subject to the foregoing, in the opinion of Paradigm Capital, the
merger is fair, from a financial point of view, to the
stockholders of Sideware. A copy of the written opinion of
Paradigm Capital is attached to this joint proxy statement -
prospectus as Appendix B.
In preparing its opinion, Paradigm Capital relied, without
independent verification, upon all financial and other
information that was obtained from public sources or that was
provided by Sideware and its affiliates, associates, advisors, or
otherwise. Paradigm Capital assumed that this information was
complete and accurate and did not omit to state any material fact
or any fact necessary to be stated to make that information not
misleading.
The opinion of Paradigm Capital was based on the securities
markets, economic, general business and financial conditions
prevailing as of the date of the opinion and the conditions and
the prospects, financial and otherwise, of Sideware and
KnowledgeMax as they were reflected in the information reviewed
by Paradigm Capital. The limiting assumptions and qualifications
to the opinion of Paradigm Capital are set out more fully in the
written opinion provided by Paradigm Capital, attached to this
joint proxy statement - prospectus.
The consideration to be provided to KnowledgeMax stockholders in
the merger was determined by Sideware management through arm's
length negotiations with KnowledgeMax. No advice was sought
from, or provided by, Paradigm Capital on that issue.
Sideware paid approximately $23,000 to Paradigm Capital in
consideration of the services provided by Paradigm Capital in
providing the fairness opinion.
CONSIDERATION TO BE RECEIVED IN THE MERGER
The merger agreement includes a procedure to calculate the
conversion ratio, setting the number of shares of Sideware common
stock that will be issued for each share of KnowledgeMax common
stock. The intent of the merger agreement is to give existing
KnowledgeMax stockholders a 55%
36
interest in Sideware, with the existing Sideware stockholders retaining
45%. The merger agreement also includes procedures to allow for
outstanding warrants and stock options.
More specifically, the conversion ratio will be calculated using
data that is current at the time of closing, by:
- - adding the total number of outstanding Sideware shares to
the total number of shares underlying Sideware warrants and
options that are "in the money" (i.e., with exercise prices
below the market value of Sideware shares) at closing;
- - dividing that number by the total number of outstanding
KnowledgeMax shares, plus the total number of shares
underlying KnowledgeMax warrants and options, whether in
the money or not; and
- - multiplying the result by 55/45.
The merger agreement also includes two qualifications to this
procedure:
- - In December 2001, Sideware granted options to employees and
officers of the Chalk Group to purchase 1,255,000 shares of
Sideware common stock, to fulfill previous commitments to
those employees. These options will expire within 30 days
after the merger, and will only be included in calculating
the conversion ratio to the extent that they are exercised
prior to the merger.
- - In December 2001 and January 2002, Sideware has also
granted options to purchase 2,475,000 shares of Sideware
common stock to several Sideware directors and employees,
also to fulfill existing commitments, and to compensate
employees who have accepted reduced pay. These options
will be included in calculating the conversion ratio,
whether they are in or out of the money.
When the merger agreement was signed, Sideware had 68,086,965
shares of common stock outstanding. Subsequent to entering into
the merger agreement, Sideware has issued the following
additional securities.
- - Sideware has issued 13,500,000 shares of common stock at
$0.10 per share, to complete a private placement in the
amount of $1,350,000. This issuance satisfied the
requirement that Sideware raise at least $1,000,000 in
financing prior to the merger.
- - Sideware has issued 3,233,346 shares of common stock and
646,668 share purchase warrants to acquire the positions of
minority stockholders in the Chalk Group. This will
improve the ability of Sideware to sell the Chalk Group,
which is also a condition of the merger. Each share
purchase warrant entitles the holder to acquire one
additional share of Sideware common stock at a price of
$0.13 per share for a period of 18 months. These warrants
are currently in the money, and have been included in
estimating the conversion ratio in the merger.
- - Sideware has issued 332,222 shares of Sideware common stock
to directors and employees in satisfaction of unpaid salary
and bonus commitments as follows.
Kenneth Thornton: 445,303 shares in lieu of $6,500 in
unpaid salary
James Speros: 98,737 shares in lieu of $14,166.68 in
unpaid salary
Rahul Bardhan: 48,788 shares is lieu of $7,000 in unpaid
salary
Michael Finn: 139,394 shares in lieu of $20,000.00 in
unpaid salary and bonus
- - Sideware has issued 362,202 shares of Sideware common stock
to a creditor of the Chalk Group, in settlement of debts of
the Chalk Group.
As at the date of this joint proxy statement - prospectus,
Sideware has outstanding:
- - 85,514,735 shares of Sideware common stock;
37
- - options to purchase 2,475,000 shares of Sideware common
stock that are in the money, or deemed to be so by the
merger agreement, consisting of the options granted in
December 2001 and January 2002 to Sideware directors and
employees;
- - out of the money options to purchase approximately 10.5
million shares of Sideware common stock, including those
granted in December 2001 to employees of the Chalk Group;
and
- - warrants to purchase approximately 9.4 million shares of
Sideware common stock, of which 646,668 are in the money,
with the balance out of the money.
As of the date of this joint proxy statement - prospectus,
KnowledgeMax has outstanding:
- - 2,114,120 shares of common stock;
- - 328,610 shares of Series A Preferred Stock; and
- - 959,163 shares of Series B Preferred Stock.
In addition, KnowledgeMax has agreed to issue the following
securities:
- - Baker & Taylor has agreed that on closing of the merger it
will terminate a KnowledgeMax warrant which it holds, and
convert the outstanding $200,000 principal amount under a
line of credit which it has extended to KnowledgeMax, into
shares of KnowledgeMax common stock representing 7.5% of
the company's fully diluted capital stock. KnowledgeMax
currently estimates that it will be required to issue
approximately 334,532 shares of common stock in
satisfaction of this obligation.
- - KnowledgeMax will issue 2,000 additional shares of Series B
Preferred Stock to Baker & Taylor on April 1, 2002, if the
merger has not yet closed, in consideration for the
extension of the line of credit to June 30, 2002.
- - KnowledgeMax will issue 2,020 shares of Series B Preferred
Stock to Baker & Taylor per quarter during 2002, in
satisfaction of the interest obligations under the line of
credit.
- - One other creditor of KnowledgeMax has agreed to convert a
debt owing to it by KnowledgeMax into approximately 50,394
shares of Series B Preferred Stock immediately prior to the
closing.
Finally, KnowledgeMax has agreed to issue shares of its common
stock in lieu of cash compensation in the following amounts to
the following employees:
- - Charles Abod: 10,101 shares in exchange for accrued salary
of $30,000;
- - Edwin Grosvenor: 6,313 shares in exchange for accrued
salary of $18,750;
- - Richard Luebkemann: 4,209 shares in exchange for accrued
salary of $12,500;
- - Donna Lynn: 6,313 shares in exchange for accrued salary of
$18,750;
- - Lin Pearce: 8,418 shares in exchange for accrued salary of
$25,000; and
- - Alan Sultan: 4,209 shares in exchange for accrued salary of
$12,500.
Each share of KnowledgeMax preferred stock is convertible into
one share of KnowledgeMax common stock, and the merger agreement
provides that all shares of preferred stock must be converted
into common stock prior to closing. At the KnowledgeMax special
meeting of stockholders, KnowledgeMax management will put forward
resolutions to convert all outstanding shares of KnowledgeMax
preferred stock to shares of KnowledgeMax common stock.
Based on the data given above, Sideware and KnowledgeMax estimate
that on closing, the conversion ratio will be approximately 24.5
Sideware shares for each KnowledgeMax share, and will result in:
- - approximately 93,917,206 shares of Sideware common stock
being issued to current KnowledgeMax stockholders; and
- - approximately 14,416,176 shares of Sideware common stock
being reserved for issuance on the exercise of KnowledgeMax
stock options.
38
No fractional shares will be issued in the merger. The merger
agreement provides that the number of shares of Sideware common
stock issued to each KnowledgeMax stockholder will be rounded up
to the nearest whole number.
Following the merger, Sideware expects to have approximately
179,431,941 shares of common stock issued and outstanding. The
following table shows the number of Sideware shares that will
either be issued or reserved in the categories indicated, and
also percentage ownership on:
- - an issued and outstanding basis; and
- - a diluted basis, giving effect to all options and warrants
which are "in the money" based on current trading prices.
Sideware share capital - post merger
Category Number of % - issued and % - diluted,
shares outstanding including in
the money
options and
warrants
Sideware
Stockholders 85,514,735 48% 44%
KnowledgeMax
stockholders 93,917,206 52% 48%
Holders of
KnowledgeMax
options 14,416,176 n/a 7%
Holders of
Sideware
warrants - in
the money 646,668 n/a *
Holders of
Sideware
warrants - out
of the money 8,279,085 n/a n/a
Holders of
Sideware
options - in
the money 2,475,000 n/a 1%
Holders of
Sideware
options - out
of the money 10,968,316 n/a n/a
* Less than 1%
STOCK OPTIONS
Under the merger agreement, Sideware will assume the obligations
of KnowledgeMax under the outstanding KnowledgeMax stock options.
This means that after the merger, holders of KnowledgeMax options
will be able to exercise them for shares of Sideware common
stock, subject to the adjustments described below in the numbers
of optioned shares and exercise prices. At the date of this
joint proxy statement - prospectus, there were outstanding
options to purchase 587,962 shares of KnowledgeMax common stock
at $1.00 per share. The merger agreement also provides that:
- - the number of Sideware shares to be issued to each
KnowledgeMax optionee on the exercise of his option will be
equal to the number of KnowledgeMax shares issuable under
the option, multiplied by the conversion ratio; and
- - the exercise per Sideware share will be equal to the
exercise price per KnowledgeMax share, divided by the
conversion ratio.
39
Using the estimated conversion ratio of 24.5, Sideware estimates
that following completion of the merger, participants in the
KnowledgeMax stock option plan will hold options to purchase
approximately 14,416,176 shares of Sideware common stock at a
price of approximately $0.041 per share.
SHARE PURCHASE WARRANTS
The merger agreement provides as a condition of the merger that
all KnowledgeMax warrants must be exercised, converted, or
terminated prior to closing. Outstanding Sideware warrants will
continue to be exercisable, at the same prices as before the
merger.
CONDUCT OF BUSINESS PRIOR TO MERGER
The merger agreement provides that both parties will conduct
their business in the ordinary course up to closing. In
addition, neither party will engage in any type of merger or
acquisition negotiations with any other party until the merger is
either completed or terminated.
In December 2001, Sideware completed a private placement
financing in the amount of $1,350,000, issuing 13,500,000 shares
of common stock at a price of $0.10 per share. The merger
agreement provides that those funds will be used to fund the
operations of both companies up to closing. Funds which Sideware
advances to KnowledgeMax constitute unsecured loans. The
repayment terms for those loans are described below, under
"Termination, loan repayment, and liquidated damages".
As required in the merger agreement, Sideware and KnowledgeMax
have established a budget for the use of the funds raised by
Sideware. For the period December 2001 to March 2002, Sideware
and KnowledgeMax expect that their monthly expenditures will
total approximately $350,000 per month, consisting of
approximately:
- - $200,000 per month in salaries; and
- - $150,000 per month in general and administrative expenses,
including expenses relating to the merger.
In addition to the funds raised by Sideware, KnowledgeMax raised
approximately $200,000 in private placement financing during
December 2001. Based on the monthly expenditures described
above, Sideware and KnowledgeMax believe that the financing they
have raised will be sufficient to pay the combined operating
expenses of the two companies until approximately the end of
March 2002. Of the funds being spent by KnowledgeMax, the
parties expect that an average of approximately $250,000 per
month will come from funds loaned by Sideware under the merger
agreement.
The merger agreement also provides that Sideware must appoint
certain directors and officers of KnowledgeMax to act as
directors and officers of Sideware following the merger.
Additional information on the individuals expected to serve as
directors and executive officers following the merger is give
under "Management after the merger".
MANAGEMENT AFTER THE MERGER
The merger agreement provides that Sideware will have 11
directors following the merger. Five directors will come from
the current Sideware board, and six will be current directors of
KnowledgeMax. The following table lists the individuals that are
expected to serve as directors and executive officers following
the merger:
Name Age Expected position with Sideware
E. Linwood Pearce 56 Chairman of the Board of
Directors, Chief Executive
Officer, and Director
40
James L. Speros 42 President and Director
Kenneth R. Thornton 59 Vice Chairman of the Board of
Directors and Director
Donna L. Lynn 60 Chief Operating Officer and
Director
Edwin S. Grosvenor 50 Executive Vice President and
Director
Alan R. Sultan 36 Senior Vice President and
Director
Jay H. Nussbaum 57 Director
Jack Kemp 66 Director
John Shoemaker 59 Director
Edward H. Gross 58 Director
Joe J. Boivin 35 Director
Charles P. Abod II 41 Acting Chief Financial Officer
Richard Luebkemann 43 Vice President for Technology
Rahul Bardhan 36 Vice President for Engineering
Until the closing of the merger, if any of the proposed directors
listed above is unable to serve, or refuses to serve, his
replacement will be nominated by:
- - the other directors from Sideware, if the director in
question is from Sideware; and
- - the other directors from KnowledgeMax, if the director in
question is from KnowledgeMax.
The proposed certificate of incorporation for Sideware provides
for a staggered board of directors. Directors on the Sideware
board will be divided into three classes. Directors in the first
class will serve initially until the next annual meeting of
Sideware stockholders. Directors in the second and third classes
will serve, respectively, until the second and third annual
meetings of stockholders following the merger. Following their
initial terms, each director or his replacement will be elected
for a three year term. The effect of the staggered board will be
that only one third of the board seats are up for election at any
annual meeting.
Biographical information on the proposed directors and executive
officers for Sideware is set forth below.
E. Linwood Pearce. Chairman of the Board of Directors, Chief
Executive Officer, and Director. Mr. Pearce has thirty years'
experience in managing worldwide software organizations. Mr.
Pearce joined KnowledgeMax in 2000, and is currently Chairman and
co-CEO. Mr. Pearce is former President and Chief Executive
Officer of Template Software, which merged with Level 8 Software
Inc. (Nasdaq NMS: LVEL) in December 1999. During Mr. Pearce's
term at Template, the company completed its initial public
offering, which, along with private placements, raised over $40
million in capital. Prior to joining Template, Mr. Pearce was
Executive Vice President of Worldwide Sales, Marketing, and
Business Development for Sage Software. Prior to joining Sage
Software, Mr. Pearce served as Executive Vice President and Chief
Operating Officer of Software AG of North America for three
years. In 1967, Mr. Pearce started his career with Applied Data
Research, a pioneer in computer software products, where he held
a number of positions, including Vice President of Field
Operations for five years. Mr. Pearce earned his engineering
degree from Chowan College and currently serves on the boards of
two private companies.
James L. Speros. President and Director. Mr. Speros was
appointed President and Chief Executive Officer of Sideware
effective October 15, 2000. Prior to that, beginning August 5,
1998, Mr. Speros was the President and Chief Operating Officer of
Sideware Corp., Sideware's wholly owned US subsidiary. 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, and of Braintech, Inc.,
a public company trading through the OTC Bulletin Board.
41
Kenneth R. Thornton. Assistant Chairman of the Board of
Directors and Director. Mr. Thornton was appointed as a director
of Sideware effective April 1, 2001, and as Chairman of the Board
effective June 28, 2001. Mr. Thornton was previously employed by
IBM, as General Manager of IBM's Public Sector. In this role, he
led IBM's government, education, healthcare and pharmaceuticals
business operations worldwide. Previously, he served as the vice
president and general manager of IBM's Mid-Atlantic Area, where
he was responsible for leading IBM's marketing and services
operations in the Mid-Atlantic states. Prior positions with IBM
include Industry Director of the Public Sector, Regional Manager
of the Atlantic Region, Director of Federal Marketing Operations
and Sales Branch Manager. Mr. Thornton has been a member of the
Internet2 Executive Council, a part of IBM's Worldwide Management
Council, and a member of IBM's Corporate Technology Council.
Edwin S. Grosvenor. Executive Vice President and Director. Mr.
Grosvenor has over twenty years' experience in publishing and the
management of new ventures. Mr. Grosvenor founded the Leadership
Library LP, the predecessor of KnowledgeMax, in 1996, and is
currently a co-Chief Executive Officer of KnowledgeMax. From
1991 to 1995, he was the president and publisher of Capital
Communication Group, L.L.C., which published the literary
magazine, Current Books. From 1985 to 1990, he served as
president of Hotel Magazine Network, Inc., a publisher of
magazines for business travelers. From 1977 to 1984, Mr.
Grosvenor was the president of Grosvenor Publications, Inc.,
which published Portfolio, a fine arts magazines. Mr. Grosvenor
obtained his MBA and his MS (Journalism) degrees from Columbia
University, and his BA from Yale University.
Donna L. Lynn. Chief Operating Officer and Director. Ms. Lynn
has developed and led information technology companies for over
twenty-five years. Ms. Lynn joined KnowledgeMax in 1998, and is
currently its President and Chief Operating Officer. Previously,
Ms. Lynn was President of SilverPlatter Information, Inc., the
U.S. operation of a global information leader, which has
subsequently been acquired by Wolters Kluwer, a global publishing
firm. Ms. Lynn was a founder of Online Computer Systems, Inc. in
1979, and served as its Chief Executive Officer. Online Computer
Systems was acquired in 1985 by Reed International, PLC, a
leading global publisher which later merged to become Reed
Elsevier. Ms. Lynn served as a senior executive with Reed
Elsevier through 1995. Ms. Lynn attended the University of
Florida and the Florida Institute of Technology where she majored
in mathematics, economics, and business.
Alan R. Sultan. Senior Vice President and Director. Mr. Sultan
is an experienced executive/entrepreneur in the diverse worlds of
publishing, new media and international business development.
Mr. Sultan joined KnowledgeMax in 1996, and is currently the Sr.
Vice President, Business Development, of KnowledgeMax. From 1988
to 1995 Mr. Sultan served as Vice President and Director of
Marketing at National Press Books. Mr. Sultan earned a BS in
Marketing and a BS in Psychology at the State University of New
York.
Jay H. Nussbaum. Director. Mr. Nussbaum was appointed a
director of Sideware on June 14, 1999. In December 2001, Mr.
Nussbaum was appointed Executive Vice President for Managed
Services and Enterprise Solutions for KPMG Consulting.
Previously, Mr. Nussbaum was 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. 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 of
Sideware 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.
42
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 of Sideware on February 9, 2001. For the past 10 years,
Mr. Shoemaker has held a variety of senior executive positions
with Sun Microsystems. His present position is Executive Vice
President & General Manager, Computer Systems. 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.
Edward H. Gross. Director. Mr. Gross has served as Executive
Vice President, Chief Administrative Officer, and Chief Financial
Officer of Baker & Taylor, Inc. since July 1994. Baker & Taylor
is a full line distributor of books, music, and video products to
the Internet, traditional retailers, and institutions. From
March 1992 to July 1994 Mr. Gross was Baker & Taylor's Senior
Vice President and Chief Financial Officer. He joined the Baker
& Taylor Books Division of W.R. Grace & Co. in 1985, and until
1987 was its senior Vice President and Chief Financial Officer.
He held the same positions at the Baker & Taylor Video Division
of Grace from 1988 to 1992. Prior to that, Mr. Gross served in
various capacities at Grace from 1973 to 1984, including
divisional and group financial positions in its Organic Chemicals
Division, Specialty Business Group and American Breeders Service
Division. Mr. Gross earned a B.A. from Brown University in 1965
and an M.B.A. from Columbia University Graduate School of
Business Administration in 1967.
Joseph J. Boivin, Jr. Director. Mr. Boivin is the Executive
Vice President & Managing Director of Washington Capital
Partners, L.L.C. From 1998 to 2000 he served as Director of
Business Development and Director of Strategic Relationships at
TechTrader, Inc., a software company creating public and
private e-procurement exchanges. Mr. Boivin was part of the
founding team as the third employee and helped grow the company
from four to 28 employees. From 1997-1998 Mr. Boivin worked as a
Research Staff Member in the Computer Systems and Engineering
Division (CSED) at the Institute for Defense Analyses (IDA) where
he served the Office of the Secretary of Defense (OSD). From
1995 to 1997 he served as a Senior Engineer and Business Analyst
at Northrop Grumman where he evaluated and implemented new
manufacturing technologies. From 1993 to 1995 he served as an
Advisor to Nuclear Utilities Services Company, a company
specializing in complex tool application, design and usage for
the nuclear power generation industry. He graduated from the
University of Arkansas, Fayetteville, AR, in 1995 with a BS in
Mechanical Engineering and in 1996 with an MBA. In 1998 he
graduated from Georgetown University, Washington, DC, with an
Executive MBA.
Charles Abod II. Acting Chief Financial Officer. Mr. Abod is a
CPA and Managing Partner of Abod and Associates LLC. Mr. Abod's
firm provides financial and accounting services, systems design
and implementation, business advisory, strategic planning, and
corporate tax planning to a variety of firms. He was formerly
Vice President of Finance and Administration for Sky Alland
Marketing, CFO for Micro Dynamics Ltd., Controller for University
Research Corporation, and Audit Supervising Senior for Deloitte
and Touche. Mr. Abod is a member of the AICPA, Maryland
Association of CPAs, Florida Institute of CPAs, and the National
Society of Accountants. Mr. Abod obtained his BS with a double
major in Accounting and Finance from the University of Maryland.
Richard Luebkemann. Vice President for Technology. Mr.
Luebkemann has been Chief Technology Officer and Vice President
of Technology for KnowledgeMax since 1998. He was previously the
Director of Professional Services and team leader for
implementing major software systems at Metasys, Inc., in
Charlotte, NC. Prior to joining Metasys, he founded and managed
a key business unit at Universal Systems, Inc., providing
client/server applications and professional services in
electronic document workflow, electronic commerce, and imaging.
From 1987 to 1992 Mr. Luebkemann was a senior project manager at
Online Computer Systems, where he worked for
43
KnowledgeMax's President, Donna Lynn. Mr. Luebkemann has also
held senior software development and engineering positions at
Litton-Amecom, Honeywell, and General Dynamics.
Rahul Bardhan. Vice President for Engineering. Mr. Bardhan was
appointed Chief Technology Officer of Sideware 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.
EXECUTIVE AND DIRECTOR COMPENSATION
It is the intention of Sideware and KnowledgeMax to enter into
definitive employment agreements with a number of the individuals
expected to serve as executive officers of Sideware following the
merger. The particulars of these arrangements, including
compensation, are still undetermined.
AUTHORIZED CAPITAL OF SIDEWARE FOLLOWING THE MERGER
The present authorized capital of Sideware is 198,978,997 common
shares without par value. Following its continuation to
Delaware, Sideware will be governed by the General Corporation
Law of the State of Delaware, and its authorized capital will be
as set out in the certificate of incorporation filed under that
act.
The proposed certificate of incorporation for Sideware is
attached as Appendix C to this joint proxy statement -
prospectus, It provides that the authorized capital of Sideware
will consist of:
- - 300,000,000 shares of common stock with a par value $0.001
per share; and
- - 50,000,000 shares of preferred stock with a par value
$0.001 per share.
Additional information on the rights and restrictions that will
attach to these shares is given under "COMPARISON OF STOCKHOLDER
RIGHTS".
PRINCIPAL STOCKHOLDERS AFTER THE MERGER
Sideware estimates that following the merger, Sideware will have
approximately 179,431,941 shares issued and outstanding.
The following table sets forth certain information regarding the
estimated beneficial ownership of outstanding voting shares in
Sideware following the merger, based on data existing as at
January 10, 2002, by:
- - all individuals expected to be directors and executive officers
following the merger;
- - persons expected to own 5% or more of the issued and outstanding
voting shares of Sideware following the KnowledgeMax merger; and
- - all of the expected directors and executive officers as a group.
No person other than E. Linwood Pearce , Baker & Taylor, or Edwin S.
Grosvenor is expected to own beneficially more than 5% of the issued
and outstanding voting shares of Sideware following the merger.
Ownership figures for holders of KnowledgeMax stock have been
calculated using a conversion ratio of 24.5.
44
Title of Class Name of Beneficial Owner Amount and Nature of Percent of
Beneficial Ownership Class(1)
Common Edwin S. Grosvenor,
Executive Vice President 16,445,478 8.4%
Common Baker & Taylor 13,142,829(2) 6.8%
Common E. Linwood Pearce,
Chairman and CEO 12,356,036(3) 6.4%
Common Donna L. Lynn,
Chief Operating Officer 6,577,442(4) 3.6%
Common Alan R. Sultan,
Senior Vice President 5,293,838(5) 2.9%
Common Joseph J. Boivin, Director 4,148,316(6) 2.3%
Common Richard Luebkemann,
Vice President for Technology 3,520,669(7) 1.9%
Common James L. Speros, President 3,051,137(8) 1.7%
Common Kenneth R. Thornton,
Vice Chairman 2,450,000(9) 1.4%
Common Rahul Bardhan, Vice
President for Engineering 1,488,788(10) *
Common Jay H. Nussbaum, Director 600,000(11) *
Common Jack Kemp, Director 150,000(12) *
Common John Shoemaker, Director 150,000(13) *
Common Edward H. Gross, Director 0 -
Common All Directors and
Executive Officers 69,582,036 28.3%
* less than 1%
(1) 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) Consists of shares issuable on the conversion of 158,553
shares of KnowledgeMax common stock and 34,489 shares of
KnowledgeMax Series B Convertible Preferred Stock held by
Baker & Taylor on the date hereof. Also includes shares
issuable upon conversion of an estimated 339,380 shares of
KnowledgeMax common stock issuable to Baker & Taylor
immediately prior to the closing of the merger pursuant to the
terms of an agreement between KnowledgeMax and Baker & Taylor.
The address of Baker & Taylor is 2709 Water Ridge Parkway,
Charlotte, NC 28217.
(3) Includes shares issuable on the conversion of 39,774 shares
of Series B Convertible KnowledgeMax Preferred Stock held
jointly with Mr. Pearce's wife, Mary Pearce, and shares
issuable on the conversion of 150,000 shares of KnowledgeMax
common stock underlying an option which will vest upon the
closing of the merger.
(4) Includes shares issuable on the conversion of 70,000 shares
of KnowledgeMax common stock issuable upon the exercise of
currently exercisable options. Also includes shares issuable
on the conversion of 2,525 KnowledgeMax shares held by Ms.
Lynn's spouse, Joe Lynn, of which Ms. Lynn disclaims
beneficial ownership.
(5) Includes shares issuable on the conversion of 55,000 shares
of KnowledgeMax common stock issuable upon exercise of
currently exercisable options.
(6) Consists entirely of shares issuable on the conversion of
Series B Convertible Preferred KnowledgeMax Stock held by
Washington Capital Partners. The address of Washington Capital
Partners is 1020 19th Street, NW, Suite 400, Washington, DC
20036. Mr. Boivin is a managing director of Washington
Capital Partners and disclaims beneficial ownership of all
shares held by Washington Capital Partners, except to the
extent of his pecuniary interest in such shares.
(7) Includes shares issuable on the conversion of 23,500 shares
of KnowledgeMax common stock issuable upon the exercise of
currently exercisable options and shares issuable upon
conversion of 23,569 shares of common stock held by a
company owned by Mr. Luebkemann.
(8) Includes 1,175,000 shares issuable on the exercise of stock
options.
45
(9) Includes 950,000 shares issuable on the exercise of stock
options.
(10)Includes 1,400,000 shares issuable on the exercise of stock
options.
(11)Includes 600,000 shares issuable on the exercise of stock
options.
(12)Includes 150,000 shares issuable on the exercise of stock
options.
(13)Includes 150,000 shares issuable on the exercise of stock
options.
INTERESTS OF INSIDERS
No director or officer of either Sideware or KnowledgeMax owns
any shares, or has any other pecuniary interest in, the other
company.
To complete the merger, Sideware will have to sell most or all of
its interest in the Chalk Group. No contract for the sale of the
Chalk Group has been finalized. However, Sideware expects that
Grant Sutherland, one of its directors, will likely have a
financial interest in any purchaser for the Chalk Group.
Mr. Sutherland introduced Sideware to the Chalk Group, where his
son works as Executive Vice President. In October 2000, Mr.
Sutherland had made a personal investment in the Chalk Group,
acquiring 100,000 special warrants. The special warrants entitle
Mr. Sutherland to acquire, without further payment, approximately
132,000 shares in Chalk.com Network (Holding) Corp., parent
company of the Chalk Group. At the date of this joint proxy
statement - prospectus, 132,000 common shares of Chalk.com
Network (Holding) Corp. would represent less than 1% of
outstanding common shares of that company. Mr. Sutherland
arranged for the investment which Sideware made in the Chalk
Group, and invested $1,000,000 in Sideware to provide the funds
that Sideware used to make the investment. Mr. Sutherland's
interest in the Chalk Group was disclosed to the other directors
of Sideware before Sideware made its investment.
On October 9, 2001, the Sideware board of directors authorized
Mr. Sutherland to search for a purchaser for the Chalk Group.
Mr. Sutherland advised the board that it is likely that any
purchase of the Chalk Group will require Mr. Sutherland to
participate as an investor in the purchaser.
The following directors and executive officers of Sideware and
KnowledgeMax are expected to serve as salaried employees or
officers following the merger.
Expected position
with Sideware
Name Current position following the merger
E. Linwood Pearce Chairman and co-CEO of KnowledgeMax Chairman and CEO
James L. Speros President and CEO of Sideware President
Kenneth R. Thornton Chairman of Sideware Vice Chairman
Edwin S. Grosvenor Founder and co-CEO of KnowledgeMax Executive Vice President
Donna L. Lynn President and COO of KnowledgeMax COO
Alan R. Sultan VP, Business Development of KnowledgeMax Senior Vice President
Richard Luebkemann VP, Technology of KnowledgeMax VP for Technology
Rahul Bardhan Chief Technical Officer of Sideware VP for Engineering
While employed by Sideware, Mr. Bardhan and Mr. Speros entered
into Change of Control Severance Agreements with Sideware, under
which they are each entitled to be paid up to two years' salary
and bonus if their employment is terminated in anticipation of,
or following, a change in control. Sideware believes that the
merger with KnowledgeMax would likely constitute a change in
control for purposes of these agreements. In December 2001 Mr.
Speros executed an amendment to his agreement reducing his
maximum cash compensation to $170,000 if his employment is
terminated. Mr. Bardhan executed a similar amendment, although
Mr. Bardhan's amendment is conditional
46
on Sideware either completing the merger or raising $5 million in
additional financing by June 30, 2002. Additional information on
the compensation paid to the individuals listed above is given under
"EXECUTIVE AND DIRECTOR COMPENSATION".
Anne Grosvenor, mother of Edwin Grosvenor, has loaned
approximately $15,000 to KnowledgeMax and personally guaranteed
KnowledgeMax's $100,000 line of credit. In connection with the
merger, Ms. Grosvenor will be repaid and her liability on the
line of credit revoked.
E. Linwood Pearce, KnowledgeMax Chairman and co-CEO, holds an
option to purchase 150,000 shares of KnowledgeMax common stock
which will vest as a result of the completion of the merger.
The members of the boards of directors of Sideware and
KnowledgeMax knew about and considered these additional interests
when they approved the merger.
ACCOUNTING TREATMENT
As the proposed transaction will result in the former stockholders of
KnowledgeMax owning greater than 50% of the merged entity, the
acquisition has been accounted for using generally accepted accounting
principles in the United States of America applicable to reverse mergers
with KnowledgeMax being identified as the acquirer. This means, among
other things, that:
- - to the extent that the value of Sideware stock issued in
the merger exceeds the value of the net tangible assets of
Sideware, the difference will be shown as goodwill on
the post-merger balance sheets of Sideware; and
- - the fair value of the Sideware stock issued in the merger
will be included in the stockholders' equity section of
Sideware's post-merger balance sheets.
TAX CONSEQUENCES OF THE MERGER
Information on the tax consequences of the merger is given under
"MATERIAL TAX CONSEQUENCES OF THE TRANSACTIONS".
RESTRICTIONS ON RESALE OF SIDEWARE STOCK BY KNOWLEDGEMAX
AFFILIATES
This joint proxy statement - prospectus does not cover any
resales of Sideware shares issued to KnowledgeMax stockholders in
the merger. No person is authorized to use this joint proxy
statement - prospectus in connection with any resale.
All Sideware shares issued to KnowledgeMax stockholders will be
freely tradable, except that persons deemed "affiliates" of
KnowledgeMax at the time of the KnowledgeMax meeting may resell
their Sideware shares only in transactions permitted by Rule 145
under the Securities Act of 1933, or as otherwise permitted under
that act. Persons who may be deemed affiliates of KnowledgeMax
for this purpose generally include directors, executive officers,
and the holders of 10% or more of the outstanding KnowledgeMax
shares.
Rule 145 of the Securities Act provides generally that for a
period of one year following the merger, public resales of
Sideware shares by KnowledgeMax affiliates are subject to volume
restrictions and manner of sale requirements. For a period of
two years after the merger, the ability of KnowledgeMax
affiliates to resell shares of Sideware under Rule 145 will
generally also be subject to Sideware having satisfied its
reporting requirements under the Securities Exchange Act of 1934
for specified periods prior to the sale. Beginning two years
after the merger, affiliates of KnowledgeMax who have not become
affiliates of Sideware may resell their shares without
restriction. Affiliates of Sideware will generally remain
subject to these restrictions until they cease to be an affiliate
of Sideware.
47
In addition to sales permitted under Rule 145, affiliates will
also be permitted to resell Sideware shares received in the
merger pursuant to an effective registration statement under the
Securities Act covering the shares, or pursuant to an available
exemption from the registration requirements.
DISSENT RIGHTS FOR SIDEWARE STOCKHOLDERS
Under the Yukon Business Corporations Act, Sideware stockholders
have dissent rights arising from the proposed resolutions to:
- - adopt the merger agreement; and
- - continue Sideware to Delaware.
Information on these dissent rights is given under "SIDEWARE
STOCKHOLDERS' MEETING - Dissent rights."
APPRAISAL RIGHTS FOR KNOWLEDGEMAX STOCKHOLDERS
Under the Delaware General Corporation Law, KnowledgeMax
stockholders have appraisal rights arising from the proposed
merger. Information on these appraisal rights is given under
"KNOWLEDGEMAX STOCKHOLDERS' MEETING - Appraisal rights".
CONDITIONS TO COMPLETION OF THE MERGER
The merger agreement is subject to a number of conditions which
must be fulfilled before the merger is completed.
Some of the conditions bind only one of the parties, meaning that
the other party can decide to waive the condition, and proceed
with the merger even if the condition is not fulfilled. Other
conditions are binding on both parties, meaning that they must
either be fulfilled or waived by both parties before the merger
proceeds.
Some of the conditions have already been fulfilled at the date of
this joint proxy statement - prospectus:
- - Sideware has raised at least $1,000,000 in private
placement financing.
- - Certain of the directors, officers, and large stockholders
of Sideware and KnowledgeMax have executed voting
agreements.
- - KnowledgeMax has completed an audit of its financial
statements delivered to Sideware prior to execution of the
merger agreement.
The principal remaining conditions that bind both parties are the
following:
- - The merger agreement must be approved by the stockholders
of both KnowledgeMax and Sideware.
- - Sideware must continue as a Delaware corporation.
- - The percentage of dissenting Sideware shares plus the
percentage of KnowledgeMax dissenting shares must not
exceed 6%.
The principal conditions binding Sideware only, which can be
waived by KnowledgeMax, are the following:
- - Sideware must raise at least $2,000,000 through the sale of
some or all of the Chalk Group, and have the proceeds
placed in escrow prior to closing the merger. SIDEWARE
EXPECTS THAT IT CAN ONLY RAISE THIS AMOUNT BY SELLING MOST
OR ALL OF ITS INTEREST IN THE CHALK GROUP. AT
48
THE DATE OF THIS JOINT PROXY STATEMENT - PROSPECTUS, SIDEWARE
HAS NOT ENTERED INTO ANY AGREEMENT TO SELL ANY PORTION OF ITS
INTEREST IN THE CHALK GROUP.
- - Sideware must appoint certain existing KnowledgeMax
directors and officers as directors and officers of
Sideware.
- - The representations and warranties of Sideware must be
accurate, and Sideware must perform the covenants set out
in the merger agreement.
- - Sideware must have a third party assume liability under the
lease of its Vancouver, British Columbia office premises,
effective by April 1, 2002. Sideware expects that it will
require the purchaser of the Chalk Group to assume this
lease.
- - Sideware must not suffer a material adverse change.
The principal conditions binding KnowledgeMax only, which can be
waived by Sideware, are the following:
- - All KnowledgeMax preferred shares must be converted to
common shares, and all KnowledgeMax warrants must either be
exercised or terminated.
- - The representations and warranties of KnowledgeMax must be
accurate, and KnowledgeMax must perform the covenants set
out in the merger agreement.
- - KnowledgeMax must not suffer a material adverse change.
The full text of the conditions is set forth in the merger
agreement, attached to this joint proxy statement - prospectus as
Appendix A.
REPRESENTATIONS AND WARRANTIES
Under the merger agreement, each party has made customary
representations and warranties covering such matters as:
- - its corporate organization and powers;
- - its legal ability and authorization to carry out the
merger;
- - its existing capital structure; and
- - its financial statements and the description of its
business activities.
The full text of the representations and warranties is set forth
in the merger agreement, attached to this joint proxy statement -
prospectus as Appendix A.
REQUIRED RECOMMENDATIONS TO STOCKHOLDERS
The directors of both companies are required to recommend
approval of the merger to their respective stockholders, although
the merger agreement provides that this requirement does not
apply to the directors of Sideware, as a public company, if they
determine in good faith that a favorable recommendation would
violate their fiduciary duties.
WAIVER AND AMENDMENT
The merger agreement can only be amended in writing, and its
provisions can only be waived in writing. The merger agreement
states expressly that no failure to enforce, or delay in
enforcing, any of its provisions constitutes a waiver.
TERMINATION, LOAN REPAYMENT, AND LIQUIDATED DAMAGES
Either party can terminate the merger agreement if:
- - it determines that a condition to the merger binding the
other party either has not been, or will not be, fulfilled;
49
- - the other party is in breach of its representations,
warranties or covenants, and the breach is not cured within
15 days of demand; or
- - the merger is not completed by July 31, 2002, other than
because of a default by the party seeking to terminate the
merger.
In addition, KnowledgeMax can terminate the merger agreement if
the board of directors of Sideware fails to recommend the merger
to the Sideware stockholders.
The merger agreement also contains provisions governing repayment
of any funds loaned by Sideware to KnowledgeMax, and the payment
of liquidated damages, if the agreement is terminated.
- - If Sideware terminates the merger agreement on account of
an intentional misrepresentation or willful material breach
of contract by KnowledgeMax, KnowledgeMax must repay any
amounts it has borrowed from Sideware immediately, plus
$1,000,000 in liquidated damages.
- - If KnowledgeMax terminates the merger agreement on account
of an intentional misrepresentation or willful material
breach of contract by Sideware, Sideware must pay
KnowledgeMax $1,000,000 in liquidated damages, and
KnowledgeMax can set that amount off against any loan it
has received from Sideware.
- - If KnowledgeMax terminates the merger agreement as a result
of the board of directors of Sideware failing to recommend
approval of the merger, Sideware must pay KnowledgeMax
$430,000 in liquidated damages, and KnowledgeMax can set
that amount off against any loan it has received from
Sideware. The amount of $430,000 was calculated based on
3% of the value of the consideration to be received by
KnowledgeMax stockholders in the merger.
- - If the merger agreement is terminated on any other grounds,
besides those identified above, KnowledgeMax must repay any
amounts loaned to it under the merger agreement within six
months.
DIRECTOR AND OFFICER INDEMNIFICATION
Sideware will assume the obligations of KnowledgeMax under its
existing contracts of indemnification with its directors and
officers.
EXCHANGE OF SHARE CERTIFICATES
KnowledgeMax stockholders should not tender their stock
certificates now. As soon as practicable after the merger,
Sideware will send each KnowledgeMax stockholder a letter
instructing the KnowledgeMax stockholders how they should deliver
their KnowledgeMax share certificates for surrender. Upon
surrender of his KnowledgeMax share certificate, each
KnowledgeMax stockholder will receive a Sideware share
certificate representing the appropriate number of shares.
VOTING AGREEMENTS
Directors, officers, and certain large stockholders of both
Sideware and KnowledgeMax have entered into voting agreements,
under which they have agreed:
- - to vote all shares which they own in favor of the merger;
and
- - not to exercise any dissent or appraisal rights.
Parties to these voting agreements own approximately 12% of the
voting shares of Sideware and in excess of 50% of the voting
shares of KnowledgeMax.
PROPOSED RESOLUTION FOR SIDEWARE STOCKHOLDERS
The text of the proposed resolutions to approve the merger, to be
put forward at the Sideware meeting, is as follows.
50
"BE IT RESOLVED as special resolutions that:
1. The Agreement and Plan of Merger and Reorganization dated
December 7, 2001 between Sideware Systems Inc.,
KnowledgeMax, Inc., and KM Acquisition Corp., be approved
and adopted.
2. If required to complete the Agreement and Plan of Merger
and Reorganization, the board of directors of Sideware
Systems Inc. is authorized to sell some or all of the
interest of Sideware Systems Inc. in Chalk.com Network
(Holding) Corp. for at least US$2,000,000, or such other
amount as may be approved by the board of directors of
Sideware Systems Inc. and may satisfy the requirements of
the Agreement and Plan of Merger and Reorganization.
3. The board of directors of Sideware Systems Inc. is
authorized to execute and deliver all documents and do all
acts, including without limitation issuing the shares of
common stock required to be issued under the Agreement and
Plan of Merger and Reorganization, necessary to give effect
to and complete the transactions set out in and
contemplated by the Agreement and Plan of Merger and
Reorganization."
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial information has
been prepared by management and gives effect to the proposed
business combination and merger of Sideware Systems Inc.
("Sideware") and KnowledgeMax, Inc. ("KnowledgeMax") and related
transactions including the disposition by Sideware of 100% of its
interest in the Chalk Group for cash consideration of $2 million.
The unaudited pro forma consolidated balance sheet as at
September 30, 2001 has been prepared assuming that the
transactions described in note 2 occurred on that date. The pro
forma consolidated statements of operations for the nine months
ended September 30, 2001 and the year ended December 31, 2000
have been compiled assuming the transactions described in note 2
occurred at the beginning of the periods presented.
The pro forma adjustments, which are based on available
information and certain assumptions that we believe are
reasonable under the circumstances, are applied to the historical
consolidated financial statements. As this proposed transaction
will result in the former shareholders of KnowledgeMax owning
greater than 50% of the merged entity, the acquisition has been
accounting for using generally accepted accounting principles
applicable to reverse takeovers with KnowledgeMax identified as
the acquirer. The allocation of the purchase price is based upon
preliminary estimated fair values of assets acquired and
liabilities assumed as at September 30, 2001. The purchase price
allocation for the proposed business combination and merger
reflected in the accompanying unaudited pro forma consolidated
financial statements will be different from the final allocation
of the purchase price, as that allocation will be made based on
the fair value of Sideware's assets and liabilities as at the
date of completion of the business combination and merger, and
any such differences may be material. The unaudited pro forma
consolidated financial information is provided for informational
purposes only and does not purport to represent what the
financial position or results of operations would actually have
been had the pro forma transactions occurred on such dates or to
project our results of operations or financial position for any
future period.
The accompanying unaudited pro forma consolidated financial
information should be read in conjunction with the historical
financial statements of each company and other information
included in this joint proxy statement - prospectus.
51
SIDEWARE SYSTEMS INC.
Pro Forma Consolidated Balance Sheet
(Unaudited)
(Expressed in United States dollars)
September 30, 2001
- -------------------------------------------------------------------------------------------------------------------------
Pro forma
Sideware adjustments
KnowledgeMax, Systems and eliminating
Inc. Inc. entries Pro forma
- -------------------------------------------------------------------------------------------------------------------------
(note 2)
Assets
Current assets:
Cash and cash equivalents $ 51,744 $ 1,512,059 (a) (ii) $ 1,350,000 $ 3,753,623
(b) (i) 26,500
(b) (iii) 250,000
(b) (iv) 75,379
(c) 2,000,000
(c) (1,512,059)
Trade accounts receivable,
net of allowance for
doubtful accounts 151,080 368,023 (c) (368,023) 151,080
Other receivables - 30,066 - 30,066
Prepaid expenses and deposits 5,000 129,834 (c) (22,566) 112,268
- -------------------------------------------------------------------------------------------------------------------------
207,824 2,039,982 1,799,231 4,047,037
Deposit on lease - 120,439 - 120,439
Property and equipment, net 108,863 560,453 (c) (261,310) 408,006
Intangible assets, net 1,200 1,486,861 (a) (iii) 555,767 1,200
(c) (2,042,628)
- -------------------------------------------------------------------------------------------------------------------------
$ 317,887 $ 4,207,735 $ 51,060 $ 4,576,682
- -------------------------------------------------------------------------------------------------------------------------
52
- -------------------------------------------------------------------------------------------------------------------------
Pro forma
Sideware adjustments
KnowledgeMax, Systems and eliminating
Inc. Inc. entries Pro forma
- -------------------------------------------------------------------------------------------------------------------------
(note 2)
Liabilities and Stockholders'
Equity (Deficiency)
Current liabilities:
Bank line of credit $ 67,955 $ - $ - $ 67,955
Accounts payable and
accrued liabilities 779,973 1,323,166 (a) (iv) (44,800) 1,277,300
(a) (v) (47,567)
(b) (ii) (162,120)
(b) (iv) (79,191)
(c) (692,161)
(d) 200,000
Convertible notes - Series B 75,000 - (b) (iv) (50,000) 25,000
Line of credit - related party 200,000 - (b) (v) (200,000) -
Notes payable 192,338 - (b) (iv) (107,030) 85,308
Notes payable - related party 328,967 - (b) (iv) (258,967) 70,000
Convertible notes payable 114,600 - (b) (iv) (40,000) 74,600
Convertible notes payable
- related party 27,090 - - 27,090
Deferred revenue - 280,450 (c) (280,450) -
Due to related party 138,252 6,142 (c) (2) 144,392
Current portion of obligations
under capital leases 24,294 40,360 (c) (40,360) 24,294
-----------------------------------------------------------------------------------------------------------------------
1,948,469 1,650,118 (1,802,648) 1,795,939
Obligations under capital leases 46,139 57,758 (c) (57,758) 46,139
Due to stockholders - 947,805 (c) (947,805) -
Stockholders' equity (deficiency):
Capital stock 27,538 69,057 (a) (i) (970) 179,432
(a) (ii) 13,500
(a) (iii) 3,234
(a) (iv) 362
(a) (v) 332
(b) (i) 265
(b) (ii) 1,621
(b) (iii) 842
(b) (iv) 2,056
(b) (v) 3,345
(d) 58,250
Additional paid-in capital 4,431,871 57,387,054 (a) (ii) 1,336,500 9,166,302
(a) (iii) 552,533
(a) (iv) 61,212
(a) (v) 56,146
(b) (i) 26,235
(b) (ii) 160,499
(b) (iii) 249,158
(b) (iv) 608,510
(b) (v) 671,655
(d) (56,828,272)
(d) 453,201
Accumulated other
comprehensive loss - (623,091) (d) 623,091 -
Deficit (6,136,130) (55,280,966) (a) (iv) (16,774) (6,611,130)
(a) (v) (8,911)
(b) (v) (475,000)
(c) (188,050)
(d) 55,494,701
- -------------------------------------------------------------------------------------------------------------------------
$ 317,887 $ 4,207,735 $ 51,060 $ 4,576,682
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to pro forma consolidated financial
statements.
53
SIDEWARE SYSTEMS INC.
Pro Forma Consolidated Statement of Operations
(Unaudited)
(Expressed in United States dollars)
Nine months ended September 30, 2001
- -------------------------------------------------------------------------------------------------------------------------
Pro forma
Sideware adjustments
KnowledgeMax, Systems and eliminating
Inc. Inc. entries Pro forma
- -------------------------------------------------------------------------------------------------------------------------
(note 2)
Revenue $ 355,983 $ 136,019 (c) $ (136,019) $ 355,983
Cost of revenues 315,376 91,611 (c) (91,611) 315,376
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 40,607 44,408 (44,408) 40,607
Expenses:
Sales and marketing and
website operations - 60,896 (c) (60,896) -
General and administrative 787,238 2,745,934 (c) (115,518) 3,407,654
Research and development 239,474 - - 239,474
-----------------------------------------------------------------------------------------------------------------------
1,026,712 2,806,830 (176,414) 1,142,230
- -------------------------------------------------------------------------------------------------------------------------
Operating loss from continuing
operations (986,105) (2,762,422) 132,006 (3,616,521)
Interest income - 245,031 - 245,031
Interest expense (86,898) - - (86,898)
- -------------------------------------------------------------------------------------------------------------------------
Loss from continuing
operations $ (1,073,003) $ (2,517,391) $ 132,006 $ (3,458,388)
- -------------------------------------------------------------------------------------------------------------------------
Basic and diluted
loss per share
from continuing
operations $ (0.04) $ (0.02)
- -------------------------------------------------------------------------------------------------------------------------
Weighted average
common shares used
in computing loss
per share, basic
and diluted 64,378,281 162,881,183
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to pro forma consolidated financial
statements.
54
SIDEWARE SYSTEMS INC.
Pro Forma Consolidated Statement of Operations
(Unaudited)
(Expressed in United States dollars)
Year ended December 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
Pro forma
Sideware adjustments
KnowledgeMax, Systems and eliminating
Inc. Inc. entries Pro forma
- -------------------------------------------------------------------------------------------------------------------------
(note 2)
Revenue $ - $ - $ - $ -
Cost of revenues - - - -
- -------------------------------------------------------------------------------------------------------------------------
Gross margin - - - -
Expenses:
Sales and marketing - - - -
General and administrative 1,535,015 7,533,958 - 9,068,973
Research and development 479,457 - - 479,457
-----------------------------------------------------------------------------------------------------------------------
2,014,472 7,533,958 - 9,548,430
- -------------------------------------------------------------------------------------------------------------------------
Operating loss from continuing
operations (2,014,472) (7,533,958) - (9,548,430)
Interest income 751 550,533 - 551,284
Interest expense (593,261) - - (593,261)
Other - (5,369) - (5,369)
- -------------------------------------------------------------------------------------------------------------------------
Loss from continuing
operations $ (2,606,982) $ (6,988,794) $ - $ (9,595,776)
- -------------------------------------------------------------------------------------------------------------------------
Basic and diluted
loss per share
from continuing operations $ (0.12) $ (0.07)
- -------------------------------------------------------------------------------------------------------------------------
Weighted average common shares
used in computing loss per
share, basic and diluted 58,078,005 146,041,214
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to pro forma consolidated financial
statements.
55
SIDEWARE SYSTEMS INC.
Notes to Pro Forma Consolidated Financial Statements
(Unaudited)
(Expressed in United States dollars)
Nine months ended September 30, 2001
1. BASIS OF PRESENTATION:
The accompanying pro forma consolidated financial statements have
been compiled for purposes of inclusion in the joint proxy
statement - prospectus included in the registration statement
on Form S-4, filed with the Securities and Exchange Commission
in the United States, relating to the proposed business combination
and merger of Sideware Systems Inc. ("Sideware") and KnowledgeMax,
Inc. ("KnowledgeMax").
These pro forma consolidated financial statements are not
necessarily indicative of the financial position and results of
operations that would have been attained had the transaction
actually taken place at the dates indicated and does not purport
to be indicative of the effects that may be expected to occur in
the future.
The pro forma consolidated statements have been compiled from:
(a) the unaudited consolidated financial statements of Sideware
as at September 30, 2001 and for the nine months then ended;
(b) the audited consolidated financial statements of Sideware for
the year ended December 31, 2000;
(c) the unaudited financial statements of KnowledgeMax as at
September 30, 2001 and the nine months then ended;
(d) the audited financial statements of KnowledgeMax for the year
ended December 31, 2000; and
(e) the additional information set out in note 2.
The pro forma consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States in effect at September 30, 2001 and
should be read in conjunction with the historical financial
statements of each company and other information included in this
joint proxy statement - prospectus. The pro forma consolidated
statements of operations do not include any recurring charges or
credits as a result of the described transactions.
2. PRO FORMA ADJUSTMENTS AND ELIMINATING ENTRIES:
The pro forma consolidated balance sheet as at September 30, 2001
has been prepared assuming that the transactions described below
occurred on that date. The pro forma consolidated statements of
operations for the nine months ended September 30, 2001 and the
year ended December 31, 2000 have been compiled assuming the
transaction relating to
56
the proposed merger occurred at the beginning of the periods
presented, but as indicated in note 1, apply generally accepted
accounting principles as they will be in effect at the date of
consummation of the merger.
The pro forma consolidated financial statements give effect to
the following transactions:
(a) The actual issuance and/or cancellation by Sideware of its
capital stock from October 1, 2001 to January 9, 2002 as
follows:
(i) cancellation of 970,378 escrow shares;
(ii) issuance of 13,500,000 common shares at $0.10 per share
for total proceeds of $1,350,000;
2. PRO FORMA ADJUSTMENTS AND ELIMINATING ENTRIES (CONTINUED):
(a) The actual issuance and/or cancellation by Sideware of its
capital stock from October 1, 2001 to January 9, 2002 as
follows (continued):
(iii) issuance of 3,233,346 common shares and 646,668 share
purchase warrants to acquire approximately an additional
14% from then existing minority stockholders in the Chalk
Group;
(iv) issuance of 362,202 common shares in settlement of debts
of the Chalk Group; and
(v) issuance of 332,222 common shares to directors and
employees in settlement of unpaid salary and bonus
commitments.
Shares issued for transactions (a)(iv) and (a)(v), above, have
been valued based on the market price of Sideware's common
stock as at the settlement date.
(b) Issuance by KnowledgeMax of its capital stock from October 1,
2001 to January 9, 2002 (and the proposed issuances up to the
closing of the merger) as follows:
(i) issuance of capital stock upon exercise of share options
for cash of $26,500;
(ii) issuance of capital stock for settlement of unpaid
compensation of $162,120;
(iii) issuance of capital stock for cash of $250,000;
(iv) issuance of capital stock for cash of $75,379, on conversion of
notes payable aggregating $455,997, and for settlement of
accrued liabilities of $79,191; and
(v) issuance of capital stock for settlement of the $200,000
principal under its line of credit and for termination of a
warrant agreement.
(c) The sale of Chalk Group by Sideware for proceeds of
$2,000,000 and the related disposition of Chalk Group's
assets, liabilities, revenues and expenses.
(d) The continuation of Sideware into Delaware and the
acquisition of Sideware and related elimination of Sideware's
share capital and deficit (note 3).
3. PRO FORMA MERGER:
Under the proposed merger, KnowledgeMax will become a wholly-
owned subsidiary of Sideware through the exchange of all of
KnowledgeMax's issued and outstanding capital stock for that
number of Sideware common shares that result at closing in the
former shareholders of KnowledgeMax owing in excess of 50% of the
issued and outstanding
57
common shares of Sideware. The merger agreement contains a formula
for calculating the conversion ratio, which depends on the number
of outstanding shares and the option and warrant positions of each
company at the time of closing.
As this proposed transaction will result in the former
shareholders of KnowledgeMax owning greater than 50% of the
merged entity, the acquisition has been accounted for as an
acquisition by KnowledgeMax of the net assets of Sideware.
The fair value of the deemed consideration has been estimated
based on the fair value of the net assets of Sideware at the date
of the pro forma consolidated balance sheet and includes estimated
cash acquisition costs of $200,000. The total consideration
allocated to assets and liabilities acquired, based on estimated fair
values as at September 30, 2001, adjusted for the pro forma
disposition of the Chalk Group, is as follows:
-----------------------------------------------------------------
Cash $ 3,350,000
Accounts and other receivables 30,066
Prepaid expenses 107,268
Deposit on lease 120,439
Property and equipment, net 299,143
Accounts payable, accrued liabilities and due
to related party (544,778)
-----------------------------------------------------------------
Total net assets acquired $ 3,362,138
-----------------------------------------------------------------
Consideration paid:
Fair value of equity instruments issued $ 2,708,937
Fair value of Sideware options and warrants
outstanding, deemed issued 453,201
Acquisition costs 200,000
-----------------------------------------------------------------
$ 3,362,138
-----------------------------------------------------------------
4. CAPITAL STOCK:
Authorized (on consummation of the merger):
300,000,000 common stock with a par value of $0.001 per share
50,000,000 preferred stock with a par value of $0.001 per share
Common stock issued and outstanding:
-----------------------------------------------------------------
Number
of shares Amount
-----------------------------------------------------------------
Sideware balance as at September
30, 2001 69,057,343 $ 69,057
Escrow shares cancelled (970,378) (970)
Shares issued in private placement
for cash 13,500,000 13,500
Shares issued to acquire position
of minority shareholders
in Chalk Group 3,233,346 3,234
Shares issued for settlement of
Chalk Group debt 362,202 362
Shares issued for settlement of
unpaid salaries 332,222 332
-----------------------------------------------------------------
58
Sideware balance prior to merger 85,514,735 85,515
Shares issued on merger 93,917,206 93,917
-----------------------------------------------------------------
Pro forma balance as at September
30, 2001 179,431,941 $ 179,432
-----------------------------------------------------------------
The amounts assigned to common stock issued has been
retroactively restated to reflect the par value per share of
common stock that will be authorized on completion of the pro forma
transactions.
The pro forma weighted average number of shares of common stock
outstanding has been calculated by applying the conversion ratio to
the effective weighted average number of KnowledgeMax shares
outstanding during the pro forma periods presented.
SIDEWARE STOCKHOLDERS' MEETING
DATE, TIME, AND PLACE OF THE SIDEWARE MEETING
This joint proxy statement - prospectus, which was mailed to
stockholders on [ ], 2002, is furnished in connection with
the solicitation of proxies by the board of directors of Sideware
to be voted at the Extraordinary General Meeting of the
stockholders of Sideware, which will be held at 1:00 p.m. (local
time) on [ ], 2002 at [ ]for the purposes set forth in the
accompanying Notice of Annual General Meeting.
VOTING RIGHTS; RECORD DATE; OUTSTANDING SHARES
The close of business on [______] has been fixed by the Sideware
board of directors as the record date for determination of the
Sideware stockholders entitled to notice of, and to vote at, the
Sideware meeting. On the record date, Sideware had outstanding
[______] shares of common stock, which were held of record by
448 stockholders. Each stockholder of record at the close of
business on the record date is entitled to one vote for each
share of Sideware stock held on the record date.
PURPOSES OF THE SIDEWARE MEETING
The purposes of the Sideware meeting are:
1. To consider and, if thought fit, to pass a special
resolution approving and adopting the Agreement and Plan of
Merger and Reorganization dated December 7, 2001 between Sideware
Systems Inc., KnowledgeMax Inc., and KM Acquisition Corp.;
2. To consider and, if thought fit, to pass a special
resolution approving the continuation of Sideware to the State of
Delaware, as a corporation under the Delaware General Corporation
Law;
3. To consider and, if thought fit, to pass a special
resolution increasing the authorized capital of Sideware to
300,000,000 common shares without par value;
4. To consider and, if thought fit, to pass a resolution
approving an amendment to the certificate of incorporation of
Sideware Systems Inc. to change the corporate name to
"KnowledgeMax, Inc.";
59
5. To consider and, if thought fit, to pass a resolution
approving the Sideware 2002 Equity Incentive Plan; and
6. To transact such other business as may be brought before
the meeting or any adjournment or postponement of the meeting.
VOTES REQUIRED FOR APPROVAL
The proposed resolutions to:
- - approve the merger agreement;
- - continue Sideware as a Delaware corporation; and
- - increase the authorized capital of Sideware;
are special resolutions under the Yukon Business Corporations
Act. Special resolutions must be passed by a majority of at
least two-thirds of the votes cast.
The proposal to change the corporate name of Sideware to
"KnowledgeMax, Inc." will require Sideware to file an amendment
to its certificate of incorporation under the General Corporation
Law of Delaware. Under Delaware law, that proposal must be
approved by the holders of a majority of the outstanding shares
of Sideware.
The proposed resolution to approve the Sideware 2002 Equity
Incentive Plan is an ordinary resolution, which must be passed by
a simple majority of the votes cast. However, under regulations
of the Toronto Stock Exchange, shares owned beneficially by
insiders of Sideware who might be granted awards under the plan
cannot be counted on this resolution. To the knowledge of
management of Sideware there are approximately 9.3 million
shares, representing approximately 11% of the outstanding voting
shares, which will not be counted in the voting in respect of the
Sideware 2002 Equity Incentive Plan.
APPOINTMENT AND REVOCATION OF PROXIES
The persons named in the accompanying instrument of proxy are
directors or officers of Sideware. A STOCKHOLDER HAS THE RIGHT
TO APPOINT A DIFFERENT PERSON TO ACT ON HIS BEHALF AT THE
SIDEWARE MEETING. TO EXERCISE THIS RIGHT, A STOCKHOLDER SHOULD
STRIKE OUT THE NAMES OF THE PERSONS NAMED IN THE INSTRUMENT OF
PROXY AND INSERT THE NAME OF HIS NOMINEE IN THE BLANK SPACE
PROVIDED, OR COMPLETE ANOTHER INSTRUMENT OF PROXY.
THE PROXY CARD MUST BE DATED AND SIGNED, AND THE COMPLETED PROXY
CARD MUST BE DEPOSITED AT SIDEWARE'S TRANSFER AGENT,
COMPUTERSHARE INVESTOR SERVICES, INC., 4TH FLOOR, 510 BURRARD
STREET, VANCOUVER, BRITISH COLUMBIA, V6C 3B9, AT LEAST 48 HOURS
BEFORE THE TIME OF THE SIDEWARE MEETING OR ANY ADJOURNMENT
THEREOF, EXCLUDING SATURDAYS, SUNDAYS AND HOLIDAYS.
The proxy card must be signed by the stockholder or by his duly
authorized attorney. If the stockholder is a corporation, the
instrument of proxy must be signed in the full corporate name by
the President or other authorized officer. The articles of
Sideware confer discretionary authority upon the Chairman of the
Sideware meeting to accept proxies which do not strictly conform
to the foregoing requirements and certain other requirements set
forth in the articles.
A STOCKHOLDER MAY REVOKE A PROXY BY (A) SIGNING A PROXY WITH A
LATER DATE AND DEPOSITING THAT PROXY IN THE MANNER DESCRIBED
ABOVE, (B) DEPOSITING A WRITTEN NOTICE OF REVOCATION,
60
DATED AND SIGNED (IN THE SAME MANNER AS THE PROXY CARD IS REQUIRED
TO BE EXECUTED), AND EITHER DEPOSITING IT IN THE MANNER DESCRIBED
ABOVE OR WITH THE CHAIRMAN OF THE SIDEWARE MEETING ON THE DAY OF THE
SIDEWARE MEETING OR ON THE DAY OF ANY ADJOURNMENT THEREOF, (C)
REGISTERING WITH THE SCRUTINEER AT THE SIDEWARE MEETING AS A
STOCKHOLDER PRESENT IN PERSON, IN WHICH CASE THE PROXY IS
AUTOMATICALLY REVOKED, OR (D) IN ANY OTHER MANNER PERMITTED BY
LAW.
VOTING PROCEDURES
Votes cast by proxy or in person at the meeting will be tabulated
by representatives of Montreal Trust Company of Canada. A quorum
for the Sideware meeting will consist of stockholders, present in
person or by proxy, representing 5% of the shares entitled to
vote at the Sideware meeting.
EFFECT OF AN ABSTENTION AND BROKER NON-VOTES; VOTING DISCRETION
The proposed resolutions to:
- - adopt the Agreement and Plan of Merger and Reorganization;
- - approve the continuation of Sideware to Delaware;
- - approve the increase in the authorized capital of Sideware;
and
- - approve the 2002 Sideware Equity Incentive Plan;
will all be governed by the Yukon Business Corporations Act and
the present bylaws of Sideware. A stockholder who abstains from
voting on any or all of these proposals will be included in the
number of stockholders present at the meeting for the purpose of
determining the presence of a quorum. However, abstentions will
not be counted either in favor of or against any of these
proposals. If a broker returns a "non-vote" proxy, indicating a
lack of authority to vote on a proposal, then the shares covered
by such "non-vote" shall be deemed present at the meeting for
purposes of determining a quorum, but not for the purposes of
calculating the vote with respect to the proposal on which the
broker had no authority to vote. Because each of the proposals
listed above requires approval by the specified majority of the
votes cast, abstentions and broker non-votes with respect to a
proposal will have no effect on that proposal.
The proposal to change the corporate name of Sideware to
"KnowledgeMax Inc." will require Sideware to file an amended
certificate of incorporation. Under the Delaware General
Corporation Law, that proposal must be approved the holders of a
majority of the outstanding shares of Sideware common stock.
Accordingly, abstentions and "non-vote" proxies returned by
brokers will have the same effect as votes against this proposal.
The enclosed proxy card confers discretionary authority with
respect to amendments or variations, or any other matters which
are properly brought before the Sideware meeting. At the time of
printing of this joint proxy statement - prospectus, Sideware
management is not aware of any proposed amendments, variations,
or other matters. However, if any amendments, variations, or
other matters are brought before the Sideware meeting, the
proxies being solicited will be exercised in accordance with the
best judgement of the nominee. If a proposal to adjourn the
Sideware meeting is properly presented, proxy holders who have
instructions to vote against a particular proposal will not be
able to vote in favour of an adjournment to solicit further
proxies in favour of that proposal.
61
THE PROXIES SOLICITED WITH THIS JOINT PROXY STATEMENT -
PROSPECTUS WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS
INDICATED, THIS PROXY WILL BE VOTED FOR EVERY ITEM LISTED IN THE
PROXY CARD.
PERSONS MAKING THE SOLICITATION
THE ENCLOSED INSTRUMENT OF PROXY IS SOLICITED BY MANAGEMENT.
Solicitations will be made by mail and possibly supplemented by
telephone or other personal contact to be made without special
compensation by regular officers and employees of Sideware.
Sideware may reimburse stockholders' nominees or agents
(including brokers holding shares on behalf of clients) for the
cost incurred in obtaining authorization from their principals to
execute the instrument of proxy. No solicitation will be made by
specifically engaged employees or soliciting agents. The cost of
solicitation will be borne by Sideware. None of the directors of
Sideware have advised management in writing that they intend to
oppose any action intended to be taken by management is set forth
in this joint proxy statement - prospectus.
VOTING SHARES AND PRINCIPAL HOLDERS THEREOF
Stockholders of Sideware at the close of business on [ ], 2002
will be entitled to vote at the Sideware meeting. On January 10,
2002, there were 85,514,735 shares of Sideware common stock
outstanding, held by 844 stockholders of record. At a general
meeting of Sideware stockholders, on a show of hands, every
stockholder present in person shall have one vote and, on a poll,
every stockholder shall have one vote for each share of which he
is the holder.
The following table sets forth certain information regarding the
beneficial ownership of Sideware outstanding common shares as of
January 10, 2002 by:
- - Sideware directors and executive officers; and
- - all of the Sideware directors and executive officers as
a group.
To the best of the knowledge of Sideware management, no
person other than Grant Sutherland is the beneficial owner of
more than 5% of the Sideware issued and outstanding common
shares. Unless otherwise indicated, the address of each person
listed below is c/o Sideware Systems Inc., 7900 Westpark Drive,
Suite T300, McLean, VA 22102.
Title of Class Name of Beneficial Owner Amount and Nature of Percent of
Beneficial Ownership Class(1)
Common James Speros,
President, CEO 3,051,137(2) 3.5%
Common Kenneth R. Thornton,
Chairman 2,450,000(3) 2.6%
Common Grant Sutherland, Director 7,812,276(4) 9.0%
Common Jay Nussbaum, Director 600,000(5) *
Common Jack Kemp, Director 150,000(6) *
Common John Shoemaker, Director 150,000(7) *
Common Edward White, Director 335,780(8) *
Common Peter Kozicki, Director 769,100(9) *
Common Rahul Bardhan, Chief
Technology Officer 1,448,788(10) 1.7%
62
Common Stewart Walchli, Chief
Financial Officer 1,300,000(11) 1.5%
Common All Directors and
Executive Officers 18,067,081(12) 19.3%
* less than 1%
(1) 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:
- 1,175,000 shares issuable under stock options exercisable
within 60 days.
(3) Includes shares issuable under the following securities:
- 950,000 shares issuable under stock options exercisable
within 60 days.
(4) Includes shares issuable under the following securities:
- 520,000 shares issuable under stock options exercisable
within 60 days; and
- 1,250,000 shares issuable under outstanding share purchase
warrants exercisable within 60 days.
(5) Includes shares issuable under the following securities:
- 600,000 shares issuable under stock options exercisable
within 60 days. Mr. Nussbaum's address is c/o KPMG
Consulting, 1676 International Drive, McLean, VA 22102
(6) Includes shares issuable under the following securities:
- 150,000 shares issuable under stock options exercisable
within 60 days. Mr. Kemp's address is c/o Empower America,
1701 Pennsylvania Ave., Washington, DC 20006.
(7) Includes shares issuable under the following securities:
- 150,000 shares issuable under stock options exercisable
within 60 days. Mr. Shoemaker's address is c/o Sun
Microsystems, 901 San Antonio Road, USCA04-208, Palo Alto, CA
94303-4900.
(8) Includes shares issuable under the following securities:
- 195,000 shares issuable under stock options exercisable
within 60 days.
(9) Includes shares issuable under the following securities:
- 195,000 shares issuable under stock options exercisable
within 60 days.
(10)Includes shares issuable under the following securities:
- 1,400,000 shares issuable under stock options exercisable
within 60 days.
(11)Includes shares issuable under the following securities:
- 1,300,000 shares issuable under stock options exercisable
within 60 days.
(12)Includes shares issuable under the following securities:
- 6,635,000 shares issuable under stock options exercisable
within 60 days; and
- 1,250,000 shares issuable under outstanding share purchase
warrants exercisable within 60 days.
DISSENT RIGHTS
Section 193 of the Yukon Business Corporations Act gives dissent
rights to Sideware stockholders who oppose either:
- - the continuation of Sideware to the State of Delaware; or
- - the merger of Sideware and KnowledgeMax.
A stockholder may dissent only with respect to shares registered
in his name. A dissenting stockholder who complies with section
193 of the Yukon Business Corporations Act can require Sideware
to purchase his shares at fair market value. Fair market value
is determined as of the last business day preceding the adoption
of the resolution from which the stockholder dissents.
To exercise the right of dissent, a stockholder must send
Sideware, at the following address, written notice of objection
to one or both of the resolutions referred to above.
63
Sideware Systems Inc.
7900 Westpark Drive, Suite T300
McLean, VA 22102
Attention: James L. Speros
The notice must be sent prior to the Sideware meeting. A vote
against a resolution does not constitute notice of dissent, for
purposes of section 193 of the Yukon Business Corporations Act.
The Yukon Business Corporations Act does not specify whether a
failure to vote against a resolution prevents a stockholder from
dissenting with respect to that resolution. If the issue arises
in any dispute with a dissenting stockholder, Sideware intends to
take the position that a failure to vote against a resolution
does prevent a stockholder from exercising dissent rights.
Following delivery of a notice of objection, either Sideware or
any dissenting stockholder may apply to the Supreme Court of the
Yukon Territory to fix the fair value of the shares of the
dissenting stockholder. If a court application is brought
Sideware must, unless the court otherwise orders, send every
dissenting stockholder a written offer to pay a price which the
directors consider to be the fair value of the Sideware shares.
The same offer must be sent to each dissenting stockholder:
- - at least ten days before the hearing date for the
application, if the application is brought by Sideware; or
- - within ten days after Sideware is served with notice of the
court application, if the application is brought by a
dissenting stockholder.
Every offer made to dissenting stockholders must be on the same
terms, and must be accompanied by a statement showing how the
fair value was determined.
On the hearing of a court application, the court will make an
order fixing the fair value of the shares of the dissenting
stockholders, giving judgment against Sideware for that amount in
favor of the dissenting stockholders, and fixing a time within
which Sideware must pay that amount. Any time before the Court
makes an order fixing the value of the shares, a dissenting
stockholder may make an agreement with Sideware for purchase of
the dissenting stockholder's shares.
A dissenting stockholder ceases to have any rights as a
stockholder, other than the right to be paid fair value for his
shares, on the earlier of:
- - the action approved by the resolution, from which the
stockholder dissents, becoming effective;
- - the making of an agreement between Sideware and the
dissenting stockholder for payment for the shares; or
- - the pronouncement of a Court order fixing the fair value of
the shares.
Until one of these events occurs, a dissenting stockholder may
withdraw his dissent, or the corporation may rescind the
resolution to which objection was taken.
Under subsection 193(20) of the Yukon Business Corporations Act,
Sideware cannot make a payment to a dissenting stockholder if
there are reasonable grounds for believing that:
- - Sideware is, or would after the payment be, unable to pay
its liabilities as they become due; or
64
- - the net realizable value of Sideware's assets would thereby
be less than the aggregate of Sideware's liabilities.
If either of these conditions applies Sideware must, within ten
days of either:
- - the pronouncement of a Court order fixing the value of a
dissenting stockholder's shares; or
- - making any agreement to pay for a dissenting stockholder's
shares;
notify each dissenting stockholder that it is unable lawfully to
pay dissenting stockholders for their shares. Within 30 days of
receiving that notice, a dissenting stockholder may give written
notice to Sideware withdrawing the notice of objection, in which
case the dissenting stockholder is reinstated to the full rights
of a Sideware stockholder. If the notice of objection is not
withdrawn, the dissenting stockholder has the status of a
claimant against Sideware, to be paid as soon as Sideware is
lawfully able to do so or, in a liquidation, to be ranked
subordinate to the rights of creditors, but in priority to
stockholders.
THE FOREGOING SUMMARY IS NOT MEANT TO PROVIDE A COMPREHENSIVE
STATEMENT OF THE PROCEDURES TO BE FOLLOWED BY A DISSENTING
STOCKHOLDER AND IS QUALIFIED IN ITS ENTIRETY BY THE PROVISIONS OF
SECTION 193 OF THE YUKON BUSINESS CORPORATIONS ACT, A COPY OF
WHICH IS ATTACHED AS APPENDIX E TO THIS JOINT PROXY STATEMENT -
PROSPECTUS. FAILURE TO COMPLY WITH SECTION 193 OF THE YUKON
BUSINESS CORPORATIONS ACT MAY RESULT IN THE LOSS OF ALL OF A
STOCKHOLDER'S DISSENT RIGHTS. ACCORDINGLY, STOCKHOLDERS WHO
DESIRE TO EXERCISE DISSENT RIGHTS SHOULD SEEK QUALIFIED
PROFESSIONAL LEGAL ADVICE, AND SHOULD CAREFULLY CONSIDER AND
COMPLY WITH THE PROVISIONS OF SECTION 193 OF THE YUKON BUSINESS
CORPORATIONS ACT.
PROPOSAL FOR CONTINUATION OF SIDEWARE TO DELAWARE
To complete the merger, Sideware must continue to the State of
Delaware, under the General Corporation Law of Delaware. Under
the corporate law of the Yukon Territory, Sideware's present
corporate jurisdiction, continuation of Sideware to a different
jurisdiction must be authorized by a special resolution of
stockholders, which requires approval by at least two thirds of
the votes cast. Accordingly, Sideware management will put
forward special resolutions authorizing continuation of Sideware
corporate jurisdiction to Delaware.
Continuation to Delaware will result in Sideware being a Delaware
corporation for all purposes, including taxation. All rights of
creditors against Sideware's property, rights, and assets, and all
liens on Sideware's property, rights, and assets, are unimpaired
by the continuation. All debts, contracts, liabilities and duties
of Sideware from then on attach to Sideware as continued to
Delaware, and remain enforceable against Sideware.
Continuation to Delaware will involve filing a certificate of
domestication and a certificate of incorporation with the
Secretary of State of Delaware. In addition, Sideware will have
to adopt bylaws under the General Corporation Law of the State of
Delaware. Copies of the proposed certificate of incorporation
and bylaws are attached to this joint prospectus - proxy
statement as Appendices C and D.
If Sideware becomes a Delaware corporation, the existing common
shares in Sideware, which do not have a par value, will be
converted to shares of common stock with a par value of $0.001
per share.
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If the merger does not proceed, Sideware management may determine
that a continuation to Delaware is not in Sideware's best
interests. Accordingly, the resolutions authorizing continuation
to Delaware also authorize the directors of Sideware to rescind
those resolutions, and to abandon the continuation to Delaware.
STOCKHOLDER RIGHTS
Following continuation to Delaware, the rights of Sideware
stockholders will be governed by the certificate of incorporation
and bylaws which Sideware adopts, and by the General Corporation
Law of the State of Delaware. Rights of stockholders under the
Delaware General Corporation Law differ from those given to
stockholders under the Yukon Business Corporations Act. In
addition, the provisions of the proposed certificate of
incorporation and bylaws of Sideware differ from those in
Sideware's present constating documents. Information on the
principal differences is given under "COMPARISON OF STOCKHOLDER
RIGHTS".
DISSENT RIGHTS
The resolution to approve continuation to Delaware gives rise to
dissent rights under the Yukon Business Corporations Act.
Information on those dissent rights is given under "SIDEWARE
STOCKHOLDERS' MEETING - Dissent rights ".
TAX CONSEQUENCES OF CONTINUATION
The continuation to Delaware will also have income tax
consequences for Sideware and its stockholders. Information on
those income tax consequences is given under "MATERIAL TAX
CONSEQUENCES OF THE TRANSACTIONS".
PROPOSED RESOLUTION
The text of the resolutions to be put forward is as follows.
"BE IT RESOLVED as special resolutions that:
1. The filing of a certificate of domestication and a
certificate of incorporation pursuant to the General Corporation
Law of the State of Delaware, continuing Sideware as if it had
been incorporated thereunder, is authorized and approved.
2. The conversion of all of the issued and outstanding common
shares without par value in the capital of Sideware to common
shares with a par value $0.001 per share is authorized and
approved.
3. The certificate of incorporation and bylaws presented to
the stockholders are approved and adopted for purposes of the
General Corporation Law of the State of Delaware.
4. Notwithstanding that the foregoing resolutions have been
duly passed by the stockholders of Sideware, the directors of
Sideware be and are hereby authorized and empowered to abandon
Sideware's application for continuance under the Delaware General
Corporation Law and to rescind all or any one of these
resolutions at any time prior to their being acted upon without
further approval of the stockholders of Sideware;
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5. Any director or officer of Sideware be and is hereby
authorized and empowered, acting for, and in the name of and on
behalf of the name of Sideware, to execute or cause to be
executed, under the seal of Sideware or otherwise, and to deliver
or caused to be delivered, such other documents and instruments,
and to do or cause to be done, such other acts and things, as in
the opinion of such one director or officer of Sideware may be
necessary or desirable in order to carry out the intent of the
foregoing resolutions."
THE SIDEWARE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
SIDEWARE STOCKHOLDERS APPROVE THE CONTINUATION OF SIDEWARE TO
DELAWARE.
PROPOSAL FOR INCREASE IN AUTHORIZED CAPITAL OF SIDEWARE
The present authorized capital of Sideware is 198,978,997 common
shares without par value. As at January 10, 2002, 85,514,735
shares are issued and outstanding. In addition, approximately 19
million shares are reserved for issuance under stock options and
share purchase warrants.
If the merger with KnowledgeMax and continuation to Delaware do
not proceed, Sideware management may wish to enter into other
merger or acquisition transactions. To complete transactions of
this nature, Sideware may be required to issue additional shares,
beyond the number currently authorized. Accordingly, Sideware
management will put forward the following resolution to increase
the authorized capital of Sideware to 300,000,000 common shares.
The proposed resolution to increase the authorized capital of
Sideware will only be of importance if the continuation to
Delaware does not proceed. The reason is that the proposed
certificate of incorporation for Sideware, which Sideware will
file if it continues to Delaware, already provides for an
increase in authorized capital.
An increase in the authorized capital of Sideware may be viewed
as an anti-takeover provision, which may have the effect of
discouraging a proposal to acquire or otherwise obtain control of
Sideware. For instance, the additional authorized shares could
be privately placed with purchasers who would cooperate with
Sideware management in opposing an attempt by third parties to
gain control of Sideware. Although Sideware management does not
currently anticipate issuing shares for this kind of purpose,
Sideware management reserves the right to do so in a manner
consistent with the fiduciary duties of corporate directors.
PROPOSED RESOLUTION
The text of the proposed resolution is as follows:
"BE IT RESOLVED as special resolutions that:
1. The authorized capital of Sideware Systems Inc. be
increased from 198,978,997 common shares without par value to
300,000,000 common shares without par value, and the Articles of
Continuation of Sideware Systems Inc. be amended accordingly; and
2. The Board of Directors of Sideware Systems Inc. is
authorized to file any and all amendments to the Articles of
Continuation and any other constating documents of Sideware
Systems Inc. to give effect to the increase in authorized capital
as set out in 1, above."
The additional common shares to be authorized by this special
resolution will be the same in all material respects, including
voting rights, entitlement to dividends, and priority of payment on
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liquidation, as the existing common shares.
THE SIDEWARE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
SIDEWARE STOCKHOLDERS APPROVE THE PROPOSED INCREASE IN AUTHORIZED
CAPITAL.
PROPOSAL FOR SIDEWARE NAME CHANGE
The merger agreement provides that Sideware will change its
corporate name to "KnowledgeMax, Inc." following the merger. To
change its corporate name, Sideware will have to file an
amendment to its certificate of incorporation under the General
Corporation Law of Delaware. Accordingly, the voting
requirements for this proposal are governed by the Delaware
General Corporation Law, which requires that the amendment be
approved by holders of at least 50% of the outstanding shares of
Sideware common stock on the Sideware record date. If approved
by stockholders, Sideware will only file the amendment if the
merger is completed.
PROPOSED RESOLUTION
The text of the proposed resolution is as follows:
"BE IT RESOLVED as special resolutions that:
1. An amendment to the certificate of incorporation of
Sideware, to change the corporate name of Sideware Systems Inc.
to "KnowledgeMax, Inc.", is approved.
2. The Board of Directors of Sideware Systems Inc. is
authorized to file an amended certificate of incorporation, at
such time as it considers appropriate, changing the corporate
name of Sideware Systems Inc. to "KnowledgeMax, Inc."
THE SIDEWARE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
SIDEWARE STOCKHOLDERS APPROVE THE PROPOSED AMENDMENT TO THE
CERTIFICATE OF INCORPORATION, TO CHANGE THE CORPORATE NAME OF
SIDEWARE TO "KNOWLEDGEMAX, INC."
PROPOSAL FOR APPROVAL OF THE SIDEWARE
2002 EQUITY INCENTIVE PLAN
In connection with the merger, the Board of Directors of Sideware
has adopted the company's 2002 Equity Incentive Plan (the "2002
Plan"), subject to stockholder approval. There are 10,000,000
shares of common stock reserved for issuance under the 2002 Plan.
Stockholders are requested in this proposal to approve the 2002
Plan.
FEATURES OF THE PLAN
The essential features of the 2002 Plan are outlined below:
GENERAL
The 2002 Plan provides for the grant of incentive stock options,
nonstatutory stock options, stock bonuses and restricted stock
purchase awards (collectively "awards"). Incentive stock options
granted under the 2002 Plan are intended to qualify as "incentive
stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). Nonstatutory
stock options granted under the 2002 Plan are not intended to
qualify as incentive
68
stock options under the Code. See "Federal Income Tax Information"
for a discussion of the tax treatment of awards. To date, Sideware
has not granted any awards under the 2002 Plan.
PURPOSE
The Board adopted the 2002 Plan to provide a means by which
employees, directors and consultants of Sideware and its
affiliates may be given an opportunity to purchase stock in
Sideware, to assist in retaining the services of such persons, to
secure and retain the services of persons capable of filling such
positions and to provide incentives for such persons to exert
maximum efforts for the success of Sideware and its affiliates.
following the merger, all of the employees, directors and
consultants of Sideware and its affiliates will be eligible to
participate in the 2002 Plan.
ADMINISTRATION
The Board administers the 2002 Plan. Subject to the provisions
of the 2002 Plan, the Board has the power to construe and
interpret the 2002 Plan and to determine the persons to whom and
the dates on which awards will be granted, the number of shares
of Common Stock to be subject to each award, the time or times
during the term of each award within which all or a portion of
such award may be exercised, the exercise price, the type of
consideration and other terms of the award.
The Board has the power, which it has not yet exercised, to
delegate administration of the 2002 Plan to a committee composed
of not fewer than two members of the Board. In the discretion of
the Board, a committee may consist solely of two or more outside
directors in accordance with Section 162(m) of the Code or solely
of two or more non-employee directors in accordance with Rule
16b-3 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). As used herein with respect to the 2002 Plan,
the "Board" refers to any committee the Board appoints as well as
to the Board itself.
The regulations under Section 162(m) of the Code require that the
directors who serve as members of the committee must be "outside
directors." The 2002 Plan provides that, in the Board's
discretion, directors serving on the committee may be "outside
directors" within the meaning of Section 162(m). This limitation
would exclude from the committee directors who are (i) current
employees of Sideware or an affiliate, (ii) former employees of
Sideware or an affiliate receiving compensation for past services
(other than benefits under a tax-qualified pension 2002 Plan),
(iii) current and former officers of Sideware or an affiliate,
(iv) directors currently receiving direct or indirect
remuneration from Sideware or an affiliate in any capacity (other
than as a director), and (v) any other person who is otherwise
not considered an "outside director" for purposes of
Section 162(m).
STOCK SUBJECT TO THE 2002 PLAN
Subject to this Proposal, an aggregate of 10,000,000 shares of
common stock is reserved for issuance under the 2002 Plan. If
awards granted under the 2002 Plan expire or otherwise terminate
without being exercised, the shares of Common Stock not acquired
pursuant to such awards again become available for issuance under
the 2002 Plan. If Sideware reacquires unvested stock issued
under the 2002 Plan, the reacquired stock will again become
available for reissuance under the 2002 Plan.
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ELIGIBILITY
Incentive stock options may be granted under the 2002 Plan only
to employees (including officers) of Sideware and its affiliates.
Employees (including officers), directors, and consultants of
both Sideware and its affiliates are eligible to receive all
other types of awards under the 2002 Plan.
No incentive stock option may be granted under the 2002 Plan to
any person who, at the time of the grant, owns (or is deemed to
own) stock possessing more than 10% of the total combined voting
power of Sideware or any affiliate of Sideware, unless the
exercise price is at least 110% of the fair market value of the
stock subject to the option on the date of grant and the term of
the option does not exceed five years from the date of grant. In
addition, the aggregate fair market value, determined at the time
of grant, of the shares of Common Stock with respect to which
incentive stock options are exercisable for the first time by a
participant during any calendar year (under the 2002 Plan and all
other such plans of Sideware and its affiliates) may not exceed
$100,000.
The 2002 Plan also provides that, for so long as Sideware's
Common Stock is listed for trading on the Toronto Stock Exchange,
the exercise price of a nonstatutory stock option shall be not
less than the fair market value of the common stock subject to
the option on the date the option is granted.
No employee may be granted options under the 2002 Plan
exercisable for more than five million (5,000,000) shares of
Common Stock during any calendar year (the "Section 162(m)
Limitation").
TERMS OF OPTIONS
The following is a description of the permissible terms of
options under the 2002 Plan. Individual option grants may be
more restrictive as to any or all of the permissible terms
described below.
Exercise Price; Payment. The exercise price of incentive stock
options may not be less than 100% of the fair market value of the
stock subject to the option on the date of the grant and, in some
cases (see "Eligibility" above), may not be less than 110% of
such fair market value. The exercise price of nonstatutory
options may not be less than 85% of the fair market value of the
stock on the date of grant and, in some cases (see "Eligibility"
above), may not be less than 100% of such fair market value. If
options were granted to covered executives with exercise prices
below fair market value, deductions for compensation attributable
to the exercise of such options could be limited by
Section 162(m) of the Code. See "Federal Income Tax
Information."
The exercise price of options granted under the 2002 Plan must be
paid either in cash at the time the option is exercised or at the
discretion of the Board, (i) by delivery of other Common Stock of
Sideware, (ii) pursuant to a deferred payment arrangement or
(iii) in any other form of legal consideration acceptable to the
Board. For so long as Sideware shares continue to trade on the
Toronto Stock Exchange, the exercise prices for options granted
under the 2002 Plan will not be less than the market price for
Sideware stock, as determined in accordance with the regulations
of the Toronto Stock Exchange.
Repricing. In the event of a decline in the value of Sideware's
Common Stock, the Board has the authority to offer participants
the opportunity to replace outstanding higher priced options with
new lower priced options. To the extent required by
Section 162(m) of the Code, a repriced
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option is deemed to be canceled and a new option granted. Both the
option deemed to be canceled and the new option deemed to be granted
will be counted against the Section 162(m) Limitation.
Option Exercise. Options granted under the 2002 Plan may vest in
cumulative increments as determined by the Board. The Board has
the power to accelerate the time during which an option may vest
or be exercised. In addition, options granted under the 2002
Plan may permit exercise prior to vesting, but in such event the
participant may be required to enter into an early exercise stock
purchase agreement that allows Sideware to repurchase unvested
shares, generally at their exercise price, should the
participant's service terminate before vesting. To the extent
provided by the terms of an option, a participant may satisfy any
federal, state or local tax withholding obligation relating to
the exercise of such option by a cash payment upon exercise, by
authorizing Sideware to withhold a portion of the stock otherwise
issuable to the participant, by delivering already-owned Common
Stock of Sideware or by a combination of these means.
Term. The maximum term of options under the 2002 Plan is 10
years, except that in certain cases (see "Eligibility") the
maximum term is five years. Options under the 2002 Plan
generally terminate three months after termination of the
participant's service unless (i) such termination is due to the
participant's permanent and total disability (as defined in the
Code), in which case the option may, but need not, provide that
it may be exercised (to the extent the option was exercisable at
the time of the termination of service) at any time within 12
months of such termination; (ii) the participant dies before the
participant's service has terminated, or within three months
after termination of such service, in which case the option may,
but need not, provide that it may be exercised (to the extent the
option was exercisable at the time of the participant's death)
within 18 months of the participant's death by the person or
persons to whom the rights to such option pass by will or by the
laws of descent and distribution; or (iii) the option by its
terms specifically provides otherwise. A participant may
designate a beneficiary who may exercise the option following the
participant's death. Individual option grants by their terms may
provide for exercise within a longer period of time following
termination of service.
The option term generally is not extended in the event that
exercise of the option within these periods is prohibited.
However, a participant's option agreement may provide that if the
exercise of the option following the termination of the
participant's service would be prohibited because the issuance of
stock would violate the registration requirements under the
Securities Act of 1933, as amended (the "Securities Act"), then
the option will terminate on the earlier of (i) the expiration of
the term of the option or (ii) three months after the termination
of the participant's service during which the exercise of the
option would not be in violation of such registration
requirements.
TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK
Payment. The Board determines the purchase price under a
restricted stock purchase agreement but the purchase price may
not be less than 85% of the fair market value of Sideware's
Common Stock on the date of purchase. The Board may award stock
bonuses in consideration of past services without a purchase
payment. The purchase price of stock acquired pursuant to a
restricted stock purchase agreement under the 2002 Plan must be
paid either in cash at the time of purchase or at the discretion
of the Board, (i) by delivery of other Common Stock of Sideware,
(ii) pursuant to a deferred payment arrangement or (iii) in any
other form of legal consideration acceptable to the Board.
Vesting. Shares of stock sold or awarded under the 2002 Plan
may, but need not be, subject to a repurchase option in favor of
Sideware in accordance with a vesting schedule as determined by
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the Board. The Board has the power to accelerate the vesting of
stock acquired pursuant to a restricted stock purchase agreement
under the 2002 Plan.
Restrictions on Transfer. Rights under a stock bonus or
restricted stock bonus agreement may be transferred only upon
such terms and conditions as are set forth in the restricted
stock purchase agreement as the board shall determine in its
discretion.
RESTRICTIONS ON TRANSFER
The participant may not transfer an incentive stock option
otherwise than by will or by the laws of descent and
distribution. During the lifetime of the participant, only the
participant may exercise an incentive stock option. The Board
may grant nonstatutory stock options that are transferable to the
extent provided in the stock option agreement. Shares subject to
repurchase by Sideware under an early exercise stock purchase
agreement may be subject to restrictions on transfer that the
Board deems appropriate.
ADJUSTMENT PROVISIONS
Transactions not involving receipt of consideration by Sideware,
such as a merger, consolidation, reorganization, stock dividend,
or stock split, may change the type(s), class(es) and number of
shares of Common Stock subject to the 2002 Plan and outstanding
awards. In that event, the 2002 Plan will be appropriately
adjusted as to the type(s), class(es) and the maximum number of
shares of Common Stock subject to the 2002 Plan and the
Section 162(m) Limitation, and outstanding awards will be
adjusted as to the type(s), class(es), number of shares and price
per share of Common Stock subject to such awards.
EFFECT OF CERTAIN CORPORATE TRANSACTIONS AND CHANGE IN
CONTROL EVENTS
In the event of (i) the sale or other disposition of all or
substantially all of the outstanding securities of Sideware, (ii)
the sale or other disposition of at least ninety percent (90%) of
the outstanding securities of the company, or (iii) certain
specified types of merger, consolidation or similar transactions
(collectively, "corporate transaction"), any surviving or
acquiring corporation may continue or assume awards outstanding
under the 2002 Plan or may substitute similar awards. If any
surviving or acquiring corporation does not assume such awards or
to substitute similar awards, then with respect to awards held by
participants whose service with Sideware or an affiliate has not
terminated as of the effective date of the corporate transaction,
the vesting of such awards (and, if applicable, the time during
which such awards may be exercised) will be accelerated in full
and the awards will terminate if not exercised (if applicable) at
or prior to such effective date.
The 2002 Plan provides that an award held by any participant
whose continuous service has not terminated prior to the
effective time of a change in control of the company may be
subject to accelerated vesting and exercisability upon or after
such event as may be provided in the stock award or any other
written agreement between the participant and the company.
The acceleration of an award in the event of a corporate
transaction or change in control event may be viewed as an anti-
takeover provision, which may have the effect of discouraging a
proposal to acquire or otherwise obtain control of Sideware.
DURATION, AMENDMENT, AND TERMINATION
The Board may suspend or terminate the 2002 Plan without
stockholder approval or ratification at
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any time or from time to time. Unless sooner terminated, the 2002
Plan will terminate on January 3, 2012.
The Board may also amend the 2002 Plan at any time or from time
to time. However, no amendment will be effective unless approved
by the stockholders of Sideware within 12 months before or after
its adoption by the Board to the extent such approval is
necessary to satisfy the requirements of Section 422 of the Code.
The Board may submit any other amendment to the 2002 Plan for
stockholder approval, including, but not limited to, amendments
intended to satisfy the requirements of Section 162(m) of the
Code regarding the exclusion of performance-based compensation
from the limitation on the deductibility of compensation paid to
certain employees.
FEDERAL INCOME TAX INFORMATION
Incentive Stock Options. Incentive stock options under the 2002
Plan are intended to be eligible for the favorable federal income
tax treatment accorded "incentive stock options" under the Code.
There generally are no federal income tax consequences to the
participant or Sideware by reason of the grant or exercise of an
incentive stock option. However, the exercise of an incentive
stock option may increase the participant's alternative minimum
tax liability, if any.
If a participant holds stock acquired through exercise of an
incentive stock option for more than two years from the date on
which the option is granted and more than one year from the date
on which the shares are transferred to the participant upon
exercise of the option, any gain or loss on a disposition of such
stock will be a long-term capital gain or loss if the participant
held the stock for more than one year.
Generally, if the participant disposes of the stock before the
expiration of either of these holding periods (a "disqualifying
disposition"), then at the time of disposition the participant
will realize taxable ordinary income equal to the lesser of (i)
the excess of the stock's fair market value on the date of
exercise over the exercise price, or (ii) the participant's
actual gain, if any, on the purchase and sale. The participant's
additional gain or any loss upon the disqualifying disposition
will be a capital gain or loss, which will be long-term or short-
term depending on whether the stock was held for more than one
year.
To the extent the participant recognizes ordinary income by
reason of a disqualifying disposition, Sideware will generally be
entitled (subject to the requirement of reasonableness, the
provisions of Section 162(m) of the Code and the satisfaction of
a tax reporting obligation) to a corresponding business expense
deduction in the tax year in which the disqualifying disposition
occurs.
Nonstatutory Stock Options, Restricted Stock Purchase Awards and
Stock Bonuses. Nonstatutory stock options, restricted stock
purchase awards and stock bonuses granted under the 2002 Plan
generally have the following federal income tax consequences.
There are no tax consequences to the participant or Sideware by
reason of the grant. Upon acquisition of the stock, the
participant normally will recognize taxable ordinary income equal
to the excess, if any, of the stock's fair market value on the
acquisition date over the purchase price. However, to the extent
the stock is subject to certain types of vesting restrictions,
the taxable event will be delayed until the vesting restrictions
lapse unless the participant elects to be taxed on receipt of the
stock. With respect to employees, Sideware is generally required
to withhold from regular wages or supplemental wage payments an
amount based on the ordinary income recognized. Subject to the
requirement of reasonableness, the provisions of Section 162(m) of the
73
Code and the satisfaction of a tax reporting obligation,
Sideware will generally be entitled to a business expense
deduction equal to the taxable ordinary income realized by the
participant.
Upon disposition of the stock, the participant will recognize a
capital gain or loss equal to the difference between the selling
price and the sum of the amount paid for such stock plus any
amount recognized as ordinary income upon acquisition (or
vesting) of the stock. Such gain or loss will be long-term or
short-term depending on whether the stock was held for more than
one year. Slightly different rules may apply to participants who
acquire stock subject to certain repurchase options or who are
subject to Section 16(b) of the Exchange Act.
Potential Limitation on Company Deductions. Section 162(m) of
the Code denies a deduction to any publicly held corporation for
compensation paid to certain "covered employees" in a taxable
year to the extent that compensation to such covered employee
exceeds $1 million. It is possible that compensation
attributable to awards, when combined with all other types of
compensation received by a covered employee from Sideware, may
cause this limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-
based compensation," are disregarded for purposes of the
deduction limitation. In accordance with Treasury Regulations
issued under Section 162(m), compensation attributable to stock
options and stock appreciation rights will qualify as
performance-based compensation if the award is granted by a
compensation committee comprised solely of "outside directors"
and either (i) the plan contains a per-employee limitation on the
number of shares for which such awards may be granted during a
specified period, the per-employee limitation is approved by the
stockholders, and the exercise price of the award is no less than
the fair market value of the stock on the date of grant, or (ii)
the award is granted (or exercisable) only upon the achievement
(as certified in writing by the compensation committee) of an
objective performance goal established in writing by the
compensation committee while the outcome is substantially
uncertain, and the award is approved by stockholders.
Awards to purchase restricted stock and stock bonus awards will
qualify as performance-based compensation under the Treasury
Regulations only if (i) the award is granted by a compensation
committee comprised solely of "outside directors," (ii) the award
is granted (or exercisable) only upon the achievement of an
objective performance goal established in writing by the
compensation committee while the outcome is substantially
uncertain, (iii) the compensation committee certifies in writing
prior to the granting (or exercisability) of the award that the
performance goal has been satisfied and (iv) prior to the
granting (or exercisability) of the award, stockholders have
approved the material terms of the award (including the class of
employees eligible for such award, the business criteria on which
the performance goal is based, and the maximum amount -- or
formula used to calculate the amount -- payable upon attainment
of the performance goal).
OTHER OPTIONS OUTSTANDING
In addition to options which may be granted under the 2002 Plan,
the following Sideware stock option and plans are outstanding, or
will be outstanding on completion of the merger.
- - Sideware has reserved a total of 13,667,778 shares for
issuance under its 2000 Stock Option Plan and its 2001
Stock Option Plan. At the date of this joint proxy
statement - prospectus, options to purchase approximately
11 million shares are outstanding under the 2000 and 2001
Plans.
- - Options to purchase approximately 2 million shares are
outstanding from individual
74
option grants which preceded the adoption of the 2000 Stock Option
Plan and the 2001 Stock Option Plan.
- - KnowledgeMax has outstanding options to purchase 594,656
shares of KnowledgeMax common stock, which will convert to
options to purchase approximately 14.3 million shares of
Sideware common stock following the merger.
These options include the following options held by persons who
are expected to serve as directors or executive officers of
Sideware following the merger.
Optionee Number of Exercise Expiry
Shares Price Date
E. Linwood Pearce(1) 3,675,000 $0.041 06/13/10
James Speros 250,000 C$0.36 07/06/03
125,000 C$2.33 06/17/04
500,000 $1.00 01/18/06
300,000 $0.24 12/05/06
Kenneth R. Thornton 150,000 $1.00 03/07/06
500,000 $0.35 06/27/06
300,000 $0.24 12/05/06
Donna Lynn(1) 1,715,000 $0.041 06/13/10
Jay Nussbaum 200,000 $11.08 01/21/05
200,000 $5.10 04/20/05
50,000 $1.00 01/18/06
150,000 $1.00 02/09/06
Jack Kemp 150,000 $1.00 01/18/06
John Shoemaker 150,000 $1.00 01/18/06
Alan Sultan(1) 1,347,500 $0.041 06/13/10
Richard Luebkemann(1) 575,350 $0.041 06/13/10
Rahul Bardhan 1,000,000 $2.25 08/30/05
500,000 $1.00 01/18/06
300,000 $0.24 12/05/06
(1) Denotes KnowledgeMax options converted to Sideware options
at an estimated conversion ratio of 24.5 Sideware shares
for each KnowledgeMax share.
DISINTERESTED STOCKHOLDER APPROVAL
Pursuant to regulations of the Toronto Stock Exchange, the 2002
Plan requires disinterested shareholder approval. The approval
requires the affirmative vote of more than 50% of the eligible
votes cast. Votes attaching to shares owned beneficially by
insiders to whom options may be awarded under the Sideware 2002
Equity Incentive Plan and their associates will be excluded. To
the knowledge of management of Sideware there are approximately
9.3 million shares , representing approximately 11% of the voting
shares of Sideware, which will not be counted in the voting in
respect of the Sideware 2002 Equity Incentive Plan.
PROPOSED RESOLUTION
The text of the proposed resolution is as follows:
"BE IT RESOLVED that the 2002 Equity Incentive Plan of Sideware,
presented for consideration
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at the Extraordinary General Meeting of Sideware held [____], be
approved subject to Sideware completing the intended merger with
KnowledgeMax, Inc."
THE SIDEWARE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
SIDEWARE STOCKHOLDERS APPROVE THE PROPOSED 2002 EQUITY INCENTIVE
PLAN, SUBJECT TO THE COMPLETION OF THE PROPOSED MERGER WITH
KNOWLEDGEMAX, INC.
KNOWLEDGEMAX STOCKHOLDERS' MEETING
DATE, TIME AND PLACE OF KNOWLEDGEMAX MEETING
This joint proxy statement - prospectus is furnished to
KnowledgeMax stockholders in connection with the solicitation of
proxies by the Board of Directors of KnowledgeMax to be voted at
KnowledgeMax's special meeting of stockholders (the "KnowledgeMax
Special Meeting"), or at any adjournment thereof. The
KnowledgeMax Special Meeting is to be held on [_______], 2002 at
10:00 a.m., local time. The KnowledgeMax Special Meeting will be
held at [__________]. KnowledgeMax's telephone number is (301)
468-8000.
These proxy materials were mailed on or about [____], 2002 to all
KnowledgeMax stockholders entitled to vote at the KnowledgeMax
Special Meeting.
VOTING RIGHTS; RECORD DATE; OUTSTANDING SHARES
The close of business on [_______] has been fixed by the
KnowledgeMax board of directors as the record date for
determination of the KnowledgeMax stockholders entitled to notice
of, and to vote at, the KnowledgeMax Special Meeting. On the
record date, KnowledgeMax had outstanding [_______] shares of
common stock, which were held of record by [____] stockholders,
[______] shares of Series A Preferred Stock, which were held of
record by [____] stockholders and [______] shares of Series B
Preferred Stock, which were held of record by [____]
stockholders. Holders of common stock, Series A Preferred Stock
and Series B Preferred Stock are entitle to vote together as a
single class with respect to the proposals at the KnowledgeMax
Special Meeting. Each stockholder of record at the close of
business on the record date is entitled to one vote for each
share of KnowledgeMax stock held on the record date.
PURPOSES OF THE KNOWLEDGEMAX SPECIAL MEETING
The purposes of the KnowledgeMax Special Meeting are:
- - for the holders of Common Stock, Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock,
voting together as a class, to consider and vote upon a
proposal (the "KnowledgeMax Merger Proposal") to: (1)
approve and adopt the merger agreement and (2) approve the
merger of KnowledgeMax with KM Acquisition Corp., whereby
holders of KnowledgeMax stock will receive for each share
of KnowledgeMax stock held, a number of shares of Sideware
common stock-based on the formula described under "THE
MERGER - Consideration to be received in the merger" and in
the merger agreement attached as Appendix A;
- - for the holders of Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock, voting together as a
class, to consider and vote upon a proposal (the
"KnowledgeMax Conversion Proposal") to convert all
outstanding shares of KnowledgeMax preferred stock into
shares of common stock immediately prior to the effective
time of the merger; and
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- - to transact such other business as may properly come before
the KnowledgeMax Special Meeting or any adjournment or
postponement thereof.
VOTE REQUIRED; KNOWLEDGEMAX VOTING AGREEMENTS
Approval of the KnowledgeMax Merger Proposal requires the
affirmative vote of holders of at least a majority of the shares
of KnowledgeMax stock entitled to vote at the KnowledgeMax
Special Meeting. Each stockholder of record at the close of
business on the record date is entitled to one vote for per
share, exercisable in person or by properly executed proxy, on
the KnowledgeMax Merger Proposal.
Approval of the KnowledgeMax Conversion Proposal requires the
affirmative vote of holders of at least a majority of the shares
of KnowledgeMax Series A Preferred Stock and Series B Preferred
Stock, voting together as a class. Each preferred stockholder of
record at the close of business on the record date is entitled to
one vote for per share, exercisable in person or by properly
executed proxy, on the KnowledgeMax Conversion Proposal.
Certain directors, executive officers and large stockholders of
KnowledgeMax, owning an aggregate of approximately 66.8% of the
outstanding shares of KnowledgeMax stock and 52.7% of the
outstanding shares of KnowledgeMax preferred stock as of the
record date, have executed voting agreements with KnowledgeMax
pursuant to which they each agreed to vote all of their shares of
KnowledgeMax stock in favor of the KnowledgeMax Merger Proposal
and the KnowledgeMax Conversion Proposal. Therefore, the
approval of each of the KnowledgeMax Merger Proposal and
KnowledgeMax Conversion Proposal is guaranteed.
QUORUM; ABSTENTIONS
The presence in person, or by proxy duly authorized, of the
holders of a majority of the outstanding voting shares of
KnowledgeMax stock will constitute a quorum for the purpose of
approving the KnowledgeMax Merger Proposal. The presence in
person, or by proxy duly authorized, of the holders of a majority
of the outstanding voting shares of KnowledgeMax preferred stock
will constitute a quorum for the purpose of approving the
KnowledgeMax Conversion Proposal. Abstentions will be counted as
present in determining whether a quorum is present for each
proposal. Abstentions will have the same effect as a vote
against the KnowledgeMax Merger Proposal and the KnowledgeMax
Conversion Proposal.
SOLICITATION OF PROXIES; EXPENSES
This solicitation of proxies is being made by the KnowledgeMax
board of directors and the expenses associated with this
solicitation will be borne by KnowledgeMax. In addition to
soliciting proxies by mail, KnowledgeMax's directors, officers
and employees may, without additional compensation, solicit
proxies by telephone, fax, e-mail, telegram or in person.
KnowledgeMax stockholders should not send stock certificates with
their proxy cards. A transmittal form with instructions
concerning the surrender of KnowledgeMax stock will be delivered
to KnowledgeMax stockholders promptly after completion of the
merger.
VOTING OF PROXIES
The KnowledgeMax proxy card accompanying this joint proxy
statement - prospectus is solicited on behalf of the KnowledgeMax
board of directors for use at the KnowledgeMax Special
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Meeting. KnowledgeMax stockholders should complete, date and sign
the KnowledgeMax proxy card and promptly return it in the enclosed
envelope or otherwise deliver it to KnowledgeMax. All shares
represented by properly executed proxy cares received in time for
the KnowledgeMax Special Meeting and that are not revoked will be
vote at the KnowledgeMax Special Meeting in the manner specified
by the holders. Properly executed proxy cards that do not
contain voting instructions with respect to approval of one or
more proposals will be voted "FOR" the approval of each proposal
for which no instruction is indicated.
KnowledgeMax's Board of Directors does not know of any matter
that is not referred to in this joint proxy statement - prospectus
to be presented for action at the KnowledgeMax Special Meeting.
If any other matters are properly brought before the meeting, the
persons named in the proxies will have discretion to vote on such
matters in accordance with their best judgment.
The persons named as proxies by a stockholder may propose and
vote for one or more adjournments of the KnowledgeMax Special
Meeting, including adjournments to permit further solicitations
of proxies. No proxy voted against the KnowledgeMax Merger
Proposal or the KnowledgeMax Conversion Proposal will be voted in
favor of any motion for adjournment or postponement for the
purpose of soliciting additional proxies with respect to such
proposal.
REVOCATION OF PROXIES
A KnowledgeMax stockholder may revoke his or her proxy at any
time before it is exercised by:
- - delivering a written notice to the Secretary of
KnowledgeMax by any means, including facsimile, bearing a
date later than the date of the proxy, stating that the
proxy is revoked;
- - signing and delivering a proxy relating to the same shares
and bearing a later date than the original proxy at any
time prior to the vote at the KnowledgeMax Special Meeting;
- - attending the meeting and voting in person, although
attendance at the meeting will not, by itself, revoke a
proxy.
BENEFICIAL OWNERSHIP OF KNOWLEDGEMAX
The following table sets forth certain information regarding the
beneficial ownership of KnowledgeMax stock as of January 8, 2002
by:
- - each KnowledgeMax director;
- - each KnowledgeMax executive officer;
- - the KnowledgeMax directors and executive officers as a
group; and
- - each person or group who beneficially owns more than 5% of
KnowledgeMax capital stock.
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission, and includes voting
and investment power with respect to shares. Unless otherwise
indicated below, to the best of KnowledgeMax's knowledge, all
persons named in the table below have sole voting and investment
power with respect to their shares of stock, except to the extent
authority is shared by spouses under applicable law. Unless
otherwise indicated, the address of each person listed below is
c/o KnowledgeMax, Inc., 6110 Executive Blvd., Suite 202, N.
Bethesda, MD 20852.
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Common and Preferred Stock
Shares
Name and address Beneficially Percent (2)
Owned (1)
Edwin Grosvenor 664,931 19.5%
E. Linwood Pearce (3) 345,910 10.2%
Entities associated with
Steve Walker &
Associates (4) 301,683 8.9%
Donna Lynn (5) 262,154 7.6%
Alan Sultan (6) 211,866 6.1%
Baker & Taylor (7) 193,022 5.7%
Washington Capital
Partners/Joe Boivin (8) 169,319 5.0%
Richard Luebkemann (10) 139,493 4.1%
Edward H. Gross 0 *
All executive officers
and directors as a group (11) 2,288,378 50.5%
___________
* less than 1%
(1) Includes, where applicable, shares of common stock, Series
A Convertible Preferred Stock, Series B Convertible Preferred
Stock and shares of common stock issuable upon exercise of
stock options exercisable within sixty days of January 8,
2002. The company's preferred stock votes together with the
common stock as a single class on substantially all matters.
(2) Calculated based on total outstanding shares of common
stock, Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and shares of common stock
issuable upon exercise of stock options held by the
stockholder that are exercisable within sixty days of January
8, 2002.
(3) Includes 39,774 shares of Series B Convertible Preferred
Stock held jointly with Mr. Pearce's wife, Mary Pearce.
Excludes 150,000 shares of common stock underlying an option
which will vest upon the closing of the merger.
(4) Consists entirely of preferred stock held by Steve Walker &
Associates and its affiliate Walker Investment Fund I, LLC.
The address of both these entities is 3060 Washington Road,
Glenwood, MD 21738.
(5) Includes 70,000 shares of common stock issuable upon the
exercise of currently exercisable options. Also includes
2,525 shares held by Ms. Lynn's spouse, Joe Lynn, of which Ms.
Lynn disclaims beneficial ownership.
(6) Includes 55,000 shares of common stock issuable upon
exercise of currently exercisable options.
(7) Consists of 158,553 shares of common stock and 34,489
shares of Series B Convertible Preferred Stock held by Baker &
Taylor. Excludes an estimated 339,380 shares of KnowledgeMax
common stock issuable to Baker & Taylor immediately prior to
the closing of the merger pursuant to the terms of a letter
agreement between KnowledgeMax and Baker & Taylor. Also
excludes 2000 shares of Series B convertible Preferred Stock
issuable to Baker & Taylor on April 1, 2001 if the merger has
not yet closed and up to 4040 shares of Series B convertible
Preferred Stock issuable in 2002 in satisfaction of interest
on a line of credit. The address of Baker & Taylor is 2709
Water Ridge Parkway, Charlotte, NC 28217.
(8) Consists entirely of Series B Convertible Preferred Stock
held by Washington Capital Partners. The address of Washington
Capital Partners is 1020 19th Street, NW, Suite 400,
Washington, DC 20036. Mr. Boivin is a managing director of
Washington Capital Partners and disclaims beneficial ownership
of all shares held by Washington Capital Partners, except to
the extent of his pecuniary interest in such shares.
(9) Includes 23,500 shares of common stock issuable upon the
exercise of currently exercisable options and 23,569 shares of
common stock held by a company owned by Mr. Luebkemann.
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(10)Mr. Gross' address is c/o Baker & Taylor, 2709 WaterRidge
Parkway, Charlotte, NC 28217.
(11)Includes 148,500 shares of common stock issuable upon the
exercise of currently exercisable options held by executive
officers and directors.
APPRAISAL RIGHTS
The Delaware General Corporation Law grants appraisal rights in
the merger to the holders of KnowledgeMax common stock, Series A
Preferred Stock and Series B Preferred Stock. If KnowledgeMax
stockholders do not wish to accept Sideware stock in the merger,
they have the right under Delaware law to have the fair value of
their KnowledgeMax shares determined by the Delaware Chancery
Court. Fair value takes into account all relevant factors but
excludes any appreciation or depreciation in anticipation of the
merger. This right to appraisal is subject to a number of
restrictions and technical requirements.
Section 262 of the Delaware General Corporation Law sets forth
the required procedure a stockholder requesting appraisal must
follow. Following these procedures to perfect appraisal rights
can be complicated. The procedural rules are specific and must
be followed completely. Failure to comply with the procedure set
forth in Section 262 may cause a termination of appraisal rights.
KnowledgeMax is providing only a summary of appraisal rights and
the procedure. The following information is qualified in its
entirety by the provisions of Section 262, a copy of which is
attached as Appendix F to this joint proxy statement -
prospectus. KnowledgeMax stockholders wishing to exercise their
appraisal rights are encouraged to review Section 262 carefully
for the complete procedure. KnowledgeMax will not give
stockholders any notice other than as described in this joint
proxy statement - prospectus and as required by the Delaware
General Corporation Law.
APPRAISAL RIGHTS PROCEDURES
KnowledgeMax stockholders who wish to exercise their appraisal
rights must satisfy the provisions of Section 262 of the Delaware
General Corporation Law. Section 262 requires the following:
Written Demand for Appraisal. Stockholders must deliver a
written demand for appraisal to KnowledgeMax before the vote on
the merger agreement and the merger is taken at the KnowledgeMax
Special Meeting. This written demand for appraisal must be
provided to KnowledgeMax separately from the proxy. In other
words, a vote against the KnowledgeMax Merger Proposal will not
alone constitute a valid demand for appraisal. Additionally,
this written demand must reasonably inform the KnowledgeMax of
the stockholder's identity and intention to demand the appraisal
of his or her shares of KnowledgeMax stock.
A written demand for appraisal of KnowledgeMax stock is effective
only if it is signed by, or for, the stockholder of record who
owns such shares at the time the demand is made. The demand must
be signed as the stockholder's name appears on his or her stock
certificate(s). Stockholders who are the beneficial owners of
KnowledgeMax stock, but not the stockholder of record, must have
the stockholder of record sign a demand for appraisal.
Stockholders who own KnowledgeMax stock in a fiduciary capacity,
such as a trustee, guardian or custodian, must disclose the fact
that they are signing the demand for appraisal in that capacity.
Stockholders who own KnowledgeMax stock with one or more other
persons, such as in a joint tenancy or tenancy in common, must
all sign, or have signed for them, the demand for appraisal.
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An authorized agent, which could include one or more of the joint
owners, may sign the demand for appraisal for a stockholder of
record; however, the agent must expressly disclose the identity
of the stockholder of record and the fact that the agent is
signing the demand as that stockholder's agent.
KnowledgeMax stockholders who elect to exercise appraisal rights
should mail or deliver a written demand to:
KnowledgeMax, Inc.
6110 Executive Blvd.
N. Bethesda, MD 20852
Attention: Secretary
It is important that KnowledgeMax receive all written demands for
appraisal before the vote is taken at the KnowledgeMax Special
Meeting. As explained above, this written demand should be
signed by, or on behalf of, the stockholder of record. The
written demand for appraisal should specify the stockholder's
name and mailing address, the number of shares of stock owned,
and that the stockholder is thereby demanding appraisal of that
stockholder's shares.
Refrain from Voting for Approval of the Merger. KnowledgeMax
stockholders wishing to exercise their appraisal rights must not
vote for approval of the KnowledgeMax Merger Proposal.
Stockholders who vote, by proxy or in person, in favor of the
KnowledgeMax Merger Proposal will terminate their right to
appraisal. They will also terminate their right to appraisal if
they return a signed proxy and (1) fail to vote against approval
of the KnowledgeMax Merger Proposal or (2) fail to note that they
are abstaining from voting. In these cases, appraisal rights will
be terminated even if a stockholder has previously filed a
written demand for appraisal.
Continuously Hold KnowledgeMax Shares. KnowledgeMax stockholders
wishing to assert appraisal rights must continuously hold their
shares of KnowledgeMax stock, from the date they make the demand
for appraisal through the effective date of the merger.
Stockholders who are the record holder of KnowledgeMax stock on
the date the written demand for appraisal is made but thereafter
transfer the shares prior to the effective date of the merger
will lose any right to appraisal in respect of those shares. You
should read the paragraphs below for more details on making a
demand for appraisal.
Failure to comply with any of these conditions prior to the time
that the merger becomes effective will cut off a stockholder's
appraisal rights and such stockholder will only be entitled to
receive the merger consideration provided in the merger
agreement.
Written Notice. Within ten days after the effective date of the
merger, KnowledgeMax must give written notice that the merger has
become effective to each stockholder who has fully complied with
the conditions of Section 262.
Petition with the Chancery Court. Within 120 days after the
effective date of the merger, either the surviving corporation or
any stockholder who has complied with the conditions of Section
262, may file a petition in the Delaware Court of Chancery. This
petition should request that the chancery court determine the
value of the shares of stock held by all of the stockholders who
are entitled to appraisal rights. A KnowledgeMax stockholder who
intends to exercise rights of appraisal should file such a
petition in the chancery court. KnowledgeMax has no intention at
this time to file such a petition. Because KnowledgeMax has no
obligation to file such a petition,
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stockholders who do not file such a petition within 120 days after
the effective date of the merger will lose their rights of appraisal.
Withdrawal of Demand. Stockholders who change their minds and
decide they no longer want appraisal rights may withdraw their
demands for appraisal rights at any time within 60 days after the
effective date of the merger. They may also withdraw their demand
for appraisal rights after 60 days after the effective date of
the merger, but only with the written consent of KnowledgeMax.
Stockholders who effectively withdraw their demands for appraisal
rights will receive the merger consideration provided in the
merger agreement.
Request for Appraisal Rights Statement. Stockholders who have
complied with the conditions of Section 262 are entitled to
receive a statement from KnowledgeMax. This statement will set
forth the number of shares that have demanded appraisal rights,
and the number of stockholders who own those shares. In order to
receive this statement, a stockholder must send a written request
to KnowledgeMax within 120 days after the effective date of the
merger. After the merger, KnowledgeMax has 10 days after
receiving a request to mail this statement.
Chancery Court Procedures. After a stockholder properly files a
petition for appraisal in the chancery court and delivers a copy
to KnowledgeMax, KnowledgeMax will then have 20 days to provide
the chancery court with a list of the names and addresses of all
stockholders who have demanded appraisal rights and have not
reached an agreement with KnowledgeMax as to the value of their
shares. The chancery court will then send notice to all of the
stockholders who have demanded appraisal rights. If the chancery
court thinks it is appropriate, it has the power to conduct a
hearing to determine whether the stockholders have fully complied
with Section 262 of the Delaware General Corporation Law and
whether they are entitled to appraisal rights under that section.
The chancery court may also require stockholders to submit their
stock certificates to the Registry in Chancery so that it can
note on the certificates that an appraisal proceeding is pending.
Stockholders who fail to follow the chancery court's directions
may be dismissed from the proceeding.
Appraisal of Shares. After the chancery court determines which
stockholders are entitled to appraisal rights, the chancery court
will appraise the shares of stock. To determine the fair value of
the shares, the chancery court will consider all relevant factors
except for any appreciation or depreciation due to the
anticipation or accomplishment of the merger. After the chancery
court determines the fair value of the shares, it will direct
KnowledgeMax to pay that value to the stockholders who are
entitled to appraisal rights. The chancery court can also direct
KnowledgeMax to pay interest, simple or compound, on that value
if the chancery court determines that the payment of interest is
appropriate. In order to receive the fair value of their shares,
stockholders must then surrender their KnowledgeMax stock
certificates to KnowledgeMax.
THE CHANCERY COURT COULD DETERMINE THAT THE FAIR VALUE OF THE
SHARES OF KNOWLEDGEMAX STOCK IS MORE THAN, THE SAME AS, OR LESS
THAN THE MERGER CONSIDERATION. IN OTHER WORDS, STOCKHOLDERS WHO
DEMAND APPRAISAL RIGHTS COULD RECEIVE LESS CONSIDERATION THAN
THEY WOULD UNDER THE MERGER AGREEMENT.
Costs and Expenses of Appraisal Proceeding. The costs and
expenses of the appraisal proceeding may be assessed against
KnowledgeMax and the stockholders participating in the appraisal
proceeding, as the chancery court deems equitable under the
circumstances. Stockholders can request that the chancery court
determine the amount of interest, if any, KnowledgeMax should
pay on the value of stock owned by stockholders entitled to the
payment
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of interest. Stockholders may also request that the
chancery court allocate the expenses of the appraisal action
incurred by any stockholder pro rata against the value of all of
the shares entitled to appraisal.
Loss of Stockholder's Rights. Stockholders who demand appraisal
rights, from and after the effective date of the merger, will not
be entitled to:
- - vote the shares of KnowledgeMax stock, for any purpose, for
which they have demanded appraisal rights;
- - receive payment of dividends or any other distribution with
respect to such shares, except for dividends or
distributions, if any, that are payable to holders of
record as of a record date prior to the effective time of
the merger; or
- - receive the payment of the consideration provided for in
the merger agreement (unless they properly withdraw their
demand for appraisal).
If no petition for an appraisal is filed within 120 days after
the effective date of the merger, a stockholder's right to an
appraisal will cease. Stockholders may withdraw their demand for
appraisal and accept the merger consideration by delivering to
KnowledgeMax a written withdrawal of their demand, except that
(1) any attempt to withdraw a demand for appraisal made more than
60 days after the effective date of the merger will require the
written approval of KnowledgeMax, and (2) an appraisal proceeding
in the chancery court cannot be dismissed unless the chancery
court approves such dismissal.
Relevant sections of the General Corporation Law of the State of
Delaware are attached as Appendix F to this joint proxy statement
- - prospectus.
FAILURE TO COMPLY STRICTLY WITH THE PROCEDURES DESCRIBED ABOVE
WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS. CONSEQUENTLY,
KNOWLEDGEMAX STOCKHOLDERS WHO WISH TO EXERCISE THEIR APPRAISAL
RIGHTS, ARE STRONGLY URGED TO CONSULT WITH THEIR LEGAL ADVISORS
BEFORE ATTEMPTING TO EXERCISE APPRAISAL RIGHTS.
PROPOSAL TO APPROVE THE CONVERSION OF ALL OUTSTANDING
KNOWLEDGEMAX PREFERRED STOCK INTO COMMON STOCK
KnowledgeMax currently has outstanding 328,610 shares of Series A
Convertible Preferred Stock and 959,163 shares of Series B
Convertible Preferred Stock, and expects to issue prior to
closing up to an additional 54,414 shares of Series B Convertible
Preferred Stock (collectively, the "Preferred Stock").
KnowledgeMax's certificate of incorporation provides that the
outstanding shares of Preferred Stock may be converted into
common stock upon the affirmative vote of a majority of the
outstanding shares of Preferred Stock. The certificate of
incorporation does not provide for automatic conversion of the
Preferred Stock into common stock upon a merger.
Conversion of all of the outstanding Preferred Stock into common
stock prior to the merger is a condition of the merger under the
merger agreement. Therefore the KnowledgeMax board of directors
is proposing that the KnowledgeMax preferred stockholders vote to
convert all of the outstanding shares of Preferred Stock into
common stock, with such conversion to be contingent upon the
closing of the merger (the "KnowledgeMax Conversion Proposal").
If the KnowledgeMax Conversion Proposal is adopted, each share of
Preferred Stock will convert into one share of common stock
immediately prior to the effective time of the merger. The
Preferred
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Stock would only convert into shares of common stock if the merger
closes. Therefore, implementation of this resolution will be
dependent on the merger closing.
To effect the conversion, a majority of the holders of the
Preferred Shares, voting together as a class, must affirmatively
approve the KnowledgeMax Conversion Proposal. Currently, the
holders of more than 50% of the outstanding shares of Preferred
Stock have executed voting agreements under which they have
agreed to vote for the KnowledgeMax Conversion Proposal.
Therefore, this proposal will most likely be adopted at the
KnowledgeMax Special Meeting.
THE KNOWLEDGEMAX BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
HOLDERS OF KNOWLEDGEMAX PREFERRED STOCK APPROVE THE KNOWLEDGEMAX
CONVERSION PROPOSAL AT THE KNOWLEDGEMAX SPECIAL MEETING.
COMPARISON OF STOCKHOLDER RIGHTS
SIDEWARE STOCKHOLDERS
At present, the rights of Sideware stockholders are governed by
the Yukon Business Corporations Act, and by the articles of
incorporation and bylaws that Sideware has adopted under that act.
Following continuation to Delaware and the merger, the rights of
Sideware stockholders will be governed by the Delaware General
Corporation Law, and by the certificate of incorporation and
bylaws that Sideware adopts under that act. The following
discussion summarizes material differences between the rights the
Sideware stockholders will have before and after the continuation
to Delaware and merger with KnowledgeMax. This discussion does
not contain a complete description of the differences, and is
qualified in its entirety by reference to Delaware law and Yukon
law, the present articles and bylaws of Sideware, and the proposed
new certificate of incorporation and bylaws of Sideware.
AUTHORIZED CAPITAL
The authorized capital of Sideware currently consists of
198,978,997 common shares without par value.
The authorized capital for Sideware following the merger and
continuation, as set out in the proposed certificate of
incorporation for Sideware, will be:
- - 300,000,000 shares of common stock with par value $0.001 per
share; and
- - 50,000,000 shares of preferred stock with par value $0.001
per share.
Holders of Sideware common stock are entitled to receive notice
of, attend, and vote at all Sideware stockholder meetings.
Common stock carries one vote per share. The holders of the
common stock are entitled to receive dividends if, as and when
declared by the Sideware board of directors. Shares of common
stock carry no pre-emptive rights, conversion rights, redemption
provisions, or sinking fund provisions. These rights will not be
changed by the merger or continuation.
Following the merger, Sideware's board of directors will be
authorized, without further stockholder approval, to issue up to
an aggregate of 50,000,000 shares of preferred stock in one or
more series. The board of directors may fix or alter the
designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series,
including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, redemption
84
price or prices, pre-emptive rights and liquidation preferences.
The issuance of preferred stock could:
- - adversely affect the voting power of holders of common
stock; and
- - adversely affect the likelihood that the holders of common
stock will receive dividend payments and payments upon
liquidation.
The ability to issue "blank check" preferred stock of this nature
may also be viewed as an anti-takeover provision, which may have
the effect of discouraging a proposal to acquire or otherwise
obtain control of Sideware. For instance, Sideware management
could issue preferred stock with preferential voting rights to
purchasers who would cooperate with Sideware management in
opposing an attempt by third parties to gain control of Sideware.
Although Sideware management does not currently anticipate
issuing preferred stock for this kind of purpose, Sideware
management reserves the right to do so.
Under the Yukon statute, all shares must be issued as fully paid
and non-assessable, without liability to further calls or to
assessment. All outstanding shares of Sideware common stock are
fully paid and non-assessable. The Delaware statute will permit
Sideware to issue partly paid stock.
DIVIDENDS
Under both the Yukon and Delaware statutes, the payment of
dividends is determined by the board of directors from time to
time, subject to any special rights that may be attached to a
class of shares. Sideware does not presently expect that any such
special rights or restrictions will be attached to any of its
shares.
Under the Yukon statute, a record date for determining the
stockholders entitled to receive a dividend may be fixed by the
board of directors not more than 50 days before payment. The
Delaware statute does not contain specific provisions for
establishing a record date. The proposed Delaware bylaws provide
that the directors may fix a record date for the payment of
dividends which is not more than sixty before the payment date,
and not later than the date of the resolution fixing the record
date. If no record date is fixed by the board of directors, the
record date is the close of business on the day on which the board
of directors adopts a resolution for the payment of a dividend.
MEETINGS OF STOCKHOLDERS
The Yukon statute specifies that general meetings may be held
either inside or outside the Yukon, as may be specified in the
corporate articles. The current articles of Sideware allow the
board of directors to fix the place of a meeting. The Delaware
statute provides that stockholders' meetings must be held, either
within or without Delaware, at a location designated by or in the
manner provided in the bylaws, or if not so designated, at the
registered office of the company in Delaware. The proposed
Delaware bylaws specify that the board of directors may fix the
place of a meeting.
Annual general meetings of a company under the Yukon statute must
be held not more than 15 months after the last annual general
meeting. Under the Delaware statute, an annual meeting must be
held at the time designated in the bylaws. If the meeting is not
held within 30 days of the designated date, or within 13 months of
the most recent annual meeting if no date is designated, the
Delaware Court of Chancery can order that a meeting be held on
application by any shareholder or director. Subject to the
requirements of the Delaware statute, the proposed Delaware bylaws
leave the location and time for stockholder meetings to the
discretion of the directors.
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Under both the Yukon and Delaware statutes, every stockholder
entitled to vote at a meeting of stockholders has, upon a ballot
being required, one vote for each share held by the stockholder,
unless the articles or bylaws of Sideware otherwise provide. In
addition, every stockholder entitled to vote at a meeting may
appoint a proxy holder, who need not be a stockholder of Sideware,
to attend and act at the meeting on his behalf.
Under the Yukon statute, unless the bylaws of Sideware state
otherwise or unless a proxy holder has conflicting instructions
from more than one stockholder, a proxy holder may vote on a show
of hands. The Delaware statute provides that all elections of
directors shall be by ballot unless the certificate of
incorporation provides otherwise. The proposed certificate of
incorporation for Sideware permits voting by a show of hands in
the election of directors.
Under the current bylaws of Sideware as a Yukon corporation,
stockholders representing 5% of the issued and outstanding voting
shares constitute a quorum. Under the proposed Delaware bylaws,
stockholders representing 50% of the shares entitled to vote will
represent a quorum.
REQUISITION OF MEETINGS
Under the Yukon statute, the board of directors may convene a
special general meeting at any time. Under the Delaware statute,
special meetings of stockholders may be called by the board of
directors, or by such person or persons as may be authorized by
the certificate of incorporation or the bylaws. The proposed
Delaware bylaws provide that a special meeting of stockholders may
be called by the Chairman or Chief Executive Officer of Sideware,
or by a majority of the board of directors.
Under the Yukon statute, stockholders of Sideware holding not less
than 5% of the issued voting shares of Sideware may give notice to
the directors requiring them to call and hold a stockholders'
meeting. Neither the Delaware statute nor the proposed Delaware
bylaws contains provisions for requisition of meetings by
stockholders.
ELECTION OF DIRECTORS
Under the Yukon statute, Sideware must have a minimum of three
directors. Under the Delaware statute, the number of directors
shall be fixed by, or in the manner provided in, the certificate
of incorporation and bylaws, with a minimum number of 1. The
merger agreement and proposed certificate of incorporation for
Sideware provide that Sideware will have 11 directors. Under the
Yukon statute, at least two of the directors must not be officers
or employees of Sideware or its affiliates. There is no similar
requirement in the Delaware statute.
Under the Yukon statute, the articles of incorporation of a
company may provide for a director's term to last longer than the
period of time between successive annual general meetings,
provided that the term does not exceed the third annual general
meeting of the stockholders of the company following the
director's election.
The proposed Delaware certificate of incorporation contains the
following provisions governing the constitution of the Sideware
board after the merger.
- - Sideware will have a staggered board of directors.
Directors on the Sideware board will be divided into three
classes. Directors in the first class will serve initially
until the next annual meeting of Sideware stockholders.
Directors in the second and third classes will
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serve, respectively, until the second and third annual meetings of
stockholders following the merger. Following their initial
terms, each director or his replacement will be elected for
a three year term. The effect of the staggered board will
be that only one third of the board seats are up for
election at any annual meeting.
- - Upon completion of the merger, Sideware will have 11
directors, of whom five will be current Sideware directors
and six will be current KnowledgeMax directors. There will
be two KnowledgeMax directors in each class, and two
directors from Sideware in classes 1 and 2, with only one
director from Sideware in class 3.
The provisions in the Sideware certificate of incorporation for a
staggered board may be viewed as having an anti-takeover effect,
as it would take a dissident stockholder submitting his own
director nominees at least two annual meetings to elect a
majority of the board of directors. This provision could thus
have the effect of discouraging a proposal to acquire or
otherwise obtain control of Sideware.
Where provided in the certificate of incorporation, the Delaware
statute permits cumulative voting for directors. The proposed
certificate of incorporation for Sideware does not provide for
cumulative voting. Both Yukon law and the proposed Delaware
bylaws provide that directors are elected by a plurality of votes
cast.
BOARD COMMITTEES
The Yukon statute requires Sideware to have an audit committee
composed of not less than three directors, a majority of whom are
not officers or employees of Sideware or any of its affiliates.
The Delaware statute permits the establishment of one or more
board committees, but does not require any. The proposed Delaware
bylaws permit the board to establish an executive committee or any
other committee the board considers appropriate. Each committee
can consist of one or more directors.
STOCKHOLDER NOMINATIONS FOR DIRECTOR
Under the Yukon statute, a stockholder is permitted to submit a
stockholder proposal for the nomination of a director not more
than 90 days before the anniversary date of the previous annual
meeting of the stockholders. The proposal must be signed by
registered holders of at least 5% of the shares entitled to vote
at the meeting. The Delaware statute does not contain specific
provisions for advance publication of meetings for the election of
directors, or for stockholder nominations. The proposed Delaware
bylaws provide that stockholders may submit nominations for the
board of directors not less than 90 days nor more than 120 days
prior to the anniversary date of the last annual meeting, although
these time periods are adjusted if an annual meeting is scheduled
to occur more than 30 days prior to the anniversary date of the
last annual meeting. At the time of submitting a nomination, a
stockholder must also deliver proxy cards to stockholders owning
shares sufficient, in the reasonable estimation of the
stockholder, to elect the nominated director.
DIRECTOR QUALIFICATIONS
Neither the Yukon statute nor the Delaware statute has any
residency requirements for directors of Sideware.
Under the Yukon statute the minimum age for a corporate director
is nineteen years. Other conditions disqualifying persons from
being a director under the Yukon statute include being an
undischarged bankrupt and mental infirmity. The Delaware statute
does not specify qualifications
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which directors must meet, and none are included in the proposed
certificate of incorporation or bylaws.
REMOVAL OF DIRECTORS BETWEEN ANNUAL GENERAL MEETINGS
Under the Yukon statute, subject to any cumulative voting
provisions in the corporate articles, the stockholders of a
company may remove a director from office between annual general
meetings by ordinary resolution, which requires a simple majority
of the votes cast at a meeting held for that purpose.
Under the Delaware statute, unless the certificate of
incorporation provides otherwise, directors elected in classes can
only be removed for cause by the holders of a majority of the
voting shares. The proposed certificate of incorporation for
Sideware provides that directors can only be removed for cause,
and only by the holders of at least two-thirds of the outstanding
shares entitled to vote. The proposed certificate of
incorporation does not provide for any other or additional means
for stockholders to remove a director.
RIGHTS OF DISSENTING STOCKHOLDERS
The Yukon statute contains provision for the stockholders of a
company to dissent from certain proposed stockholder resolutions.
The principal examples are:
- - continuing the company to another incorporating
jurisdiction;
- - a proposed sale of all or substantially all of the company's
undertaking;
- - a proposed amendment to the company's articles to change or
remove any restriction on the business or businesses that
the company may carry on;
- - a proposed amalgamation of the company with another company
or companies;
- - a proposed amendment to the corporate articles to add,
change or remove any provisions restricting the issue or
transfer of shares; and
- - a proposed amendment to the rights, privileges, restrictions
or conditions attached to a class or series of shares.
A stockholder who is entitled to dissent, and who validly
exercises that right of dissent, can require the company to
purchase his shares at fair market value. Fair market value is
determined as of the close of business on the last business day
before the day on which the resolution entitling the stockholder
to dissent was passed. If the company and the dissenting
stockholder are unable to agree on fair market value, the value
can be determined in court proceedings.
The Delaware statute contains appraisal rights which apply, in
some cases, in the event of a proposed merger or consolidation.
The appraisal rights are available if stockholders are required to
accept for their shares anything other than:
- - shares of a surviving corporation;
- - shares of another corporation which are listed on a national
securities exchange or quoted on an interdealer quotation
system designated as a national market system by the NASD;
or
- - cash.
If these conditions are not met, the appraisal rights will still
be available if the shares of Sideware, at the time of the
transaction, are either:
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- - not listed for trading on a national securities exchange or
quoted on a interdealer quotation system designated as a
national market system by the NASD; or
- - not held of record by more than 2,000 holders.
STOCKHOLDER PROPOSALS
The Yukon statute provides that a stockholder may give a
corporation notice of any matter which he proposes to raise at a
stockholders' meeting. If the corporation solicits proxies, it
must include the proposal in its proxy statement along with a
statement of the stockholder, not more than 200 words in length,
relating to the proposal.
The Delaware statute does not contain provisions dealing with
stockholder proposals. The proposed Delaware bylaws provide that
stockholders may submit proposals for business to be transacted at
an annual stockholders' meeting not less than 90 days nor more
than 120 days prior to the anniversary date of the last annual
stockholders' meeting, although these time periods are adjusted if
an annual meeting is scheduled to occur more than 30 days prior to
the anniversary date of the last annual meeting. When submitting
a proposal, the stockholder must have delivered a proxy statement
and a proxy card to stockholders owning at least the number of
voting shares required to carry the stockholders' proposal.
AMENDMENTS TO CONSTATING DOCUMENTS
The articles of a Yukon corporation can only be amended by a
special resolution of the stockholders requiring an affirmative
vote of two-thirds of the votes cast. The bylaws can be amended
by a resolution of the directors. However, the amendment must
subsequently be placed before the shareholders at the next
meeting of the shareholders and confirmed, rejected or amended by
the shareholders by an ordinary resolution.
Under the Delaware statute, amendments to the certificate of
incorporation must be proposed pursuant to a resolution of the
board of directors. The amendment must also be approved by the
holders of a majority of the outstanding shares entitled to vote,
unless a greater vote requirement is set forth in the certificate
of incorporation. An amendment to the certificate of
incorporation must also be approved by a majority vote of the
holders of a class of shares if the amendment would:
- - increase or decrease the aggregate number of shares of the
class (unless the certificate of incorporation or any
amendment thereto creating the class provides that the
number of shares in the class can be increased or decreased
without approval of the holders of the shares of the class);
- - increase or decrease the par value of the shares of the
class; or
- - alter or change the powers, preferences, or special rights
of the shares of the class.
In addition, any provision of the certificate of incorporation
requiring a vote of more than a simple majority of stockholders
cannot be amended without a vote of that same number of
stockholders.
The proposed new bylaws and certificate of incorporation for
Sideware provide that the bylaws can be amended either by a
majority of the board of directors or by stockholders owing at
least two-thirds of the shares entitled to vote on the election of
directors. The certificate of incorporation also provides that
provisions of the certificate of incorporation dealing with
director liability can only be amended by stockholders owing at
least two-thirds of the shares entitled to vote on the election of
directors.
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COMPULSORY ACQUISITION OF SHARES
The Yukon statute provides for compulsory acquisition of the
remaining issued shares of a company, if the acquiring entity has
already acquired at least 90% of the outstanding shares of the of
that company. The compulsory acquisition procedure can also be
applied to individual classes of shares.
The Delaware statute does not contain any provision for the
compulsory acquisition of shares.
STOCKHOLDER REMEDIES
Under the Yukon statute, a stockholder of Sideware has a right to
apply to court on the grounds that the affairs of Sideware are
being conducted in a manner that is oppressive or prejudicial to
the stockholder. On such an application, the court may make such
order as it sees fit, including an order to prohibit any act
proposed by Sideware. There is no similar "oppression" remedy
under the Delaware statute.
Under the Yukon statute, a stockholder of Sideware may also, with
leave of the Court, bring a derivative action on behalf of
Sideware to enforce a right, duty or obligation owed to Sideware.
The Delaware statute has no requirement for leave of the Court
before a derivative suit can be brought, but provides that a
derivative suit may only be commenced by a stockholder who was a
stockholder at the time of the transaction complained of.
Under the Yukon statute, any stockholder may also apply to the
court having jurisdiction for an order directing an investigation
be made of the corporation or any of its affiliate corporations.
LIMITATION OF DIRECTOR LIABILITY AND INDEMNIFICATION
Under the Yukon statute and the current bylaws of Sideware,
Sideware can indemnify a director in respect of costs incurred in
a proceeding if:
- - he acted honestly and in good faith with a view to the best
interests of the corporation; and
- - in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he had
reasonable grounds for believing that his conduct was
lawful.
Indemnification is mandatory if the director was substantially
successful on the merits in his defense of the action or
proceeding, fulfils the conditions set out above, and is fairly
and reasonably entitled to indemnity. With court approval, a
company may also indemnify a person referred to above in respect
of an action by or on behalf of the corporation to procure a
judgment in its favor, if the person fulfils the conditions set
out above.
The proposed certificate of incorporation provides that Sideware
will indemnify its directors to the greatest extent permitted
under the Delaware statute. Under the Delaware statue, Sideware
can indemnify a director in respect of costs incurred in a
proceeding if:
- - he acted in good faith and in a manner that the person
reasonably believed to be in or not opposed to the best
interests of the corporation; and
- - in the case of a criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful.
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Indemnification is mandatory if a director has been successful on
the merits or otherwise in defense of the proceeding. With
approval of the Court of Chancery, a corporation may also
indemnify a person referred to above in respect of any claim,
issue, or matter as to which the person has been adjudged to be
liable to the corporation, if in view of all of the circumstances
of the case, he is fairly and reasonably entitled to indemnity.
The proposed certificate of incorporation also provides that
Sideware directors will be relieved from liability for monetary
damages to the greatest extent permitted by the Delaware statute.
Under the Delaware statute, a director can be relieved from
liability for monetary damages to a corporation for breach of
fiduciary duty, other than for :
- - breach of a duty of loyalty;
- - acts or omissions not in good faith;
- - liability for unlawful dividends, stock repurchases, or
stock redemptions; or
- - receipt of an improper benefit.
Other than the indemnification provisions described above,
neither the Yukon statute nor the present constating documents of
Sideware contain similar provisions.
KNOWLEDGEMAX STOCKHOLDERS
At present, the rights of KnowledgeMax stockholders are governed
by the Delaware General Corporation Law, KnowledgeMax's Amended
and Restated Certificate of Incorporation and its bylaws.
Following the merger, the rights of KnowledgeMax stockholders will
continue to be governed by the Delaware General Corporation Law,
but the rights will be supplemented by the provisions of
Sideware's certificate of incorporation and bylaws. The following
discussion summarizes material differences between the current
rights and privileges of KnowledgeMax stockholders and the rights
and privileges they will have following the merger. This
discussion does not contain a complete description of the
differences, and is qualified in its entirety by reference to
Delaware law, the present certificate of incorporation and bylaws
of KnowledgeMax and the proposed new certificate of incorporation
and bylaws of Sideware.
AUTHORIZED CAPITAL
The authorized capital of KnowledgeMax currently consists of
20,000,000 shares of capital stock, 15,000,000 of which is
designated "common stock" and 5,000,000 of which is designated
"preferred stock." The par value of both the preferred stock and
common stock is $0.01 per share. The proposed authorized capital
for Sideware following the merger will be:
- - 300,000,000 shares of common stock with a par value $0.001
per share; and
- - 50,000,000 shares of preferred stock with a par value $0.001
per share.
Following the merger, Sideware's board of directors will be
authorized, without further stockholder approval, to issue up to
an aggregate of 50,000,000 shares of preferred stock in one or
more series. The board of directors may fix or alter the
designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series,
including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, redemption price or prices,
pre-emptive rights and liquidation preferences. The issuance of
preferred stock could:
- - adversely affect the voting power of holders of common
stock;
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- - adversely affect the likelihood that the holders of common
stock will receive dividend payments and payments upon
liquidation; and
- - delay, defer or prevent a change in control.
VOTING
Holders of KnowledgeMax common stock are entitled to receive
notice of, attend and vote at all KnowledgeMax stockholder
meetings with respect to matters to be voted on by the
stockholders of KnowledgeMax generally. Holders of KnowledgeMax
preferred stock are entitled to receive notice of, attend and
vote at all KnowledgeMax stockholder meetings with respect to
matters to be voted on by the preferred stockholders of
KnowledgeMax or the stockholders generally. Each share of common
stock carries one vote per share. Each share of preferred stock
carries with it the number of votes equal to the number of shares
of common stock into which such share is convertible (presently
one vote per share). With respect to most matters, the holders
of common stock and preferred stock vote together as a single
class. With respect to certain matters specified below, the
preferred stock votes as a separate class. There is no
cumulative voting.
Following the merger, holders of Sideware common stock will be
entitled to one vote per share. There will be no cumulative
voting.
ACTION WITHOUT MEETING OF STOCKHOLDERS
Holders of KnowledgeMax stock are currently entitled to take
action by written consent in lieu of a meeting of stockholders,
in accordance with Delaware General Corporation Law. Following
the merger, holders of Sideware common stock will not be
permitted to take action by written consent in lieu of a meeting
of stockholders.
DIVIDENDS
The holders of the preferred stock are entitled to cumulative
cash dividends of 8% per year. Additionally, the holders of
preferred stock are entitled to receive this dividend in
preference to any dividends to be paid on any class of junior
stock, including KnowledgeMax common stock. Furthermore, the
preferred stock is entitled to participate equally in any
dividends declared and paid on the common stock. Subject to the
foregoing provisions, dividends may be declared and paid on the
KnowledgeMax stock at such time and in such amounts as the board
of directors may determine and the holders of KnowledgeMax stock
are entitled to receive dividends if, as and when declared by the
KnowledgeMax board of directors.
Following the merger, dividends may be declared and paid on the
Sideware common stock at such time and in such amounts as the
board of directors may determine and the holders of Sideware
stock will be entitled to receive dividends if, as and when
declared by the Sideware board of directors.
PRE-EMPTIVE RIGHTS
The holders of KnowledgeMax preferred stock and certain founding
stockholders of KnowledgeMax are presently entitled to certain
pre-emptive rights to participate in future sales of KnowledgeMax
stock, subject to certain exceptions. Following the merger,
Sideware stockholders will not be entitled to any pre-emptive
rights.
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ANNUAL MEETINGS OF STOCKHOLDERS
Under Delaware General Corporation Law and KnowledgeMax's bylaws,
the meetings of the company's stockholders may be held either
inside or outside the state of Delaware, as may be fixed by the
board of directors. Annual meetings to elect directors and to
conduct such other business as may be properly before the
stockholders must be held within thirteen months of the last
annual meeting of stockholders. Presence, in person or by proxy
duly authorized, of a majority of the shares outstanding and
entitled to vote at the meeting shall constitute a quorum.
Following the merger, the requirements regarding annual meetings
of stockholders will be substantially the same, although at the
discretion of the board of directors, Sideware's annual meeting
may be held by remote communication.
ADVANCE NOTICE PROVISIONS
KnowledgeMax's bylaws presently provide, and following the merger,
Sideware's bylaws will also provide, that stockholders wishing to
bring business before the annual meeting of stockholders must
provide the company with timely notice not later than the close of
business on the ninetieth (90th) day nor earlier than the close of
business on the one hundred twentieth (120th) day prior to the
first anniversary of the preceding year's annual meeting,
although these time periods are adjusted if an annual meeting is
scheduled to occur more than 30 days prior to the anniversary date
of the last annual meeting.
SPECIAL MEETINGS OF STOCKHOLDERS
Under the Delaware General Corporation Law and KnowledgeMax's
bylaws, either the board of directors, chief executive officer or
the chairman of the board of directors may convene a special
meeting of stockholders at any time. Following the merger, the
requirements regarding special meetings of Sideware's stockholders
will be the same.
ELECTION OF DIRECTORS
Under the Delaware General Corporation Law, the number of
directors shall be fixed by, or in the manner provided in, the
certificate of incorporation and bylaws, with a minimum of one
director. KnowledgeMax's certificate of incorporation provides for
a board of five directors and that this number may be increased or
decreased in accordance with the company's bylaws. KnowledgeMax's
bylaws provide that the number of directors shall be as determined
from time to time by the board. KnowledgeMax currently has six
directors. The merger agreement and the proposed certificate of
incorporation for Sideware provide that, following the merger,
Sideware will have 11 directors.
The Delaware General Corporation Law permits the establishment of
one or more board committees, but does not require any. Following
the merger, Sideware's bylaws will permit the board of directors
to establish an executive committee or any other committee the
board considers appropriate. Each committee can consist of one or
more directors.
CLASSIFICATION OF THE BOARD OF DIRECTORS
Under the Delaware General Corporation Law, a company may, in its
bylaws or certificate of incorporation, divide its directors into
one, two or three classes, with the terms of each class of
directors expiring every three years, in staggered fashion. The
effect of the staggered board will be that only one third of the
board seats are up for election at any annual meeting. Directors
in the
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first class will serve initially until the next annual
meeting of Sideware stockholders. Directors in the second and
third classes will serve, respectively, until the second and
third annual meetings of stockholders following the merger.
Following their initial terms, each director or his replacement
will be elected for a three year term. KnowledgeMax does not
presently have a staggered board of directors.
The provisions in the Sideware certificate of incorporation for a
staggered board may be viewed as an anti-takeover provision,
which may have the effect of discouraging a proposal to acquire
or otherwise obtain control of Sideware.
REMOVAL OF DIRECTORS BETWEEN ANNUAL GENERAL MEETINGS
Under KnowledgeMax's bylaws, stockholders may remove any director
of the company, with or without cause, by the affirmative vote of
a majority of all shares outstanding and entitled to vote.
Following the merger, Sideware stockholders will only be permitted
to remove directors for cause and such removal must be approved by
the holders of 66 2/3% of the shares outstanding and entitled to
vote.
VACANCIES
Vacancies in the board of directors resulting from death,
resignation, disqualification, removal or other causes and any
newly created directorships resulting from an increase in the size
of the board of directors may be filled by the affirmative vote of
a majority of the board of directors, unless the board of
directors determines by resolution that such vacancy or newly
created directorship shall be filled by the company's
stockholders.
PREFERRED STOCK
KnowledgeMax's certificate of incorporation authorizes the board
of directors to provide for the issue of all or any of the shares
of the Preferred Stock in one or more series, and to fix the
number of shares and to determine or alter for each such series,
such voting powers, full or limited, or no voting powers, and
such designation, preferences, and relative, participating,
optional, or other rights and such qualifications, limitations,
or restrictions thereof ("blank check preferred stock") without
the further approval of the company's stockholders. Following the
merger, Sideware's certificate of incorporation will similarly
allow for the issuance of blank check preferred stock. The
ability to issue blank check preferred stock may be viewed as an
anti-takeover provision, which may have the effect of
discouraging a proposal to acquire or otherwise obtain control of
Sideware.
AMENDMENTS TO CERTIFICATE OF INCORPORATION
KnowledgeMax's certificate of incorporation may be amended only
by resolution of the board of directors and must be approved by a
majority of the shares of capital stock outstanding and entitled
to vote. In addition, an amendment to the certificate of
incorporation must be approved by the holders of any class, or
series of a class, of KnowledgeMax's capital stock (e.g.,
KnowledgeMax's Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock or Common Stock), voting separately,
that would: (i) increase or decrease the aggregate number of
shares of the class or series; (ii) increase or decrease the par
value of the shares of the class or series; or (iii) adversely
alter or change the powers, preferences, or special rights of the
shares of the class or series.
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Sideware's certificate of incorporation following the merger will
be subject to the same requirements. Following the merger,
Sideware will only have outstanding shares of common stock.
AMENDMENTS TO BYLAWS
KnowledgeMax's bylaws may be amended either by a majority vote of
the company's board of directors or by stockholders owing at least
two-thirds of the shares outstanding and entitled to vote on the
election of directors.
LIMITATION OF DIRECTOR LIABILITY AND INDEMNIFICATION
The certificates of incorporation of both KnowledgeMax and
Sideware following the merger provide that the liability of
directors for monetary damages shall be limited to the fullest
extent under applicable law. Similarly, the bylaws of both
KnowledgeMax and Sideware following the merger provide that the
company shall indemnify its directors and officers to the fullest
extent under applicable law.
MATERIAL TAX CONSEQUENCES OF THE TRANSACTIONS
GENERAL
The following sections summarize material provisions of United
States and Canadian federal income tax laws that may affect
Sideware, KnowledgeMax, and their respective stockholders.
Although this summary discusses the material United States and
Canadian federal income tax considerations arising from and
relating to the continuation of Sideware as a Delaware
corporation and the merger with KnowledgeMax, it does not purport
to discuss all of the United States and Canadian tax consequences
that may be relevant to the stockholders of either company, nor
will it apply to the same extent or in the same way to all
stockholders. The summary does not describe the effect of the
U.S. federal estate tax laws or the effects of any state, local,
or provincial tax law, rule or regulation, nor is any information
provided as to the effect of any other U.S. federal or foreign
tax law, other than the income tax laws of the United States and
Canada to the extent specifically set forth herein.
The tax discussion set forth below is based upon the facts set
out in this joint proxy statement - prospectus and upon
additional information possessed by the management of Sideware
and KnowledgeMax and upon representations of management. The tax
discussion is included for general information purposes only. It
is not intended to be, nor should it be construed to be, legal or
tax advice to any particular stockholder. The following does not
address all aspects of taxation that may be relevant to you in
light of your individual circumstances and tax situation.
THE STOCKHOLDERS OF SIDEWARE AND KNOWLEDGEMAX ARE STRONGLY
ADVISED AND ARE EXPECTED TO CONSULT WITH THEIR OWN LEGAL AND TAX
ADVISORS REGARDING THE U.S. AND CANADIAN INCOME TAX CONSEQUENCES
OF THE CONTINUATION AND MERGER IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
This discussion is based on the Internal Revenue Code of 1986, as
amended, adopted and proposed regulations thereunder, Internal
Revenue Service ("IRS") rulings and pronouncements, reports of
congressional committees, judicial decisions, and current
administrative practice, all of which are subject to change,
perhaps with retroactive effect. Any such change could alter the
tax consequences discussed below. The tax consequences set
forth in the following discussion are
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not binding on the IRS or the courts and no assurance can be given
that contrary positions will not be successfully asserted by the IRS
or adopted by a court.
As indicated above, this discussion does not address all aspects
of U.S. federal income taxation that may be relevant to
particular U.S. holders in light of their personal circumstances
or to U.S. holders subject to special treatment under the U.S.
Internal Revenue Code, including, without limitation, banks,
financial institutions, insurance companies, tax-exempt
organizations, broker-dealers, S corporations, individual
retirement and other deferred accounts, pension or retirement
plans, application of the alternative minimum tax rules, holders
who received Sideware Canada stock as compensation, persons who
hold notes or stock as part of a hedge, conversion, or
constructive sale transaction, straddle, or other risk-reduction
transaction, persons that have a "functional currency" other than
the U.S. dollar, and persons subject to taxation as expatriates.
Furthermore, this discussion does not address the tax
consequences applicable to holders that are treated as
partnerships or other pass-through entities for U.S. federal
income tax purposes. This summary also does not address the U.S.
federal income tax consequences to a U.S. holder of the
ownership, exercise or disposition of any warrants or
compensatory options.
For purposes of this discussion, the term "Sideware Canada"
refers to Sideware Systems Inc., a Yukon corporation, and the
term "Sideware Delaware" refers to Sideware Systems Inc., a
Delaware corporation that will succeed to the assets,
liabilities, and business of Sideware Canada following the
effective date of the continuation.
CONTINUATION TRANSACTION
This portion of the summary applies to U.S. holders (and certain
non-U.S. holders that are otherwise subject to United States
income taxation) who own common shares of Sideware Canada as
capital assets. U.S. holders include individual citizens or
residents of the United States, and corporations (or entities
treated as corporations for U.S. federal income tax purposes) and
partnerships organized under the laws of the United States, any
state thereof or the District of Columbia. Trusts are U.S.
holders if they are subject to the primary supervision of a U.S.
court and the control of one or more U.S. persons with respect to
substantial trust decisions. An estate is a U.S. holder if the
income of the estate is subject to U.S. federal income taxation
regardless of the source of the income. U.S. holders who own
interests in Sideware Canada indirectly through one or more non-
U.S. entities or carry on business outside the United States
through a permanent establishment or fixed place of business, or
U.S. holders who hold an interest in Sideware Canada other than
as a common stockholder, should consult with their tax advisors
regarding their particular tax consequences.
This summary also describes certain U.S. federal income tax
consequences of the continuation transaction to Canadian and
other non-U.S. holders who are not otherwise subject to United
States income taxation, who are specifically those persons
resident outside the United States and who own common shares of
Sideware Canada as capital assets.
U.S. TAX CONSEQUENCES TO SIDEWARE CANADA
The merger agreement requires Sideware to sell some or all of the
Chalk Group prior to the completion of the merger. If Sideware
sells all or substantially all of the Chalk Group immediately
before or after the continuation but before completion of the
merger, it will have disposed of all or substantially all of its
historic business and will fail to continue a significant portion
of its historic business assets in a business following the
continuation. In such case, Sideware will fail the "continuity
of business enterprise" requirement imposed on continuation
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transactions under the Treasury Regulations and the continuation
will not qualify as a tax-free reorganization under Section
368(a)(1)(F) of the Internal Revenue Code. On the effective date
of the continuation, the Delaware continuation of Sideware Canada
will be treated as the transfer by Sideware Canada of its assets
to Sideware Delaware in exchange for Sideware Delaware stock, in
a tax-free transaction described under Internal Revenue Code
Section 351. Sideware Canada then will be deemed to distribute
the Sideware Delaware shares received in the initial exchange to
its stockholders, in liquidation of Sideware Canada and in
cancellation of such stockholders' Sideware Canada stock.
Sideware Canada will not recognize gain or loss either on the
initial exchange or the distribution of the Sideware Delaware
stock to its stockholders. Moreover, Sideware Delaware will not
recognize any gain or loss for U.S. federal income tax purposes
as a result of the continuation transaction. Note, however, that
U.S. holders and certain non-U.S. holders of Sideware Canada
shares will be subject to U.S. income taxation on the deemed
distribution, as described in the following section.
U.S. TAX CONSEQUENCES TO U.S. HOLDERS AND CERTAIN NON-U.S.
HOLDERS OF SIDEWARE COMMON STOCK
As noted in the preceding section, Sideware Canada will be deemed
to distribute shares of Sideware Delaware to its stockholders in
cancellation of their shares of Sideware Canada on the effective
date of the continuation. As a result, the U.S. holders and
certain non-U.S. holders of Sideware stock will recognize capital
gain or loss on the deemed receipt of the Sideware Delaware
stock. The amount of capital gain or loss recognized will equal
the difference between the fair market value of the Sideware
stock held on the effective date of the continuation and the
adjusted tax basis in such holder's shares of Sideware stock
deemed to be cancelled in the continuation.
A non-U.S. holder of Sideware stock will not be subject to U.S.
federal income tax or withholding tax on gain realized on the
continuation transaction, unless (i) the gain is effectively
connected with a trade or business of the non-U.S. holder in the
United States (and is attributable to a permanent establishment
maintained in the United States by such non-U.S. holder, if an
applicable income tax treaty so requires as a condition for such
non-U.S. holder to be subject to U.S. taxation on a net income
basis in respect of gain from the sale or other disposition of
the Sideware stock) or (ii) such holder is an individual who is
present in the United States for 183 days or more in the taxable
year of the sale, and certain other conditions are met.
Effectively connected gains realized by a corporate non-U.S.
holder may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate
as may be specified by an applicable income tax treaty.
Under current U.S. tax law, the net long-term capital gains
(assets held in excess of 12 months) of individuals are subject
to a maximum federal income tax rate of 20 percent. Net short-
term capital gains are taxed at the marginal tax rates for
ordinary income. (For individuals the maximum marginal rate is
38.6% and for corporations the maximum marginal rate is 35%.)
In order to determine the appropriate capital gains tax rate,
U.S. holders (and certain non-U.S. holders described above) who
are individuals will need to determine the holding period of
their Sideware Canada shares (i.e., the period of time that the
holder has owned the Sideware Canada shares).
Capital losses are deductible only to the extent of capital
gains. However, in the case of taxpayers other than corporations,
$3,000 ($1,500 in the case of a married person filing a separate
return) of capital losses is deductible against ordinary income
annually. In the case of individuals and other
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non-corporate taxpayers, capital losses that are not currently
deductible may be carried forward to other years. In the case of
corporations, capital losses that are not currently deductible are
carried back to each of the three years preceding the loss year and
forward to each of the five years succeeding the loss year.
The adjusted tax basis of a U.S. holder (and certain non-U.S.
holders) subject to U.S. federal income tax on the continuation
in the shares of Sideware Delaware constructively received in the
deemed exchange will equal the fair market value of the shares on
the effective date of the continuation. Such holder's holding
period in the shares of Sideware Delaware received in the
exchange will begin on the date following the effective date of
the continuation.
DISSENTING U.S. HOLDERS
A U.S. holder who dissents from the continuation will generally
recognize capital gain (or loss) equal to the amount by which the
cash received pursuant to the exercise of dissenters' rights
exceeds (or is exceeded by) such holder's adjusted tax basis in
the shares surrendered.
U.S. TAX CONSEQUENCES TO CANADIAN HOLDERS AND CERTAIN
OTHER NON-U.S. HOLDERS OF SIDEWARE COMMON STOCK
A Canadian holder of Sideware stock and other non-U.S. holders
that are not otherwise subject to United States income taxation
(as described above) will not be subject to United States federal
income tax or reporting requirements on gain recognized as a
result of the continuation.
Under U.S. tax law, such holders will receive a U.S. federal
income tax adjusted tax basis in the Sideware Delaware shares
deemed to be received pursuant to the constructive liquidation of
Sideware Canada that equals the fair market value of their shares
of Sideware Canada surrendered on the effective date of the
continuation. The holding period for the Sideware Delaware
shares constructively received by such holders will begin on the
date following the effective date of the continuation.
Such holders will not be subject to U.S. income tax on account of
cash received on payments made pursuant to the dissent provisions
of the continuation.
CONTROLLED FOREIGN CORPORATION CONSIDERATIONS
If more than 50% of the total combined voting power, or the total
value, of the stock of Sideware Canada is owned (within the
meaning of Code Section 958(a)), or is considered as owned by
applying the rules of ownership of Code Section 958(b), by United
States shareholders on any day during its taxable year, Sideware
Canada will be treated as a controlled foreign corporation under
Subpart F of the Internal Revenue Code. For this purpose, a
"United States shareholder" is a U.S. holder that owns, directly
or indirectly, 10% or more of the total combined voting power of
all classes of stock entitled to vote of a foreign corporation.
Classification as a controlled foreign corporation would have
many complex results, including the United States shareholders'
required inclusion in income of their pro rata shares of the
"Subpart F income" of Sideware Canada, as specifically defined by
the Internal Revenue Code. Further, if Sideware Canada is treated
as a controlled foreign corporation, United States shareholders
may be subject to U.S. income tax on their pro rata shares of any
increase in the average amounts of U.S. property held by Sideware
Canada.
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In addition, under Section 1248 of the Internal Revenue Code,
gain from the sale or exchange of shares of Sideware Canada by a
holder who is or was a United States shareholder at any time
during the five-year period ending with such sale or exchange
would be treated as dividend income and taxed at ordinary income
rates to the extent of earnings and profits of Sideware Canada
attributable to the stock sold or exchanged.
If Sideware Canada is both a passive foreign investment company
(as defined below) and a controlled foreign corporation, Sideware
Canada will not be treated as a passive foreign investment
company with respect to the United States shareholders.
Management believes that Sideware Canada is not a controlled
foreign corporation.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
Sideware Canada will be classified as a passive foreign
investment company for any taxable year during which either 75%
or more of its gross income is passive income or the average fair
market value of its assets that produce or are held for the
production of passive income for such taxable year equals or
exceeds 50% of the average value of its total assets for the
year. Classification of Sideware Canada as a passive foreign
investment company at any time during a particular U.S. holder's
holding period may result in a number of unfavorable U.S. income
tax consequences including, among other things, recognition of
gain on the sale, exchange, disposition, pledge, or hypothecation
of Sideware Canada shares, States, taxation of gain on the
continuation of Sideware Canada to the United States at rates
applicable to ordinary income, and an imposition of an interest
charge on taxes apportioned to prior years in the U.S. holder's
holding period for his Sideware Canada shares.
Management believes that Sideware Canada is not a passive foreign
investment company, nor was it ever a passive foreign investment
company in any previous year.
FOREIGN PERSONAL HOLDING COMPANY CONSIDERATIONS
Sideware Canada will be classified as a foreign personal holding
company for U.S. federal income tax purposes if both of the
following tests are satisfied: (i) more than 50% of either the
total combined voting power of all classes of its voting stock or
the total value of its outstanding stock is owned, directly or
indirectly (pursuant to the rules of attribution), by five or
fewer U.S. holders at any time during Sideware Canada's taxable
year, and (ii) Sideware Canada receives at least 60% (in certain
cases 50%) of its gross income (regardless of source), as
specifically adjusted, from passive sources.
If Sideware Canada were to be classified as a foreign personal
holding company, a portion of its "undistributed foreign personal
holding company income" (as defined for U.S. federal income tax
purposes) would be allocated to each of its U.S. holders on the
last day on which Sideware Canada is classified as a foreign
personal holding company or the last day of Sideware Canada's
taxable year if earlier. This income would be includible in a
U.S. holder's gross income as a dividend for U.S. federal income
tax purposes.
Management believes that Sideware Canada is not a foreign
personal holding company.
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POST-CONTINUATION U.S. TAXATION OF INCOME, GAINS AND LOSSES
After the continuation/domestication, distributions made by
Sideware Delaware to U.S. holders of Sideware Delaware shares
will be treated as dividends, taxable to U.S. holders as ordinary
income, to the extent such distributions are paid from Sideware
Delaware's current or accumulated earnings and profits. To the
extent a distribution were to exceed Sideware Delaware's current
and accumulated earnings and profits, the excess would be treated
first as a tax-free return of the U.S. holder's adjusted tax
basis in their Sideware Delaware shares and would reduce the
adjusted tax basis by such excess. Any remaining excess (in
excess of the U.S. holder's adjusted tax basis) would be treated
as capital gain.
A corporate U.S. holder who receives a dividend from Sideware
Delaware will generally be allowed a dividends received deduction
from its taxable income.
U.S. holders generally will recognize capital gain or loss on a
sale or exchange of their Sideware Delaware shares. A U.S.
holder's gain (or loss) will equal the amount by which the
holder's amount realized for the shares exceeds (or is exceeded
by) such holder's adjusted tax basis in the shares sold or
exchanged. The gain or loss recognized by a U.S. holder on a
sale of exchange of stock will be long-term capital gain or loss
if the stock has been held for more than 12 months. In the case
of individuals, long-term capital gains generally are currently
taxed at a maximum rate of 20 percent. The deductibility of
capital losses is subject to limitations noted above. In the case
of corporations, long-term capital gains and ordinary income are
taxed at the same maximum federal income tax rate and capital
losses are non-deductible in the absence of capital gains.
POST-CONTINUATION SALE BY CANADIAN HOLDERS OF SIDEWARE
DELAWARE SHARES
A Canadian holder will not be subject to United States federal
income tax on gain recognized on a subsequent sale or other
disposition of Sideware Delaware shares, unless the Sideware
Delaware shares constitute a United States real property interest
at the time of disposition and the Canadian holder is a "5%
shareholder." A Canadian holder who beneficially owns or owned
more than 5% of the common stock of Sideware Delaware, either at
the time of disposition or at any time in the five-year period
ending on the disposition date, will be a 5% shareholder. Gain
recognized by such a 5% shareholder would be subject to United
States tax unless the Canadian 5% shareholder were to establish
in a prescribed manner that his or her stock in Sideware Delaware
is not a United States real property interest. Specifically, the
Canadian 5% shareholder must establish that the fair market value
of Sideware Delaware's United States real property interests is
and was less than 50% of the fair market value of the sum of all
of its trade or business assets, its real properties located
outside the United States and its United States real property
interests, both at the time of disposition and at any time in the
five year period ending on the disposition date.
Management believes that the stock in Sideware Delaware is not
nor will it be a U.S. real property interest.
POST-CONTINUATION DIVIDENDS RECEIVED BY CANADIAN HOLDERS ON
SIDEWARE DELAWARE SHARES
Distributions made by Sideware Delaware to Canadian holders of
Sideware Delaware shares will be treated as U.S. source dividends
to the extent of Sideware Delaware's current accumulated earnings
and profits.
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Canadian holders will generally be subject to 15% U.S. non-
resident withholding tax, with no allowance for deductions. This
withholding tax rate is reduced to 5% in the case of a Canadian
corporation that owns at least 10% of the Sideware Delaware
voting shares. Distributions in excess of Sideware Delaware's
current and accumulated earnings and profits will be tax-free to
the extent of the Canadian holders' adjusted tax basis in their
Sideware Delaware shares, but will reduce their adjusted tax
basis in the shares by the same amount. Distributions in excess
of Sideware Delaware's earnings and profits and the Canadian
holders' adjusted tax basis will give rise to capital gain,
treated in the manner described in "Post-Continuation Sale of
Sideware Delaware Shares," above.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The Internal Revenue Code and the Treasury regulations require
those who make certain specified payments to report the payments
to the IRS. Among the specified payments are dividends and
proceeds paid by brokers to their customers. The required
information returns enable the IRS to determine whether the
recipient properly included the payments in income. This
reporting regime is reinforced by "backup withholding" rules.
These rules require payors to withhold tax at a flat 30 percent
rate from payments subject to information reporting if the
recipient fails to cooperate with the reporting regime, fails to
provide a correct taxpayer identification number to the payor, or
if the IRS or a broker informs the payor that withholding is
required. The information and backup withholding rules do not
apply to payments to corporations, whether domestic or foreign.
Payments of dividends to a U.S. holder generally will be subject
to information reporting, and will be subject to backup
withholding unless Sideware is provided with a correct taxpayer
identification number of the holder and neither the IRS nor a
broker informs Sideware management that withholding is required.
The backup withholding rules do not apply to payments that are
subject to the 30 percent (or reduced 15 percent or 5 percent)
withholding tax on dividends paid to non-U.S. holders, or to
payments that are exempt from tax by application of a tax treaty
or special exception. Accordingly, payments of dividends to
Canadian holders generally will not be subject to backup
withholding. To avoid backup withholding on dividends, Canadian
holders will have to certify their nonresident status. Even if
certification is provided, information reporting may still apply
to payments of dividends.
Payments made to a U.S. holder upon a sale of stock generally
will be subject to information reporting and possible backup
withholding. Payments made to a Canadian holder upon a sale of
stock will not be subject to information reporting or backup
withholding, provided the Canadian holder certifies its foreign
status.
Any amounts withheld from a payment to a holder under the backup
withholding rules can be credited against any U.S. federal income
tax liability of the holder.
MERGER TRANSACTION
The following is a summary description of the material current
United States federal income tax consequences of the merger
generally applicable to holders of KnowledgeMax common stock who,
pursuant to the merger, exchange their KnowledgeMax common stock
for Sideware Delaware common stock, assuming that the merger is
effected pursuant to applicable state law and as described in the
merger agreement and in this joint proxy statement - prospectus. This
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summary is not a comprehensive description of all of the tax
consequences that may be relevant to KnowledgeMax stockholders.
For example, this discussion does not describe tax consequences
that arise from rules that apply to some classes of taxpayers.
This discussion also does not describe tax consequences that are
generally assumed to be known by investors.
This portion of the discussion is based upon assumptions,
limitations, representations and covenants, including those
contained in certificates of Sideware Delaware (hereinafter
referred to as Sideware), KM Acquisition Corp., and KnowledgeMax,
and may not be relied upon if any of such assumptions,
limitations, representations or covenants are, or later become,
inaccurate.
In addition, this discussion assumes that KnowledgeMax
stockholders hold their shares of common stock as a capital
asset and does not address all the United States federal
income tax consequences that may be relevant to
KnowledgeMax stockholders in light of their particular
circumstances or if KnowledgeMax stockholders are persons
subject to special rules, noted in the second paragraph
under "United States federal income tax consequences",
above.
This discussion also does not address the tax consequences of an
exchange or conversion of options or warrants for KnowledgeMax
common stock into options or warrants for Sideware common stock.
Sideware has received an opinion from Mintz, Levin, Cohn, Ferris,
Glovsky & Popeo, P.C., Sideware's special tax counsel, stating
that the merger will be treated as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. This
opinion was based upon the existing law and the continuing truth
and accuracy of the representations of KnowledgeMax and Sideware
described above, and is subject to certain assumptions and
qualifications, including the assumption that the merger will be
effected pursuant to applicable state law and otherwise completed
according to the terms of the merger agreement. The tax opinion
is not binding on the Internal Revenue Service or the courts, and
there can be no assurance that the Internal Revenue Service or
the courts will not take a contrary view. No ruling from the
Internal Revenue Service has been or will be sought. Future
legislative, judicial or administrative changes or
interpretations could alter or modify the statements and
conclusions set forth herein, and any such changes or
interpretations could be retroactive and could affect the tax
consequences of the merger to Sideware, KnowledgeMax, or the
stockholders of KnowledgeMax.
Counsel to Sideware has stated in writing to Sideware their view
that the discussion in the five bullet points below fairly
presents the material current United States federal income tax
consequences generally applicable to the merger, based upon the
opinion of counsel described above and the foregoing assumptions:
- - Sideware or KnowledgeMax will recognize no gain or loss as
a result of the merger;
- - no gain or loss will be recognized by KnowledgeMax
stockholders upon the receipt of Sideware common stock
solely in exchange for KnowledgeMax common stock in the
merger;
- - the aggregate tax basis of the Sideware common stock
received by KnowledgeMax stockholders in the merger will be
the same as the aggregate adjusted tax basis of the
KnowledgeMax common stock surrendered in exchange;
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- - the holding period of Sideware common stock received by
each KnowledgeMax stockholder in the merger will include
the holding period of the KnowledgeMax common stock
surrendered in exchange; and
- - cash payments received by KnowledgeMax stockholders upon
exercise of their appraisal rights will result in capital
gain (or loss) measured by the difference between the cash
payment received and the adjusted tax basis in their shares
of KnowledgeMax common stock surrendered. Such gain (or
loss) will be long-term capital gain (or loss) if the
holding period of the KnowledgeMax common stock exchanged
for cash payment is more than 12 months at the effective
time of the merger.
A successful Internal Revenue Service challenge to the
"reorganization" status of the merger would result in a
KnowledgeMax stockholder recognizing gain or loss with respect to
each share of KnowledgeMax common stock surrendered in the
merger, equal to the difference between the KnowledgeMax
stockholder's adjusted tax basis in such share and the fair
market value, as of the effective time of the merger, of the
Sideware common stock received in exchange. In such event, a
KnowledgeMax stockholder's aggregate tax basis in the Sideware
common stock received would equal its fair market value as of the
effective time of the merger, and the KnowledgeMax stockholder's
holding period for such stock would begin the day after the
merger.
Tax matters are very complicated, and the tax consequences of the
merger to KnowledgeMax stockholders will depend on their
particular situation. KnowledgeMax stockholders are encouraged to
consult their own tax advisors regarding the specific tax
consequences of the merger, including tax return reporting
requirements, the applicability of federal, state, local and
foreign tax laws and the effect of any proposed change in the tax
laws. This discussion is not intended to be a complete analysis
or description of all potential tax consequences of the merger.
CANADIAN FEDERAL INCOME TAX CONSEQUENCES
Sideware has received a tax opinion from Thorsteinsson's on the
Canadian federal income tax consequences of the merger and
continuation of Sideware to Delaware. This section summarizes
the principal federal tax consequences of those transactions to:
- - United States stockholders of Sideware;
- - Canadian stockholders of Sideware; and
- - Sideware.
The summaries of Canadian tax consequences given in this joint
proxy statement - prospectus are based upon the current
provisions of the Canadian Income Tax Act, the regulations
therein, any proposed amendments to the Canadian Income Tax Act
or regulations previously announced by the Federal Minister of
Finance, and Sideware's understanding of the current
administrative and assessing policies of the Canada Customs and
Revenue Agency. The summaries are not exhaustive of all possible
Canadian federal income tax consequences and do not take into
account or anticipate any changes in law, whether by legislative,
governmental or judicial action other than the proposed
amendments. The summaries also do not take into account
provincial or foreign tax considerations which may differ
significantly from those discussed herein. The summaries also do
not address the tax consequences arising from compensatory
options.
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UNITED STATES STOCKHOLDERS OF SIDEWARE
This summary describes Canadian tax consequences to U.S.
stockholders and warrant holders to whom shares and warrants of
Sideware constitute capital property for the purposes of the
Canadian Income Tax Act.
No Canadian tax liability will result from either the
continuation of Sideware to Delaware or the merger. Neither
event will result in the recognition of a capital gain or loss
for Canadian income tax purposes, as neither event creates a
deemed disposition of Sideware shares.
Following continuation of Sideware to Delaware, United States
stockholders will no longer be subject to Canadian withholding
tax on dividends received from Sideware.
CANADIAN STOCKHOLDERS OF SIDEWARE
This summary describes Canadian tax consequences to stockholders
and warrant holders who are resident in Canada, and to whom
shares and warrants of Sideware constitute capital property for
the purposes of the Canadian Income Tax Act. Other Canadian
stockholders and warrant holders should consult their own
independent professional tax advisors.
The shares and warrants of Sideware will generally constitute
"capital property" to a Canadian holder unless the Canadian
holder is a trader or dealer in securities or is engaged in an
adventure in the nature of trade with respect to the shares and
warrants. Certain individual Canadian holders whose Sideware
shares might not otherwise qualify as "capital property" may be
entitled to obtain such qualification by disposing of their
shares before the time of the continuation and making an
irrevocable election under subsection 39(4) of the Canadian
Income Tax Act. After the continuation, the Sideware shares will
no longer constitute Canadian securities for purposes of the
subsection 39(4) election. ANY INDIVIDUALS CONTEMPLATING MAKING
AN ELECTION UNDER SUBSECTION 39(4) OF THE CANADIAN INCOME TAX ACT
SHOULD CONSULT THEIR TAX ADVISORS AS THE ELECTION WILL AFFECT THE
CANADIAN INCOME TAX TREATMENT OF THE DISPOSITION OF THE
STOCKHOLDER'S OTHER CANADIAN SECURITIES.
CAPITAL GAINS AND LOSSES
No Canadian tax liability will result from either the
continuation of Sideware to Delaware or the merger. Neither
event will result in the recognition of a capital gain or loss
for Canadian income tax purposes, as neither event creates a
deemed disposition of Sideware shares. Canadian holders will
continue to hold their shares and warrants at the same adjusted
cost base as before the continuation.
DIVIDENDS
Dividends paid to Canadian stockholders who are individuals after
the continuation of Sideware to Delaware will no longer be
eligible for the dividend tax credit provided under the Canadian
Income Tax Act. Under the Canada-US Income Tax Convention the
U.S. tax that may be withheld from dividends paid to Canadian
stockholders who are individuals will be limited to a maximum
rate of 15%. Canadian stockholders may claim a foreign tax
credit or a deduction in computing their taxable income for US
tax withheld on dividends paid by Canada. In the case of a
Canadian corporation that owns at least 10% of the Sideware
voting shares, the U.S. non-resident withholding tax will be
reduced to 5% of the amount of dividends paid in accordance with
the Canada-U.S. Income Tax Convention.
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FOREIGN REPORTING
A Canadian resident is required under the Canadian Income Tax Act
to report his or her foreign property holdings if the aggregate
cost amount of such holdings exceeds $100,000. Following the
continuation of Sideware to Delaware, the shares and warrants of
Sideware will constitute foreign property for the purposes of
this rule and their "cost amount" will count towards the
calculation of the $100,000 threshold.
DISSENT PROCEEDINGS
If a stockholder initiates formal dissent proceedings, Sideware
will be required to purchase the dissenting stockholder's shares
for a cash payment equal to the fair value of the shares. The
redemption proceeds will be treated as a dividend to the extent
that the proceeds exceed the paid-up capital of the purchased
shares. The balance of the redemption proceeds (i.e., the amount
equal to the paid-up capital of the purchased shares) will be
treated as proceeds of disposition of the shares for the purpose
of computing the stockholder's capital gain or loss.
Consequently, the dissenting stockholder will realize a capital
gain or loss to the extent that the paid-up capital of the shares
exceeds or is exceeded by the stockholder's adjusted cost base of
the shares. A dissenting stockholder that is a private
corporation or a subject corporation, as those expressions are
defined in the Canadian Income Tax Act, will be liable to pay a
33 1/3% refundable tax under Part IV of the Canadian Income Tax
Act on the redemption proceeds to the extent that they are
treated as a dividend. A private corporation is one that is not
public and is not controlled by one or more public companies and
a subject corporation is one that is not private and is
controlled by or for the benefit of one individual or a related
group of individuals. If the dissenting stockholder is a
corporation resident in Canada, the full amount of the redemption
proceeds may be treated as proceeds of disposition with the
result that no dividend will be deemed to have been paid to the
stockholder and any gain or loss realized by the dissenting
stockholder will be determined by reference to the full amount of
the redemption proceeds. Any capital loss arising on the
exercise of dissent rights by a corporate stockholder of Sideware
will be reduced by the amount of dividends received or deemed to
have been received, including any deemed dividend arising from
the exercise of dissent rights, on the purchased shares where the
period of ownership of the shares was less than 365 days or where
the corporate holder (together with individuals or entities with
whom it did not deal at arm's length) held more than 5% of the
issued shares of any class of Sideware at the time the dividends
were received or deemed to have been received.
INTEREST EXPENSES
Neither the merger nor the continuation of Sideware to Delaware
will affect the deductibility of interest incurred on money
borrowed to purchase shares of Sideware. Interest that is
deductible now will continue to be deductible by the stockholder
when paid or payable, depending on the method regularly followed
by the stockholder. Interest will remain deductible only as long
as the stockholder continues to own the shares of Sideware or
uses the borrowed funds to earn income from a business or
property. Compound interest is deductible only when paid.
CONSEQUENCES TO SIDEWARE
On continuation of Sideware to Delaware, Sideware will be deemed
to have been incorporated in Delaware at that time for purposes
of the Canadian Income Tax Act. Sideware will cease to be a
resident of Canada, and the "corporate emigration" rules under
the Canadian Income Tax Act will apply. The principal
consequences of those rules will be the following:
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- - Sideware will have a deemed taxation year end immediately
prior to the continuation.
- - Sideware will be deemed to dispose of each property owned
by it, at a price equal to that property's fair market
value. Any gains, taxable capital gains or losses, and
allowable capital losses resulting from this deemed
disposition of property will be included in calculating
Sideware's tax liability. At the date of this joint proxy
statement - prospectus, Sideware management believes that
its historic tax losses will be sufficient to offset any
income resulting from the deemed disposition, so that no
capital gains tax will be payable.
- - Under the Income Tax Act and the Convention, Sideware will
also be required to pay a special branch tax equal to 5% of
the amount by which the fair market value of its assets at
the time of the continuation exceeds the aggregate of its
liabilities, including any liabilities under Part I of the
Canadian Income Tax Act, and the paid-up capital of its
issued and outstanding shares. At the date of this joint
proxy statement - prospectus, Sideware does not believe
that the fair market value of its assets will be sufficient
to cause any tax liability under the branch tax provisions.
- - Once it becomes a Delaware corporation, Sideware will no
longer be a Canadian resident taxpayer that is subject to
tax on its worldwide income. However, if Sideware carries
on business through a permanent establishment located in
Canada, as that expression is defined in the Canadian-
United States Income Tax Convention, it will be subject to
Canadian tax on business profits attributable to the
permanent establishment.
- - For purposes of calculating any Canadian income tax
liability, Sideware will be unable to deduct historic
losses incurred prior to becoming a Delaware corporation.
The continuation of Sideware outside of Canada will
eliminate past tax losses as a source of future deductions.
At the date of this joint proxy statement - prospectus,
Sideware management estimates that it has at least $10
million in past tax losses that will be eliminated by the
continuation to Delaware.
CANADIAN RETIREMENT PLANS
Following continuation of Sideware to Delaware, so long as the
shares of Sideware remain listed on the Toronto Stock Exchange or
another recognized stock exchange under the Income Tax Act and
regulations, Sideware shares will be qualified investments for:
- - a registered retirement savings plan;
- - a deferred profit sharing plan; and
- - a registered income fund.
However, Sideware shares will constitute "foreign property" to
these trusts and trusts governed by a registered pension plan for
purposes of the Canadian Income Tax Act. These type of trusts
and other entities must pay a monthly tax under the Canadian
Income Tax Act equal to 1% of the amount by which the cost amount
of all the trust's foreign property, as determined at the end of
each month, exceeds the aggregate of:
- - 30% of the cost amount of all the trust's property; and
- - in certain circumstances, an additional amount in respect
of the trust's "small business investment amount."
When applying this rule, property that was not foreign property
of a trust when acquired but became foreign property within the
preceding two years is excepted. The result of these rules is
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that the cost of the shares of Sideware will not be included in
the "excess" foreign property subject to the monthly tax until
two years after the date of Sideware's continuation to Delaware.
If Sideware shares cease trading on the Toronto Stock Exchange,
and does not commence trading on another prescribed stock
exchange under the Income Tax Act and regulations, Sideware
shares will no longer be qualified investments for a trust
governed by a registered retirement savings plan, a deferred
profit sharing plan, or a registered retirement income fund. The
potential consequences from this event are complex, and may vary
from taxpayer to taxpayer. The potential adverse tax
consequences can be substantial, and can include:
- - a tax liability equal to 1% per month, calculated on the
cost of the non-qualified investments held by or through
one of the types of entities described above; and
- - tax liability on dividends and other types of income
received on Sideware shares, and on gains realized on the
sale of Sideware shares, held by or through one of the
types of entities described above.
HOLDERS THAT ARE ONE OF THE TYPES OF ENTITIES DESCRIBED ABOVE, OR
THAT HOLD SIDEWARE SHARES INDIRECTLY THROUGH ONE OF THOSE TYPES
OF ENTITIES, SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
CONSEQUENCES OF HOLDING SHARES AND WARRANTS OF SIDEWARE AND THE
CONTINUATION OF SIDEWARE TO DELAWARE.
INFORMATION ABOUT SIDEWARE
DESCRIPTION OF BUSINESS ACTIVITIES
Sideware was incorporated in April 1983 in the Province of
British Columbia, under the name "Heart Minerals Ltd." Sideware
shares commenced trading publicly on the Vancouver Stock Exchange
in October 1993. On June 27, 1984 Sideware changed its name to
"SRO Entertainment International Ltd.", as a result of a change
in business to the development of theatrical productions. On
January 30, 1990 Sideware changed its name to "Pacrim
Entertainment Group Inc.", as a result of a capital
reorganisation, in which Sideware shares were consolidated on a
2.5:1 basis.
Sideware entered the software development business in 1990, when
it acquired the assets of a private software company named
"Evergreen Technology Corp." On January 9, 1991 Sideware changed
its corporate name to "Evergreen International Technology Inc."
In May 1995, Sideware came under new management. In November
1995, the new management released its first commercial product,
JOT-IT!. 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.
On January 31, 1997 Evergreen changed its corporate name to "JOT-
IT! Software Corp.".
In July 1997, 3M Corporation commenced legal proceedings against
JOT-IT! alleging that the name "JOT-IT!" infringed 3M trademarks.
In October 1997, JOT-IT! settled the 3M litigation, and agreed to
change its corporate and product names. The single user product
was re-named "Tagalongs".
In November 1997, JOT-IT! released its first groupware product,
Net Notions. Neither Tagalongs nor Net Notions generated
material revenue, and both products were discontinued. On
107
February 18, 1998, to comply with the agreement with 3M
Corporation, JOT-IT! changed its corporate name to "Sideware
Systems Inc."
In the fall of 1997, Sideware also commenced development of Dr.
Bean, an eCRM (electronic Customer Relationship Management)
computer program. Dr. Bean created direct real time chat
communication between customers and producers marketing their
products through Internet e-commerce sites. Dr. Bean was
released for commercial distribution during the second half of
1999. Following release of Dr. Bean, development and marketing
of Dr. Bean and its successor products became Sideware's
principal business.
During 2000 Sideware expanded its work force substantially, and
opened several regional sales offices in the United States.
Sideware also relocated its head office from North Vancouver,
British Columbia, to Reston, Virginia.
During 2001 Sideware released the Enterprise Interaction Suite,
which included the core features of Dr. Bean. The Enterprise
Interaction Suite also added features, including e-mail
management, integration of Web based and telephone
communications, and software capable of providing automated
responses to customer inquiries.
Sideware was not able to generate substantial sales revenue
through the Enterprise Interaction Suite. Accordingly, in
September 2001 Sideware ceased marketing and development of the
Enterprise Interaction Suite. Sideware terminated the majority
of its employees, including substantially all of its sales and
technical personnel.
In September 2001, Sideware invested $1,000,000, exclusive of
acquisition costs, in Chalk.com Network (Holding) Corp., parent
company of the Chalk Group, to acquire 13,000,000 common shares
from the company's treasury. In addition, Sideware paid $1.00 to
acquire 5,000,000 common shares of Chalk.com Network (Holding)
Corp., from David Chalk, the founder of the Chalk Group. The
18,000,000 shares acquired by Sideware represented 66.7% of the
issued and outstanding shares of Chalk.com Network (Holding)
Corp., or 60.3% on a fully diluted basis, after allowing for the
exercise of outstanding share purchase warrants and stock options
previously issued by Chalk.com Network (Holding) Corp.
In December 2001, after signing the merger agreement with
KnowledgeMax, Sideware acquired 3,875,050 additional shares in
Chalk.com Network (Holding) Corp. from remaining minority
stockholders. The additional shares raised Sideware's ownership
of the Chalk Group to 80.7%, or 72.9% on a fully diluted basis.
To acquire the additional shares, Sideware issued 3,233,346
common shares and 646,668 share purchase warrants. Each share
purchase warrant entitles the holder to acquire one additional
Sideware share for a period of 18 months at a price of $0.13 per
share.
Since September 2001, development of the business of the Chalk
Group has been Sideware's principal business. Sideware financial
information presented for the nine and three month periods ended
September 30, 2001 includes the operations of the Chalk Group,
which have been consolidated in Sideware's financial statements
with effect from the date of acquisition.
BUSINESS OF THE CHALK GROUP
The Chalk Group began business in 1996 as the producer of "Dave
Chalk's Computer Show", a television show aimed at educating
consumers in new technologies.
108
During 1997, the Chalk Group expanded its business to include
production of video presentations for closed circuit broadcast on
commercial airline flights. The Chalk Group secured contracts to
broadcast its productions on flights of Canadian Airlines
International and Cathay Pacific. From the beginning of its
business to the final quarter of 1999, the Chalk Group completed
its production work relying principally on outside contractors,
having fewer than ten full time employees.
In the final quarter of 1999, the Chalk Group began an expansion
of its business. The Chalk Group decided to focus its business
and marketing efforts on two principal lines of business:
- - production and marketing of video vignettes for online
Internet advertising; and
- - expansion of the group's existing business producing video
presentations for commercial airline flights.
The Chalk Group opened an office in the United States, and
expanded its work force to approximately 60 employees.
Operations of the Chalk Group during 2000 were financed
principally through approximately $5,000,000 in new equity
capital which the Chalk Group raised during 2000.
The expansion of the Chalk Group's business did not prove
profitable.
- - The Chalk Group secured contracts to broadcast its in-
flight video presentations with several international
airlines, including Delta Airlines, Air France, KLM, and
British Airways. In doing so, the Chalk Group committed to
make substantial fixed payments for flight broadcast time,
in the expectation that it would be able to sell
advertising in its presentations at profitable rates. The
airline contracts became unprofitable when anticipated
advertising revenue did not materialize.
- - The Chalk Group also secured contracts to place advertising
vignettes on two major internet websites, yahoo.com and
excite.ca. Initially the Chalk Group sold its advertising
vignettes at loss leader prices, in the expectation that
market exposure would lead to additional profitable sales.
The production of advertising vignettes became unprofitable
when additional sales did not materialize.
For the year ended December 31, 2000, the Chalk Group reported a
comprehensive loss of approximately $7.9 million.
During 2001, the Chalk Group contracted its operation, closing
its United States office and reducing its work force to
approximately 25 employees. With growing use of the Internet for
training purposes, the Chalk Group began seeking contracts to
produce interactive Internet training programs. In these fields,
the Chalk Group has been successful in winning contracts with
major corporations. Examples include the following:
- - In January 2001, the Chalk Group secured a contract with
Sega to develop a website to educate retailers on new Sega
game products.
- - In March 2001, the Chalk Group secured a contract with
Canon Corp. to develop a web-based training program on
Canon printers, for use by Canon sales representatives.
- - In March 2001, the Chalk Group secured a contract with
Symantec to develop an audio/visual Internet presentation
explaining the use of Symantec products.
- - In June 2001, the Chalk Group secured a contract with Telus
Mobility to develop a website to educate sales
representatives on new cell phone technologies.
109
- - In July 2001, the Chalk Group secured a contract with the
Royal Bank of Canada to develop a website to instruct
consumers in on-line banking.
- - In October 2001, the Chalk Group secured a contract with
Microsoft Canada to produce 15 video vignettes, to be used
on the web site of Microsoft Canada, demonstrating key
features of the Windows XP operating system.
The approximate geographic breakdown of the contracts signed by
the Chalk Group during 2001, by value, is as follows:
- - 53% with customers in the United States
- - 47% with customers in Canada
- - 0.5% with overseas customers
For the fiscal year ended December 31, 2001, the Chalk Group
signed contracts with customers with a total value of
approximately US$1.4 million. The value of signed contracts
differs from recognized revenues due to the timing of the
delivery of the products and the Chalk Group's revenue
recognition policy. For fiscal 2001, the Chalk Group's top ten
and top twenty customers by signed contract values accounted for
66% and 91% of the total value of signed contracts, respectively.
The Chalk Group's top two customers by signed contract values
accounted for 12% and 10% of signed contract values.
Substantially all of the contracts signed in 2001 were from
customers based in Canada and the United States. At present, the
Chalk Group cannot determine whether it will have a similar level
of customer concentration going forward.
The Chalk Group believes that additional contracts to develop
Internet e-Learning content are its most likely source of future
revenues, and intends to focus its sales efforts in that area.
The Chalk Group also continues to produce the television show
"Dave Chalk Computer Life" (previously "Dave Chalk's Computer
Show"), which is shown currently in Canada on the Globe and
Mail's ROB TV, the Global Television Network, and Tech TV. The
Chalk Group has terminated the majority of its airline contracts,
but has continued to produce in-flight productions for some
airlines, including Air Canada and Cathay Pacific.
Currently, the Chalk Group has 34 full-time employees consisting
of:
- - 8 sales employees;
- - 4 marketing employees;
- - 7 accounting, general, and administrative employees; and
- - 15 production and engineering employees.
The Chalk Group believes that its owns copyright in the Internet
content and television shows which it produces. Otherwise, the
Chalk Group has not developed any proprietary software.
The Chalk Group has identified four public companies that it
believes compete most directly with its business: Docent, Inc.,
Click2Learn.com Incorporated, SmartForce CBT Group Plc, and
Digitalthink Incorporated. All four companies specialize in the
development of web-based learning and training solutions. The
Chalk Group believes that additional competitors are likely to
enter the field as e-learning becomes more prominent in the
corporate world. Those competitors may have significant
competitive advantages over the Chalk Group, including greater
name recognition and greater financial, technical, marketing, and
other resources.
110
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - SIDEWARE
Prior to September 2001, the core business of Sideware was the
development and marketing of its electronic Customer Relationship
Management software. In September 2001, Sideware discontinued
its business activities in that segment. Accordingly, Sideware
has reported results from that segment as discontinued
operations. General and administrative expenses have been
allocated to continuing operations, while sales and marketing and
research and development expenses have been allocated to
discontinued operations.
NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2001
COMPARED WITH THE NINE AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2000
COMPREHENSIVE LOSS
Comprehensive loss decreased from $23,780,089 for the nine month
period ended September 30, 2000 to $12,601,796 for the nine month
period ended September 30, 2001. This reduction included:
- - a reduction in the net loss from continuing operations from
$7,941,351 to $2,762,422; and
- - a reduction in the net loss from discontinued operations
from $15,661,773 to $9,964,999.
Comprehensive loss decreased from $7,691,669 for the three month
period ended September 30, 2000 to $3,662,653 for the three month
period ended September 30, 2001. This reduction included:
- - a reduction in the net loss from continuing operations from
$1,750,384 to $770,421; and
- - a reduction in the net loss from discontinued operations
from $5,722,714 to $2,909,376.
Factors contributing to the respective changes in continuing and
discontinued operations are set out below, under the applicable
headings.
REVENUES - CONTINUING OPERATIONS
Consolidated revenues from continuing operations for both the
nine and three month periods ended September 30, 2001 were
$136,019. This amount included:
- - $110,093 from television and airline segment productions;
and
- - $25,926 from the sale of interactive Internet media
content.
All of these revenues were earned within the Chalk Group. There
were no corresponding revenues during the nine and three month
periods ended September 30, 2000, as Sideware did not have any
interest in the Chalk Group or revenues from any other source
during those periods.
COST OF REVENUES - CONTINUING OPERATIONS
Cost of revenues for the three and nine month periods ended
September 30, 2001 was $91,611. The principal components of this
amount were:
111
- - approximately $42,000 in salaries relating to the
production of media content sold;
- - approximately $19,000 in post-production costs; and
- - approximately $15,000 in fees paid to airlines to secure
in-flight broadcast time.
All of these costs of revenue were incurred by the Chalk Group.
There was no corresponding cost of revenues for the nine and
three month periods ended September 30, 2000, as Sideware did not
have any interest in the Chalk Group during those periods.
OPERATING EXPENSES - CONTINUING OPERATIONS
Total operating expenses for continuing operations decreased from
$7,941,351 for the nine month period ended September 30, 2000 to
$2,806,830 for the nine month period ended September 30, 2001.
Operating expenses for the nine month period ended September 30,
2001 included the following expenses incurred by the Chalk Group:
- - $60,896 in sales and marketing and website operation
expenses; and
- - $115,518 in general and administrative expenses.
No Chalk Group operating expenses were included in Sideware's
operating results for the nine month period ended September 30,
2000, as Sideware did not have any interest in the Chalk Group
during that period.
The balance of the operating expenses for continuing operations
consisted of general and administrative expenses incurred by
Sideware, which decreased from $7,941,351 for the nine month
period ended September 30, 2000 to $2,745,934 for the
corresponding period in 2001. These amounts included stock-based
compensation of $5,928,736 and $56,213 respectively. Excluding
stock-based compensation, general and administrative expenses of
Sideware increased from $2,012,615 for the nine month period
ended September 30, 2000 to $2,689,721 for the corresponding
period in 2001. The principal factors contributing to this
increase were the following:
- - Foreign exchange losses increased by approximately
$500,000. Sideware's foreign exchange gains and losses
result principally from the translation of financial
transactions recorded in Canadian dollars into the
functional and reporting currency of United States dollars
for financial reporting purposes.
- - Bad debt expenses increased by approximately $270,000.
Several customers from fiscal 2000 went bankrupt during
2001, requiring accounts receivable to be written off.
- - Professional fees decreased by approximately $325,000,
principally as a result of using in-house personnel to do
more legal and accounting work.
For the three month period ended September 30, 2001, total
operating expenses for continuing operations were $821,332,
compared with $1,915,367 for the prior year period. Amounts
included for the Chalk Group were the same as for the
corresponding nine month periods, as set out above. The balance
of the operating expenses for continuing operations were general
and administrative expenses incurred by Sideware, which decreased
from $1,915,367 for the three month period ended September 30,
2000 to $760,436 for the three month period ended September 30,
2001. These amounts included stock-based compensation of
$1,036,857 and $0, respectively. Excluding stock-based
compensation, Sideware's general and administrative expenses
decreased from $878,510 to $760,436. The principal factors
contributing to the decrease were the following:
112
- - Salaries and benefits allocated to general and
administrative expenses decreased by approximately
$180,000, principally as a result of personnel reductions
during 2001.
- - Professional fees decreased by approximately $260,000,
principally as a result of using in-house personnel to do
more legal and accounting work.
- - The reductions in salary and professional expenses were
offset in part by increases in foreign exchange losses and
bad debt expenses, which increased by approximately $81,000
and $73,000, respectively.
NON-OPERATING INCOME - CONTINUING OPERATIONS
Non-operating income has consisted of interest earned on cash
balances. Interest income decreased:
- - from $529,861 for the nine month period ended September 30,
2000 to $245,031 for the nine month period ended September
30, 2001; and
- - from $164,983 for the three month period ended September
30, 2000 to $6,503 for the three month period ended
September 30, 2001.
The principal reason for the decreases was lower average cash
balances during 2001.
NET LOSS - CONTINUING OPERATIONS
Net loss from continuing operations decreased:
- - from $7,411,490 for the nine month period ended September
30, 2000 to $2,517,391 for the nine month period ended
September 30, 2001; and
- - from $1,750,384 for the three month period ended September
30, 2000 to $770,421 for the three month period ended
September 30, 2001.
In each case, the principal reason was the reduction in general
and administrative expenses of Sideware, including stock-based
compensation, described above.
NET LOSS FROM DISCONTINUED OPERATIONS
Net loss from discontinued operations consisted of Sideware's net
loss in the development and marketing of eCRM software. Sideware
terminated this business segment during September 2001.
DISCONTINUED OPERATIONS - NINE MONTH PERIOD ENDED SEPTEMBER
30, 2001 COMPARED WITH NINE MONTH PERIOD ENDED SEPTEMBER
30, 2000
Net loss from discontinued operations decreased from $15,661,773
for the nine month period ended September 30, 2000 to $9,964,999
for the nine month period ended September 30, 2001. The
principal reason for the decrease was lower stock-based
compensation, which decreased from $5,493,167 to $321,261.
Sideware's stock-based compensation expenses resulted principally
from stock options granted to employees at prices below the
prevailing market prices for Sideware shares. Excluding stock-
based compensation expenses, net losses from discontinued
operations decreased from $10,168,606 for the nine month period
ended September 30, 2000 to $9,643,738 for the nine month period
ended September 30, 2001. The principal components of these
amounts included the following.
113
- - Revenue from discontinued operations decreased from
$379,743 to $135,838, principally as a result of a
reduction of approximately $210,000 in software license
revenue. In addition, hardware re-sales to related parties
decreased by approximately $34,000.
- - Cost of revenues from discontinued operations decreased
from $106,712 to $40,911, principally as a result of the
reduction of hardware sales to related parties, which were
made at cost.
- - Sales and marketing expenses decreased from $12,425,135 to
$5,002,421, inclusive of stock-based compensation of
$4,438,594 and $193,746, respectively. Excluding stock-
based compensation, sales and marketing expenses decreased
from $7,986,541 to $4,808,675, principally as a result of
reductions in sales and marketing personnel during 2001 and
reduced attendance at industry trade shows.
- - Research and development expenses decreased from $3,509,669
to $2,560,334, inclusive of stock-based compensation of
$1,054,573 and $127,515, respectively. Excluding stock-
based compensation, research and development expenses were
approximately constant, at $2,455,096 for the nine month
period ended September 30, 2000 and $2,432,819 for the nine
month period ended September 30, 2001.
- - For the nine month period ended September 30, 2001 Sideware
recorded costs associated with discontinuing operations of
$1,370,003. Cash costs totaled approximately $372,000,
consisting principally of termination payments made to
departing employees. Non-cash costs totaled approximately
$998,000, resulting principally from writing off capital
assets associated with office premises which Sideware no
longer uses.
- - For the nine month period ended September 30, 2001 Sideware
also recorded restructuring costs of $1,127,168. Cash
restructuring costs totaled approximately $611,000,
consisting principally of termination payments made to
departing employees. Non-cash restructuring costs totaled
approximately $516,000, resulting principally from writing
off capital assets associated with office premises which
Sideware no longer uses. The terminated employees and
written off capital assets were all related to, or used in,
the eCRM business segment exclusively.
DISCONTINUED OPERATIONS - THREE MONTH PERIOD ENDED
SEPTEMBER 30, 2001 COMPARED WITH THREE MONTH PERIOD ENDED
SEPTEMBER 30, 2000
Net loss from discontinued operations decreased from $5,722,714
for the three month period ended September 30, 2000 to $2,909,376
for the three month period ended September 30, 2001. The
principal reason for the decrease was lower stock-based
compensation, which decreased from $1,903,400 to $0. Excluding
stock-based compensation, net losses from discontinued operations
decreased from $3,819,314 to $2,909,376. The principal factors
contributing to the decrease included the following.
- - Revenue from discontinued operations decreased from
$190,748 to $0.
- - Cost of revenues decreased from $26,750 to $0.
- - Sales and marketing expenses decreased from $4,587,807 to
$927,348, inclusive of stock-based compensation of
$1,351,285 and $0, respectively. Excluding stock-based
compensation, sales and marketing expenses decreased from
$3,236,522 to $927,348, principally as a result of
reductions in sales and marketing personnel during 2001 and
reduced attendance at industry trade shows.
114
- - Research and development expenses decreased from $1,298,905
to $612,025, inclusive of stock-based compensation of
$552,115 and $0, respectively. Excluding stock-based
compensation, research and development expenses decreased
from $746,790 to $612,025, principally as a result of
personnel reductions during 2001.
- - For the three month period ended September 30, 2001
Sideware recorded costs associated with discontinuing
operations of $1,370,003. Cash costs totaled approximately
$372,000, consisting principally of termination payments
made to departing employees. Non-cash costs totaled
approximately $998,000, resulting principally from writing
off capital assets associated with office premises which
Sideware no longer uses.
OTHER COMPREHENSIVE LOSS
For the nine month period ended September 30, 2001, Sideware
recorded a net realized holding loss on short-term investments of
$136,550. There was no corresponding loss for the nine month
period ended September 30, 2000, or for either of the three month
periods ended September 30, 2000 or September 30, 2001.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED
DECEMBER 31, 1999
COMPREHENSIVE LOSS
Comprehensive loss for the year ended increased from $5,421,609
for the year ended December 31, 1999 to $28,446,552 for the year
ended December 31, 2000. This change included:
- - an increase in loss from discontinued operations, from
$3,771,690 to $20,805,594; and
- - an increase in loss from continuing operations, from
$1,915,778 to $6,988,794.
The increased losses were principally the result of higher
operating expenses, which increased in virtually all categories
from the year ended December 31, 1999 to the year ended December
31, 2000. The principal reasons for the increase in operating
expenses were the increase in Sideware's work force, the opening
of additional offices in the United States, and an increase in
sales and marketing efforts.
In addition, Sideware incurred large stock-based compensation
expenses during 2000. Sideware incurred stock-based compensation
expenses when it granted stock options to employees or to
consultants having exercise prices below the prevailing market
prices for Sideware 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 the 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 Sideware shares were then trading, the
minimum price for stock options was based on the average
closing price for its shares during the 10 trading days
preceding the grant of stock options.
- - Sideware 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 Sideware shares on the 10 trading
days preceding January 21, 2000.
- - The closing price for Sideware shares on January 21, 2000
was $19.00. Sideware used this price in calculating the
stock-based expense arising from this transaction, which
was equal to $6,980,000.
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- - 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. Sideware received CDNX
approval on February 23, 2000. The closing price for the
shares on that date was $10.00.
- - None of the options granted January 21, 2000 have been
exercised.
Exclusive of stock-based compensation expenses, total operating
costs were $9,963,061 for the year ended December 31, 2000,
compared with $3,500,271 for the year ended December 31, 1999,
representing a 185% increase.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations increased from $1,915,778 for the
year ended December 31, 1999 to $6,988,794 for the year ended
December 31, 2000. In each case, the amount of the loss was
equal to interest earned on cash balances, less general and
administrative expenses.
The increased loss was due principally to higher general and
administrative expenses, which increased from $1,978,298 during
1999 to $7,533,958 during 2000. The principal factors which
contributed to the increase were as follows.
- - Stock-based compensation expense allocated to general and
administrative expenses 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, Sideware 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 its shares on the OTC
Bulletin Board.
- - Sideware's bad debt expense increased from $6,146 to
$136,503. The majority of the 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, Sideware
made a general allowance in the amount of 10% of license
and services revenue recognized during 2000.
- - During the year ended December 31, 2000 Sideware recognized
a foreign exchange gain of $593,042, compared with a
foreign exchange loss of $184,179 for the year ended
December 31, 1999. Sideware incurred expenses, received
revenues, and held short term financial instruments, in
both Canadian and United States dollars. Sideware's
foreign exchange gains and losses result principally from
continuing to use the Canadian dollar as the company's
functional currency, while reporting financial results in
United States dollars.
Interest earned on cash balances increased from $98,493 during
1999 to $550,533 during 2000, principally as a result of higher
average cash balances during 2000.
LOSS FROM DISCONTINUED OPERATIONS
Discontinued operations for the years ended December 31, 2000 and
1999 included Sideware's eCRM software business, which was
discontinued in September 2001. Net loss from discontinued
operations increased from $3,771,690 for the year ended December
31, 1999 to $20,805,594 for the year ended December 31, 2000.
The increased loss resulted from higher
116
sales and marketing and research and development expenses, which
are explained more fully below.
REVENUE - DISCONTINUED OPERATIONS
Revenue from discontinued operations 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 software
products;
- - $96,217 for services rendered in installing 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. Sideware purchased computer
equipment for Braintech, Inc., Techwest Management Inc., and
Dunsmuir Management Inc., owing to favourable prices available to
Sideware under the IBM Business Partner Reseller Program.
Braintech, Inc. is a public company whose directors include James
Speros, Grant Sutherland, and Edward White, directors of
Sideware. Techwest Management Inc. and Dunsmuir Management Inc.
are private companies with which Mr. Sutherland is affiliated.
In the initial re-sales to related parties during 1998 Sideware
charged a mark-up over cost. The mark-up was eliminated on
subsequent transactions.
In addition, Sideware recorded $168,661 in deferred revenue as at
December 31, 2000. The deferred revenue consisted of payments
received, and accounts receivable recorded, on account of:
- - future maintenance obligations; and
- - sales of software products which were not sufficiently
completed by December 31, 2000 to comply with Sideware's
revenue recognition policy.
COST OF REVENUES - DISCONTINUED OPERATIONS
Cost of revenues for the year ended December 31, 2000 was
$139,824 Cost of revenues allocated to hardware and software re-
sales was $109,449, of which $81,945 resulted from sales to
related parties. As stated above, re-sales to related parties
were made at cost. Re-sales of hardware and software to arm's
length parties were generally included in sales of software
products. Sideware's practice was 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.
117
Sideware 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 Sideware recorded no
deferred revenue.
OPERATING EXPENSES - DISCONTINUED OPERATIONS
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:
- - Stock-based compensation allocated to sales and marketing
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 Sideware hired
approximately 65 new sales and marketing employees.
- - Trade show costs increased from $257,466 to $807,165. The
majority of the 2000 trade show expenses were incurred at
the Spring Internet World 2000 trade show, where Sideware
provided an extensive display and demonstrations of its
eCRM products.
- - Travel costs increased from $154,758 to $771,698, as a
result of the increase in Sideware's 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 a new
head office in Reston, and 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 the exhibit at Spring Internet
World 2000 and for work relating to telephony integration and
VoIP features for potential incorporation into Sideware products.
Travel costs allocated to research and development increased from
$42,737 to $188,085, principally as a result of travel by
research and development personnel between the Reston and North
Vancouver offices.
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YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE EIGHT MONTH
PERIOD ENDED DECEMBER 31, 1998
COMPREHENSIVE LOSS
Comprehensive loss increased from $1,383,422 for the eight month
period ended December 31, 1998 to $5,421,609 for the year ended
December 31, 1999. This change included:
- - an increase in loss from discontinued operations from
$828,725 to $3,771,690; and
- - an increase in loss from continuing operations from
$453,762 to $1,915,778.
The increased losses resulted principally from higher operating
expenses. The general level of activity within Sideware
increased substantially during 1999. Sideware opened a new
office in the United States, and began to hire employees in the
United States. Sideware also hired new employees in Canada, and
opened additional office premises in Vancouver, British Columbia.
In addition, the results of operations for the period ended
December 31, 1999 cover a full year, whereas the comparative
period ended December 31, 1998 covers 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.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations increased from $453,762 for the
eight month period ended December 31, 1998 to $1,915,778 for the
year ended December 31, 1999. In each case, the amount of the
loss was equal to interest earned on cash balances, less general
and administrative expenses.
The increased loss was due principally to higher general and
administrative expenses, which 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:
- - Stock-based compensation allocated to general and
administrative expenses 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 Sideware 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, Sideware required substantial legal work in
connection with private placement financings, registration
of its shares under United States securities laws, the
establishment of an offshore subsidiary, taxation issues
relating to cross-border transactions, and outstanding
court actions.
- - During 1999, Sideware 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 Sideware shares on the OTC Bulletin Board.
There was no corresponding expense during the eight month
period ended December 31, 1998.
119
- - Sideware's bad debt expense decreased from $20,396 to
$6,146.
- - During the year ended December 31, 1999 Sideware recognized
a foreign exchange loss of $184,179, compared with a
foreign exchange gain of approximately $93,402 for the
eight month period ended December 31, 1998.
Interest earned on cash balances increased from $27,637 to
$98,493, principally as a result of higher average cash balances
during the year ended December 31, 1999.
LOSS FROM DISCONTINUED OPERATIONS
Loss from discontinued operations increased from $828,725 for the
eight month period ended December 31, 1998 to $3,771,690 for the
year ended December 31, 1999. The increased loss resulted from
higher operating expenses, which are explained more fully below.
REVENUES - DISCONTINUED OPERATIONS
Sales revenue decreased from $104,982 for the eight month period
ended December 31, 1998 to $33,389 for the year ended December
31, 1999. The principal reasons for the decrease were as
follows:
- - Licensing revenues decreased from $19,458 to $0. During
the eight month period ended December 31, 1998 Sideware
received revenue from the sale of Tagalongs, its single
user notation utility which was subsequently discontinued.
Sideware did not realize revenue from the sale of the
Enterprise Interaction Suite, or its predecessor Dr. Bean,
during either 1998 or 1999.
- - Hardware re-sales decreased from $85,524 to $30,856.
During 1998, all of the hardware re- sales were to
Braintech, Inc. and Techwest Management Inc., related
parties. During 1999, Sideware sold $2,533 in hardware to
an arm's length party, and $30,856 to Braintech, Inc. and
Techwest Management Inc.
COST OF REVENUES - DISCONTINUED OPERATIONS
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 $30,856. Cost of software sold decreased from
$13,476 to $0, as Sideware did not have any software sales during
1999.
OPERATING EXPENSES - DISCONTINUED OPERATIONS
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:
- - Stock-based compensation allocated to sales and marketing
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 Sideware attended more trade shows, and
rented larger display booths.
120
- - Travel costs increased from $51,289 to $154,758, due
principally to costs associated with opening the 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 an 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, Sideware
opened a United States head office, and also allocated
additional office space in its 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.
EIGHT MONTH PERIOD ENDED DECEMBER 31, 1998 COMPARED WITH
THE YEAR ENDED APRIL 30, 1998
COMPREHENSIVE LOSS
Comprehensive loss for the eight month period ended December 31,
1998 was $1,383,422, compared with $1,748,025 for the year ended
April 30, 1998. The principal reason was the shorter reporting
period ended December 31, 1998, and the resulting lower operating
expenses.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations was $453,762 for the eight month
period ended December 31, 1998, compared with $893,644 for the
year ended April 30, 1998. In each case, the amount of the loss
was equal to interest earned on cash balances, less general and
administrative expenses.
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 legal and accounting costs.
- - During the eight month period ended December 31, 1998
Sideware realized a foreign exchange gain of $93,402,
compared to $23,818 for the year ended April 30, 1998.
121
- - Bad debt expense decreased from $25,860 to $20,397. During
the eight month period ended December 31, 1998 Sideware
wrote off the balance of an account receivable from
Intermark Corporation in the amount of $20,397. Intermark
Corporation acted previously as the marketing agent for
Tagalongs in the United States. In its April 30, 1998
financial statements, Sideware made a provision of $25,860
in respect of the receivable from Intermark Corporation.
During the eight month period ended December 31, 1998,
Sideware 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.
Interest income increased from $19,847 for the year ended April
30, 1998 to $27,637 for the eight month period ended December 31,
1998, principally as a result of higher average cash balances
during the latter period.
LOSS FROM DISCONTINUED OPERATIONS
Loss from discontinued operations was $828,725 for the eight
month period ended December 31, 1998, compared with $820,492 for
the year ended April 30, 1998.
REVENUES - DISCONTINUED OPERATIONS
During the eight month period ended December 31, 1998 Sideware
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 REVENUES - DISCONTINUED OPERATIONS
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.
OPERATING EXPENSES - DISCONTINUED OPERATIONS
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 Sideware paid approximately $111,000 to marketing
agents in respect of its previous products, NetNotions and
Tagalongs. There were no similar payments during the eight
month period ended December 31, 1998.
122
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.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 2001, Sideware had exhausted substantially all of
its cash resources.
During December 2001, Sideware raised $1,350,000 in private
placement financing, issuing 13,500,000 shares at a price of
$0.10 per share. Under the merger agreement with KnowledgeMax,
those proceeds are being used to fund the operations of both
companies prior to closing. For the period December 2001 to
March 2002, Sideware and KnowledgeMax expect that their monthly
expenditures will total approximately $350,000 per month,
consisting of approximately:
- - $200,000 per month in salaries; and
- - $150,000 per month in general and administrative expenses,
including expenses relating to the merger.
In addition to the funds raised by Sideware, KnowledgeMax raised
approximately $200,000 in private placement financing during
December 2001. Based on the monthly expenditures described
above, Sideware and KnowledgeMax believe that the financing they
have raised will be sufficient to pay the combined operating
expenses of the two companies until approximately the end of
March 2002.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - THE CHALK GROUP
Chalk.com Network (Holding) Corp., the parent company of the
Chalk Group, was incorporated in January 1999, as part of a
corporate reorganization of the Chalk Group. As a result, the
eleven month period ended December 31, 1999 is the first period
for which financial statements are available for Chalk.com
Network (Holding) Corp.
In addition, from January 1999 to September 7, 2001, Chalk.com
Network (Holding) Corporation operated as a private company, and
was not under any statutory obligation to prepare audited
financial statements. In September 2001, following its
acquisition of a majority interest in Chalk.com Network (Holding)
Corp., Sideware commenced an audit of Chalk.com Network (Holding)
Corp. for the eight month period ended August 31, 2001, the year
ended December 31, 2000, and the eleven month period ended
December 31, 1999. Financial statements covering these periods
are included in this joint proxy statement - prospectus.
123
EIGHT MONTH PERIOD ENDED AUGUST 31, 2001 COMPARED WITH THE
YEAR ENDED DECEMBER 31, 2000
COMPREHENSIVE LOSS
The comprehensive loss for the Chalk Group for the eight month
period ended August 31, 2001 was $2,245,172, compared with
$7,952,194 for the year ended December 31, 2000.
REVENUE
Revenue for the eight month period ended August 31, 2001 was
$980,648, compared with $1,079,951 for the year ended December
31, 2000. These figures included the following amounts.
- - Revenue from television and airline segment production was
$550,668 for the eight month period ended August 31, 2001,
compared with $564,558 for the year ended December 31,
2000.
- - Revenue from the sale of interactive media content and
systems was $429,980 for the eight month period ended
December 31, 2000, compared with $515,393 for the year
ended December 31, 2000.
Total revenue was approximately equal for the periods compared,
but increased from an average of approximately $90,000 per month
during 2000 to approximately $120,000 per month during 2001, due
principally to more successful sales efforts in the eLearning and
eTraining field.
COST OF SALES
Cost of sales was $1,349,086 for the eight month period ended
August 31, 2001, compared with $3,022,110 for the year ended
December 31, 2000. These amounts included stock-based
compensation expenses of $523 and $552,519, respectively.
Excluding stock-based compensation, cost of sales was $1,348,563
for the eight month period ended August 31, 2001, compared with
$2,469,591 for the year ended December 31, 2000. In addition to
the shorter reporting period ended August 31, 2001, the principal
factors contributing to the decrease in cost of sales were the
following.
- - External production costs decreased from approximately
$1,400,000 to approximately $430,000. During 2000 the
Chalk Group decreased its production of both advertising
vignettes and in-flight video presentations. In addition,
the Chalk Group did a greater percentage of its production
work with in-house personnel.
- - Rent expenses allocated to cost of sales decreased from
approximately $185,000 to approximately $53,000. Rent
expenses during both periods include payments to David
Chalk, then the principal stockholder of the Chalk Group,
for use of his personal residence as a film set. During
2001, the Chalk Group reduced those payments, owing to its
financial difficulties. In addition, rent expenses for
2000 included an adjustment of approximately $80,000
relating to use of Mr. Chalk's residence as a film set
during prior periods. There was no corresponding charge
during the eight month period ended August 31, 2001.
124
OPERATING EXPENSES
Operating expenses decreased substantially from the year ended
December 31, 2000 to the eight month period ended August 31,
2001. During 2001, the Chalk Group reduced its work force
substantially, including closing its San Francisco office. In
addition figures for the period ended August 31, 2001 cover a
shorter period of eight months.
Selling and website operation expenses were $772,571 for the
eight month period ended August 31, 2001, compared with
$1,984,524 for the year ended December 31, 2000. These amounts
included stock-based compensation of $14,880 and $845,276,
respectively. Excluding stock-based compensation, selling and
website operations expenses were $757,691 for the eight month
period ended August 31, 2001, compared with $1,139,248 for the
year ended December 31, 2000. On a monthly basis, selling and
website operation expenses were approximately constant, at
approximately $90,000 per month. The largest component of
selling and website operations expenses was salaries, which were
approximately $60,000 per month during both periods.
General and administrative expenses were $1,062,766 for the eight
month period ended August 31, 2001, compared with $3,824,563 for
the year ended December 31, 2001. These amounts included stock-
based compensation of $84,037 and $1,037,841, respectively.
Excluding stock-based compensation, general and administrative
expenses decreased from $2,786,722 to $978,729. In addition to
the shorter reporting period ended August 31, 2001, the reduction
in general and administrative expenses resulted principally from
a reduction in salary costs, owing to a reduction in the
workforce of the Chalk Group. General and administrative salary
expenses were approximately $300,000 for the eight month period
ended August 31, 2001, compared with $1,050,000 for the year
ended December 31, 2000. On a monthly basis, general and
administrative salary costs were approximately $40,000 per month
for the eight month period ended August 31, 2001, compared with
$90,000 per month during 2000. In addition, professional
expenses for the eight month period ended August 31, 2001 were
approximately $155,000, compared with approximately $350,000 for
the year ended December 31, 2001.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE ELEVEN MONTH
PERIOD ENDED DECEMBER 31, 1999
COMPREHENSIVE LOSS
The comprehensive loss for the Chalk Group for the year ended
December 31, 2000 was $7,952,194, compared with $302,491 for the
eleven month period ended December 31, 1999.
REVENUE
Total revenue for the year ended December 31, 2000 was
$1,079,951, compared with $954,904 for the prior eleven month
period. The following changes occurred in components of revenue.
- - Revenue from television and airline segment production
decreased from $954,904 to $564,558. The principal reason
was a contraction during 2000 of the efforts of the Chalk
Group to produce market in-flight airline broadcasts, owing
to losses on airline broadcast contracts.
- - Revenue from the sale of interactive media content and
systems increased from $0 to $515,393. During 2000, the
Chalk Group entered the field of supplying interactive
Internet media content and systems.
125
COST OF SALES
Cost of sales increased from $217,312 for the year ended December
31, 1999 to $3,022,110 for the year ended December 31, 2000.
These amounts included stock-based compensation expenses of $0
and $552,519, respectively. Excluding stock-based compensation,
cost of sales increased from $217,312 to $2,469,591. The
principal factors contributing to this increase were the
following.
- - Salaries allocated to cost of sales increased from $0 to
approximately $500,000. During 1999 substantially all of
the production work was done by outside contractors.
During 2000, a substantial amount of the production work
was done by company personnel.
- - External production costs increased from approximately
$200,000 to approximately $1,400,000. During 2000 the
Chalk Group increased its production of both advertising
vignettes and in-flight video presentations substantially.
- - Rent expenses allocated to cost of sales increased from
approximately $15,000 to approximately $185,000. During
2000, the Chalk Group made rental payments to its President
and principal stockholder, David Chalk, for use of Mr.
Chalk's personal residence as a film set. These payments
included an adjustment of approximately $80,000 relating to
use of Mr. Chalk's residence as a film set during prior
periods.
- - Travel expenses allocated to cost of production increased
from $0 to approximately $80,000. Travel expenses
increased principally because the Chalk Group commenced
operations in the United States.
- - Payments to airlines for in-flight broadcast time increased
from $0 to approximately $280,000, due to new contracts for
the broadcast of in-flight video presentations, requiring
substantial payments to airlines.
OPERATING EXPENSES
Operating expenses increased substantially in all categories
during 2000, owing to the expansion of the Chalk Group, the
opening of new offices in San Francisco, and the hiring of
additional personnel.
Selling and website operation expenses increased from $162,625 to
$1,984,524. These amounts included stock-based compensation of
$0 and $845,276, respectively. Excluding stock-based
compensation, selling and website operations expenses increased
from $162,625 to $1,139,248. The principal factors contributing
to this increase were the following.
- - Salaries allocated to selling and website operations
increased from $0 to approximately $700,000. During 2000
the Chalk Group hired a substantial internal sales force,
which it did not have during 1999.
- - Travel costs increased from approximately $0 to $110,000,
due to the opening of US operations.
General and administrative expenses increased from $850,806 to
$3,824,563. These amounts included stock-based compensation of
$0 and $1,037,841, respectively. Excluding stock-based
compensation, general and administrative expenses increased from
$850,806 to $2,786,722. The principal factors which contributed
to this increase included the following.
- - Professional expenses increased from approximately $55,000
to approximately $350,000. During 2000 the Chalk Group
incurred substantial legal costs in connection with a
corporate reorganization, involving the incorporation of
companies in the United States.
126
The Chalk Group also incurred higher accounting costs, owing
to its higher level of activity.
- - Salaries allocated to general and administrative expenses
increased from approximately $600,000 to approximately
$1,050,000, owing to the expansion in the work force of the
Chalk Group.
- - Rent expenses increased from approximately $30,000 to
approximately $260,000, principally as a result of opening
an office in the United States.
- - Travel costs increased from approximately $90,000 to
approximately $250,000.
In addition, the Chalk Group wrote down assets of $75,957 for the
year ended December 31, 2000. In conjunction with the audits of
the December 31, 2000 and August 31, 2001 financial statements,
the Chalk Group performed a physical asset count in September
2001. As a part of that count, the company assessed the
existence, usefulness and fair market value of each of its
assets. As a result of the count, required write-downs of
$75,957 were identified. Because a physical asset count had not
been conducted at December 31, 2000, the write-downs were deemed
to take place as at December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES - THE CHALK GROUP
On acquisition of the Chalk Group, Sideware invested $1 million
in the Chalk Group. As at January 4, 2002, the Chalk Group holds
cash balances of approximately $208,000.
Current monthly expenditures of the Chalk Group are approximately
$190,000 per month. The principal monthly expenditures are
approximately as follows:
salaries and benefits - $115,000 per month
variable production costs - $30,000 per month
general and administrative - $45,000 per month
In addition, during the final quarter of 2001, the Chalk Group
spent approximately $275,000 in retiring indebtedness incurred
prior to the investment by Sideware.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
As at September 30, 2001 Sideware has not entered into or
acquired financial instruments that have a material market risk.
Sideware has no financial instruments for trading or other
purposes and no 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 September 30, 2001 is not materially different
from their carrying value.
DESCRIPTION OF PROPERTY
Sideware is in the process of moving to premises at 7900 Westpark
Drive, Suite T300, McLean, VA 22102. KnowledgeMax has entered into
a lease for these premises, which are intended to serve as the principal
executive offices for the combined company following the merger.
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Prior to October 2000, Sideware's head office was in North
Vancouver, British Columbia. In October 2000, Sideware moved its
head office to Reston Virginia, and continued to use the North
Vancouver premises as a research and development office. In
addition, during 2000 Sideware opened approximately 8 regional
sales offices in the United States.
With the contraction of its business during 2001, Sideware has
substantially reduced its office premises. During 2001, it
closed its regional sales offices. Sideware has also terminated
its lease obligations with respect to its Reston head office
premises.
Sideware has also terminated its lease obligations relating to
its previous U.S. head office premises in Herndon, Virginia. As
part of the agreement to terminate that lease, Sideware agreed
with the landlord that it will be responsible for a maximum of
$30,500 in rent if the new tenant does not pay the required rent.
The premises previously occupied by Sideware in North Vancouver
have now been occupied by other companies. However, Sideware
remains liable to the landlord if the present tenants fail to pay
the rent. The term of the lease which Sideware executed ends in
August 2003. At present, Sideware has no reason to believe that
the present tenants will default in payment of the rent. If they
do so, however, the resulting maximum liability for Sideware will
be approximately $300,000, based on the rental payments remaining
until the end of the lease term.
Sideware has sublet premises which it previously occupied in
Atlanta, Georgia. Rent payments under the head lease total
approximately $5,800 per month, and Sideware is receiving
approximately $4,200 from the sub-tenant. Sideware must pay the
difference, and could be liable for the total lease payment if
the sub-tenant does not pay the rent. The Atlanta lease ends in
April 2003.
The Chalk Group operates from leasehold premises in Burnaby,
British Columbia. The lease runs to December 2002, and costs
approximately $7,000 per month.
LEGAL PROCEEDINGS
At the date of this joint proxy statement - prospectus, neither
Sideware nor the Chalk Group is party to any material litigation
or legal proceedings.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS
Sideware is 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 the Yukon
Territory, or by the Sideware charter or other governing
documents, on the right of a non-resident to hold or vote shares
of Sideware common stock. However, investments in Sideware
common stock 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 Sideware common
stock. The summary is of a general nature only and is not
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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.
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 was $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 Sideware for purposes of
the Investment Act if the non-Canadian acquired a majority of the
common stock. The acquisition of less than a majority, but of
one-third or more of the common stock, 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 shares of common stock.
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.
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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 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 transaction.
TAXATION
This section summarizes the current principal Canadian federal
income tax considerations applicable to the holding and disposing
of common shares of Sideware 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 of Canada, the regulations
thereunder, all amendments thereto publicly proposed by the
government of Canada to the date hereof, the published
administrative practices of the Canada Customs and Revenue
Agency, 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
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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 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 Income Tax Act, 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 Sideware of its 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 Sideware's 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 Income Tax Act 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 Income Tax Act 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.
Sideware 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.
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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.
INFORMATION ABOUT KNOWLEDGEMAX
OVERVIEW
KnowledgeMax is a privately held company incorporated in the State
of Delaware and located in metropolitan Washington D.C.'s
technology corridor. KnowledgeMax has developed a supply chain
management system which it believes will significantly change the
way corporations and other organizations select, purchase, and
deliver knowledge resources and education to their professional
employees. Through KnowledgeMax's solution, corporations can
select and make available to employees throughout the organization
a wealth of inter-related learning and knowledge resources at a
measurable and controllable cost.
KnowledgeMax's eLearning desktop incorporates proprietary
technologies and connects to multiple databases of learning
content and knowledge resources, utilizing an integrated
internet-enabled backplane. KnowledgeMax's marketing approach is
to provide corporate users with an integrated desktop containing
value-added services as a means to bind its clients to
KnowledgeMax's enterprise eLearning and knowledge resource
centers, using a co-branded corporate delivery structure.
KnowledgeMax has assembled an experienced and complementary
executive team that brings to KnowledgeMax expertise in general
business, traditional and electronic publishing, corporate
education, the information industry, internet/intranet
integration, and information technology. KnowledgeMax's senior
executives have launched and developed new business ventures and
have experience managing both privately held and publicly traded
companies. They have experience in international marketing and
distribution, strategic partnering technology and enterprise
platform development, and capital raising.
INDUSTRY BACKGROUND
According to Training Magazine's 1999 Industry Report, the market
for education, including both instructor-led and technology-
enabled (e.g. online, computer-based, or video) is more than $62
billion in the U.S. for corporations (employer-sponsored
learning) and of this $62 billion, U.S. organizations spend more
than half ($34 billion) on professionals and managers. According
to Eduventures, Inc., companies in the training market generated
revenues of $26.7 billion in 1999, a 10% growth over 1998, and
overall training budgets grew 23.5% with outsourcing growing at
51.5%. Fueling the market is a strong demand for effective
development and retention of knowledge resources within
corporations.
With growing concern over competition, the need to retain the
best and most qualified professionals (even in an economic
downturn), and the attrition of dedicated in-house knowledge
professionals, corporations are facing ever-increasing pressure
to treat the knowledge of workers
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as a primary asset of the firm and a key source of competitive
advantage. KnowledgeMax believes that leading organizations have
realized that effective internal education, development, and access
to knowledge resources are critical to both retaining valuable
employees and increasing their capabilities at a reasonable cost.
Consolidation in a variety of industries such as finance,
telecommunications, and energy, is fostering the need to retrain
displaced personnel.
Investment in the education of the workforce has always been a
significant corporate expense - according to Training and
Development Magazine, companies spend between $500 and $3,500 for
each employee. However this outlay has generally been
inefficiently spread across an uncoordinated and undirected array
of educational offerings from multiple vendors. Today, few
companies can accurately determine the return on training
investments due to a lack of consolidated data and supporting
measurement criteria. Without central control of education and
training activities, organizations often make unnecessary and
duplicate investments, acquire materials of uneven quality,
disseminate at significant expense and find that much of their
effort is ineffective.
Numerous organizations have begun to embrace the "next wave" of
technological innovation - the corporate university - as a way of
consolidating educational investment and controlling the focus of
employee education. Corporate University Xchange, a US corporate
education research and consulting group, estimates that over the
past 15 years the number of corporate universities grew from 400
to about 2,000, and it estimates that by the end of the decade
the number of corporate universities will exceed 3,700.
KnowledgeMax believes that organizations are now searching for an
"out-of-the-box" solution for their corporate universities.
The supply of education and training products and services has
traditionally been fragmented into many small players and a
handful of larger providers, each targeting only specific
"islands of learning content," and delivered in classroom
settings that often require expensive travel and critical time
away from the workplace. The development of electronic
distribution technologies has greatly reduced the time and cost
of providing education while increasing the flexibility and
customization of learning programs.
VALUE PROPOSITION
KnowledgeMax has developed an enterprise knowledge platform to
provide an off-the-shelf procurement and delivery service that
supports an enterprise-wide knowledge and eLearning solution. The
system manages transactions, while responding to the changing
needs of its clients. The system enables clients to track
expenditures across their organizations, and leverage the
capabilities of technology-based educational and knowledge
products, including books, online courseware, training videos,
and books on tape.
KnowledgeMax believes that the efficiencies provided by its
supply chain management system can generate significant cost
savings for its corporate clients. KnowledgeMax believes that
its clients' employees will benefit from a one-stop shop for a
wealth of knowledge resources, access to personalized learning
anytime and at anyplace, the empowerment to learn and develop
their careers, and the support and explicit sponsorship of their
employers. KnowledgeMax also believes that the direct access to
the corporate desktop to be provided by its system will give many
learning and information content partners a superior distribution
channel to millions of professionals worldwide.
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PRODUCTS AND SERVICES: THE VIRTUAL KNOWLEDGE RESOURCE CENTER
KnowledgeMax creates added value beyond simple aggregation of
content with a variety of services, including its own expert
advice on the selection of materials. KnowledgeMax also offers
additional content that includes excerpts of leading business
books, product descriptions, reviews of new offerings, suggested
reading lists, and proprietary online knowledge resources
including:
- KnowledgeNetwork: A proprietary online database created by
KnowledgeMax, containing courses, videos, audiotapes, and
online excerpts of business books in over fifty categories.
The system functions like a consultant and an expert
business librarian, providing employees with a variety of
ready-to-go materials.
- Experts Online: Instant access to writing by more than 800
business leaders, consultants and academics such as Norman
Augustine, Warren Bennis, Edwards Deming, Peter Drucker,
Andrew Grove, Michael Hammer, Rosabeth Moss Kanter, Tom
Peters, Michael Porter, Peter Senge, and Jack Welsh.
- Virtual Business SchoolTM: The Virtual Business SchoolTM is a
proprietary learning system organized into recommended
courses for independent learning. The Virtual Business
SchoolTM features current best practices and thinking on
critical business issues, including Business Strategy,
Growth and Innovation, The Learning Organization, Managing
Quality, People Skills, Teams and Teamwork, Marketing,
Salesmanship, and Sales Strategy.
- BookFinder - information on over 2.5 million books with one
of the most powerful search systems available for books,
including 100,000 searchable tables of contents and lists
of books in 12,000 business subject categories.
- E-Learning - hundreds of Web-based courses and Computer-
Based Training (on CD-ROMs) from numerous respected content
providers in one convenient database.
- Videos/Tapes - a single source for hundreds of training
videos and business books on tape.
In the future, KnowledgeMax plans to offer premium services that
enable client organizations to integrate their content into the
KnowledgeMax platform, take advantage of the KnowledgeMax supply
chain infrastructure to provide an internal and external
distribution channel for client content, and deliver specialized
events and learning opportunities to the end-user desktop.
KnowledgeMax expects that the first of its premium service
offerings will be "Print on Demand", providing on-demand printing
or CD/CDR replication for books and bound publications and
documents. This feature will provide the client with the ability
to deliver volatile information without incurring the upfront
costs of volume commitments, printing, and warehousing.
KnowledgeMax's supply chain process is expected to enable the
client to completely outsource this function to KnowledgeMax.
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INFRASTRUCTURE ASSETS
KnowledgeMax currently operates a proprietary search engine
developed with the assistance of leadSOFT, which incorporates
content management, user authentication, registration, tailored
purchasing protocols, and eCommerce functionality.
KnowledgeMax's eCommerce services will offer a number of
combinations of purchasing options, including automatic purchase
orders and required charge back codes to fit different corporate
purchasing protocols.
Orders for books placed through the system are directed to
KnowledgeMax's strategic partner and investor, Baker & Taylor,
and drop-shipped from Baker & Taylor's warehouse. Koen Books and
Pearson Education also provide book fulfillment directly to the
end user. Other learning products, when added, are expected to
be fulfilled by Baker & Taylor or made available through business
alliances with owners of the content.
SALES AND MARKETING
KnowledgeMax promotes its services through executive direct sales
at the enterprise level, marketing to the ultimate employee end
user within an organization, and assisted distribution through
service partners and value-added reseller partners. This multi-
tiered approach is designed to capture new customers and maximize
the business conducted with existing customers:
- - Enterprise: A dedicated sales force solicits sales to new
clients.
- - Partnerships: KnowledgeMax is focused on creating
strategic relationships, such as co-branding and co-
marketing, with established service and product vendors in
related markets.
- - End-User: KnowledgeMax intends to establish a client
services group to expand its existing relationships.
CLIENTS
KnowledgeMax has contracts with several customers, of which the
largest is IBM. To date, IBM has accounted for the majority of
KnowledgeMax's revenue. If KnowledgeMax were to lose one of its
key contracts or if sales to its key customers were reduced
materially, it would have a material adverse effect on
KnowledgeMax's results of operations.
INTELLECTUAL PROPERTY
The success and ability of KnowledgeMax to compete are dependent
on its ability to develop and maintain the proprietary aspects of
its technology and operate without infringing on the proprietary
rights of others. KnowledgeMax relies on a combination of
trademark, trade secret and contractual restrictions to protect
the proprietary aspects of its technology and license
arrangements to use the proprietary technology of others. These
legal protections afford only limited protection for KnowledgeMax
technology. KnowledgeMax holds no patents and has not filed any
patent applications with the United States Patent and Trademark
Office. KnowledgeMax seeks to limit disclosure of KnowledgeMax
intellectual property by requiring employees and consultants with
access to proprietary information to execute confidentiality
agreements with
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KnowledgeMax and by restricting access to its source code. Due to
rapid technological change, KnowledgeMax believes that factors such
as the technological and creative skills of its personnel, new
product developments and enhancements to existing products are more
important than the various legal protections of its technology to
establishing and maintaining a technology leadership position.
Despite the efforts of KnowledgeMax to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of
KnowledgeMax technology or to obtain and use information that
KnowledgeMax regards as proprietary. Litigation may be necessary
in the future to enforce the intellectual property rights of
KnowledgeMax, to protect its trade secrets, to determine the
validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. Any
litigation could result in substantial costs and diversion of
resources and could cause the business and financial results of
KnowledgeMax to suffer. There can be no assurance that the means
of KnowledgeMax of protecting its proprietary rights will be
adequate or that competitors will not independently develop
similar technology. Any failure to meaningfully protect
KnowledgeMax property could cause its business and financial
results to suffer.
SUPPLIERS AND STRATEGIC PARTNERS
KnowledgeMax has formed a number of strategic relationships to
support operations, to provide premium services, and to grant
access to a broad pipeline of content in order to provide a suite
of the "best-of-breed" education and training products available:
- - Baker & Taylor, one of the world's largest book, video, and
audio wholesalers (with over 10 million books in stock), is
a stockholder and a key strategic partner of KnowledgeMax,
and has been engaged to fulfill KnowledgeMax's book orders
directly to KnowledgeMax's clients. In turn, KnowledgeMax
provides an outlet for Baker & Taylor to reach the
corporate market.
- - leadSOFT, a leading provider of search engines in the
publishing industry, is both the developer of the search
engine technology and a stockholder of KnowledgeMax.
- - Koen Books, another large wholesaler, fulfills and ships
book orders worldwide.
- - Pearson Education, one of the leading providers of IT and
business books and educational materials, provides books and
other educational materials to KnowledgeMax customers.
- - KnowledgeMax has over fifty agreements with providers of
courseware, eLearning, videotapes, databases, journals, and
publications and research reports, which it is in the
process of aggregating into its system.
COMPETITION
The corporate learning market is highly fragmented and extremely
competitive with many new companies emerging to capitalize on the
growing corporate eLearning space. Many firms are solely
concentrating on developing original learning content (books,
tapes, CDs, videos, online courseware, interactive simulations,
etc.). However, KnowledgeMax and its most direct competitors
focus on supplying distribution and services in the corporate
education and training industry.
Many of KnowledgeMax's competitors have greater financial
resources and more experience than KnowledgeMax. Smaller
companies may also prove to be significant competitors,
particularly through arrangements with large corporate
collaborators.
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KnowledgeMax anticipates that it will face increased competition
in the future as new companies enter the market and advanced
technologies become available. KnowledgeMax's competitors may
develop more effective or more affordable technologies or
services than KnowledgeMax can provide, thus rendering
KnowledgeMax's technologies and/or services obsolete or
uneconomical.
EMPLOYEES
As of January 1, 2002, KnowledgeMax employs 12 fulltime employees
and six independent contractors. Of these employees and
contractors, six are in executive or administrative positions,
two are in editorial, six are in information technology, and four
are in sales and business development. KnowledgeMax believes that
its professional employees are trained and skilled and that its
ability to continue to provide products and services to its
existing clients and to expand its business is highly dependent
upon retaining its existing professionals and attracting
additional professionals with the requisite credentials. The
competition for these types of employees is intense and the loss
of a significant number of its professional staff could have a
material adverse effect on the company. KnowledgeMax believes
that its relationship with its employees is good and none of its
employees are represented by a collective bargaining unit.
FACILITIES
KnowledgeMax leases its principal executive offices at 6110
Executive Boulevard, Suite 202, North Bethesda, Maryland 20852.
In connection with the merger, KnowledgeMax will terminate this
lease and relocate its principal executive offices to 7900 Westpark
Drive, Suite T300, McLean, VA 22102. KnowledgeMax entered into a lease
for those premises on January 9, 2002. The term of the lease runs
to March 1, 2003, and KnowledgeMax has the right to renew the lease
for a further three years. The rent is $12,030.33 per month and the
area of the premises is 8,492 square feet. KnowledgeMax owns no real
property.
LEGAL PROCEEDINGS
KnowledgeMax is not currently subject to any material legal
proceeding, nor to its knowledge, is any material legal
proceeding threatened against it.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
KnowledgeMax, Inc. was incorporated under the laws of the State
of Maryland in May 1998. KnowledgeMax succeeded to the business
of The Leadership Library, a private startup company through a
merger with the Leadership Library Limited Partnership in June
1998 and a subsequent merger with its general partner, The
Learning Library, Inc. in June 2000. In June 2000, KnowledgeMax
reincorporated under the laws of the State of Delaware.
Through September 30, 2001, KnowledgeMax has been primarily
engaged in developing the KnowledgeMax.com website, a book-
selling, e-Commerce, and e-Learning database platform for
companies to select, purchase, and deliver knowledge resources
and education to their employees.
In March 2001, KnowledgeMax obtained its first contract to
fulfill orders through the website, and began generating revenues
in May, 2001. Prior to May 2001, KnowledgeMax devoted all of its
efforts to the development of its website and was considered a
development stage company.
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KnowledgeMax recognizes revenue from the sale of books and
learning materials, net of any discounts or promotions, when the
products are received and accepted by the customer. KnowledgeMax
takes title to the books upon transfer to the shipper and assumes
risks and rewards of ownership, including risk of loss while the
products are in transit to the customer, and for collection.
KnowledgeMax does not act as an agent or broker for the supplier.
General and administrative expenses consist of payroll and
related expenses for all company personnel, facilities expense,
professional fees, travel, sales and marketing, depreciation and
amortization, and other corporate expenses.
Research and development costs consist of expenses incurred in
the development of KnowledgeMax's e-Commerce and e-Learning
database platforms. These costs were primarily for software
development firms engaged to develop and implement KnowledgeMax's
website, e-Commerce and database platform and for staff costs to
manage and implement the development effort. These systems have
undergone substantial revision and are expected to be upgraded
and improved on a continual basis. To date, these costs have
been expensed in the periods incurred due to the short useful
life of these development efforts.
RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARED WITH
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
REVENUES
KnowledgeMax signed a contract with a customer in the first
quarter of 2001 and began generating revenues in the second
quarter of 2001. Total revenues generated during the nine months
ended September 30, 2001 were $355,983. Revenue in the nine
month period ended September 30, 2001 consisted entirely of the
sale of books supplied by national book wholesalers. There were
no customers or revenues during 2000.
COST OF REVENUES
The cost of revenues in 2001 was from the products purchased to
fulfill customer orders generated during the period. Cost of
revenues for the nine month period ended September 30, 2001 was
$315,376, which included $177,470 of products purchased from a
related party.
OPERATING EXPENSES
Total operating expenses for the nine month period ended
September 30, 2001 were $1,026,712. These consisted of:
- - sales and marketing expenses of $10,681;
- - general and administrative expenses of $323,921;
- - payroll, benefits and payroll taxes of $452,636; and
- - research and development expenses of $239,474.
Total operating expenses for the nine month period ended
September 30, 2000 were $1,574,334. These consisted of:
- - general and administrative expenses of $786,249;
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- - payroll, benefits and payroll taxes of $434,789; and
- - research and development expenses of $353,287.
General and administrative expenses declined from 2000 to 2001
due to reduced legal and operational expenses. Sales and
marketing efforts commenced during 2001, and are expected to
increase in future periods.
OTHER INCOME (EXPENSE)
Other expense consists primarily of interest charges incurred
with the financing activities of KnowledgeMax. Total interest
expense for the month period ended September 30, 2001 was
$86,898, as compared to $560,810 for the prior year period.
Interest expense decreased in 2001 due to the conversion of
convertible promissory notes into preferred stock during 2000,
and due to a one-time beneficial conversion charge in connection
with the conversion of the Series A convertible notes into Series
A convertible Preferred Stock of $371,801, incurred in 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED
DECEMBER 31, 1999
REVENUES
KnowledgeMax did not generate any revenues prior to June 2001.
OPERATING EXPENSES
Total operating expenses for the year ended December 31, 2000
were $2,014,472. These consisted of:
- - general and administrative expenses of $711,410;
- - payroll, benefits and payroll taxes of $823,605; and
- - research and development expenses of $479,457.
Total operating expenses for the year ended December 31, 1999
were $1,315,076. These consisted of:
- - general and administrative expenses of $413,137;
- - payroll, benefits and payroll taxes of $454,014; and
- - research and development expenses of $447,925.
General and administrative expense increased during 2000, as
compared to 1999, due to increased legal, accounting, and
operational expenses.
Payroll, benefits, and payroll taxes increased during 2000, as
compared to 1999, as KnowledgeMax hired a co-chief executive
officer and other additional staff, and increased staff salaries.
Increased research and development expenses were incurred during
2000, as compared to 1999, as greater development efforts were
required for the KnowledgeMax system during 2000.
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OTHER INCOME (EXPENSE)
Other expense consists primarily of interest charges incurred
with the financing activities of KnowledgeMax. Total interest
expense for the year ended December 31, 2000 was $593,261, as
compared to $86,380 for 1999. Interest expense increased due to
the issuance of additional convertible promissory notes during
2000, and a one-time beneficial conversion charge in connection
with the conversion of the Series A convertible notes into Series
A convertible Preferred Stock of $371,801.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED
DECEMBER 31, 1998
OPERATING EXPENSES
Total operating expenses for the year ended December 31, 1998
were $768,673. These consisted of:
- - general and administrative expenses of $185,967;
- - payroll, benefits and payroll taxes of $309,207; and
- - research and development expenses of $273,499.
General and administrative expense increased during 1999, as
compared to 1998, due to increased legal, accounting, and
operational expenses. Payroll, benefits and payroll taxes
increased during 1999, as compared to 1998, as KnowledgeMax hired
additional employees. Increased development expenses were
incurred during 1999, as compared to 1998, as research and
development efforts increased during 1999.
OTHER INCOME (EXPENSE)
Other expense consists primarily of interest charges incurred
with the financing activities of KnowledgeMax. Total interest
expense for the year ended December 31, 1999 was $86,380 as
compared to $18,529 for 1998. Interest expense increased due to
the issuance of convertible promissory notes during 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, KnowledgeMax had $51,744 of cash and
cash equivalents. KnowledgeMax had current liabilities of
approximately $1.95 million, and an accumulated deficit of
approximately $6.14 million. KnowledgeMax has consistently
funded its operations through stock issuances and by issuing
promissory notes which, in most cases, were subsequently
converted to equity. KnowledgeMax has also funded work and
operations by granting common stock in exchange for accrued
compensation and for services.
With the signing of its first customer in 2001, KnowledgeMax
started to generate revenue and incur costs of revenues. As of
September 30, 2001 KnowledgeMax had accounts receivable of
$151,080. Revenues from current customers are not expected to be
sufficient to fund operations.
KnowledgeMax used cash in operating activities of $731,211 for
the nine month period ended September 30, 2001. The cash for
operations was funded by issuance of $125,000 of convertible
debt, issuance of a $70,000 promissory note, and $602,500
received from the issuance of preferred stock to investors.
During 2001, KnowledgeMax secured a lease line of credit in the
amount of $300,000 for the purchase of equipment and services.
KnowledgeMax purchased approximately $78,000 of equipment during
the period. There was approximately $220,000
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available under the lease at September 30, 2001.
Subsequent to September 30, 2001, and in connection with the
proposed merger, KnowledgeMax was able to renegotiate the terms
of a significant portion of its current liabilities and convert a
substantial portion of the outstanding liabilities into equity.
KnowledgeMax's growth has required, and will continue to require,
substantial capital to fund expanding working capital needs, new
business initiatives, and capital expenditures. To date, the
funding of these requirements has come primarily from outside
investors. While outside investors have historically provided
the required funding, they have no obligation to continue to do
so. KnowledgeMax intends to seek additional funding from
investors, which funding may be in the form of debt, equity, or
some combination. There can be no assurance of continued funding
by outside investors or other sources or that such funding will
be on favorable terms to KnowledgeMax.
KnowledgeMax expects to continue to focus on developing and
enhancing its software and website applications as well as
expanding its service offerings and revenues, however,
KnowledgeMax anticipates generating operating losses and negative
cash flows from operations for the foreseeable future. The
markets KnowledgeMax is pursuing are highly competitive and there
can be no assurance that KnowledgeMax's service offerings will be
successful, or that KnowledgeMax will ever generate operating
profits or positive cash flows.
KnowledgeMax has a limited operating history and its prospects
are subject to the risks, expenses, and uncertainties frequently
encountered by companies in the new and rapidly evolving markets
for Internet products and services. These risks include the
failure to develop a viable online delivery service, inability to
maintain and increase its customer base and interruptions of
service from the Internet service provider that hosts
KnowledgeMax's website, as well as other risks and uncertainties.
KnowledgeMax has experienced operating losses and negative cash
flows from operations since its inception, has working capital
and stockholders' deficiencies and has been unable to repay
certain obligations when due, as a result of efforts to
construct, develop, and market its website and as a result of
efforts to design, develop, and market its book-selling knowledge
resources and education to customers and their employees.
KnowledgeMax's plan of operation for the next twelve months
involves continuing to further develop its platform through its
ongoing research and development efforts. KnowledgeMax also
expects to increase its focus on sales and marketing to generate
revenues now that the company's online book selling service is
operational. Given the current cash position of KnowledgeMax and
the anticipated capital resources of the combined company
following the merger, including the proceeds from the sale of
Sideware's interest in the Chalk Group, it is expected that
KnowledgeMax will be able to satisfy its cash requirements for
approximately five months. Therefore, it is likely that the
company will need to raise additional funds during the next
twelve months in order to fund its operations. There can be no
assurance that such additional funds will be available on terms
that the company finds acceptable, if at all.
These factors described above, either individually or in the
aggregate, could have an adverse effect on KnowledgeMax's
financial condition and future operating results and create an
uncertainty as to KnowledgeMax's ability to continue as a going
concern.
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QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
As of September 30, 2001, KnowledgeMax has not entered into or
acquired financial instruments that have a material market risk.
KnowledgeMax has no financial instruments for trading or other
purposes and no derivative or other financial instruments with
off balance sheet risk. All financial assets and liabilities are
due within the next twelve months, except for $46,139 of capital
lease obligations which are due after 12 months, and are
classified as current assets or liabilities in the unaudited
condensed balance sheet provided with this prospectus. The fair
values of all financial instruments at September 30, 2001 is not
materially different from their carrying values.
KnowledgeMax does not enter into hedging or derivative securities
transactions that would subject it to market risk. KnowledgeMax
does not enter into transactions in foreign denominated
currencies and does not have any material obligations that are
subject to volatility in foreign currency exchange rates or
interest rates.
MATERIAL CONTRACTS BETWEEN SIDEWARE AND KNOWLEDGEMAX
Prior to the negotiation of the merger, there were no material
business dealings between Sideware and KnowledgeMax.
Subsequent to signing the merger agreement, Sideware has
completed a private placement financing in the amount of
$1,350,000. Under the merger agreement, private placement funds
raised by Sideware are being used to fund the operations of both
companies. Additional information is contained under "THE MERGER
- - Conduct of business prior to merger" and "THE MERGER -
Termination, loan repayment, and liquidated damages".
EXECUTIVE AND DIRECTOR COMPENSATION
The following compensation arrangements have existed with respect
to individuals who are directors or executive officers of
Sideware, and who are expected to remain with Sideware following
the merger.
James L. Speros. During 1999 Mr. Speros was paid a salary of
$8,000 per month from January to April, $11,500 per month from
May to October, and $15,000 per months during November and
December. During 2000, Mr. Speros was paid a salary of $250,000.
During 2001, Mr. Speros agreed to reduce his salary to $200,000
per year, in view of the reduced cash resources of Sideware. By
written amendment dated November 27, 2001, Mr. Speros agreed to
reduce his salary further to $170,000 per year. In December
2001, Mr. Speros agreed to accept 98,737 shares of Sideware in
lieu of one half of his salary for the months of November and
December 2001. Mr. Speros' amendment agreement also provides
that if another Sideware employee earns a salary greater than
that earned by Mr. Speros, Mr. Speros shall automatically receive
a raise to match the other employee's salary up to a maximum of
$250,000 annually.
Mr. Speros also holds options to purchase 1,175,000 shares of
Sideware common stock, all of which have vested.
In April 2001, Mr. Speros entered into a Change of Control
Severance Agreement which entitled him to up to two years salary
and bonus if his employment was terminated within specified
periods either before or after a change in control of Sideware.
Under the November 27, 2001
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amendment agreement, the maximum cash payout to Mr. Speros in
the event of termination of his employment was reduced to $170,000.
Kenneth R. Thornton. Commencing in July 2001, Mr. Thornton
received a salary of $6,500 per month as Chairman of Sideware.
In December 2001, Mr. Thornton agreed to accept 45,303 shares of
Sideware common stock in lieu of one half of his salary for the
months of November and December 2001. Mr. Thornton holds options
to purchase 950,000 shares, all of which have vested.
Jay Nussbaum. Mr. Nussbaum has not received a salary from
Sideware. He holds options to purchase 600,000 shares.
Jack Kemp. Mr. Kemp has not received a salary from Sideware. He
holds options to purchase 150,000 shares.
John Shoemaker. Mr. Shoemaker has not received a salary from
Sideware. He holds options to purchase 150,000 shares.
Rahul Bardhan. Mr. Bardhan's salary during 2000 and at the
commencement of 2001 was $250,000 per year. In March 2001, Mr.
Bardhan was also paid a bonus of $60,000 in respect of the fiscal
year ended December 31, 2000. During 2001, in view of the
reduced cash resources of Sideware, Mr. Bardhan accepted a series
of salary reductions which reduced his monthly salary to the
equivalent of $170,000 per year. By written agreement dated
November 27, 2001, Mr. Bardhan agreed to reduce his salary to
$170,000 per year. In December 2001, Mr. Bardhan also agreed to
accept 48,788 shares of Sideware in lieu of one half of his
salary for the month of November 2001.
In August 2000, Mr. Bardhan entered into a Change of Control
Severance Agreement which entitled him to up to two years salary
and bonus if his employment was terminated within specified
periods either before or after a change in control of Sideware.
Under the November 27, 2001 written agreement, the maximum cash
payout to Mr. Bardhan in the event of termination of his
employment was reduced to $170,000. The November 27, 2001
agreement is subject to Sideware either completing the merger
with KnowledgeMax or raising $5 million in financing by June 30,
2002.
Mr. Bardhan also holds options to purchase 1,800,000 shares, of
which 1,400,000 have vested.
The following tables summarize compensation paid to all
individuals who are expected to remain with Sideware following
the merger, and who qualified as Named Executive Officers of
Sideware or KnowledgeMax during the years ended December 31,
2001, 2000, or 1999.
The term "Named Executive Officer" includes:
- - a corporation's chief executive officer; and
- - a corporation's four most highly paid executive officers
other than the chief executive officer;
except that no disclosure is provided for any individual, other
than a chief executive officer, whose total annual salary and
bonus do not exceed $100,000.
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SUMMARY COMPENSATION TABLE - SIDEWARE
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, 12/31/01 $196,191 - - - 800,000 - -
President, CEO 12/31/00 $225,000 - - - - - $54,000 (1)
(since Oct. 12/31/99 $136,250 $ 50,000 - - 125,000 - -
15, 2000)
Rahul Bardhan, 12/31/01 $245,191 - - - 800,000 - -
Chief 12/31/00 $ 63,550 $ 60,000 - - 1,000,000 - -
Technology
Officer
1. This amount represents a club membership purchased for Mr. Speros.
SUMMARY COMPENSATION TABLE - KNOWLEDGEMAX
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
E. Linwood 12/31/01 $89,375 - - $126,136(1) - - -
Pearce,
Chairman,
Co-CEO
Edwin 12/31/01 $90,625 - - $68,987 (2) - - -
Grosvenor,
Founder,
Co-CEO
Donna Lynn, 12//31/01 $54,167 - - $97,351 (3) - - -
COO and
President
Alan Sultan 12//31/01 $90,625 - - $54,122 (4) - - -
Vice
President,
Business
Development
Richard 12/31/01 $87,500 - - $54,924 (5) 69,000 - -
Luebkemann
Executive
Vice
President,
Technology
(1) Restricted Stock Awards for Mr. Pearce include: (i) 62,798
shares of common stock issued in consideration for services
performed during the year 2001 and (ii) 63,338 shares of
common stock issued in consideration for services performed
during the year 2000.
(2) Restricted Stock Awards for Mr. Grosvenor include: (i)
30,075 shares of common stock issued in consideration for
services performed during the year 2001 and (ii) 38,912 shares
of common stock issued in consideration for services performed
during the year 2000.
144
(3) Restricted Stock Awards for Ms. Lynn include: (i) 42,351
shares of common stock issued in consideration for services
performed during the year 2001 and (ii) 55,000 shares of
common stock issued in consideration for services performed
during the year 2000.
(4) Restricted Stock Awards for Mr. Sultan include: (i) 22,622
shares of common stock issued in consideration for services
performed during the year 2001 and (ii) 31,500 shares of
common stock issued in consideration for services performed
during the year 2000.
(5) Restricted Stock Awards for Mr. Luebkemann include: (i)
23,674 shares of common stock issued in consideration for
services performed during the year 2001 and (ii) 31,250 shares
of common stock issued in consideration for services performed
during the year 2000.
Neither Sideware nor KnowledgeMax has implemented any long term
incentive plan.
SIDEWARE OPTIONS
The following table summarizes options granted during the year
ended December 31, 2001 to the executive officers of Sideware
whom Sideware expects to remain with Sideware following the
merger.
SIDEWARE OPTION / SAR GRANTS IN LAST FISCAL YEAR
Name Number of Percent of Exercise or Expiration Potential Realizable
securities total options / base price date Value at Assumed
underlying SARs granted to (mm/dd/yy) Rates of Stock Price
Options / employees in Appreciation (1)
SARs granted fiscal year
5% 10%
James Speros 500,000 4.5% $1.00 01/18/06 $138,000 $30,500
300,000 2.7% $0.24 12/05/06 $ 19,870 $43,920
Rahul Bardhan 500,000 4.5% $1.00 01/18/06 $138,000 $30,500
300,000 2.7% $0.24 12/05/06 $ 19,870 $43,920
(1) Potential realizable values are computed by (a)
multiplying the number of shares subject to the options by the
fair market value of Sideware shares, (b) assuming that the
aggregate stock value derived from that calculation compounds
at the annual 5% or 10% rate shown in the table for the term
of the option and (c) subtracting from that result the
aggregate option exercise price. The 5% and 10% assumed annual
rates of stock price appreciation are mandated by the rules of
the SEC and do not represent Sideware's prediction of its
stock price.
All option grants were authorized by the full board of directors,
and all options were granted at an exercise price equal to fair
market value in accordance with the rules of the Toronto Stock
Exchange.
The following table summarizes information with respect to
options exercised and held at December 31, 2001 by each of the
executive officers of Sideware whom Sideware expects to remain
with Sideware following the merger.
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SIDEWARE OPTION EXERCISES AND YEAR END OPTION 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 1,175,000 / 0 $0
Rahul Bardhan 0 0 1,400,000 / 400,000 $0
No Sideware options were exercised during the year ended December
31, 2000 by any director or executive officer of Sideware whom
Sideware expects to remain with Sideware following the merger.
KNOWLEDGEMAX OPTIONS
The following table sets forth information regarding options
granted to the named executive officers during 2000.
KNOWLEDGEMAX OPTION / SAR GRANTS IN LAST FISCAL YEAR
Name Number of Percent of Exercise or Expiration Potential Realizable
securities total options / base price date Value at Assumed
underlying SARs granted to (mm/dd/yy) Rates of Stock Price
Options / employees in Appreciation (1)
SARs granted fiscal year
5% 10%
E. Linwood Pearce 0 n/a n/a n/a n/a n/a
Edwin Grosvenor 0 n/a n/a n/a n/a n/a
Donna Lynn 0 n/a n/a n/a n/a n/a
Alan Sultan 0 n/a n/a n/a n/a n/a
Richard Luebkemann 65,000 29% $1.00 04/05/11 $375,206 $577,336
(1) Potential realizable values are computed by (a) multiplying
the number of shares of common stock subject to a given option
by the conversion ratio, (b) multiplying this amount by the
fair market value of Sideware shares, (c) assuming that the
aggregate stock value derived from that calculation compounds
at the annual 5% or 10% rate shown in the table for the term
of the option and (d) subtracting from that result the
aggregate option exercise price. The 5% and 10% assumed annual
rates of stock price appreciation are mandated by the rules of
the SEC and do not represent KnowledgeMax's prediction of
Sideware's stock price following the merger.
The percent of total options granted to employees in the above
table is based on 226,000 total options granted by KnowledgeMax
in 2001.
146
Options were granted at an exercise price equal to the fair
market value of KnowledgeMax common stock, as determined by the
board of directors on the date of grant. In making this
determination, the board of directors considered a number of
factors, including:
- - KnowledgeMax's historical and prospective future revenue
and profitability;
- - KnowledgeMax's cash balance and rate of cash consumption;
- - the development and size of the market for KnowledgeMax's
services;
- - the status of KnowledgeMax's financing activities;
- - the stability of KnowledgeMax's management team; and
- - the breadth of KnowledgeMax's service offerings.
The following table sets forth information concerning the value
realized upon exercise of options during 2000 and the number and
value of unexercised options held by each of the named executive
officers at December 31, 2001.
KNOWLEDGEMAX OPTION EXERCISES AND YEAR END OPTION 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
E. Linwood 0 n/a 0/150,000(2) -/$551,250
Edwin Grosvenor 0 n/a 0/0 -/-
Donna Lynn 0 n/a 70,000/40,000 $257,250/$147,000
Alan Sultan 0 n/a 55,000/25,000 $202,125/$91,875
Richard Luebkemann 0 n/a 18,000/47,000 $66,150/$172,725
(1) Based on the estimated value of one Sideware share,
multiplied by the estimated conversion ratio, minus the per
share exercise price of the option, multiplied by the number
of KnowledgeMax shares issued or issuable upon exercise of the
option.
(2) Consists of an option to purchase 150,000 shares of
KnowledgeMax common stock which will vest and become
exercisable immediately upon closing of the merger.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SIDEWARE
Since January 1, 2000, Sideware has entered into the transactions
set out below in which individuals who:
- - were directors or executive officers of Sideware at the
time of the transaction; and
- - are expected to serve as director or executive officers
after the merger;
147
were interested. No information is given in this section with
respect to directors or executive officers of Sideware who are
not expected to remain with Sideware after the merger.
TRANSACTIONS WITH BRAINTECH, 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 include James
Speros, Grant Sutherland, and Edward White. Braintech common
shares are quoted on the OTC Bulletin Board. Mr. Speros is
expected to remain as a director and President of Sideware
following the merger. Neither Mr. Sutherland nor Mr. White is
expected to remain with Sideware following the merger, and no
information is given in this section concerning separate
transactions in which either Mr. Sutherland or Mr. White was
interested.
Up to November 2000 Sideware operated under a cost sharing
arrangement with Braintech, pursuant to which the two companies
shared the following costs:
- - costs of North Vancouver offices premises;
- - salary costs of certain personnel including, among other
things, the salary costs of accounting personnel; and
- - miscellaneous office charges, such as office supplies and
telephone and fax charges.
Sideware bore 80% of the common costs owing to the substantially
greater level of its business activity, and its corresponding
greater use of the common premises and personnel. Both companies
signed the lease for the North Vancouver premises, and could be
liable for 100% of the rent.
In the summer of 2000, Braintech, Inc. began to move its
operations to separate premises. On November 6, 2000 the two
companies entered into a letter agreement under which Braintech
would continue to use a portion of the North Vancouver office, as
well as certain services provided by Sideware personnel, during a
transitional period not to exceed six months.
In the summer of 2001, Sideware terminated its operations in
North Vancouver. Braintech took occupancy of approximately two-
thirds of the North Vancouver premises, and the remaining third
was sublet to a third party. Sideware remains a signatory to the
lease, and could be held liable for the rent payments of the
present occupants fail to pay the rent. The term of the lease
expires August 31, 2003. Inclusive of a proportionate share of
operating costs, the lease payments for the premises currently
occupied by Braintech are approximately $120,000 per year. The
lease payments for the premises occupied by the third party sub-
tenant are approximately $60,000 per year.
Sideware previously purchased computer equipment for Braintech,
Inc. owing to favorable equipment pricing available to it under
IBM marketing programs. Hardware sales to Braintech totaled
approximately $20,000 during the fiscal year ended December 31,
2000. There have been no sales to Braintech during 2001.
Braintech also enrolled in the Sideware Partner Program, through
which Sideware previously marketed its eCRM software products.
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PRIVATE PLACEMENTS
On January 21, 2000, Sideware 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. James Speros purchased 60,000 units.
In December 2001 Sideware completed a private placement of
13,500,000 shares at a price of $0.10 per share. Mr. Speros
purchased 1,000,000 of the shares.
ISSUANCE OF STOCK FOR PAYROLL OBLIGATIONS
In January 2002, Sideware issued 332,222 shares of common stock
to satisfy payroll obligations totaling $47,567 to officers and
employees.
KNOWLEDGEMAX
PERSONAL GUARANTEES
Anne Grosvenor, the mother of KnowledgeMax's founder and co-chief
executive officer Edwin Grosvenor, has guaranteed KnowledgeMax's
$100,000 line of credit and provided a number of other loans to
the company. In 2000 KnowledgeMax granted her 10,000 shares of
common stock in consideration for her guarantee of the line of
credit. From 1996 through 1998, Mrs. Grosvenor loaned a total of
$107,030 to KnowledgeMax, which in consideration for a promissory
note with interest accruing at 8% per year. The note initially
became due on January 1, 2001. In January 2002, Mrs. Grosvenor
converted the $107,030 principal and $25,711 interest due on this
note into 44,694 shares of Series B Preferred Stock. In 1999,
2000, and 2001, Mrs. Grosvenor loaned an additional $44,827 to
KnowledgeMax. In August 2000, $30,000 of this debt was converted
into 16,835 shares of Series A Preferred Stock. As part of an
agreement entered into with Mrs. Grosvenor in December 2001,
KnowledgeMax has agreed to eliminate her liability by removing
her from the line of credit, and to pay off the balance owed to
Mrs. Grosvenor of $14,827 in full upon closing of the merger.
In September 1999, Edwin Grosvenor personally guaranteed
KnowledgeMax's obligations under the office lease for its
headquarters in N. Bethesda, Maryland. The lease was for an
initial term of one year which expired on September 2001. The
lease provides for monthly rental payments of approximately
$4200. KnowledgeMax has given notice to the lesser that it is
vacating the premises in February 2002.
CONVERTIBLE PROMISSORY NOTES
In July 2000, KnowledgeMax issued a convertible promissory note
in principal amount of $95,304 to Sentix, LLC, with interest
accruing at 8% per year. Sentix is owned by
KnowledgeMax's chief technology officer, Richard Luebkemann.
Sentix converted $70,000 of the principal due on this note into
23,569 of common stock in January 2002, with a balance of $30,000
paid in cash.
On November 12, 2001 KnowledgeMax issued a convertible
promissory note in principal amount equal to $75,000 to Washington
Capital Partners, LOC with interest accruing at 8% per year. The note
is convertible into Series B Preferred Stock at $2.97 per share at
the option of the holder. In
149
January 2002, Washington Capital Partners converted the principal and
accrued interest on the note into 25,380 shares of Series B Preferred
Stock. Joe Boivin, a director of KnowledgeMax, is a managing director
of Washington Capital Partners.
BAKER & TAYLOR AGREEMENTS
In July 1998, KnowledgeMax entered into strategic agreement with
Baker & Taylor, Inc., a book distributor, to provide KnowledgeMax
with training and technical books, fulfillment and shipping
services and a license to use Baker & Taylor's database. At the
same time, KnowledgeMax issued and sold 148,533 shares of common
stock to Baker & Taylor for $250,000. KnowledgeMax also entered
into a loan agreement and a warrant agreement with Baker &
Taylor. The loan agreement provided KnowledgeMax with a line of
credit of up to $200,000, bearing interest at the rate of 8
percent per annum, due on April 30, 2000. KnowledgeMax
immediately made draws against the line of credit for the
$200,000 limit. The warrant agreement allows Baker & Taylor to
purchase shares equal to 5% of KnowledgeMax's outstanding equity
interests on a fully diluted basis at any time until April 30,
2003 at a purchase price of $200,000. In December 2001, Baker &
Taylor agreed to terminate the warrant agreement immediately
prior to the closing of the merger pursuant to the terms of a
letter agreement. Under the terms of the letter agreement, Baker
& Taylor will convert its warrant and the outstanding principal
under the line of credit into 7.5% of KnowledgeMax's fully
diluted capital stock immediately prior to closing of the merger.
Edward Gross, a director of KnowledgeMax is an executive officer
of Baker & Taylor.
In June 2000, KnowledgeMax issued Baker & Taylor 10,000 shares of
common stock in consideration of the extension of the line of
credit through December 31, 2000. In August 2000, KnowledgeMax
issued Baker & Taylor 16,409 shares of Series B Convertible
Preferred Stock in exchange for the cancellation of accrued
interest of $48,733.
In June 2001, the loan agreement with Baker & Taylor was amended
to extend the maturity date to December 31, 2001. In return,
KnowledgeMax issued 8,000 shares of Series B Preferred Stock to
Baker & Taylor. In connection with the amendment and the waiver
by Baker & Taylor of its rights under the provisions pertaining
to default, KnowledgeMax agreed to convert the default interest
on the loan at the end of each quarter of 2001 into shares of its
Series B Convertible Preferred Stock at a conversion price of
$2.97 per share for a total of 2,020 shares per quarter. In
December 2001, the loan agreement was amended again to extend the
maturity date to June 30, 2002. In connection with the December
amendment and the waiver by Baker & Taylor of its rights under
the provisions pertaining to default, KnowledgeMax agreed to
convert the default interest on the loan at the end of each
quarter of 2002 into shares of Series B Convertible Preferred
Stock at a conversion price of $2.97 per share for a total of
2,020 shares per quarter, and agreed to issue Baker & Taylor 2000
shares of Series B Convertible Preferred Stock on January 1, 2002
and an additional 2,000 shares of Series B Convertible Preferred
Stock on April 1, 2002 if the loan is not paid off or terminated
by March 31, 2002.
ISSUANCE OF STOCK FOR ACCRUED PAYROLL OBLIGATIONS
On June 14, 2000, KnowledgeMax issued 271,651 shares of common
stock for $344,132 of accrued compensation for services rendered
by employees, officers, and consultants.
On April 16, 2001, KnowledgeMax issued 236,313 shares of common
stock for $278,033 of accrued compensation as of December 31,
2000, for services rendered by employees, officers, and
consultants.
150
On January 8, 2002, KnowledgeMax agreed to issue an aggregate of
39,563 shares of common stock for $117,500 of accrued
compensation as of December 31, 2001 for services rendered by
employees and officers.
LEGAL AND TAX MATTERS
The validity of the Sideware common stock to be issued in
connection with the merger and the continuation to Delaware will
be passed upon by Silver Freedman & Taff, L.L.P. The United
States federal income tax consequences of the continuation of
Sideware to Delaware and the merger with KnowledgeMax will be
passed on by Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C.
The Canadian federal income tax consequences of the merger and
continuation of Sideware to Delaware will be passed on by
Thorsteinsson's.
EXPERTS
The consolidated balance sheets of Sideware as at December 31,
2000 and 1999, and the consolidated statements of operations and
deficit and changes in financial position for the years ended
December 31, 2000 and 1999, the eight month period ended December
31, 1998, and the year ended April 30, 1998 included herein and
elsewhere in this joint proxy statement - prospectus have been
included in reliance upon the report of KPMG LLP, independent
chartered accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing. The
report of KPMG LLP covering the December 31, 2000 consolidated
financial statements contains an explanatory paragraph that
states that Sideware's recurring losses from operations and
negative cash flows from operating activities raise substantial
doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
that might result from the outcome of that uncertainty.
The consolidated balance sheets of Chalk.com Network (Holding)
Corp. as at August 31, 2001 and December 31, 2000 and 1999, and
the consolidated statements of operations and deficit and changes
in financial position for the eight month period ended August 31,
2001, the year ended December 31, 2000 and the eleven month
period ended December 31, 1999 included herein and elsewhere in
this joint proxy statement - prospectus have been included in
reliance upon the report of KPMG LLP, independent chartered
accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing. The report
of KPMG LLP covering the December 31, 2000 consolidated financial
statements contains an explanatory paragraph that states that
Chalk.com Network (Holding) Corp.'s recurring losses from
operations and negative cash flows from operating activities
raise substantial doubt about its ability to continue as a going
concern. The consolidated financial statements do not include
any adjustments that might result from the outcome of that
uncertainty.
The financial statements of KnowledgeMax, Inc. as of December 31,
2000 and 1999, and for each of the years in the three-year period
ended December 31, 2000 and for the period from June 13, 1996
(date of inception) to December 31, 2000, have been included
herein and elsewhere in this joint proxy statement - prospectus
in reliance upon the report of KPMG LLP, independent accountants,
appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing. The report of KPMG LLP
covering the December 31, 2000 financial statements contains an
explanatory paragraph that states that KnowledgeMax has incurred
losses and negative cash flows from operations since inception, has
working capital and stockholders' deficiencies and has been unable
to repay certain obligations when due that raise substantial doubt
about its ability to continue as a going concern. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
151
STOCKHOLDER PROPOSALS
After the merger is completed, the next annual meeting of
Sideware stockholders will be held in 2002. In order to be
eligible for inclusion in Sideware's proxy materials for that
annual meeting, any stockholder proposal must be received at
Sideware's executive offices at 7900 Westpark Drive, Suite T300,
McLean, Virginia 22102 by February 3, 2002. To be considered
for presentation at the 2002 annual meeting, although not included
in Sideware's proxy statement for that meeting, any stockholder
proposal must be received at Sideware's executive offices not
less than 60 days nor more than 90 days prior to the meeting,
regardless of any postponements, deferrals or adjournments of
that meeting to a later date. If, however, less than 70 days'
notice or prior public disclosure of the date of the annual
meeting is given or made, the stockholder proposal must be
received by the close of business on the tenth day following
the day on which notice of the annual meeting was mailed or
public announcement of the date of the meeting was made,
whichever occurs first.
All stockholder proposals submitted for inclusion in Sideware's
proxy materials will be subject to the requirements of the proxy
rules adopted under the Securities Act of 1934 and, as with any
stockholder proposal (regardless of whether it is included in
Sideware's proxy materials) Sideware's certificate of
incorporation and bylaws and, assuming the continuation of
Sideware proceeds, Delaware law.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
SIDEWARE F-1
Condensed Consolidated Balance Sheets as of
December 31, 2000 and September 30, 2001
(unaudited) F-2
Condensed Consolidated Statements of Operations
(unaudited) for the nine month periods ended
September 30, 2000 and 2001 and the three month
periods ended September 30, 2000 and 2001 F-3
Condensed Consolidated Statements of Stockholders'
Deficit (unaudited) for the nine month period
ended September 30, 2000 F-4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the nine month periods ended
September 30, 2000 and 2001 F-5
Condensed notes to Consolidated Financial Statements F-6
Auditors' report of KPMG LLP F-17
Consolidated Balance Sheets as of December 31, 2000
and December 31, 1999 F-18
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 F-19
Consolidated Statements 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 F-20
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 F-22
Notes to consolidated financial statements F-23
Supplementary financial data showing revenues, gross margin,
net loss, and net loss per share on a quarterly basis during
Sideware's two most recent fiscal years is contained in Note 15
to the
152
audited Sideware consolidated financial statements appended to
this joint proxy statement - prospectus.
THE CHALK GROUP F-42
Auditors' report of KPMG LLP F-43
Consolidated Balance Sheets as of August 31, 2001
and December 30, 2000 F-44
Consolidated Statements of Operations for the eight
month period ended August 31, 2001 and the year
ended December 31, 2000 F-45
Consolidated Statements of Stockholders' Deficit
for the eight month period ended August 31, 2001
and the year ended December 31, 2000 F-46
Consolidated Statements of Cash Flows for the
eight month period ended August 31, 2001 and
the year ended December 31, 2000 F-47
Notes to consolidated financial statements F-48
Auditors' report of KPMG LLP F-62
Consolidated Balance Sheets as of December 31,
2000 and 1999 F-63
Consolidated Statements of Operations for the year
ended December 31, 2000, and the eleven month
period ended December 31, 1999 F-64
Consolidated Statement of Stockholders' Equity
(Deficit) for the year ended December 31, 2000
and the eleven month period ended December 31,
1999 F-65
Consolidated Statements of Cash Flows for the year
ended December 31, 2000 and the eleven month period
ended December 31, 1999 F-66
Notes to consolidated financial statements F-67
KNOWLEDGEMAX F-82
Condensed Balance Sheet as of September 30, 2001
(unaudited) F-83
Statements of Operations (unaudited) for the
nine month periods ended September 30, 2000
and 2001 F-84
Statements of Cash Flows (unaudited) for the
nine month periods ended September 30, 2000 and 2001 F-85
Notes to financial statements F-86
Auditors' report of KPMG LLP F-91
Balance Sheets as of December 31, 2000 and December
31, 1999 F-92
Statements of Operations for the years ended December
31, 2000, 1999, and 1998 and for the period from
inception on June 13, 1996 through December 31, 2000 F-93
Statement of Stockholders' Equity (Deficit)
for the years ended December 31, 2000, 1999, and 1998 F-94
Statements of Cash Flows for the years ended
December 31, 2000, 1999, and 1998 and for the
period from inception on June 13, 1996 through
December 31, 2000 F-95
Notes to financial statements F-96
APPENDICES
Appendix A Merger agreement
Appendix B Opinion of Paradigm Capital Inc.
Appendix C Form of Sideware (Delaware) Certificate of
Incorporation
Appendix D Form of Sideware (Delaware) Bylaws
Appendix E Section 193 of the Yukon Business Corporations Act
Appendix F Section 262 of the Delaware General Corporation Law
Appendix G Sideware 2002 Equity Incentive Plan
153
F-1
Consolidated Financial Statements
(Expressed in United States dollars)
SIDEWARE SYSTEMS INC.
(Prepared in accordance with generally accepted
accounting principles in the United States)
Nine month periods ended September 30, 2001 and 2000
(Unaudited)
F-2
SIDEWARE SYSTEMS INC.
Condensed Consolidated Balance Sheets
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
============================================================================
September 30, December 31,
2001 2000
- ----------------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,512,059 $ 949,999
Short-term investments - 5,982,588
Accounts receivable:
Trade, less allowance for
doubtful accounts of $12,412
(December 31, 2000 - $142,047) 368,023 467,783
Other 30,066 126,842
Due from related parties - 29,859
Current portion of long-term
receivables (note 5) - 6,849
Inventory - 46,829
Prepaid expenses 129,834 549,639
--------------------------------------------------------------------------
2,039,982 8,160,388
Deposit on lease 120,439 129,926
Long-term receivables (note 5) - 105,587
Deferred finance charges (note 5) - 95,583
Intangible assets (note 6) 1,486,861 -
Fixed assets (note 7) 560,483 1,967,818
- ----------------------------------------------------------------------------
$ 4,207,735 $ 10,459,302
============================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 1,323,166 $ 1,246,683
Due to related parties 6,142 -
Current portion of obligations under
capital leases (note 8) 40,360 -
Deferred revenue 280,450 $ 168,661
--------------------------------------------------------------------------
1,650,118 1,415,344
Obligations under capital leases (note 8) 57,758 -
Due to stockholders (note 9) 947,085 -
- ----------------------------------------------------------------------------
2,655,681 1,415,344
Stockholders' equity:
Common stock
Authorized: 199,949,375 common shares,
no par value
Issued and outstanding: 67,057,343
(2000 - 60,886,415) 45,392,800 40,660,382
Additional paid-in capital 12,063,311 12,146,732
Deferred stock-based compensation - (460,895)
Accumulated other comprehensive loss (623,091) (503,685)
Deficit (55,280,966) (42,798,576)
--------------------------------------------------------------------------
1,552,054 9,043,958
- ----------------------------------------------------------------------------
$ 4,207,735 $ 10,459,302
============================================================================
Discontinued operations (note 13)
Commitments (note 14)
Contingencies (note 15)
See accompanying notes to consolidated financial statements.
1
F-3
SIDEWARE SYSTEMS INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
============================================================================================
Three month periods ended Nine month periods ended
September 30, September 30,
------------------------- ------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------
Revenue:
Television and airline
segement production $ 110,093 $ - $ 110,093 $ -
Interactive media 25,926 - 25,926 -
------------------------------------------------------------------------------------------
136,019 - 136,019 -
Cost of revenues 91,611 - 91,611 -
- --------------------------------------------------------------------------------------------
Gross margin 44,408 - 44,408 -
Operating expenses:
Sales and marketing and
website operations 60,896 - 60,896 -
General and administrative
(including stock-based
compensation of $nil,
$1,036,857, $56,213 and
$5,928,736) 760,436 1,915,367 2,745,934 7,941,351
------------------------------------------------------------------------------------------
821,332 1,915,367 2,806,830 7,941,351
- --------------------------------------------------------------------------------------------
Operationg loss from
continuing operations (776,924) (1,915,367) (2,762,422) 7,941,351
Interest income 6,503 164,983 245,031 529,861
- --------------------------------------------------------------------------------------------
Net income (loss) from
continuing operations (770,421) (1,750,384) (2,517,391) (7,411,490)
Net loss from discontinued
operations (note 13) (2,909,376) (5,722,714) (9,964,999) (15,661,773)
- --------------------------------------------------------------------------------------------
Net loss $(3,679,797) $ (7,473,098) $(12,482,390) $ (23,073,263)
Other comprehensive
loss:
Foreign currency translation
adjustments 17,144 (281,571) 17,144 (708,826)
Net realized holding gain on
short-term investments - - (136,550) -
------------------------------------------------------------------------------------------
17,144 (281,571) (119,406) (708,826)
Comprehensive loss $ (3,662,653) $ (7,691,669) $(12,601,796) $(23,780,089)
=============================================================================+==============
Basic and diluted net loss
per share from continuing
operations $ (0.01) $ (0.03) $ (0.04) $ (0.13)
Basic and diluted net loss
per share from
discontinued operations $ (0.04) $ (0.10) $ (0.15) $ (0.27)
Basic and diluted net loss
per share $ (0.05) $ (0.13) $ (0.19) $ (0.40)
Weighted average shares
used in computing net
loss per share,
basic and diluted 65,881,083 59,040,289 63,378,281 57,502,937
===============================+============================================================
See accompanying notes to consolidated financial statements.
2
F-4
SIDEWARE SYSTEMS INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
==================================================================================================================
Accumulated
Common Stock Additional Deferred other Total
Number of paid-in stock-based comprehensive stockholders'
Shares Amount capital compensation loss Deficit equity
- ------------------------------------------------------------------------------------------------------------------
Balance, December
31, 2000 60,886,415 $40,660,382 $12,146,732 $ (460,895) $ (503,685) $ (42,798,576) $ 9,043,958
Shares issued for
cash (note 12) 8,170,928 5,037,121 - - - - 5,037,121
Share issue costs
(note 12) - (304,703) - - - - (304,703)
Amortization
of deferred
stock-based
compensation - - - 377,474 - - 377,474
Deferred stock-
based
compensation - - (83,421) 83,421 - - -
Net unrealized
holding gain
on short-term
investments - - - - (136,550) - (136,550)
Foreign currency
translation
adjustment - - - - (17,144) - 17,144
Net loss - - - - - (12,482,390) (12,482,390)
- ------------------------------------------------------------------------------------------------------------------
Balance,
September 30,
2001 69,057,343 $45,392,800 $12,063,311 $ - $ (623,091) $(55,280,966) $ 1,552,054
==================================================================================================================
See accompanying notes to consolidated financial statements.
3
F-5
SIDEWARE SYSTEMS INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
==================================================================
Nine months ended September 30,
----------------------
2001 2000
- ------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Loss for the period $(12,482,390) $(23,073,263)
Items not involving cash:
Amortization of fixed assets 467,729 436,995
Amortization of intangible
assets 28,556 -
Stock-based compensation 377,474 11,421,903
Loss on disposal of assets 1,514,439 -
Write-down of long-term
receivable 65,000 -
Realized holding gain on
short-term investments (136,550) -
Changes in non-cash operating
working capital:
Accounts receivable 618,098 (425,233)
Due to related parties 35,999 71,335
Due to officers - (215,353)
Inventory 46,829 53,438
Prepaid expenses 437,376 (172,942)
Accounts payable and accrued
liabilities (737,277) 602,150
Deferred revenue (215,748) 128,609
- -------------------------------------------------------------------
(9,980,465) (11,315,031)
Financing activities:
Shares issued for cash, net of
share issue costs 4,732,418 18,988,783
Stockholders loans 21,729 -
Repayment of lease
oblgations (3,301) -
- -------------------------------------------------------------------
4,750,847 18,988,783
Investing activities:
Proceeds on maturity of
short-term investments 5,982,588 (5,425,938)
Long-term receivables and
deferred charges 143,019 9,036
Purchase of fixed assets (305,336) (1,557,207)
Deposit on lease, net 9,487 (90,494)
Business acquisition (29,046) -
-----------------------------------------------------------------
5,800,712 (7,064,603)
- -------------------------------------------------------------------
Effect of exchange rates on
cash and cash equivalents (9,033) (448,708)
- -------------------------------------------------------------------
Increase in cash and
cash equivalents 562,060 160,441
Cash and cash equivalents,
beginning of period 949,999 5,929,801
- -------------------------------------------------------------------
Cash and cash equivalents,
end of period $1,512,059 $ 6,090,242
===================================================================
See accompanying notes to consolidated financial statements.
4
F-6
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
- ----------------------------------------------------------------------
1. BASIS OF PRESENTATION:
The unaudited condensed consolidated financial statements have
been prepared by Sideware Systems Inc. (the "Company") in
accordance with generally accepted accounting principles in the
United States and reflect all adjustments (all of which are
normal and recurring in nature) that, in the opinion of
management, are necessary for fair presentation of the interim
financial information. They include the financial statements of
Sideware Systems Inc. (the "Company") and its subsidiaries, all
of which are wholly owned except for Chalk.Com Network (Holding)
Corporation (note 6). The results of operations for the interim
periods presented are not necessarily indicative of the results
expected for any subsequent quarter or for the entire year ending
December 31, 2001. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance
with generally accepted accounting principles have been condensed
or omitted. These unaudited condensed consolidated financial
statements and notes included herein should be read in
conjunction with the Company's audited consolidated financial
statements and notes for the year ended December 31, 2000, as
filed in its Annual Report on Form 10-K/A.
2. Future Operations
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 and
commitments in the ordinary course of business. Through the
date of these consolidated financial statements the Company
has not generated significant revenues, and has incurred
operating losses and negative cash flow from operating
activities. Operations to date have been primarily financed
by equity transactions.
In April 2001, the Company began a restructuring that involved
the termination of a substantial portion of its work force, the
transferring of the research and development operations from
North Vancouver, British Columbia to its head office in Reston,
Virginia, a reduction in sales, marketing, general and
administrative expenditures, and the closing of several remote
sales offices. In September 2001, the Company decided to suspend
operations relating to the development and sales of its
Electronic Customer Relationship Management ("eCRM") software
(note 13).
5
F-7
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
- ----------------------------------------------------------------------
2. FUTURE OPERATIONS (CONTINUED):
In September 2001, the Company invested $1,000,001 in
Chalk.Com Network (Holding) Corporation to acquire 18,000,0000
common shares of Chalk.Com Network (Holding) Corporation.
The 18,000,000 common shares represent 66.7% of the issued and
outstanding shares of Chalk.Com Network (Holding) Corporation,
or 60.3% on a fully diluted basis, after allowing for the
exercise of outstanding share purchase warrants and stock
options previously issued by Chalk.Com Network (Holding)
Corporation. Chalk.Com Network (Holding) Corporation
specializes in creating e-commerce enabled multimedia
solutions for manufacturers of technology-related products.
The Company uses online and offline media distribution which
include the internet, television, in-flight airline
entertainment and radio. The Company will be concentrating
its efforts on developing the business of Chalk.Com Network
(Holding) Corporation and focus on the eLearning market.
The Company's future operations and its continuation as a
going concern are dependent upon its ability to increase its
customer base, increase sales of its e-learning product to
generate 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 that may not be available on reasonable terms. 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.
3. FOREIGN CURRENCY TRANSLATION:
Prior to January 1, 2001, the functional currency of the Company
was the Canadian dollar. Effective for its fiscal year beginning
January 1, 2001, the Company established the U.S. dollar as its
functional currency for all of its operations, as it represented
the primary market of revenues and for the Company's operations,
including the primary currency in which expenses associated with
its eCRM business were incurred. Monetary assets and liabilities
denominated in a foreign currency are translated into the Company's
functional currency 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 translation of
foreign denominated monetary assets and liabilities to the functional
currency are reflected in earnings for the period.
6
F-8
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
3. FOREIGN CURRENCY TRANSLATION (CONTINUED):
Commencing with the discontinuance of the eCRM business and the
acquisition of Chalk.com Network (Holding) Corporation (note 6)
the functional currency was determined to be the Canadian
dollar. Accordingly, foreign currency denominated balances of
the Company are remeasured into Canadian dollars as described in the
preceeding paragraph.
For the fiscal year ended December 31, 2000, the Company
adopted the U.S. dollar as its reporting currency. Where the
Company's functional currency is the Canadian dollar it
translates the Canadian dollar statements into U.S. dollar
reporting currency using the current rate method. The assets
and liabilities are translated in U.S. dollars using period
end rates and revenue and expense are translated at the
average exchange rate for the period. Exchange gains and
losses resulting from the translation are recorded as a
separate component of shareholders' equity and reported as
other comprehensive income.
4. REVENUE RECOGNITION:
(i) The Company recognizes revenue from a sale or licensing
arrangement of a television and airline segment production
when persuasive evidence of a sale or licensing arrangement
exists, the film is complete, and has been delivered in
accordance with the terms of the arrangement, the license
period of the arrangement has begun, the arrangement fee is
fixed and determinable and the collection of the arrangement
fee is reasonably assured.
(ii) The Company recognizes revenue for interactive media in
accordance with SAB 101 which states revenue generally is
realized or realizable and earned when all of the following
criteria are met: Persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered,
the seller's price to the buyer is fixed or determinable, and
collectibility is reasonably assured. Revenues are recognized
upon delivery of the module when the risks of ownership are
transferred.
(iii) If the Company does not meet any one of the situations
described above, all revenue from the arrangement is deferred
until such time as the conditions are met.
7
F-9
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
5. LONG-TERM RECEIVABLES AND DEFERRED FINANCE CHARGES:
As a result of the restructuring and termination of employees,
all employees loans except $65,000, disclosed as long-term
receivables and deferred charges as at December 31, 2000, were
repaid. Approximately $65,000 of long-term receivables was
forgiven as part of a severance package to an employee.
6. BUSINESS ACQUISITION:
On September 7, 2001, the Company acquired 66 percent of the
outstanding common shares of Chalk.Com Network (Holding)
Corporation. The business combination was accounted for using
the purchase method of accounting with effect from the date of
acquisition. Accordingly, these consolidated statements include
the operations of Chalk.Com Network (Holding) Corporation from
the date ownership was assumed by the Company until September 30,
2001.
===============================================================
---------------------------------------------------------------
Net assets acquired (at fair value):
Cash $ 1,078,705
Fixed assets 274,390
Intangible assets 1,515,417
Capital leases (60,753)
Due to stockholders (942,771)
Net non-cash operating working
capital deficiency (757,236)
---------------------------------------------------------------
Net assets acquired $ 1,107,751
===============================================================
Consideration given for net assets acquired:
Cash $ 1,107,751
===============================================================
8
F-10
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
6. BUSINESS ACQUISITION (CONTINUED):
The intangible assets that make up the amount of $1,515,417
include future revenue based intangibles of $49,500, and employment
contract based intangibles of $1,465,917. Future revenue intangibles
are being amortized over the weighted average life of the contracts,
which is one year. Accumulated amortization is $4,128. The employment
contract intangibles are being amortized the life of the contract,
which is five years. Accumulated amortization is $24,428.
7. FIXED ASSETS:
Included in fixed assets are assets held under capital leases
with a net book value of $116,793.
8. OBLIGATIONS UNDER CAPITAL LEASE:
During the year, the Company entered into various leases for
furniture and equipment expiring in 2004. The obligations
require the following minimum payments:
======================================================
Year ending September 30:
2002 $ 51,401
2003 51,401
2004 15,125
------------------------------------------------------
Future minimum lease payments 117,927
Amount representing interest 19,809
------------------------------------------------------
98,118
Current portion 40,360
------------------------------------------------------
$ 57,758
======================================================
9. DUE TO STOCKHOLDERS:
At September 30, 2001, the Company owed $947,805 to various
stockholders. Pursuant to the terms of the loan agreements,
Chalk.com Network (Holding) Corporation received proceeds of
$875,000. Interest is accrued semi-annually at a rate of 7%
per annum. The principal and accrued interest are due and
payable in full within sixty days of Chalk.Com Network (Holding)
Corporation completing an equity financing in the aggregate
amount of $7,000,000 or greater.
9
F-11
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements, page 6
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
10. STOCK OPTIONS:
A summary of the Company's stock option activity is as follows:
===============================================================
Weighted
Number average
of shares exercise price
Balance, December 31, 2000 10,912,400 $ 4.56
Options granted 7,553,500 0.84
Options expired/cancelled (4,608,400) 2.68
---------------------------------------------------------------
Balance, September 30, 2001 13,857,500 $ 3.16
===============================================================
Approximately 4,500,000 of the options outstanding at September 30,
2001 will expire by December 31, 2001 due to employee terminations
(note 13).
11. SHARE PURCHASE WARRANTS:
A summary of the Company's warrant activity for the six month
period ended September 30, 2001 is as follows:
========================================================================================================
Outstanding Outstanding
Exercise December 31, June 30,
Expiry date price per share 2000 Granted Expired 2001
- --------------------------------------------------------------------------------------------------------
March 26, 2001 U.S. 0.383 197,882 - (197,882) -
April 7, 2001 CDN 0.63 2,000,000 - (2,000,000) -
September 14, 2001 U.S. 1.89 1,417,254 - (1,417,254) -
December 14, 2001 U.S. 1.89 1,901,271 - - 1,901,271
April 13, 2001/2002 U.S. 10.00/11.50 45,000 - - 45,000
April 13, 2002 U.S. 3.00 139,000 - - 139,000
April 13, 2002 U.S. 1.00 900,000 - - 900,000
February 22, 2004
(note 12) U.S. 0.92 - 5,229,752 - 5,229,752
- --------------------------------------------------------------------------------------------------------
6,600,407 5,229,752 (3,615,136) 8,215,023
========================================================================================================
The share purchase warrants issued in consideration for financing,
outstanding at December 31, 2000, having an exercise price of U.S.
$10.00 and U.S. $2.82 expiring April 13, 2002 were repriced to U.S.
$3.00 and U.S. $1.00 in March 2001. The term of the re-priced warrants
will be reduced to 30 days if, over any period of twenty consecutive
days, the weighted average trading price for the Company's shares exceeds
the new exercise price by 25% or more.
10
F-12
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
- --------------------------------------------------------------------
12. PRIVATE PLACEMENTS:
On February 22, 2001, the Company issued, through a private
placement, 5,229,752 common shares, for net proceeds of
$3,732,418. 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.
On September 7, 2001, the Company issued, through a private
placement, 2,941,176 common shares, for net proceeds of
$1,000,000.
13. DISCONTINUED OPERATIONS:
On September 10, 2001, the Company adopted a plan to suspend
operations relating to the development and sales of its eCRM
soft ware. The Company reduced its work force to approximately
ten employees in the U.S. and Canada, six of which are working on
a transitional basis, with the remaining expected to be
integrated into the operations of Chalk.Com Network (Holding)
Corporation. Fixed assets have been written down to market
value and the Company is in the process of selling the assets.
The Company has been removed as the leasee from the Reston,
Virginia facilities as of November 15, 2001 and is currently
negotiating to remove itself from the leased offices in
Vancouver, British Columbia. The Company expects to have
these operations completely wound down by December 31, 2001.
11
F-13
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
13. DISCONTINUED OPERATIONS (CONTINUED):
============================================================================================
Three month periods ended Six month periods ended
September 30, September 30,
------------------------- ------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------
Revenue:
Licenses $ - $ 144,410 $ 41,315 $ 251,225
Services - 34,025 58,603 44,141
Hardware and software resales - 4,117 4,536 18,853
Hardware resales to related
parties - 8,916 31,384 65,524
------------------------------------------------------------------------------------------
- 190,748 135,838 379,743
Cost of revenues:
Licenses - 347 400 832
Services - 14,090 4,591 21,503
Hardware and software resales - 4,117 4,536 18,853
Hardware resales to related
parties - 8,196 31,384 65,524
- -------------------------------------------------------------------------------------------
- 26,750 40,911 106,712
- -------------------------------------------------------------------------------------------
Gross margin - 163,998 94,927 273,031
Operating expenses:
Sales and marketing
(including stock-based
compensation of
$nil, $1,351,285
$193,746 and $4,438.594) 927,348 4,587,807 5,002,421 12,425,135
Research and development
(including stock-based
compensation of $nil,
$552,115, $127,515 and
$1,054,573) 612,025 1,298,905 2,560,334 3,509,669
Costs of discontuing
operations 1,370,003 - 1,310,003 -
Restructuring costs - 1,127,168 -
-----------------------------------------------------------------------------------------
2,909,376 5,886,712 10,059,926 15,934,804
- -------------------------------------------------------------------------------------------
Net loss from
discontinued operations $ (2,909,376) $ (5,722,714) $ (9,964,999) $ (15,661,773)
===========================================================================================
12
F-14
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
13. DISCONTINUED OPERATIONS (CONTINUED):
Restructuring costs had been accrued in accordance with SAB
100. For the nine month period ended September 30, 2001,
restructuring costs totaled approximately $1,127,000, which
consisted of $611,000 of severance payments to terminated
employees and $516,000 relating to the writedown of fixed assets.
Costs associated with discontinuing operations for the three month
period ended September 30, 2001 included $372,000 of severance payments
to terminated employees and $998,000 relating to the writedown of fixed
assets.
The following represents the revised carrying values of the
remaining assets and liabilities of the discontinued operations
included on the balance sheet as at September 30, 2001:
=================================================================
-----------------------------------------------------------------
Accounts receivable $ 30,066
Prepaid expenses 107,268
Deposit on lease 120,439
Fixed assets 299,143
Accounts payable and accrued liabilities 586,205
Due to related parties 6,140
-----------------------------------------------------------------
=================================================================
14. COMMITMENTS:
The Company has obligations under operating lease arrangements,
which require the following minimum payments for the fiscal
periods ending December 31:
=================================================================
-----------------------------------------------------------------
2001 $ 128,879
2002 176,342
2003 45,039
-----------------------------------------------------------------
350,260
=================================================================
13
F-15
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
15. LEGAL CONTINGENCY:
In July 2001, an employee filed a claim against Chalk.Com Network
(Holding) Corporation and its for breach of an employment
contract. The Company believes the likelihood of this claim being
successful is low. The damages are not specified and the possible
settlement is not determinable as of the date of these financial
statements.
14
F-16
Consolidated Financial Statements
(Expressed in United States 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
F-17
AUDITORS' REPORT
To the Board of Directors
Sideware Systems Inc.
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.
(signed) "KPMG LLP"
Chartered Accountants
Vancouver, Canada
January 26, 2001, except for note 10(b) and note 14(a)
which are as of February 22, 2001 and notes 1 and 14(b)
which are as of September 14, 2001
F-18
SIDEWARE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in United States 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 7) 5,982,588 -
Accounts receivable (note 4):
Trade, less allowance for
doubtful accounts of $142,047
(1999 - nil) 467,783 -
Other 126,842 123,297
Due from related parties (note 5) 29,859 -
Current portion of long-term
receivables (note 8) 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 8) 105,587 108,655
Deferred finance charges (note 8) 95,583 100,763
Fixed assets (note 9) 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 5) - 39,340
Deferred revenue 168,661 -
--------------------------------------------------------------------------
1,415,344 662,976
Stockholders' equity:
Common stock (note 10):
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 12)
Subsequent events (notes 10(a), 10(b) and 14)
The accompanying notes are an integral part of these consolidated
financial statements.
1
F-19
SIDEWARE SYSTEMS INC.
Consolidated Statements of Operations and Comprehensive Loss
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
====================================================================================================
Eight
months ended Year ended
Years ended December 31, December 31, April 30,
------------------------
2000 1999 1998 1998
- ----------------------------------------------------------------------------------------------------
Continuing operations:
Interest income $ 550,533 98,493 27,637 19,847
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)
Write-off of fixed assets - (35,973) - -
Proceeds on settlement of legal
claim (note 6) 147,651 - - -
Value assigned to shares issued
in satisfaction of a legal
claim (note 6) (153,020) - - (17,786)
- ----------------------------------------------------------------------------------------------------
Loss from continuing
operations (6,988,794) (1,915,778) (453,762) (893,644)
Loss from discontinued
operations (note 14(b)) (20,805,594) (3,771,690) (828,725) (820,492)
- ----------------------------------------------------------------------------------------------------
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 7) 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:
Loss from continuing
operations $ (0.12) $ (0.05) $ (0.02) $ (0.04)
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.
2
F-20
SIDEWARE SYSTEMS INC.
Consolidated Statements of Stockholders' Equity
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
================================================================================================================================
Accumulated
Share capital Special warrants Additional Deferred other Total
------------- ---------------- 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 - (247,843) - - - - - - (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
3
F-21
SIDEWARE SYSTEMS INC.
Consolidated Statements of Stockholders' Equity, continued
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
================================================================================================================================
Accumulated
Share capital Special warrants Additional Deferred other Total
------------- ---------------- 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.
4
F-22
SIDEWARE SYSTEMS INC.
Consolidated Statements of Cash Flows
(Expressed in Unted States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
=================================================================================================
Eight
months ended Year ended
Years 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.
5
F-23
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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:
At December 31, 2000, Sideware Systems Inc. (the "Company")
was a provider of Electronic Customer Relationship Management
("eCRM") software. The Company's collaborative solutions
enabled companies to better manage their customer interactions
by providing enhanced Internet-based customer service. At
December 31, 2000, the Company operated in one segment as the
Company's sales are entirely made within the eCRM industry and
primarily within the United States of America. On September
7, 2001, the Company entered the eLearning business with the
acquisition of Chalk.Com Network (Holding) Corporation. On
September 14, 2001, the Company discontinued its eCRM business
(note 14(b)).
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.
In addition, as described in the preceding paragraph
subsequent to year end the Company changed its business model.
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 December 31,
2000, the Company secured private financing with net proceeds
of approximately $3,800,000 (note 14(a)). 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.
6
F-24
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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.
7
F-25
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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.
As allowed by Issue 7 of EITF 00-23, stock-based compensation
resulting from employee option grants is recognized on an
accelerated basis over the vesting period of the individual
options consistent with FIN 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.
(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.
8
F-26
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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):
(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.
Advertising costs are included in the sales and marketing
classification in discontinued operations in the consolidated
statements of operations.
(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. For multiple element
contracts where maintenance is bundled with the software license,
the residual method in accordance with SOP 98-9 is used and
Vendor Specific Objective Evidence ("VSOE") established for
the undelivered element, being the maintenance support through
the sale of separate maintenance agreements, to determine the
value to be assigned to the software license. For contracts
where maintenance is not bundled with the software license, the
Company uses the sale value of the software license as its fair
value to record revenue.
For the year ended December 31, 2000, the Company entered into
revenue generating sales contracts with 24 customers. Of the 24
sales, 18 were multi-element contracts which included both
delivered elements and an undelivered maintenance support
element. In addition, the Company entered 4 separate maintenance
contracts that had the following characteristics:
- The maintenance contracts were entered into 30 days or more
after the initial sale of the software;
- The different elements of the maintenance and software
sales contracts were not closely interrelated or
interdependent in terms of design, technology, or function;
- The fees for the maintenance contracts and the software
sales contracts were not subject to refund or forfeiture or
other concession if the other contract was not completed
satisfactorily;
- None of the elements of the maintenance contracts were
essential to the functionality of any element of software
sales contracts; and
- Payment terms in the maintenance contracts did not coincide
with, and were not otherwise contingent upon, the
performance criteria of the software sales contract.
9
F-27
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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):
(l) Revenue recognition (continued):
The Company recognized its first software sales revenue in the
second quarter of 2000. For the quarter ended June 30, 2000, the
Company entered into revenue generating sales with eight customers,
7 of which were multi-element contracts and one of which included a
separate maintenance contract. For the quarter ended September
30, 2000, the Company entered into revenue generating sales with
ten customers, eight of which were multi-element contracts and two of
which included separate maintenance contracts. For the quarter
ended December 31, 2000, the Company entered into revenue
generating sales with six customers, three of which were a multi-
element contract, one of which included a separate maintenance
contract and two of which that did not contain a maintenance
element.
The Company utilized prices charged in the four separate maintenance
contracts as VSOE establishing the fair value of the undelivered
maintenance support element in the 18 contracts, which included
both the undelivered element and delivered elements. The Company
considered the separate maintenance contracts signed to the end
of each quarter to constitute VSOE of the fair value of the
undelivered maintenance support element in the multi-element
contracts made to the end of that quarter. If a contract is
entered into prior to VSOE being established, but VSOE is
subsequently established, the Company allocates the then
unrecognized revenue among the various elements in accordance
with the residual value method described above.
If evidence of fair value for each element of the arrangement in
the situations described above 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.
In addition to the establishment of fair value, 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.
10
F-28
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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):
(l) Revenue recognition (continued):
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.
As at December 31, 2000, the Company was not involved in any hosting
arrangements, however it plans to in the future and the guidance in
EITF 00-3 will be applied.
(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 10(a) are
excluded from the calculation.
11
F-29
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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
(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. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The movements in the allowance for doubtful accounts for 2000 and 1999
are set out below:
=============================================================================
2000 1999
- -----------------------------------------------------------------------------
Balance as at January 1 $ - $ -
Expense for the year 142,047 -
- -----------------------------------------------------------------------------
Balance as at December 31 $ 142,047 $ -
=============================================================================
5. 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.
12
F-30
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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. RELATED PARTY TRANSACTIONS (CONTINUED):
(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.
6. 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.
7. 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.
13
F-31
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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. 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.
9. 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
===========================================================
10. 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.
14
F-32
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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
10. STOCKHOLDERS' EQUITY (CONTINUED):
(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. In January 2000, 2,000,000 options were
granted under individual agreements and 6,860,000 options were
granted under the 2000 plan as follows: effective April 20, 2000,
the Company granted 4,912,000 options at $5.10 per share and
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.
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.
15
F-33
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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
10. STOCKHOLDERS' EQUITY (CONTINUED):
(b) Stock compensation plans (continued):
(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
================================================================
(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
==============================================================================
16
F-34
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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
10. STOCKHOLDERS' EQUITY (CONTINUED):
(b) Stock compensation plans (continued):
(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.
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%
======================================================================
17
F-35
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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
10. 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 market
value on
grant date $ - $ 1.30 $ - $ 0.50 $ - $ 0.62 $ - $ 0.22
Exercise price
exceeds market
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
================================================================================================================
18
F-36
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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
10. 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.
11. 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 $ - $ -
===========================================================================================
The movement in the valuation allowance for deferred tax assets
in 2000 and 1999 are as follows:
=============================================================================
2000 1999
- -----------------------------------------------------------------------------
Balance as at January 1 $ 5,209,223 $ -
Increase in operating losses 5,647,445 4,905,941
Increase in share issue costs (98,403) (88,039)
Increase in amortization recorded in accounting
over tax 304,382 391,321
- -----------------------------------------------------------------------------
Balance as at December 31 $ 11,062,647 $ 5,209,223
=============================================================================
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.
19
F-37
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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. INCOME TAXES (CONTINUED):
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.
12. 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
==================================================================
13. 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.
20
F-38
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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
13. 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.
14. SUBSEQUENT EVENTS:
(a) Private placements:
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.
(b) Future operations:
On September 7, 2001, the Company invested $1,000,001 in
Chalk.Com Network (Holding) Corporation to acquire
18,000,000 common shares of Chalk.Com Network (Holding)
Corporation ("Chalk.Com"). The 18,000,000 common shares
represent 66.7% of the issued and outstanding shares of
Chalk.Com or 60.3% on a fully diluted basis, after allowing
for the exercise of outstanding share purchase warrants and
stock options previously issued by Chalk.Com Chalk.Com
specializes in creating e-commece enabled multimedia
solutions for manufacturers of technology-related products.
It uses online and offline media distribution which include
the internet, television, in-flight airline entertainment
and radio.
In April 2001, the Company began a restructuring that
involved the termination of a substantial portion of its
work force, the transferring of the research and
development operations from North Vancouver, British
Columbia to its head office in Reston, Virginia, a
reduction in sales, marketing, general and administrative
expenditures, and the closing of several remote sales
offices. On September 14, 2001, the Company announced and
terminated all operations relating to the development and
sales of its eCRM software.
21
F-39
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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
14. SUBSEQUENT EVENTS (CONTINUED):
(b) Future operations (continued):
The results of operations for the eCRM software business segment
to the date of discontinuance of its operations are as follows:
==================================================================================================
Eight
months ended Year ended
Years 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 5(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 5(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
------------------------------------------------------------------------------------------------
21,333,398 3,772,179 840,721 826,613
- --------------------------------------------------------------------------------------------------
Operating loss $(20,805,594) $(3,771,690) $ (828,725) $ (820,492)
- --------------------------------------------------------------------------------------------------
At December 31, 2000 and 1999, the Company's operations related
solely to the eCRM business segment and all reported assets and
liabilities on the consolidated balance sheet were used in that
segment.
22
F-40
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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
14. SUBSEQUENT EVENTS (CONTINUED)
The business combination with Chalk.Com was accounted for
using the purchase method of accounting with effect from
the date of acquisition. The unaudited net assets of
Chalk.Com acquired were as follows:
----------------------------------------------------------------
Net assets acquired (at fair value):
Cash $ 1,078,705
Fixed assets 274,390
Intangible assets 1,515,417
Capital leases (60,753)
Due to stockholders (942,771)
Net non-cash operating working capital deficiency (757,236)
----------------------------------------------------------------
Net asset acquired $ 1,107,752
----------------------------------------------------------------
Consideration given for net assets acquired:
Cash $ 1,107,752
----------------------------------------------------------------
The intangible assets that make up the amount of $1,515,417
include future revenue based intangibles of $49,500, and
employment contract based intangibles of $1,465,917.
Future revenue intangibles are being amortized over the
weighted average life of the contracts, which is one year.
The employment contract intangibles are being amortized
over the life of the contract, which is five years.
15. UNAUDITED QUARTERLY FINANCIAL INFORMATION:
The following table sets forth selected unaudited quarterly
information for the Company's last eight fiscal quarters (in
thousands). Due to the discontinuance of eCRM operations in
September 2001, this information has been restated to exclude
the revenues and gross margins of that business segment.
==========================================================================================
Fiscal 2000 Quarter End
--------------------------------------------------
December 31 September 30 June 30 March 31
------------------------------------------------------------------------------------------
Revenues - - - -
Gross margin - - - -
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)
==========================================================================================
23
F-41
SIDEWARE SYSTEMS INC.
Consolidated Notes to Financial Statements
(Expressed in United States 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
15. UNAUDITED QUARTERLY FINANCIAL INFORMATION (CONTINUED):
==========================================================================================
Fiscal 1999 Quarter End
--------------------------------------------------
December 31 September 30 June 30 March 31
------------------------------------------------------------------------------------------
Revenues - - - -
Gross margin - - - -
Net loss for the period (2,737) (1,371) (1,091) (488)
Net loss per share (0.08) (0.03) (0.02) (0.02)
==========================================================================================
F-42
Consolidated Financial Statements
(Expressed in United States dollars)
CHALK.COM NETWORK (HOLDING)
CORPORATION
Eight months ended August 31, 2001
Year ended December 31, 2000
F-43
AUDITORS' REPORT
To the Board of Directors and Stockholders of
Chalk.Com Network (Holding) Corporation
We have audited the consolidated balance sheets of Chalk.Com
Network (Holding) Corporation as at August 31, 2001 and
December 31, 2000 and the consolidated statements of operations
and comprehensive loss, stockholders' deficit and cash flows
for the eight months ended August 31, 2001 and the year ended
December 31, 2000. These consolidated financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our 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 provides 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 August 31, 2001 and December 31, 2000 the results
of its operations and its cash flows for the eight month period
ended August 31, 20001 and year ended December 31, 2000, in
accordance with accounting principles generally accepted 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.
"KPMG"
Chartered Accountants
Vancouver, Canada
October 12, 2001
F-44
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Balance Sheets
(Expressed in United States dollars)
==================================================================
August 31, December 31,
2001 2000
- ------------------------------------------------------------------
Assets
Current assets:
Cash $ 60,971 $ 362,347
Short term investments 17,733 18,339
Accounts receivable and other
receivables, less allowance for
doubtful accounts of $7,500
(2000 - $32,250) 428,712 499,717
Due from stockholders (note 4) - 134,065
Prepaid expenses 17,918 38,329
- ------------------------------------------------------------------
525,334 1,052,797
Deposit on lease - 100,000
Fixed assets (note 5) 274,390 206,706
$ 799,724 $ 1,359,503
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued
liabilities 811,604 841,515
Deferred revenue 435,374 164,055
Current portion of obligations
under capital leases (note 6) 42,453 3,368
- ------------------------------------------------------------------
1,289,431 1,008,938
Obligations under capital leases
(note 6) 60,753 8,287
Due to stockholders (note 7) 942,771 901,993
- ------------------------------------------------------------------
2,292,955 1,919,218
Stockholders' deficit:
Share capital: (note 9)
Issued:
Common shares 380 373
Class E exchangeable shares 11,264 11,264
Special warrants 3,463,053 2,292,073
Additional paid-in capital 5,663,084 5,673,130
Deferred stock-based compensation (62,421) (213,136)
Deficit (10,574,804 (8,277,098)
Other accumulated comprehensive
income (loss) 6,213 (46,321)
----------------------------------------------------------------
(1,493,231 (559,715)
- ------------------------------------------------------------------
$ 799,724 $ 1,359,503
Future operations (note 1)
Commitments (note 11)
Contingency (note 12)
Subsequent events (notes 9(b) and 15)
See accompanying notes to consolidated financial statements.
1
F-45
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Statements of Operations and Comprehensive Loss
(Expressed in United States dollars)
==================================================================
Eight months
ended Year ended
August 31, December 31,
2001 2000
- ------------------------------------------------------------------
Sales revenue:
Television and airline
segment production $ 550,668 $ 564,558
Interactive media 429,980 515,393
- ------------------------------------------------------------------
980,648 1,079,951
Cost of sales (including stock
based compensation of $523;
1999 - $552,519) 1,349,086 3,022,110
- ------------------------------------------------------------------
(368,438) (1,942,159)
Operating expenses:
Selling and website operations
(including stock based
compensation of $ 14,880;
1999 - $845,276) 772,571 1,984,524
General and administrative
(including stock based
compensation of $84,037;
1999 - $1,037,841) 1,062,766 3,824,563
Write-down of fixed assets - 75,957
----------------------------------------------------------------
1,835,337 5,885,044
- ------------------------------------------------------------------
Operating loss (2,203,775) (7,827,203)
Non-operating:
Interest income 6,234 3,288
Interest and bank charges (55,672) (58,200)
Loss on foreign exchange (44,493) (22,477)
----------------------------------------------------------------
(93,931) (77,389)
Loss for the period (2,297,706) (7,904,592)
Other comprehensive income (loss):
Foreign currency translation
adjustment 52,534 (47,602)
- ------------------------------------------------------------------
Comprehensive loss $ (2,245,172) $ (7,952,194)
==================================================================
See accompanying notes to consolidated financial statements.
2
F-46
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Statement of Stockholders' Equity (Deficit)
(Expressed in United States dollars)
Eight months ended August 31, 2001
Year ended December 31, 2000
Class E
exchangeable shares Accumulated
Common in subsidiary Special warrants Additional Deferred other Total
--------------- ----------------- ---------------- paid-in stock-based comprehensive Equity stockholders'
Number Assigned Number Assigned Number Assigned capital compensation loss (Deficit) equity (deficit)
Balance,
December
31, 1999 - - 9,400,000 $349,705 - $ - $ - $ - $ 1,281 $(372,506) $(21,520)
Shares
issued on
exercise
of stock
option - - 600,051 5 - - - - - - 5
Shares
issued upon
conversion
of class E
shares
(note 11) 2,350,000 235 (2,350,000) (338,446) - - 338,211 - - - -
Treasury
stock
(note 11(b)
(iv)) - - 2,350,000 - - - - - - - -
Shares
issued for
cash, net
of share
issue
costs 1,375,200 138 - - - - 2,686,147 - - - 2,686,285
Special
warrants
issued for
cash - - - - 1,467,755 2,292,073 - - - - 2,292,073
Stock-based
compensation - - - - - - 257,373 - - - 257,373
Deferred
stock based
compensation - - - - - - 2,391,399 (2,391,399) - - -
Amortization
of deferred
stock-based
compensation - - - - - - - 2,178,263 - - 2,178,263
Foreign
currency
translation
adjustment - - - - - - - - (47,602) - (47,602)
Loss for
the period - - - - - - - - - (7,904,592) (7,904,592)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance,
December
31, 2000 3,725,200 $ 373 10,000,051 $ 11,264 1,467,755 $2,292,073 $5,673,130 $ (213,136) $(46,321) $(8,277,098) $ (559,715)
Shares
issued on
exercise of
warrants 65,000 7 - - - - 41,229 - - - 41,236
Special
warrants
issued for
cash, net
of share
issued
costs - - - - 1,063,770 1,170,980 - - - - 1,170,980
Stock
based
compensation
(note 9(c)) - - - - - - (51,275) - - - (51,275)
Amortization
of dereffed
stock-based
compensation - - - - - - - 150,715 - - 150,715
Foreign
currency
translation
adjustment - - - - - - - - 52,534 - 52,534
Loss for
the period - - - - - - - - - (2,297,706) (2,297,706)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance,
August 31,
2001 3,790,200 $380 10,000,051 $11,264 2,531,525 $3,463,053 $5,663,084 $(62,421) $6,213 $(10,574,804) (1,493,231)
==================================================================================================================================
See accompanying notes to consolidated financial statements.
3
F-47
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
==================================================================
Eight months
ended Year ended
August 31, December 31,
2001 2000
- ------------------------------------------------------------------
Cash flows used in operating
activities
Loss for the period $ (2,297,706) $ (7,904,592)
Items not involving cash
Amortization 68,643 123,977
Stock-based compensation 99,440 2,435,636
Provisions for bad debt 5,051 20,267
Write-down of fixed assets - 75,957
Unrealized foreign exchange
gain - (106,224)
Changes in non-cash
working capital:
Accounts receivable and
other receivables 49,984 (226,841)
Accounts payable and
accrued liabilities (2,094) 577,005
Deferred revenue 279,594 141,126
Prepaid expenses 17,028 (136,483)
----------------------------------------------------------------
Net cash provided used in
operating activities (1,780,060) (5,000,172)
Cash flows from investing
activities:
Purchase of capital assets (144,702) (175,386)
Purchase of short-term
investments - (3,363)
----------------------------------------------------------------
Net cash used in investing
activities (144,702) (178,749)
Cash flows from financing
activities:
Issuance of common shares on
exercise of stock options - 5
Issuance of common shares,
net of share issue costs - 2,686,285
Issuance of special warrants,
net of share issue costs 1,170,980 2,292,073
Common shares issued for
services rendered 41,236 -
Deposit on lease 100,000 (100,000)
Advances from shareholders 130,964 (135,356)
Increase in shareholder loans 71,341 833,291
Payments on bank
indebtedness - (131,216)
Payments on bank loan - (50,498)
Increase in capital lease
obligations 120,890 -
Principal repayment on
capital lease obligations (28,000) (2,550)
----------------------------------------------------------------
Net cash provided used in
financing activities 1,607,411 5,392,034
Effect of foreign currency
on cash 15,975 149,234
- ------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (301,376) 362,347
Cash and cash equivalents,
beginning of period 362,347 -
- ------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 60,971 $ 362,347
==================================================================
Supplemental information:
Interest paid $ 13,949 $ 12,879
Non-cash financing and investing
activities:
Conversion of exchangeable
shares to common shares - 338,446
Special warrants issued for
services rendered 779,500 406,144
==================================================================
See accompanying notes to consolidated financial statements.
4
F-48
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Eight months ended August 31, 2001
Year ended December 31, 2000
==================================================================
1. Description of business and future operations:
Chalk.Com Network (Holding) Corporation (the "Company")
specializes in creating e-commerce enabled multimedia solutions
for manufacturers of technology-related products. The Company
uses online and offline media distribution which include the
internet, television, in-flight airline entertainment and radio.
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 increase its customer base, increase
sales of its e-learning product to generate 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 that may not be available on
reasonable terms. Subsequent to year-end, in September 2001
Sideware Systems Inc. made an investment of $1,000,000 in the
Company, for a 66.7% ownership (note 15(a)). 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 Chalk.Com Network
(Holding) Corporation and its subsidiaries, all of which are
wholly-owned. All material intercompany balances and
transactions have been eliminated in consolidation.
5
F-49
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Eight months ended August 31, 2001
Year ended December 31, 2000
==================================================================
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.
(b) Short-term investments:
The Company classifies its short-term investments in debt
instruments as "held-to-maturity." Such investments are
reported at amortized cost and interest is recorded in the
statement of operations when earned.
(c) Fixed assets:
Fixed assets are carried at cost less accumulated
amortization. Amortization is calculated annually as follows:
===============================================================
Asset Basis Rate
---------------------------------------------------------------
Automobiles declining-balance 30%
Computer equipment declining-balance 33%
Furniture and equipment declining-balance 20%
Leasehold improvements straight-line lease term
===============================================================
(d) 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.
6
F-50
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Eight months ended August 31, 2001
Year ended December 31, 2000
==================================================================
3. Significant accounting policies (continued):
(e) 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. When the realization of deferred
tax assets is not considered to be more likely than not, a
valuation allowance is provided for the excess.
(f) 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 FASB
Interpretation No. 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans". Non-
employee grants with future service requirements are not
recognized until the service is performed and the options
vest.
(g) 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.
7
F-51
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Eight months ended August 31, 2001
Year ended December 31, 2000
==================================================================
3. Significant accounting policies (continued):
(h) Website development costs:
The Company's website is in the operating stage. In accordance
with EITF 00-2, "Accounting for Website Development Costs",
costs are expensed as incurred.
(i) Advertising costs:
Advertising costs are expensed as incurred and totaled $656
and $1,965, during the eight months ended August 31, 2001
and the year ended December 31, 2000, respectively.
(j) Revenue recognition:
(i) The Company recognizes revenue from a sale or licensing
arrangement of a television and airline segment production
when persuasive evidence of a sale or licensing arrangement
exists, the film is complete, and has been delivered
in accordance with the terms of the arrangement,
the license period of the arrangement has begun, the
arrangement fee is fixed and determinable, and the
collection of the arrangement fee is reasonably assured.
(ii) The Company recognizes revenue for interactive media when
it is realized or realizable and earned when all of the
following criteria are met: Persuasive evidence of an
arrangement exists, delivery has occurred or services have
been rendered, the seller's price to the buyer is fixed
or determinable, and collectibility is reasonably assured.
(iii)If the Company does not meet any one of the criteria
described above, all revenue from the arrangement is
deferred until such time as the conditions are met.
(k) Foreign currency translation:
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 in accordance with SFAS 52, "Foreign Currency
Translation". Accordingly, foreign currency denominated
balances of the Company are initially remeasured into Canadian
dollars. Under this method, monetary assets and liabilities
denominated in a foreign currency are remeasured into 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.
8
F-52
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Eight months ended August 31, 2001
Year ended December 31, 2000
==================================================================
3. Significant accounting policies (continued):
(k) Foreign Currency translation (continued):
The Company translates the Canadian dollar statements into
U.S. dollar reporting currency using the current rate method.
The assets and liabilities are translated in U.S. dollars
using period end rates and revenue and expense are translated
at the average exchange rate for the period. Exchange gains
and losses resulting from the translation are recorded as a
separate component of shareholders' equity (deficit) and
reported as other comprehensive income.
4. Due from stockholders:
These amounts are due from stockholders without set payment or
interest terms. The Company expects that these amounts will be
re-paid within the year.
5. Fixed assets:
==================================================================
August 31, December 31,
2001 2000
- ------------------------------------------------------------------
Automobiles $ 27,930 $ 28,885
Computer equipment 148,498 150,319
Furniture and equipment 181,336 62,929
Leasehold improvements 15,847 16,389
- ------------------------------------------------------------------
373,611 258,522
Accumulated amortization (99,221) (51,816)
- ------------------------------------------------------------------
Net book value $ 274,390 $ 206,706
==================================================================
At December 31, 2000, the Company wrote down fixed assets by
$75,957 to reflect the lower fair market value.
Included in fixed assets are assets held under capital leases
with a net book value of $116,793 (2000 - $13,160).
9
F-53
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Eight months ended August 31, 2001
Year ended December 31, 2000
==================================================================
6. Obligations under capital lease:
During the year, the Company entered into various leases for
furniture and equipment expiring in 2004. The obligations require
the following minimum payments:
==================================================================
Year ending August 31:
2002 $ 51,401
2003 51,401
2004 21,416
- ------------------------------------------------------------------
Future minimum lease payments 124,218
Amount representing interest 21,012
- ------------------------------------------------------------------
103,206
Current portion 42,453
- ------------------------------------------------------------------
$ 60,753
==================================================================
7. Due to stockholders:
At August 31, 2001, the Company owed $942,771 (2000-$901,993)
to various shareholders. Pursuant to the terms of the loan
agreements, the Company received proceeds of $875,000.
Interest is accrued semi-annually at a rate of 7% per annum.
The balance payable at August 31, 2001 includes accrued interest
of $67,771 (200-$26,993). The principal and accrued interest
are due and payable in full within sixty days of the Company
completing an equity financing in the aggregate amount of
$7,000,000 or greater.
8. Letter of Credit:
The Company has an outstanding irrevocable standby letter of
credit with the Royal Bank of Canada in the amount of $17,452
expiring December 18, 2001.
10
F-54
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Eight months ended August 31, 2001
Year ended December 31, 2000
==================================================================
9. Stockholders' equity:
The Company was incorporated under the laws of the State of
Delaware on December 22, 1999 as a continuation of its wholly-
owned subsidiary, Chalk Productions Incorporation ("Subsidiary").
There was no change in effective equity interests and no new
assets or liabilities were contributed to the Company as a result
of the recapitalization of the Subsidiary. The consolidated
financial statements give retroactive effect to the
recapitalization described below at (b)(i) and (b)(ii).
(a) Authorized:
50,000,000 common shares, with a par value of $0.0001
25,000,000 non-voting preferred shares without par value
(b) Share reorganization:
(i) On January 19, 2000, 149,346 class A common voting shares
of Subsidiary were subdivided by 63.2565 and redesignated
into 9,447,105 class E exchangeable, non-voting shares in
Subsidiary. The exchangeable shares held the right to
exchange each share for one common share in the Company.
(ii) On January 26, 2000, pursuant to the Capital
Reorganization Agreement ("Agreement"), 8,741 class B non-
voting shares were cancelled and exchanged for 552,946 of
class E exchangeable shares in the Subsidiary. The
exchangeable shares held the right to exchange each share
for one common share in the Company.
(iii)Pursuant to the Support Agreement on January 26, 2000,
the Company retains the right of first refusal to purchase
the shares that are subject to exchangeability as explained
in 10(b)(i) and (ii) above.
(iv) On January 26, 2000, 2,350,000 exchangeable shares in the
Subsidiary were transferred to the Company in exchange for
2,350,000 common shares in the Company. As of that date
and at December 31, 2000, the Company holds 2,350,000
exchangeable shares in the Subsidiary that are exchangeable
for common shares in the Company. These shares have been
presented as treasury stock. On September 7, 2001, these
exchangeable shares were exchanged for 2,350,000 common
shares in the Company.
(v) As at December 31, 2000, 10,000,051 of class E
exchangeable shares were outstanding in the Subsidiary
(including the 2,350,000 held by the Company). These shares
are not redeemable and exchangeable only into common shares
of the Company. They are presented in the consolidated
financial statements of the Company as class E exchangeable
shares in shareholders' equity.
(vi) On September 7, 2001, the remaining 7,650,051 class E
exchangeable shares were exchanged for 7,650,051 common
shares in the Company.
11
F-55
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Eight months ended August 31, 2001
Year ended December 31, 2000
==================================================================
9. Stockholders' equity (continued):
(c) Stock compensation plans:
Effective July 31, 2000, the Company adopted its 2000 Stock
Option Plan ("the 2000 Plan"), which reserved 2,400,000 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.
(i) A summary of the Company's stock option activity is as
follows:
==================================================================
Weighted
Number average
of options exercise price
- ------------------------------------------------------------------
Balance, December 31, 1999 - $ -
Options granted 2,701,951 0.77
Options exercised (600,051) -
Options cancelled / expired (44,500) 1.32
- ------------------------------------------------------------------
Balance, December 31, 2000 2,057,400 $ 0.76
Options cancelled/expired (741,000) 0.94
- ------------------------------------------------------------------
Balance, August 31, 2001 1,316,400 0.64
==================================================================
(ii) Additional information regarding options outstanding as
at August 31, 2001 is as follows:
======================================================================
Outstanding Exercisable
---------------- -----------------
Weighted
average Weighted Weighted
remaining average average
Exercise Number contractual exercise Number exercise
prices of shares life (years) price of shares price
$ 0.007 200,000 8.92 $ 0.007 200,000 $ 0.007
$ 0.67 970,000 8.92 0.67 955,944 0.67
$ 1.32 146,400 8.92 1.32 74,017 1.32
- ----------------------------------------------------------------------
1,316,400 8.92 $ 0.64 1,229,961 $ 0.60
======================================================================
12
F-56
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Eight months ended August 31, 2001
Year ended December 31, 2000
==================================================================
9. Stockholders' equity (continued):
(c) Stock compensation plans (continued):
(iii) Stock-based compensation:
With respect to the stock options granted from August 31,
2001, the Company recorded stock-based compensation of
$2,535,076 (200-$2,435,636).
The stock-based compensation recognized in the period
ended August 31, 2001 includes the amortization of
deferred compensation on stock options granted to
employees of $150,715 reduced by $51,275 representing
the decrease in fair value of unvested stock options
granted to non-employees from the amount recorded at
December 31, 2000.
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:
==================================================================
August 31, December 31,
2001 1999
- ------------------------------------------------------------------
Loss for the period:
As reported $ 2,297,706 $ 7,904,592
Pro-forma 2,362,675 8,315,373
==================================================================
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
Period ended August 31,
2001 and December 31,
2000 6.5% 3 yrs 70%
==================================================================
13
F-57
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Eight months ended August 31, 2001
year ended December 31, 2000
9. Stockholders' equity (continued):
(c) Stock compensation plans (continued):
(iii) Stock-based compensation (continued):
The weighted-average fair value of stock options granted
for the period ended August 31, 2001 are as follows:
==================================================================
Weighted average Weighted average
exercise price fair value
------------------- --------------------
Eight Year Eight Year
months ended ended months ended ended
August 31, December 31, August 31, December 31,
2001 2000 2001 2000
- ------------------------------------------------------------------
Exercise
price is
less than
market
value on
grant date $ 0.77 $0.77 $ 1.50 $ 1.50
==================================================================
(d) Share purchase warrants:
A summary of the Company's warrant activity for the eight
months ended August 31, 2001 is as follows: (exercise
prices in United States dollars except where otherwise
indicated):
===========================================================================
Outstanding Outstanding
Exercise December 31, August 31,
Expiry date price per share 2000 Granted Exercised Expired 2001
- ---------------------------------------------------------------------------
February 4, 2001 $2.50 125,000 - - (125,000) -
February 24, 2001 3.75 62,500 - - (62,500) -
March 1, 2001 2.50 125,000 - - (125,000) -
March 10, 2001 2.50 Cdn 125,000 - - (125,000) -
March 15, 2001 3.75 31,250 - - (31,250) -
March 20, 2001 3.75 31,250 - - (31,250) -
March 20, 2001 2.50 31,250 - - (31,250) -
April 3, 2001 3.75 125,000 - - (125,000) -
May 15, 2001 2.50 31,250 - - (31,250) -
June 21, 2001 1.32 25,000 - - (25,000) -
March 31, 2001 1.00 Cdn 65,000 - (65,000) - -
January 21, 2003 2.50 Cdn 2,500 - - - 2,500
April 30, 2005 1.32 40,000 - - - 40,000
July 31, 2010 0.25 Cdn 107,531 - 107,531
- ---------------------------------------------------------------------------
927,531 - 65,000 712,500 150,031
===========================================================================
14
F-58
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Eight months ended August 31, 2001
year ended December 31, 2000
9. Stockholders' equity (continued):
(e) Special warrants:
During the eight month period ended August 31, 2000,
1,063,770 special warrants were issued for net proceeds
of $1,170,980. Each special warrant entitles the
holder to one common share in the Company. There is no
expiry date for these special warrants. No special
warrants were exercised during the year. At August 31,
2001, 2,531,525 special warrants were outstanding.
(2000-1,467,755).
10. Income taxes:
Income tax expense differs from the amount that would be computed
by applying the Canadian Federal and Provincial statutory income
tax rate of 44.6% (December 31, 2000 - 44.6%) to net loss due
primarily to valuation allowances provided against losses
incurred in the year.
The Company's deferred income tax assets are comprised of the
following at Auugst 31:
==================================================================
2001 2000
- ------------------------------------------------------------------
Net deferred tax assets
and liabilities:
Net operating loss carryforwards $ 2,144,787 $ 1,663,192
Excess of amortization recorded
for accounting over tax 99,314 71,190
Other temporary differences 214,585 92,285
- ------------------------------------------------------------------
Total deferred tax assets 2,458,686 1,826,667
Valuation allowance (2,458,686) (1,826,657)
- ------------------------------------------------------------------
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 August 31, 2001, management believes that sufficient
uncertainty exists as to whether or not the deferred tax assets
will be realized, and accordingly, a valuation allowance is
required.
As of Sugust 31, 2001, the Company had net operating losses of
$1,690,000 available to offset taxable income earned in Canada to
2007 and $1,340,000 available to offset taxable income earned in
the United States to 2020.
15
F-59
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Eight months ended August 31, 2001
year ended December 31, 2000
11. Commitments:
The Company has obligations under operating lease arrangements,
which require the following minimum annual payments:
==============================================================
2001 $ 47,060
2002 88,022
2003 879
==============================================================
12. Contingency:
In July 2001, an employee filed a claim against the Company and
its principal shareholder for breach of an employment contract.
Management considers that the likelihood of this claim being
successful is low. The claim does not specify damages. The
possible resolution of this claim is not determinable as of the
date of these financial statements.
13. Financial instruments:
(a) Fair values of financial instruments:
The Company's short-term financial instruments consist of
cash, short-term investments, accounts receivable, due from
shareholders, accounts payable and accrued liabilities. The
fair value of these financial instruments approximate their
carrying values due to their short term maturity.
The Company's long-term financial instruments consist
principally of due to stockholders. The estimation of fair
value of this instrument is not practicable to determine due
to its related party nature and the absence of a secondary
market for such instruments.
(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
derivatives in place.
(c) Credit risk:
Financial instruments subjecting the Company to concentrations
of credit risk consist primarily of cash, short-term
investments and trade accounts receivable. The Company
maintains cash with high quality financial institutions.
16
F-60
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Eight months ended August 31, 2001
year ended December 31, 2000
13. Financial Instruments (continued):
(c) Credit risk (continued):
The Company's customers are currently concentrated in Canada.
The Company performs periodic 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.
14. Related party transactions:
The following table summarizes the Company's related party
transactions, which were recorded at the exchange amounts agreed
upon between the related parties.
==================================================================
2001 2000
- ------------------------------------------------------------------
Rent payments owed and
paid to principal stockholder $ 56,026 $ 137,355
Management fees paid to
principal shareholder - 157,695
Rent payments owed and paid to:
CML Global Capital Ltd., a
shareholder $ - $ 22,623
Management fees paid to CML
Global Capital Ltd. 59,961 126,986
==================================================================
Accounts payable includes $40,465 (2000 - $36,384) due to
shareholders and directors.
15. Subsequent events:
(a) Acquisition of control:
On September 7, 2001, the Company issued 13,000,000 common
shares to Sideware Systems Inc. for cash consideration of
$1,000,000. On the same day, the principal shareholder sold
Sideware Systems Inc. an additional 5,000,000 common shares
for cash consideration of $1.00. Sideware Systems Inc. has
acquired control of the Company with a 66.7% ownership of
the common voting shares.
(b) Share re-purchase:
In September 2001, the Company repurchased 65,000 common
shares for $15,975.
17
F-61
Consolidated Financial Statements
(Expressed in United States dollars)
CHALK.COM NETWORK (HOLDING)
CORPORATION
Year ended December 31, 2000
Eleven months ended December 31, 1999
F-62
AUDITORS' REPORT
To the Board of Directors and Stockholders of
Chalk.Com Network (Holding) Corporation
We have audited the consolidated balance sheet of Chalk.Com Network
(Holding) Corporation as at December 31, 2000 and the consolidated
statements of operations and comprehensive loss, stockholders'
deficit and cash flows for the year ended December 31, 2000. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audit. The
accompanying financial statements of Chalk.Com Network (Holding)
Corporation as of December 31, 1999, were audited by other auditors
whose report thereon dated February 28, 2000, except for notes 1 and
15, as which to the date is September 29, 2000, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as at December 31, 2000 and the results of its operations
and its cash flows for the year ended December 31, 2000, in
accordance with accounting principles generally accepted 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.
"KPMG"
Chartered Accountants
Vancouver, Canada
October 12, 2001
F-63
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Balance Sheets
(Expressed in United States dollars)
December 31, 2000 and 1999
==================================================================
2000 1999
- ------------------------------------------------------------------
Assets
Current assets:
Cash $ 362,347 $ -
Short term investments (note 4) 18,339 15,201
Accounts receivable and other
receivables, less allowance for
doubtful accounts of $ 32,250
(1999 - $60,534) 499,717 304,933
Due from stockholders (note 5) 134,065
Prepaid expenses 38,329 3,252
- ------------------------------------------------------------------
1,052,797 323,386
Deposit on lease 100,000 -
Fixed assets (note 6) 206,706 238,995
$ 1,359,503 $ 562,381
Liabilities and Stockholders' Deficit
Current liabilities:
Bank indebtedness $ - $ 134,289
Accounts payable and accrued
liabilities 841,515 278,999
Deferred revenue 164,055 25,083
Current portion of obligations
under capital leases (note 7) 3,368 3,376
Current portion of bank loan
(note 8) - 16,538
- ------------------------------------------------------------------
1,008,938 458,285
Bank loan (note 8) - 35,143
Obligations under capital leases
(note 7) 8,287 11,271
Due to stockholders (note 9) 901,993 79,202
- ------------------------------------------------------------------
1,919,218 583,901
Stockholders' deficit:
Share capital: (note 11)
Issued:
Common shares 373 -
Class E exchangeable shares 11,264 349,705
Special warrants 2,292,073 -
Additional paid-in capital 5,673,130 -
Deferred stock-based compensation (213,136) -
Deficit (8,277,098) (372,506)
Other accumulated comprehensive
income (loss) (46,321) 1,281
----------------------------------------------------------------
(559,715) (21,520)
- ------------------------------------------------------------------
$ 1,359,503 $ 562,381
Future operations (note 1)
Commitments (note 13)
Contingency (note 14)
Subsequent events (notes 11(b) and 17)
See accompanying notes to consolidated financial statements.
1
F-64
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Statements of Operations and Comprehensive Loss
(Expressed in United States dollars)
==================================================================
Eleven months
Year ended ended
December 31, December 31,
2000 1999
- ------------------------------------------------------------------
Sales revenue:
Television and airline
segment production $ 564,558 $ 954,904
Interactive media 515,393 -
- ------------------------------------------------------------------
1,079,951 954,904
Cost of sales (including stock
based compensation of $552,519;
1999 - nil) 3,022,110 217,312
- ------------------------------------------------------------------
(1,942,159) 737,592
Operating expenses:
Selling and website operations
(including stock based
compensation of $ 845,276;
1999 - nil) 1,984,524 162,625
General and administrative
(including stock based
compensation of $1,037,841;
1999 - nil) 3,824,563 850,806
Write-down of fixed assets 75,957 -
----------------------------------------------------------------
5,885,044 1,013,431
- ------------------------------------------------------------------
Operating loss (7,827,203) (275,839)
Non-operating:
Interest income 3,288 1,355
Other - 531
Interest and bank charges (58,200) (14,144)
Gain (loss) on foreign exchange (22,477) 3,067
Unrealized loss on trading
securities - (18,813)
----------------------------------------------------------------
(77,389) (28,004)
Loss for the period (7,904,592) (303,843)
Other comprehensive income (loss):
Foreign currency translation
adjustment (47,602) 1,352
- ------------------------------------------------------------------
Comprehensive loss $ (7,952,194) $ (302,491)
==================================================================
See accompanying notes to consolidated financial statements.
2
F-65
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Statement of Stockholders' Equity (Deficit)
(Expressed in United States dollars)
Year ended December 31, 2000
Eleven months ended December 31, 1999
Class E
exchangeable shares Accumulated
Common in subsidiary Special warrants Additional Deferred other Total
--------------- ----------------- ---------------- paid-in stock-based comprehensive Equity stockholders'
Number Assigned Number Assigned Number Assigned capital compensation loss (Deficit) equity (deficit)
Balance,
January 31,
1999
(unaudited) - $ - 8,847,054 $ 13,905 - $ - $ - $ - $ (71) $ 13,373 $ 27,207
Promissory
note
issued on
reorganiz-
ation of
companies - - - - - - - - - (82,036) (82,036)
Shares
issued
for cash - - 552,946 335,800 - - - - - - 335,800
Foreign
currency
translation
adjustment - - - - - - - - 1,352 - 1,352
Loss for
the period - - - - - - - - - (303,843) (303,843)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December
31, 1999 - - 9,400,000 349,705 - - - - 1,281 (372,506) (21,520)
Shares
issued on
exercise
of stock
option - - 600,051 5 - - - - - - 5
Shares
issued upon
conversion
of class E
shares
(note 11) 2,350,000 235 (2,350,000) (338,446) - - 338,211 - - - -
Treasury
stock
(note 11(b)
(iv)) - - 2,350,000 - - - - - - - -
Shares
issued for
cash, net
of share
issue
costs 1,375,200 138 - - - - 2,686,147 - - - 2,686,285
Special
warrants
issued for
cash - - - - 1,467,755 2,292,073 - - - - 2,292,073
Stock-based
compensation - - - - - - 257,373 - - - 257,373
Deferred
stock based
compensation - - - - - - 2,391,399 (2,391,399) - - -
Amortization
of deferred
stock-based
compensation - - - - - - - 2,178,263 - - 2,178,263
Foreign
currency
translation
adjustment - - - - - - - - (47,602) - (47,602)
Loss for
the period - - - - - - - - - (7,904,592) (7,904,592)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance,
December
31, 2000 3,725,200 $ 373 10,000,051 $ 11,264 1,467,755 $2,292,073 $5,673,130 $ (213,136) $(46,321) $(8,277,098) $ (559,715)
See accompanying notes to consolidated financial statements.
3
F-66
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
==================================================================
Eleven months
Year ended ended
December 31, December 31,
2000 1999
- ------------------------------------------------------------------
Cash flows used in operating
activities
Loss for the period $ (7,904,592) $ (303,843)
Items not involving cash
Amortization 123,977 26,061
Stock-based compensation 2,435,636 -
Other - (531)
Write-down of fixed assets 75,957 -
Unrealized loss on
trading securities - 18,813
Unrealized foreign exchange
gain (106,224) (3,067)
Changes in non-cash
working capital:
Accounts receivable and
other receivables (226,841) (149,278)
Accounts payable and
accrued liabilities 577,005 155,924
Deferred revenue 141,126 25,083
Prepaid expenses (136,483) 398
----------------------------------------------------------------
Net cash provided used in
operating activities (5,000,172) (171,301)
Cash flows from investing
activities:
Purchase of capital assets (175,386) (179,870)
Purchase of short-term
investments (3,363) (33,664)
----------------------------------------------------------------
Net cash used in investing
activities (178,749) (213,534)
Cash flows from financing
activities:
Issuance of common shares on
exercise of stock options 5 -
Issuance of common shares,
net of share issue costs 2,686,285 335,800
Issuance of special warrants,
net of share issue costs 2,292,073 -
Deposit on lease (100,000) -
Advances from shareholders (135,356) -
Increase in shareholder
loans 833,291 -
Payments on shareholder
loans - (151,253)
Increase (payments) on
bank indebtedness (131,216) 132,542
Increase in bank loan - 50,498
Payments on bank loan (50,498) -
Principal repayment on
capital lease obligations (2,550) (2,682)
----------------------------------------------------------------
Net cash provided used in
financing activities 5,392,034 364,905
Effect of foreign currency
on cash 149,234 1,363
- ------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 362,347 (18,567)
Cash and cash equivalents,
beginning of period - 18,567
- ------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 362,347 $ -
==================================================================
Supplemental information:
Interest paid $ 12,879 $ 8,660
Non-cash financing and investing
activities:
Conversion of exchangeable
shares to common shares 338,446 -
Special warrants issued for
services rendered 406,144 -
==================================================================
See accompanying notes to consolidated financial statements.
4
F-67
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
1. Description of business and future operations:
Chalk.Com Network (Holding) Corporation (the "Company")
specializes in creating e-commerce enabled multimedia solutions
for manufacturers of technology-related products. The Company
uses online and offline media distribution which include the
internet, television, in-flight airline entertainment and radio.
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 increase its customer base, increase
sales of its e-learning product to generate 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 that may not be available on
reasonable terms. Subsequent to year-end, in September 2001
Sideware Systems Inc. made an investment of $1,000,000 in the
Company, for a 66.7% ownership (note 17(c)). 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 Chalk.Com Network
(Holding) Corporation and its subsidiaries, all of which are
wholly-owned. All material intercompany balances and
transactions have been eliminated in consolidation.
5
F-68
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
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.
(b) Short-term investments:
The Company classifies its short-term investments in debt
instruments as "held-to-maturity." Such investments are
reported at amortized cost and interest is recorded in the
statement of operations when earned.
The Company classifies its short-term investments in equity
instruments as "trading" securities. Such investments are
recorded at fair value based on quoted market prices. Gains
and losses on these securities are recorded in the statement
of operations.
(c) Fixed assets:
Fixed assets are carried at cost less accumulated
amortization. Amortization is calculated annually as follows:
===============================================================
Asset Basis Rate
---------------------------------------------------------------
Automobiles declining-balance 30%
Computer equipment declining-balance 33%
Furniture and equipment declining-balance 20%
Leasehold improvements straight-line lease term
===============================================================
During the year, the Company changed its amortization policy
for automobiles, computer equipment and furniture and
equipment to better approximate the remaining 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.
6
F-69
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
3. Significant accounting policies (continued):
(d) 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.
(e) 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. When the realization of deferred
tax assets is not considered to be more likely than not, a
valuation allowance is provided for the excess.
(f) 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.
7
F-70
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
3. Significant accounting policies (continued):
(f) Stock-based compensation (continued):
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 FASB
Interpretation No. 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans". Non-
employee grants with future service requirements are not
recognized until the service is performed and the options
vest.
(g) 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.
(h) Website development costs:
The Company's website is in the operating stage. In accordance
with EITF 00-2, "Accounting for Website Development Costs",
costs are expensed as incurred.
(i) Advertising costs:
Advertising costs are expensed as incurred and totaled $1,965
and $64,747, during the year ended December 31, 2000 and the
eleven months ended December 31, 1999, respectively.
(j) Revenue recognition:
(i) During the year, the Company changed its policy on
revenue recognition for television and airline segment
production to SOP 00-2 "Accounting by Producers or
Distributors of Films", released in June 2000. SOP 00-2 is
effective for fiscal years beginning on or after December
15, 2000; however, the Company has chosen to early adopt
for the year ended December 31, 2000. The adoption of this
policy has been made prospectively and did not have a
material effect on the Company's financial position or
results of operations at the date of adoption.
The Company recognizes revenue from a sale or licensing
arrangement of a television and airline segment production
when persuasive evidence of a sale or licensing arrangement
exists, the film is complete, and has been delivered and
accepted in accordance with the terms of the arrangement,
the license period of the arrangement has begun, the
arrangement fee is fixed and determinable, and the
collection of the arrangement fee is reasonably assured.
The accounting policy described above differs from that
applied in 1999 and prior years, as licensing revenue was
previously recognized as each individual episode was made
available for telecast.
8
F-71
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
3. Significant accounting policies (continued):
(j) Revenue recognition (continued):
(ii) SAB 101 was released by the Securities and Exchange
Commission in December 1999. It is effective for fiscal
years beginning on or after December 15, 2000; however, the
Company has chosen to early adopt for the year ended
December 31, 2000. The Company did not have interactive
media revenue prior to the year ended December 31, 2000.
The Company recognizes revenue for interactive media in
accordance with SAB 101 which states that revenue generally
is realized or realizable and earned when all of the
following criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or services have
been rendered, the seller's price to the buyer is fixed or
determinable, and collectibility is reasonably assured.
(iii)If the Company does not meet any one of the criteria
described above, all revenue from the arrangement is
deferred until such time as the conditions are met.
(k) Foreign currency translation:
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 in accordance with SFAS 52, "Foreign Currency
Translation". Accordingly, foreign currency denominated
balances of the Company are initially remeasured into Canadian
dollars. Under this method, monetary assets and liabilities
denominated in a foreign currency are remeasured into 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.
The Company translates the Canadian dollar statements into
U.S. dollar reporting currency using the current rate method.
The assets and liabilities are translated in U.S. dollars
using period end rates and revenue and expense are translated
at the average exchange rate for the period. Exchange gains
and losses resulting from the translation are recorded as a
separate component of shareholders' equity (deficit) and
reported as other comprehensive income.
9
F-72
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
3. Significant accounting policies (continued):
(l) Comparative figures:
Certain comparative figures have been reclassified to conform
to the financial statement presentation adopted in the current
year.
4. Short-term investments:
==================================================================
2000 1999
- ------------------------------------------------------------------
Held to maturity debt instruments $ 18,339 $ -
Trading equity securities - 15,201
- ------------------------------------------------------------------
Balance as at December 31 $ 18,339 $ 15,201
==================================================================
5. Due from stockholders:
These amounts are due from stockholders without set payment or
interest terms. The Company expects that these amounts will be
re-paid within the year.
6. Fixed assets:
==================================================================
2000 1999
- ------------------------------------------------------------------
Automobiles $ 28,885 $ -
Computer equipment 150,319 108,190
Furniture and equipment 62,929 161,787
Leasehold improvements 16,389 -
- ------------------------------------------------------------------
258,522 269,977
Accumulated amortization (51,816) (30,982)
- ------------------------------------------------------------------
Net book value $ 206,706 $ 238,995
==================================================================
At December 31, 2000, the Company wrote down fixed assets by
$75,957 to reflect the lower fair market value.
Included in fixed assets are assets held under capital leases
with a net book value of $13,160 (1999 - $15,351).
10
F-73
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
7. Obligations under capital lease:
During the year, the Company entered into various leases for
furniture and equipment expiring in 2004. The obligations require
the following minimum payments:
==================================================================
Year ending December 31:
2001 $ 5,639
2002 5,639
2003 4,345
- ------------------------------------------------------------------
Future minimum lease payments 15,623
Amount representing interest 3,968
- ------------------------------------------------------------------
11,655
Current portion 3,368
- ------------------------------------------------------------------
$ 8,287
==================================================================
8. Bank indebtedness:
As at December 31, 1999, the Company had an operating loan with
the Royal Bank of Canada with an interest rate of prime plus
0.75% per annum. The loan was repaid during the year ended
December 31, 2000.
9. Due to shareholders:
At December 31, 2000, the Company owed $901,993 to various
shareholders. Pursuant to the terms of the loan agreements, the
Company received proceeds of $875,000. Interest is accrued semi-
annually at a rate of 7% per annum. The balance payable at
December 31, 2000 includes accrued interest of $26,993. The
principal and accrued interest are due and payable in full within
sixty days of the Company completing an equity financing in the
aggregate amount of $7,000,000 or greater.
At December 31, 1999, the Company owed $ 79,202 to various
shareholders. The loans had no specific terms of repayment and
interest was calculated annually at a rate of prime plus 2%.
These amounts were paid during the year ended December 31, 2000.
11
F-74
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
10. Letter of Credit:
The Company has an outstanding irrevocable standby letter of
credit with the Royal Bank of Canada in the amount of $17,452
expiring December 18, 2001.
11. Stockholders' equity:
The Company was incorporated under the laws of the State of
Delaware on December 22, 1999 as a continuation of its wholly-
owned subsidiary, Chalk Productions Incorporation ("Subsidiary").
There was no change in effective equity interests and no new
assets or liabilities were contributed to the Company as a result
of the recapitalization of the Subsidiary. The consolidated
financial statements give retroactive effect to the
recapitalization described below at (b)(i) and (b)(ii).
(a) Authorized:
50,000,000 common shares, with a par value of $0.0001
25,000,000 non-voting preferred shares without par value
(b) Share reorganization:
(i) On January 19, 2000, 149,346 class A common voting shares
of Subsidiary were subdivided by 63.2565 and redesignated
into 9,447,105 class E exchangeable, non-voting shares in
Subsidiary. The exchangeable shares held the right to
exchange each share for one common share in the Company.
(ii) On January 26, 2000, pursuant to the Capital
Reorganization Agreement ("Agreement"), 8,741 class B non-
voting shares were cancelled and exchanged for 552,946 of
class E exchangeable shares in the Subsidiary. The
exchangeable shares held the right to exchange each share
for one common share in the Company.
(iii)Pursuant to the Support Agreement on January 26, 2000,
the Company retains the right of first refusal to purchase
the shares that are subject to exchangeability as explained
in 10(b)(i) and (ii) above.
(iv) On January 26, 2000, 2,350,000 exchangeable shares in the
Subsidiary were transferred to the Company in exchange for
2,350,000 common shares in the Company. As of that date
and at December 31, 2000, the Company holds 2,350,000
exchangeable shares in the Subsidiary that are exchangeable
for common shares in the Company. These shares have been
presented as treasury stock. On September 7, 2001, these
exchangeable shares were exchanged for 2,350,000 common
shares in the Company.
12
F-75
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
11. Stockholders' equity (continued):
(b) Share reorganization (continued):
(v) As at December 31, 2000, 10,000,051 of class E
exchangeable shares were outstanding in the Subsidiary
(including the 2,350,000 held by the Company). These shares
are not redeemable and exchangeable only into common shares
of the Company. They are presented in the consolidated
financial statements of the Company as class E exchangeable
shares in shareholders' equity.
(vi) On September 7, 2001, the remaining 7,650,051 class E
exchangeable shares were exchanged for 7,650,051 common
shares in the Company.
(c) Stock compensation plans:
Effective July 31, 2000, the Company adopted its 2000 Stock
Option Plan ("the 2000 Plan"), which reserved 2,400,000 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.
(i) A summary of the Company's stock option activity is as
follows:
==================================================================
Weighted
Number average
of options exercise price
- ------------------------------------------------------------------
Balance, December 31, 1999 - $ -
Options granted 2,701,951 0.77
Options exercised (600,051) -
Options cancelled / expired (44,500) 1.32
- ------------------------------------------------------------------
Balance, December 31, 2000 2,057,400 $ 0.76
==================================================================
13
F-76
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
11. Stockholders' equity (continued):
(c) 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
Exercise Number contractual exercise Number exercise
prices of shares life (years) price of shares price
$ 0.007 200,000 9.58 $ 0.007 200,000 $ 0.007
$ 0.67 1,370,000 9.58 0.67 1,109,389 0.67
$ 1.32 487,400 9.58 1.32 97,625 1.32
- ----------------------------------------------------------------------
2,057,400 9.58 $ 0.76 1,407,014 $ 0.62
======================================================================
(iii) Stock-based compensation:
With respect to the stock options granted from inception
through December 31, 2000, the Company recorded stock-based
compensation of $2,435,636. Of the compensation expense
recognized, $2,178,263 is attributable to grants to
employees of stock options having an exercise price less
than the fair value of the underlying common shares at the
date of grant, and $257,373 is attributable to the earned
portion of the fair value of options granted to non-
employees.
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:
==================================================================
2000 1999
- ------------------------------------------------------------------
Loss for the period:
As reported $ 7,904,592 $ 303,843
Pro-forma 8,315,373 303,843
==================================================================
14
F-77
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
11. Stockholders' equity (continued):
(c) Stock compensation plans (continued):
(iii) Stock-based compensation (continued):
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 6.5% 3 yrs 70%
==================================================================
The weighted-average fair value of stock options granted
for the year ended December 31, 2000 are as follows:
==================================================================
Weighted average Weighted average
exercise price fair value
Exercise price is
less than market
value on grant date $ 0.77 $ 1.50
==================================================================
15
F-78
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
11. Stockholders' equity (continued):
(d) Share purchase warrants:
A summary of the Company's warrant activity for the year ended
December 31, 2000 is as follows (exercise prices in United
States dollars except where otherwise indicated):
===========================================================================
Outstanding Outstanding
Exercise December 31, December 31,
Expiry date price per share 1999 Granted Exercised Expired 2000
February 4, 2001 $2.50 - 125,000 - - 125,000
February 24, 2001 3.75 - 62,500 - - 62,500
March 1, 2001 2.50 - 125,000 - - 125,000
March 10, 2001 2.50 Cdn - 125,000 - - 125,000
March 15, 2001 3.75 - 31,250 - - 31,250
March 20, 2001 3.75 - 31,250 - - 31,250
March 20, 2001 2.00 - 31,250 - - 31,250
March 31, 2001 1.00 Cdn - 65,000 - - 65,000
April 3, 2001 3.75 - 125,000 - - 125,000
May 15, 2001 2.50 - 31,250 - - 31,250
June 21, 2001 1.32 - 25,000 - - 25,000
January 21, 2003 2.50 Cdn - 2,500 - - 2,500
April 30, 2005 1.32 - 40,000 - - 40,000
July 31, 2010 0.25 Cdn 107,531 107,531
- ---------------------------------------------------------------------------
- 927,531 - - 927,531
===========================================================================
(e) Special warrants:
During the year, 1,467,755 special warrants were issued for
net proceeds of $2,292,073. Each special warrant entitles the
holder to one common share in the Company on exercise for no
additional consideration. There is no expiry date for these
special warrants. No special warrants were exercised during
the year. At December 31, 2000, 1,467,755 special warrants
were outstanding.
16
F-79
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
12. Income taxes:
Income tax expense differs from the amount that would be computed
by applying the Canadian Federal and Provincial statutory income
tax rate of 44.6% (1999 - 45.6%) to net loss due primarily to
valuation allowances provided against losses incurred in the
year.
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 $ 1,663,192 $ 66,200
Excess of amortization recorded
for accounting over tax 71,190 36,200
Other temporary differences 92,285 20,200
- ------------------------------------------------------------------
Total deferred tax assets 1,826,667 122,600
Valuation allowance (1,826,657) (122,600)
- ------------------------------------------------------------------
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 or not 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
$1,123,000 available to offset taxable income earned in Canada to
2006 and $1,590,000 available to offset taxable income earned in
the United States to 2019.
13. Commitments:
The Company has obligations under operating lease arrangements,
which require the following minimum annual payments:
==============================================================
2001 $ 237,582
2002 124,907
2003 909
==============================================================
17
F-80
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
14. Contingency:
In July 2001, an employee filed a claim against the Company and
its principal shareholder for breach of an employment contract.
Management considers that the likelihood of this claim being
successful is low. The claim does not specify damages. The
possible resolution of this claim is not determinable as of the
date of these financial statements.
15. Financial instruments:
(a) Fair values of financial instruments:
The Company's short-term financial instruments consist of
cash, short-term investments, accounts receivable, due from
shareholders, accounts payable and accrued liabilities. The
fair value of these financial instruments approximate their
carrying values due to their short term maturity.
The Company's long-term financial instruments consist
principally of due to stockholders. The estimation of fair
value of this instrument is not practicable to determine due
to its related party nature and the absence of a secondary
market for such instruments.
(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
derivatives in place.
(c) Credit risk:
Financial instruments subjecting the Company to concentrations
of credit risk consist primarily of cash, short-term
investments and trade accounts receivable. The Company
maintains cash with high quality financial institutions.
The Company's customers are currently concentrated in Canada.
The Company performs periodic 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.
18
F-81
CHALK.COM NETWORK (HOLDING) CORPORATION
Consolidated Notes to Financial Statements
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Year ended December 31, 2000
Eleven months ended December 31, 1999
==================================================================
16. Related party transactions:
The following table summarizes the Company's related party
transactions, which were recorded at the exchange amounts agreed
upon between the related parties.
==================================================================
2000 1999
- ------------------------------------------------------------------
Rent payments owed and
paid to principal stockholder $ 137,355 $ 3,231
Management fees paid to
principal shareholder 157,695 -
Rent payments owed and paid to:
CML Global Capital Ltd., a
shareholder $ 22,623 $ 26,651
Management fees paid to CML
Global Capital Ltd. 126,986 -
Interest paid to minority
shareholders of Chalk
Holdings Incorporated $ - $ 4,265
==================================================================
Accounts payable includes $36,384 (1999 - $37,777) due to
shareholders and directors.
17. Subsequent events:
(a) Warrant exercise:
In March 2001, 65,000 warrants were exercised for 65,000 Class
A common shares in the Company. In September 2001, these
shares were re-purchased by the Company for $15,975.
(b) Private placement:
In March 2001, 674,020 special warrants were issued by the
Company for net proceeds of $1,170,980 and 389,750 special
warrants were issued by the Company for commissions related to
the private placement. Each special warrant entitles the
holder to one common share in the Company. There is no expiry
date for these special warrants.
(c) Acquisition of control:
On September 7, 2001, the Company issued 13,000,000 common
shares to Sideware Systems Inc. for cash consideration of
$1,000,000. On the same day, the principal shareholder sold
Sideware Systems Inc. an additional 5,000,000 common shares
for cash consideration of $1.00. As a result of these
transactions, Sideware Systems Inc. has acquired control of
the Company with a 66.7% ownership of the common voting
shares.
(c) Share re-purchase:
In September 2001, the Company repurchased 65,000 common
shares for $15,975.
19
F-82
KNOWLEDGEMAX, INC.
Condensed Financial Statements
September 30, 2001 and 2000
(Unaudited)
F-83
KNOWLEDGEMAX, INC.
Condensed Balance Sheet
(unaudited)
Assets September 30, 2001
Current assets:
Cash and cash equivalents $ 51,744
Accounts receivable 151,080
Prepaid expenses and other
current assets 5,000
------------
Total current assets 207,824
Property and equipment, net 108,863
Intangible assets, net 1,200
------------
317,887
============
Liabilities and Stockholders' Deficit
Current liabilities
Bank line of credit $ 67,955
Convertible notes - series B 75,000
Line of credit - related party 200,000
Notes payable - related party 192,338
Notes payable 328,967
Convertible notes payable - related
party 114,600
Convertible notes payable 27,090
Accounts payable 460,152
Accounts payable - related party 50,752
Accrued expenses 161,094
Accrued expenses - related party 87,500
Salaries payable 158,727
Capital lease current obligation 24,294
------------
Total current liabilities 1,948,469
------------
Long-term portion of capital lease 46,139
------------
Total liabilities 1,994,608
------------
Commitments and contingencies
Stockholders' deficit
Preferred stock, 5,000,000 shares
authorized:
Series A convertible preferred stock
(voting), $.01 par value, 330,000
shares designated, 328,610
shares issued and outstanding,
(liquidation preference
of $638,754) 3,286 -
Series B convertible preferred stock
(voting), $.01 par value, 775,000
shares designated, 704,928
shares issued and outstanding
(liquidation preference
of $2,242,062) 7,049
Common stock, $.01 par value,
15,000,000 shares authorized
1,720,263 shares issued and
outstanding 17,203
Additional paid-in capital 4,431,871
Accumulated deficit (6,136,130)
------------
Total stockholders' deficit (1,676,721)
------------
Total liabilities and
stockholders' deficit $ 317,887
============
See accompanying notes to unaudited condensed interim financial statements.
2
F-84
KNOWLEDGEMAX, INC.
Statements of Operations
For the Nine Months Ended September 30, 2001 and 2000
(unaudited)
2001 2000
------------- -------------
Revenue $ 355,983 $ -
Costs of revenue - related
party 177,470 -
Costs of revenue 137,906 -
------------- -------------
Gross profit 40,607 -
Operating expenses:
General and administrative 787,238 1,221,047
Research and development 239,474 353,287
------------- -------------
Total operating expenses 1,026,712 1,574,334
------------- -------------
Loss from operations (986,105) (1,574,334)
Other income (expense):
Interest expense (86,898) (560,810)
Interest income - 663
------------- -------------
Loss before income taxes (1,073,003) (2,134,481)
Income taxes - -
------------- -------------
Net loss $ (1,073,003) $ (2,134,481)
============= =============
See accompanying notes to unaudited condensed interim financial statements
3
F-85
KNOWLEDGEMAX, INC.
Statements of Cash Flows
Nine Month Periods ending September 30, 2001 and 2000
(unaudited)
2001 2000
------------- -------------
Cash flows from
operating activities:
Net loss $ (1,073,003) $ (2,134,481)
Adjustments to reconcile
net loss to net cash used
in operating activities
Depreciation and amortization 41,075 21,431
Amortization of deferred
financing fees - 7,064
Beneficial conversion charge - 371,801
Issuance of common stock
to related party for accrued
interest - 10,000
Non-cash conversion of accrued
interest into series A
convertible preferred stock - 55,584
Series A convertible preferred
stock issued for services - 91,666
Non-cash conversion of accrued
interest into Series B
convertible preferred stock - 12,515
Non-cash conversion of related
party accrued interest into
Series B
convertible preferred stock - 48,733
Series B convertible preferred
stock issued for services - 154,250
Warrant expense 21,460 42,294
Issuance of common stock for
services 328,033 469,132
Non-cash stock compensation
expense 7,755 3,486
Other 6,286 -
Change in assets and
liabilities:
Increase in prepaid
expenses and other assets (5,000) (1,521)
Increase in accounts receivable (151,080) -
Increase in accounts payable
and accrued expenses 93,263 115,096
------------- -------------
Net cash used in operating (731,211) (732,950)
activities
------------- -------------
Cash flows from investing
activities:
Purchase of property and
equipment (2,015) (68,341)
------------- -------------
Net cash used in investing
activities (2,015) (68,341)
------------- -------------
Cash flows from financing
activities:
Proceeds from (repayments on)
line of credit (16,117) 25,966
Proceeds from issuance of
promissory notes 70,000 -
Book overdraft - (8,434)
Principal repayments on
capital lease obligations (7,601) -
Principal repayments on
series A convertible debt - (25,000)
Proceeds from issuance of
common stock - 2,156
Principal repayments on
series A convertible debt - (25,000)
Proceeds from issuance of
common stock - 2,156
Proceeds from issuance of
series B convertible debt 125,000 50,000
Proceeds from issuance of
series B preferred stock 602,500 849,593
------------- -------------
Net cash provided by
financing activities 773,782 894,281
------------- -------------
Net increase
in cash and cash
equivalents 40,556 92,990
Cash and cash equivalents,
beginning of period 11,188 -
------------- -------------
Cash and cash equivalents,
end of period $ 51,744 $ 92,990
============= =============
Supplemental disclosure
of cash flow information:
Interest paid $ 16,754 $ 7,488
============= =============
Supplemental disclosure
of noncash activities:
Conversion of accounts
payable into notes
payable $ - $ 53,566
Conversion of Series A
convertible debt to
Series A convertible
preferred stock $ - $ 475,000
Conversion of Series B
convertible debt to
Series B convertible
preferred stock $ 50,000 $ 325,000
Assets acquired under
capital lease 78,034 -
============= =============
See accompanying notes to unaudited condensed interim financial statements.
4
F-86
KNOWLEDGEMAX, INC.
Notes to Unaudited Condensed Interim Financial Statements
September 30, 2001 and 2000
(1) Description of Operations
KnowledgeMax, Inc. (the "Company") has been engaged in the
development of the KnowledgeMax.com website, a book-selling, e-
Commerce, and e-learning database platform for companies to select,
purchase and deliver knowledge resources and education to their
employees. In June 2001, the Company obtained its first contract to
fulfill orders through the website, and began generating revenues.
Accordingly, the Company exited the development stage during the
first nine months of 2001.
(2) Basis of Presentation
The unaudited interim condensed financial statements have been
prepared by the Company in accordance with accounting principles
generally accepted in the United States of America and reflect all
adjustments (all of which are normal and recurring in nature) that,
in the opinion of management, are necessary for fair presentation of
the interim financial information.
The unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have
been condensed or omitted pursuant to those rules and regulations,
but the Company believes that the disclosures are adequate to make
the information presented not misleading. These unaudited condensed
financial statements and notes included herein should be read in
conjunction with the Company's audited financial statements and notes
for the year ended December 31, 2000.
The results of operations for the interim periods presented are not
necessarily indicative of the results expected for any subsequent
quarter or for the entire year ending December 31, 2001.
(3) Risks and Uncertainties - Liquidity and Capital Resources and
Competitive Environment
The Company's growth has required, and will continue to require,
substantial capital to fund expanding working capital needs, new
business initiatives, and capital expenditures. To date, the funding
of these requirements has come primarily from outside investors.
While outside investors have historically provided the required
funding, they have no obligation to continue to do so. The Company
intends to seek additional financing from investors, which funding
may be in the form of debt, equity, or some combination. There can
be no assurance of continued funding by outside investors or other
sources or that such funding will be on favorable terms to the
Company.
The Company expects to continue to focus on developing and enhancing
its software and website applications as well as expanding its
service offerings and revenues, however, the Company anticipates
generating operating losses and negative cash flows from operations
for the foreseeable future. The markets the Company is pursuing are
highly competitive and there can be no assurance that the Company's
service offerings will be successful, or that the Company will ever
generate operating profits or positive cash flows.
5
F-87
KNOWLEDGEMAX, INC.
Notes to Unaudited Condensed Interim Financial Statements
September 30, 2001 and 2000
The Company has a limited operating history and its prospects are
subject to the risks, expenses, and uncertainties frequently
encountered by companies in the new and rapidly evolving markets for
Internet products and services. These risks include the failure to
develop a viable online delivery service, inability to maintain and
increase its customer base and interruptions of service from the
Internet service provider that hosts the Company's web site, as well
as other risks and uncertainties.
The Company has experienced operating losses and negative cash flows
from operations since its inception, has working capital and
stockholders' deficiencies and has been unable to repay certain
obligations when due, as a result of efforts to construct, develop,
and market its web site and as a result of efforts to design,
develop, and market its book-selling knowledge resources and
education to the Company's customers and their employees.
These factors described above, either individually or in the
aggregate, could have an adverse effect on the Company's financial
condition and future operating results and create an uncertainty as
to the Company's ability to continue as a going concern. The
unaudited condensed interim financial statements do not include any
adjustments that might be necessary should the Company be unable to
continue as a going concern.
(4) Proposed Merger of the Company
On December 7, 2001, the Company entered into an agreement to merge
with Sideware Systems, Inc., a publicly traded company. The
agreement calls for the Company's shareholders to receive approximately
55 percent of the voting interests of the merged company. The completion
of the merger is subject to all necessary shareholder and governmental
approvals. There can be no assurance that all such shareholder or
governmental approvals will be obtained or that the merger will be
completed successfully.
(5) Summary of Significant Accounting Policies - Revenue Recognition
The Company recognizes revenue from the sale of books and learning
materials, net of any discounts or promotions, when the products are
received and accepted by the customer. The Company takes title to
the books upon transfer from the shipper and assumes risks and
rewards of ownership including risk of loss while the products are in
transit to the customer and for collection of billings to the
customer. The Company does not act as an agent or broker for the
supplier. Shipping charges assessed to the customer are included in
net sales. There were no discounts or promotions during the nine
month period ended September 30, 2001.
Revenue in the nine month period consisted primarily of the sale of
books supplied by national book wholesalers.
(6) Related Party Transactions
In 1998, the Company entered into a strategic agreement (the
"agreement") with a wholesale book distributor (the "distributor").
The agreement called for the distributor to invest $250,000 for the
purchase of 148,533 shares of common stock, and provided a $200,000
secured note payable, at an 8% interest rate. The distributor was
also granted one seat on the Board of Directors.
6
F-88
KNOWLEDGEMAX, INC.
Notes to Unaudited Condensed Interim Financial Statements
September 30, 2001 and 2000
In connection with the $200,000 secured note payable and the $250,000
common stock purchase in 1998, the Company entered into a warrant
agreement, which allows the stockholder to purchase common shares
equal to 5 percent of the fully diluted shares at any time until
April 30, 2003, at a purchase price of $200,000. Therefore, each
time the Company issues additional equity interests or rights to
acquire equity interests, the number of shares of common stock into
which the warrant is exerciseable increases so that the number of
common shares to be acquired is equal to a 5 percent fully diluted
interest at that date. This results in the modification of a vested
award and a new measurement date for the warrant. The Company
recognizes, as interest expense, the additional cost arising from the
modification of the warrant in the period of modification. During
the nine month periods ended September 30, 2001 and 2000, the Company
recognized additional interest expense of $21,460, and $42,294, for
modifications made to the warrant. The fair value of each
modification made to the warrant during the nine month periods ended
September 30, 2001 and 2000, was estimated on the modification date
using the Black-Scholes option pricing model with the following
assumptions; expected life equal to the remaining contractual life of
the warrant, expected volatility of 70%, expected dividend yield of
0%, and risk free interest rate of 5.00% for 2001 modifications and
5.11% for 2000 modifications. As of September 30, 2001, the warrant
was exerciseable into 170,410 shares of common stock.
The agreement, as amended, allows the Company to utilize the
distributor's book inventory database for a period through one year
after the effective date of the proposed merger (note 4), at no cost.
Thereafter, the Company will be assessed a charge for the use of the
distributor's database in the event that the Company re-licenses the
database to its third party customers. The agreement expires on July
1, 2006. The agreement also provided for the distributor to supply to
the Company books, fulfillment, and shipping services at discounted
prices. The cost of books and materials, provided by the distributor,
have been separately classified on the statements of operations.
(7) Equity Transactions
For the nine months ended September 30, 2001, the Company granted
90,000 options to purchase common stock to employees and 40,000
options to purchase common stock to non-employees at an exercise
price of $1.00 per share. The non-employee options were measured
using the Black-Scholes option pricing model pursuant to SFAS No.
123. The fair value of these options, as re-measured at each
reporting date until vested, currently equals approximately $25,000
and is recognized as compensation expense over the vesting period.
During the nine months ended September 30, 2001, the Company sold
202,862 shares of series B convertible preferred stock at $2.97 share
for total proceeds of $602,500.
During the nine months ended September 30, 2001, the Company issued a
series B convertible note in the amount of $50,000. This note was
converted into 16,835 shares of series B convertible preferred stock
at $2.97 per share during the nine months ended September 30, 2001.
During the nine months ended September 30, 2001, the Company issued
an additional three series B convertible notes to the same investor
for an aggregate amount of $75,000. These notes are convertible into
series B convertible preferred stock at $2.97 per share. None of
these notes were converted into series B convertible preferred stock
during the nine months ended September 30, 2001.
7
F-89
KNOWLEDGEMAX, INC.
Notes to Unaudited Condensed Interim Financial Statements
September 30, 2001 and 2000
On April 16, 2001, the Company issued 236,313 shares of common stock
for $278,033 of accrued compensation as of December 31, 2000, for
services rendered by employees, officers, and consultants of the
Company.
(8) Note Payable
In April 2001, the Company received a $70,000 loan from Montgomery
County, MD, the county in which the Company is currently headquarted.
The loan bears interest at 10% and is due 5 years from the date of
issuance provided that the Company meets certain requirements such as
maintaining a presence in the county. The Company's decision to
terminate its office lease effective February 2002 and its planned
re-location outside of the county violates the provisions of the
agreement and, accordingly, upon the Company's departure from the
county in February 2002, the county may call the note for full
payment at any time thereafter. Accordingly, the amount is presented
as a current liability in the accompanying unaudited condensed
balance sheet as of September 30, 2001.
(9) Commitments - Leases
During 2001, The Company leased certain computer software equipment
under agreements that are classified as capital leases. The Company
also has an operating lease for office space. However, the Company's
office space operating lease terminates effective February 5, 2002.
8
F-90
KNOWLEDGEMAX, INC..
(A Development Stage Company)
Financial Statements
December 31, 2000 and 1999
(With Independent Auditors' Report Thereon)
F-91
Independent Auditors' Report
The Board of Directors and Stockholders
KnowledgeMax, Inc.:
We have audited the accompanying balance sheets of KnowledgeMax, Inc.
(formerly Leadership Library, Limited Partnership) (a development stage
company) as of December 31, 2000 and 1999, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of
the years in the three-year period ended December 31, 2000, and for the
period from June 13, 1996 (date of inception) to December 31, 2000.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States 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.
As discussed in Note 12 to the financial statements, on December 7, 2001,
the Company entered into an agreement to merge with Sideware Systems,
Inc., a publicly-traded company. Upon completion of the merger, the
Company's shareholders will receive approximately 55 percent of the voting
interests of the merged company.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of KnowledgeMax,
Inc. (formerly Leadership Library, Limited Partnership) (a development
stage company) as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the years in the three-year
period ended December 31, 2000, and for the period from June 13, 1996
(date of inception) to December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As described in note 2 to
the financial statements, the Company has incurred losses and negative
cash flows from operations since inception, has working capital and
stockholders' deficiencies and has been unable to repay certain
obligations when due, that 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 2. The financial statements do not
include any adjustments that may result from the outcome of this
uncertainty.
/s/ KPMG LLP
McLean, Virginia
December 21, 2001
1
F-92
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Balance Sheets
December 31, 2000 and 1999
Assets 2000 1999
------------ ------------
Current assets:
Cash and cash equivalents $ 11,188 $ -
Prepaid expenses and other
current assets - 2,979
------------ ------------
Total current assets 11,188 2,979
Property and equipment, net 76,175 32,940
Deferred financing fees, net - 7,064
Intangible assets, net 1,200 1,800
------------ ------------
Total assets 88,563 44,783
============ ============
Liabilities and Stockholders' Deficit
Current liabilities
Bank line of credit $ 84,072 $ 48,246
Convertible notes - series A - 500,000
Convertible notes - series B - 275,000
Line of credit - related party 200,000 200,000
Notes payable - related party 192,338 107,030
Notes payable 258,967 -
Convertible notes payable - related
party 114,600 -
Convertible notes payable 27,090
Book overdraft - 8,434
Accounts payable 390,282 428,330
Accounts payable - related party 6,606 20,316
Accrued expenses 113,461 55,761
Accrued expenses - related party 50,000 -
Salaries payable 264,613 395,397
------------ ------------
Total current liabilities 1,702,029 2,038,514
------------ ------------
Total liabilities 1,702,029 2,038,514
------------ ------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, 5,000,000 shares
authorized:
Series A convertible preferred stock
(voting), $.01 par value, 330,000
shares designated, 328,610 and 0
shares issued and outstanding,
respectively (liquidation preference
of $603,151) 3,286 -
Series B convertible preferred stock
(voting), $.01 par value, 775,000
shares designated, 485,231 and 0
shares issued and outstanding,
respectively (liquidation preference
of $1,484,373) 4,852 -
Common stock, $.01 par value,
15,000,000 shares authorized
1,483,950 and 1,000,143 shares
issued and outstanding, respectively 14,840 10,001
Additional paid-in capital 3,426,683 452,413
Deficit accumulated during
the development stage (5,063,127) (2,456,145)
------------ ------------
Total stockholders' deficit (1,613,466) (1,993,731)
------------ ------------
Total liabilities and
stockholders' deficit 88,563 44,783
============ ============
See accompanying notes to financial statements.
2
F-93
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Statements of Operations
Period from
June 13, 1996
Year ended December 31, (date of inception)
----------------------------------------------- through
2000 1999 1998 December 31, 2000
------------- ------------- ------------- -------------------
Revenue $ - $ - $ - $ -
Costs of Revenue - - - -
------------- ------------- ------------- -------------------
Gross profit - - - -
Operating expenses:
General and administrative 1,535,015 867,151 495,174 3,122,208
Research and development 479,457 447,925 273,499 1,247,112
------------- ------------- ------------- -------------------
Total operating expenses 2,014,472 1,315,076 768,673 4,369,320
------------- ------------- ------------- -------------------
Loss from operations (2,014,472) (1,315,076) (768,673) (4,369,320)
Other income (expense):
Interest expense (593,261) (86,380) (18,529) (698,170)
Interest income 751 1,752 1,860 4,363
------------- ------------- ------------- -------------------
Loss before income taxes (2,606,982) (1,399,704) (785,342) (5,063,127)
Income taxes - - - -
------------- ------------- ------------- -------------------
Net loss $ (2,606,982) $ (1,399,704) $ (785,342) $ (5,063,127)
============= ============= ============= ===================
See accompanying notes to financial statements
3
F-94
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Statements of Stockholders' Equity (Deficit)
Series A Series B Deficit
Convertible Convertible accumulated
Preferred Stock Preferred Stock Common Stock Additional during the
------- ------- ------- -------- --------- -------- Partnership paid-in development
Shares Amount Shares Amount Shares Amount Interest Capital stage Total
------- ------- ------- -------- --------- -------- ----------- ----------- ----------- -----------
Issuance of
partnership
interest - $ - $ - - $ - $ - $ 92,098 $ - $ - $ 92,098
Net loss - - - - - - - - (60,692) (60,692)
------- ------- ------- -------- --------- -------- ----------- ----------- ----------- -----------
Balance at December
31, 1996 - - - - - - 92,098 - (60,692) 31,406
Issuance of
partnership
interest - - - - - - 10,000 - - 10,000
Net loss - - - - - - - - (210,407) (210,407)
------- ------- ------- -------- --------- -------- ----------- ----------- ----------- -----------
Balance at December
31, 1997 - - - - - - 102,098 - (271,099) (169,001)
Conversion of
partnership
interests into
common stock - - - - 770,000 7,700 (102,098) 94,398 - -
Issuance of
common stock - - - - 220,143 2,201 - 294,299 - 296,500
Stock subscription
receivable - - - - - - - (46,500) - (46,500)
Issuance of warrant - - - - - - - 38,816 - 38,816
Issuance of common
stock in exchange
for expenses paid
for by an officer - - - - 10,000 100 - 24,900 - 25,000
Net loss - - - - - - - - (785,342) (785,342)
------- ------- ------- -------- --------- -------- ----------- ----------- ----------- -----------
Balance at December
31, 1998 - - - - 1,000,143 10,001 - 405,913 (1,056,441) (640,527)
Exchange of stock
subscription
receivable for
services rendered - - - - - - - 46,500 - 46,500
Net loss - - - - - - - - (1,399,704) (1,399,704)
------- ------- ------- -------- --------- -------- ----------- ----------- ----------- -----------
Balance at December
31, 1999 - - - - 1,000,143 10,001 - 452,413 (2,456,145) (1,993,731)
Conversion of Series
A convertible debt 297,746 2,977 - - - - - 527,607 - 530,484
Issuance of Series A
convertible
preferred stock for
consulting services 30,864 309 - - - - - 91,357 - 91,666
Series A beneficial
conversion charge - - - - - - - 371,801 - 371,801
Issuance of Series B
convertible
preferred stock - - 303,245 3,033 - - - 897,597 - 900,630
Conversion of Series
B convertible debt - - 113,640 1,136 - - - 336,379 - 337,515
Issuance of Series B
convertible
preferred stock for
consulting services - - 51,937 519 - - - 153,731 - 154,250
Issuance of Series B
convertible
preferred stock in
settlement of
related party
accrued interest - - 16,409 164 - - - 48,569 - 48,733
Issuance of common
stock for services - - - - 471,651 4,717 - 489,415 - 494,132
Issuance of common
stock to related
party for accrued
interest - - - - 10,000 100 - 9,900 - 10,000
Option compensation
expense - - - - - - - 3,486 - 3,486
Warrant expense - - - - - - - 42,294 - 42,294
Exercise of stock
options - - - - 2,156 22 - 2,134 - 2,156
Net loss - - - - - - - - (2,606,982) (2,606,982)
------- ------- ------- -------- --------- -------- ----------- ----------- ----------- -----------
Balance at December
31, 2000 328,610 $ 3,286 485,231 $ 4,852 1,483,950 $ 14,840 $ - $ 3,426,683 $(5,063,127) $(1,613,466)
======= ======= ======= ======== ========= ======== =========== =========== =========== ===========
See accompanying notes to financial statements.
4
F-95
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Statements of Cash Flows
Period from
June 13, 1996
Year ended December 31, (date of inception)
----------------------------------------------- through
2000 1999 1998 December 31, 2000
------------- ------------- ------------- -------------------
Cash flows from
operating activities:
Net loss $ (2,606,982) $ (1,399,704) $ (785,342) $ (5,063,127)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and amortization 28,574 10,367 7,340 53,642
Amortization of deferred
financing fees 7,064 21,168 10,584 38,816
Beneficial conversion charge 371,801 - - 371,801
Non-cash conversion of accrued
interest into series A
convertible preferred stock 55,584 - - 55,584
Series A convertible preferred
stock issued for services 91,666 - - 91,666
Non-cash conversion of accrued
interest into Series B
convertible preferred stock 12,515 - - 12,515
Non-cash conversion of related
party accrued interest into
Series B
convertible preferred stock 48,733 - - 48,733
Series B convertible preferred
stock issued for services 154,250 - - 154,250
Warrant expense 42,294 - - 42,294
Issuance of common stock for
services 494,132 - 25,000 519,132
Issuance of common stock to
related party for accrued
interest 10,000 - - 10,000
Non-cash stock compensation
expense 3,486 - - 3,486
Change in assets and liabilities:
(Increase) decrease in prepaid
expenses and other assets 2,979 10,163 (13,142) -
Increase in accounts payable
and accrued expenses 411,123 630,925 133,116 1,357,427
------------- ------------- ------------- -------------------
Net cash used in operating
activities (872,781) (727,081) (622,444) (2,303,781)
------------- ------------- ------------- -------------------
Cash flows from investing
activities:
Purchase of property and
equipment (71,209) (7,110) (29,976) (128,017)
Purchase of intangibles - - (3,000) (3,000)
------------- ------------- ------------- -------------------
Net cash used in investing (71,209) (7,110) (32,976) (131,017)
activities
------------- ------------- ------------- -------------------
Cash flows from financing
activities:
Proceeds from line of credit 35,826 48,246 - 84,072
Net proceeds from issuance of
promissory notes - - 107,030 107,030
Proceeds from related party
line of credit - - 200,000 200,000
Book overdraft (8,434) 8,434 - -
Proceeds from issuance of
series A convertible debt - 500,000 - 500,000
Principal repayments on
series A convertible debt (25,000) - - (25,000)
Proceeds from issuance of
common stock 2,156 - 250,000 354,254
Proceeds from issuance of
series B convertible debt 50,000 175,000 100,000 325,000
Proceeds from issuance of
series B convertible
preferred stock 900,630 - - 900,630
------------- ------------- ------------- -------------------
Net cash provided by
financing activities 955,178 731,680 657,030 2,445,986
------------- ------------- ------------- -------------------
Net increase (decrease)
in cash and cash
equivalents 11,188 (2,511) 1,610 11,188
Cash and cash equivalents,
beginning of period - 2,511 901 -
------------- ------------- ------------- -------------------
Cash and cash equivalents,
end of period $ 11,188 $ - $ 2,511 $ 11,188
============= ============= ============= ===================
Supplemental disclosure
of cash flow information:
Interest paid $ 9,839 $ 1,762 $ - $ 11,601
============= ============= ============= ===================
Supplemental disclosure
of noncash activities:
Conversion of accounts
payable into notes
payable $ 485,965 $ - $ - $ 485,965
Conversion of Series A
convertible debt to
Series A convertible
preferred stock $ 475,000 $ - $ - $ 475,000
Conversion of Series B
convertible debt to
Series B convertible
preferred stock $ 325,000 $ - $ - $ 325,000
============= ============= ============= ===================
See accompanying notes to financial statements.
5
F-96
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
(1) Organization and Nature of Business
Leadership Library, Limited Partnership, a Maryland Limited
Partnership was formed on June 13, 1996 ("inception").
On May 1, 1998, KnowledgeMax, Inc. (the "Company") was incorporated
in the State of Maryland. On June 17, 1998, Leadership Library
Limited Partnership was merged into KnowledgeMax, Inc. On June 8,
2000, Leadership Library, Inc., the former general partner
of Leadership Library, Limited Partnership, was merged into
KnowledgeMax, Inc. On August 17, 2000, the Company reincorporated in
the State of Delaware.
The Company's main activity consists of developing the
KnowledgeMax.com website, a book selling, e-Commerce, and e-learning
database platform for companies to select, purchase, and deliver
knowledge resources and education to their employees.
(2) Risks and Uncertainties - Liquidity and Capital Resources and
Competitive Environment
The Company's growth has required, and will continue to require,
substantial capital to fund expanding working capital needs, new
business initiatives, and capital expenditures. To date, the funding
of these requirements has come primarily from outside investors.
While outside investors have historically provided the required
funding, they have no obligation to continue to do so. The Company
intends to seek additional funding from investors, which funding may
be in the form of debt, equity, or some combination. There can be no
assurance of continued funding by outside investors or other sources
or that such funding will be on favorable terms to the Company.
The Company expects to continue to focus on developing and enhancing
its software and website applications as well as expanding its
service offerings and generating revenues, however, the Company
anticipates generating operating losses and negative cash flows from
operations for the foreseeable future. The markets the Company is
pursuing are highly competitive and there can be no assurance that
the Company's service offerings will be successful, or that the
Company will ever generate operating profits or positive cash flows.
The Company has a limited operating history and its prospects are
subject to the risks, expenses, and uncertainties frequently
encountered by companies in the new and rapidly evolving markets for
Internet products and services. These risks include the failure to
develop a viable online delivery service, inability to maintain and
increase its customer base and interruptions of service from the
Internet service provider that hosts the Company's web site, as well
as other risks and uncertainties.
The Company has experienced operating losses and negative cash flows
from operations since its inception, has working capital and
stockholders' deficiencies and has been unable to repay certain
obligations when due, as a result of efforts to construct, develop,
and market its web site and as a result of efforts to design,
develop, and market its book-selling knowledge resources and
education to customers and their employees.
These factors described above, either individually or in the
aggregate, could have an adverse effect on the Company's financial
condition and future operating results and create an uncertainty as
to the
6
F-97
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going
concern.
(3) Summary of Significant Accounting Policies
(a) Development Stage Enterprise
The Company is devoting substantially all of its present efforts
to developing and marketing its website software products and
services, its planned principal operations. The Company is
considered a development stage enterprise as it has not yet
derived any revenues from its planned principal operations.
(b) Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or
less when purchased are considered cash equivalents. Cash and
cash equivalents consist of cash on deposit with banks and money
market funds stated at cost which approximate fair value. At
times, these accounts may exceed federally insured limits. The
Company has not experienced any losses in such bank accounts. The
Company believes it is not exposed to significant credit risk
related to cash and cash equivalents.
(c) Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, as
estimated by management, which include cash equivalents, accounts
payable, accrued expenses, bank line of credit, and line of
credit related party approximate their fair values due to the
relatively short duration of these instruments, the stated
interest rate of these instruments, and the security interests of
these instruments. The carrying amount of the company's notes
payable related party, notes payable, convertible notes payable
related party, and convertible notes payable are in excess of
their fair value. See notes 6(c) and 8(c).
(d) Property and Equipment
Property and equipment is carried at historical cost less
accumulated depreciation and amortization. Depreciation and
amortization is calculated using the straight-line method based
on the estimated remaining useful lives of the assets as follows:
Computer equipment and software 5 years
Furniture and fixtures 7 years
(e) Recovery of Long-Lived Assets
In accordance with Financial Accounting Standards Board ("FASB")
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 periodically
reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying
7
F-98
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to the undiscounted future net cash flows expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to
sell.
(f) Research and Development Costs
Research and development costs are expensed as incurred.
(g) Stock Options and Warrants
The Company accounts for employee stock-based compensation
arrangements in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations and complies with
the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Under APB No. 25, compensation expense
is based upon the difference, if any, between the fair value of
the Company's stock and the exercise price on the date of the
grant. Stock options and warrants to purchase common stock
granted to other than employees as consideration for goods or
services rendered are measured at fair value and are recognized
as the goods or services are provided in accordance with SFAS
No. 123 and related interpretations.
(h) Income Taxes
Prior to incorporating in 1998, the Company was taxed as a
Partnership, whereby each partner was directly responsible for
the tax on income and directly received deductions for the losses
incurred.
The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the 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
income in the period that includes the enactment date.
(i) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses
during the reporting period. Actual results may differ from those
estimates.
8
F-99
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
(j) Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance
with SFAS No.130, Reporting Comprehensive Income. The Company
has determined that there were no transactions that have taken
place during the years ended December 31, 2000, 1999, or 1998 or
during the period from June 13, 1996 (date of inception) to December
31, 2000, that would be classified as other comprehensive income
(loss).
(k) Web Site Development Costs
The Company accounts for its web site development costs in
accordance with Emerging Issues Task Force Issue No. 00-2,
Accounting for Web Site Development Costs and Statement of
Position 98-1, Accounting for Costs of Computer Software
Developed or Obtained for Internal Use.
(l) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. In June 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of SFAS No. 133. These statements,
which are effective January 1, 2001, require that all derivative
instruments be recorded on the balance sheet at their respective
fair values. The Company has reviewed its contracts and has
determined that is has no derivative instruments and does not
engage in hedging activities. Accordingly, management believes
that the adoption of SFAS No. 133 and SFAS No. 138 will have no
impact on the Company's financial statements.
(4) Property and Equipment
Property and equipment consist of the following at December 31, 2000
and 1999:
2000 1999
---------- ----------
Computer equipment and software $ 107,918 $ 42,557
Furniture and fixtures 16,973 11,125
Total 124,891 53,682
Less accumulated depreciation and
amortization (48,716) (20,742)
---------- ----------
Net property and equipment 76,175 32,940
========== ==========
9
F-100
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
(5) Bank line of credit
In July 1998, the Company entered into a line of credit facility with
a bank. The maximum amount of the line is $100,000 as of December
31, 2000. The debt is secured by a personal guarantee by a
stockholder, and carries an interest rate of the bank's prime lending
rate plus 1 percent which was 9 percent as of December 31, 2000. The
Company is required to make monthly principal repayments of
approximately $2,000 with interest and there is no stated maturity
date on the line of credit.
(6) Notes Payable
(a) Series A Convertible Notes
At various dates during 1999, the Company issued series A
convertible notes ("series A notes") for an aggregate of
$500,000, bearing interest at the rate of 8 percent per annum.
In 2000, the Company repaid $25,000 of the principal balance plus
accrued interest. The series A notes were due one year after the
date of issuance and were convertible, immediately and at any
time, at the option of the holder, in whole or in part, into
shares of the Company's common stock. In addition, in the event
that the Company completed the sale of stock in a qualified
offering as defined in the agreements, the series A notes plus
accrued interest would be convertible, at the option of the
holder, into shares of the Company's series A convertible
preferred stock ("series A preferred stock") at a conversion
price of 80 percent of the price of the qualified offering if the
offering was completed within 120 days of the issuance of the
series A notes, and 60 percent of the price per share of the
qualified offering if completed after 120 days of the issuance of
the series A notes. The issuance of the Company's series B
convertible preferred stock (see note 6(b)) was considered a
qualified offering under the terms of the series A notes. The
qualified offering occurred more than 120 days after the issuance
of the Series A notes. In August 2000, at the election of the
series A note holders, the remaining principal balance of the
series A notes of $475,000, plus accrued interest of $55,584, was
converted into 297,746 shares of the Company's series A preferred
stock at a price of $1.782 per share. To account for the
beneficial conversion feature of the series A notes, the Company
recorded $371,801 of additional interest expense for the year
ended December 31, 2000. In addition, in August 2000, the
Company issued 30,864 shares of series A preferred stock in
settlement of $91,666 owed for advances and services provided to
the Company.
(b) Series B Convertible Notes
At various dates during 1998 and 1999, the Company issued series
B convertible notes ("series B notes") for an aggregate of
$275,000, bearing interest at the rate of 8 percent per annum.
In 2000, the Company issued an additional $50,000 of the series B
notes. The series B notes plus accrued interest were
convertible, at the option of the holder, in whole or in part,
into shares of the Company's series B convertible preferred stock
("series B stock") in the event of a qualified offering as
defined in the agreement, at a price per share equal to the price
per share of the qualified offering. In August 2000, the Company
completed the sale of 303,245 shares of series B stock at a price
of $2.97 per share for total proceeds of $900,630. The series B
stock represented a qualified offering under the terms of the
series B notes. In August 2000, at the election of the series B
note holders, the outstanding principal balance of the series B
notes of
10
F-101
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
$325,000, plus accrued interest of $12,515 was converted
into 113,640 shares of series B stock at $2.97 per share. The
Company also issued 51,937 shares of series B stock in full
settlement of $154,250 owed for consulting services and the
Company issued 16,409 shares of series B stock in settlement of
$48,733 of accrued interest owed under the Company's line of
credit with a wholesale book distributor (the "book distributor")
(see Note 8(a)).
(c) Promissory notes
A summary of notes payable as of December 31, 2000 and 1999
follows:
December 31, December 31,
2000 1999
---------- ----------
Unsecured note for recruiting
services due July 1, 2001, interest
accrues at 7% per annum. $ 62,783 $ -
Unsecured note for legal
services due July 1, 2001, interest
accrues at 9.5% per annum, $ 128,206 $ -
Unsecured note for development
services due July 10, 2001, interest
accrues at 8% per annum, $ 67,978 $ -
---------- ----------
$ 258,967 -
========== ==========
The fair value of the notes payable, as estimated by management,
at December 31, 2000 is approximately $250,000.
A summary of convertible notes payable as of December 31, 2000
and 1999 follows:
December 31, December 31,
2000 1999
---------- ----------
Unsecured note for development
services due July 10, 2001, interest
accrues at 8% per annum. Convertible
into 9,121 shares of common stock
at $2.97 per share $ 27,090 $ -
========== ==========
The fair value of the convertible notes payable, as estimated by
management, at December 31, 2000 is approximately $26,000.
(7) Shareholders' Equity
The Company's Certificate of Incorporation, as amended and restated,
authorizes the Company to issue 5,000,000 shares of preferred stock
and 15,000,000 shares of common stock.
11
F-102
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
(a) Common Stock
The founding partners contributed capital to Leadership Library,
Limited Partnership in the amounts of $92,098 and $10,000 during
1996 and 1997, respectively. In August 1998, the Company issued
770,000 shares of common stock to the founding partners in
exchange for the interests of Leadership Library, Limited
Partnership.
On July 2, 1998, the Company issued 71,610 shares of common stock
for $46,500 in notes receivable which were subsequently settled
in 1999 through services rendered to the Company.
On July 2, 1998, the Company issued 148,533 shares of common
stock to the book distributor for $250,000. See note 8(a).
(b) Series A and Series B Convertible Preferred Stock
The holders of the Series A and Series B Convertible Preferred
stock (together the "Preferred stock") have various rights and
preferences as follows:
Voting Rights
The holders of the Series A preferred stock are entitled to vote
together with the holders of the Series B preferred stock and the
holders of the common stock as a single class on most matters.
The total number of votes is equal to the number of common shares
that could be acquired upon conversion into common stock at the
conversion rate in effect at that date. Any merger,
reorganization, authorization of new shares, issuance of
warrants, and other transactions as defined in the Preferred
stock purchase agreements must be approved by one half of the
holders of the Preferred stock, voting separate from the holders
of the common stock.
Dividends
The Preferred stock accrues cumulative dividends at a rate of 8
percent per share per annum when and if dividends are declared by
the Board of Directors. Unpaid and undeclared dividends on the
Series A and Series B Preferred stock were $17,567 and $43,234,
respectively, as of December 31, 2000.
Liquidation
In the event of any liquidation, dissolution, or winding up of
the affairs of the Company, as defined in the Amended and
Restated Certificate of Incorporation, holders of the Preferred
stock are entitled to receive a liquidation price equal to the
original per share price paid plus any unpaid cumulative
dividends to the date of liquidation, dissolution, or winding up
of the affairs of the Company, whether or not declared, before
any distribution is made to any other class of stock.
12
F-103
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
Conversion
At any time, the holders of the Preferred stock may convert all
or some shares of Preferred stock into shares of common stock.
The Preferred stock is automatically converted into common stock
in the event of a qualified initial public offering of shares of
common stock, as defined in the Preferred stock purchase
agreements. As of December 31, 2000, the conversion rate was
such that each share of Preferred stock was convertible into one
share of common stock. No shares were converted to common stock
during the year ended December 31, 2000.
(8) Related Party Transactions
(a) The Book Distributor transactions
On July 2, 1998, the Company entered into a strategic agreement
(the "agreement") with the book distributor, the Company's
supplier of training and technical books, fulfillment and
shipping services and a supplier of database management services.
Under the agreement, the Company sold the book distributor
148,533 shares of common stock for $250,000. In addition, the
book distributor issued the Company a line of credit of up to
$200,000, bearing interest at the rate of 8 percent per annum,
due on April 30, 2000. The Company immediately made draws
against the line of credit for the $200,000 limit. In connection
with this line of credit, the Company issued the book distributor
a warrant to purchase, at any time after July 2, 1998 and through
April 30, 2003, in whole or in part, at the option of the holder,
common shares equal to a 5 percent fully diluted interest in the
Company at the date of exercise for $200,000. The fair value of
the warrant on the date of grant of $38,816, was recorded as a
deferred financing fee and amortized to interest expense from
July 2, 1998 through April 30, 2000, which coincided with the
original maturity date of the related line of credit. The fair
value was estimated using the Black-Scholes option pricing model
with the following assumptions: expected life of 5 years,
expected volatility of 70%, expected dividend yield of 0%, and
risk free interest rate of 5.47%. Each time the Company issues
additional equity interests or rights to acquire equity
interests, the number of shares of common stock into which the
warrant is exerciseable increases so that the number of common
shares to be acquired is equal to a 5 percent fully diluted
interest at that date. This results in the modification of a
vested award and a new measurement date for the warrant. The
Company recognizes, as interest expense, the additional cost
arising from the modification of the warrant in the period of
modification. During the year ended December 31, 2000, the Company
recognized additional interest expense of $42,294 for modifications
made to the warrant. No interest expense was recognized during
the years ended December 31, 1999 or 1998 as no modifications were
made to the warrant. The fair value of each modification made to
the warrant during the year ended December 31, 2000 was estimated
on the modification date using the Black-Scholes option pricing
model with the following assumptions; expected life equal to the
remaining contractual life of the warrant, expected volatility of
70%, expected dividend yield of 0%, and risk free interest rate of
5.11%. As of December 31, 2000, the warrant was exerciseable
into 141,252 shares of common stock.
Under the terms of the agreement, the Company granted one board
of directors position to a representative from the book
distributor. In addition, the agreement, as amended, allows the
Company to utilize the book distributor's book inventory database for
a period of through one year
13
F-104
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
after the proposed merger at no cost (note 12). Thereafter, the Company
will be assessed a charge for the use of this database in the event that
the Company re-licenses this database to its third party
customers. The agreement expires on July 1, 2006.
On April 30, 2000, the Company was in technical default on the
$200,000 line of credit. The book distributor waived the default
provisions, however, the 12 percent default interest rate clause
contained in the agreement was enacted. The book distributor
has consistently extended the maturity date of the line of credit
for 3 to 6 month periods, the latest extension making the line of
credit due on June 30, 2002. There can be no assurance that the
book distributor will continue to extend the maturity date of the
line of credit or that the book distributor will not invoke the
default provisions of the line of credit if it is not paid at the
June 30, 2002 scheduled maturity date.
In June 2000, the Company issued the book distributor 10,000
shares of common stock for accrued interest of $10,000.
In August 2000, the Company issued the book distributor 16,409
shares of series B convertible preferred stock for accrued
interest of $48,733.
(b) Settlements of Obligations with Common Stock
In June 2000, the Company issued 100,000 fully vested shares of
common stock to an officer of the Company as a signing bonus.
The fair value of the 100,000 shares of common stock was
estimated to be $100,000 and was recorded as a component of
general and administrative expenses in the accompanying
statements of operations during the year ended December 31, 2000.
In June 2000, the Company issued 100,000 shares of common stock
to an officer of the Company as part of an employment package.
The officer immediately holds all rights associated with the
common shares, however, the shares vest ratably over one year.
The fair value of the 100,000 shares was estimated to be
$100,000. As of December 31, 2000, 50 percent of the shares have
vested and accordingly, $50,000 has been recorded as a component
of general and administrative expenses in the accompanying
statements of operations during the year ended December 31, 2000.
On June 14, 2000, the Company issued 271,651 shares of common
stock for $344,132 of accrued compensation for services rendered
by employees, officers, and consultants of the Company.
On April 16, 2001, the Company issued 236,313 shares of common
stock for $278,033 of accrued compensation as of December 31,
2000, for services rendered by employees, officers, and
consultants of the Company.
(c) Related Party Notes Payable
A summary of related party notes payable as of December 31, 2000
and 1999 follows:
14
F-105
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
December 31, December 31,
2000 1999
---------- ----------
Unsecured note for expenses paid
on behalf of the Company, due
January 1, 2001, interest
accrues at 10% per annum, $ 107,030 $ 107,030
Unsecured note for development
services due July 1, 2001, interest
accrues at 10% per annum, $ 85,308 $ -
---------- ----------
$ 192,338 $ 107,030
========== ==========
The fair value of related party notes payable, as estimated by
management, at December 31, 2000, is approximately $190,000.
A summary of convertible notes payable - related party as of
December 31, 2000 and 1999 follows:
December 31, December 31,
2000 1999
---------- ----------
Unsecured note for development
services due July 1, 2001, interest
accrues at 10% per annum.
Convertible into 25,118 shares of
series B convertible preferred stock
at $2.97 per share $ 74,600 $ -
Unsecured note for legal services
due August 10, 2001, interest
accrues at 7% per annum. Convertible
into 13,468 shares of series B
convertible preferred stock
at $2.97 per share $ 40,000 $ -
---------- ----------
$ 114,600 $ -
========== ==========
The fair value of convertible notes related party, as estimated by
management, at December 31, 2000, is approximately $111,000.
(9) Stock Options
In June 2000, the Company approved the 2000 Equity Incentive Plan (the
"2000 Plan") which provides for the granting of incentive or non-
qualified stock options to employees, directors, consultants and
advisors of the Company to purchase shares of its common stock within
prescribed periods. Options are granted at an exercise price equal
to the estimated fair value on the grant date, as determined by the
Board of Directors. The options generally vest over two years; one-
third on the date of grant, one-third on the first anniversary of the
grant date and the remaining one-third on the second anniversary of
the grant date. The options generally expire ten years after the
grant date. As of December 31, 2000, the Company has reserved
550,000 shares of common stock for issuance under the 2000 Plan.
15
F-106
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
Stock option activity, including both employee and non-employee
options, for the 2000 Plan during the year ended December 31, 2000 is
as follows:
Weighted-
Number of average
Shares exercise price
---------- ----------
Balance, December 31, 1999 - $ -
Granted 398,150 1.07
Forfeited/canceled - -
Exercised (2,156) 1.00
---------- ----------
Balance, December 31, 2000 395,994 $ 1.07
========== ==========
At December 31, 2000, the range of exercise prices for the options
granted under the 2000 Plan was $1.00 to $2.97 and the weighted-
average remaining contractual life of those options was 9.5 years.
At December 31, 2000, the number of options exercisable under the
2000 Plan totaled 101,811 and the weighted-average exercise price of
those options exercisable was $1.29.
The per share weighted-average fair value of the options granted in
2000 was $0.62 on the grant date using the Black-Scholes option
pricing model with the following weighted-average assumptions:
2000
----------------
Risk-free interest rates 6.18%
Expected lives 5 years
Dividend yield 0%
Expected Volatility 70%
================
The Company applied APB No. 25 and related interpretations in
accounting for its employee stock options and, accordingly, no
compensation cost has been recognized for its stock options in the
accompanying financial statements as the exercise price of the stock
options granted is equal to the estimated fair value of the common
stock on the date of grant. The following table presents the pro
forma net loss that would have been recorded by the Company for the
year ended December 31, 2000 had the Company determined compensation
expense for employees based on the fair value methodology under SFAS
No. 123. The pro forma impact for 2000 may not be indicative of the
impact in future periods.
2000
----------------
Net loss - as reported $ 2,606,982
================
Net loss - pro forma $ 2,782,255
================
16
F-107
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
During the year ended December 31, 2000, the Company granted 34,656
options to non-employees, with a total fair value of $20,933, of
which $3,486 was recognized as compensation expense during the year
ended December 31, 2000.
(10) Commitments
(a) Leases
The Company has an operating lease for office space. Rental
expense attributable to this operating lease was approximately
$55,000, $56,000, and $43,000 for the years ended December 31,
2000, 1999, and 1998, respectively. As of December 31, 2000, the
lease was renewable on a rolling three-month basis.
(b) Legal Proceedings
The Company is subject to legal proceedings and claims which
arise in the ordinary course of business. As of December 31,
2000, management is not aware of any asserted or pending
litigation or claims against the Company that would have a
material adverse effect on the Company's financial condition,
results of operations, or liquidity.
17
F-108
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
(11) Income Taxes
The Company was not subject to income taxes directly prior to June
17, 1998, as the Company was established as a Partnership and the
Partners were responsible for the tax on the income or loss prior to
June 17, 1998.
The Company has incurred operating losses since its inception and has
recognized no current or deferred tax provision or benefit. The
provision for income taxes is different from that which would be
obtained by applying the statutory federal income tax rate to loss
before income taxes. The significant items causing this difference
are as follows:
Year ended December 31,
-----------------------------------------------
2000 1999 1998
--------------- ---------------- --------------
Expected tax benefit
at statutory rate $ 886,374 $ 475,899 $ 276,016
State tax, net of
federal benefit 107,996 69,067 38,724
Beneficial conversion
expense (140,792) - -
Non-deductible
expenses (3,110) (823) (354)
Partnership loss
through June 17, 1998 - - (80,800)
Increase in valuation
allowance (850,468) (544,143) (224,586)
--------------- ---------------- --------------
$ - $ - $ -
=============== ================ ==============
As of December 31, 2000, the Company had net operating loss
carryforwards available to offset future taxable income of
approximately $260,000, which will expire in 2018 through 2020. The
valuation allowance is the result of the uncertainty regarding the
ultimate realization of the tax benefits related to the deferred tax
assets. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some or
all of the deferred tax asset will not be realized. Management
considers estimates of taxable income and the reversal of temporary
differences in making this estimate. The valuation allowance was
recorded to reduce net deferred tax assets to zero, as management
believes it is more likely than not that the deferred tax assets will
not be realized. Further, as a result of certain financing and
capital transactions, an annual limitation on the future utilization
of a portion of the net operating loss carryforwards may have
occurred. As a result, the net operating loss carryforwards may not
be fully utilized before they expire.
Temporary differences that give rise to deferred tax assets and
liabilities at December 31, 2000 and 1999 are as follows:
18
F-109
KNOWLEDGEMAX, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 2000 and 1999
2000 1999
---------- ----------
Deferred tax assets
Net operating loss carryforwards $ 101,138 $ 21,202
Start-up expenses 1,127,873 498,476
Accrued expenses 372,043 256,952
Total gross deferred
tax assets 1,601,054 776,630
Deferred tax liabilities:
Depreciation and amortization 15,541 6,874
---------- ----------
1,585,513 769,756
Valuation allowance (1,585,513) (769,756)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
(12) Subsequent Events - Proposed Merger of the Company
On December 7, 2001, the Company entered into an agreement to merge
with Sideware Systems, Inc., a publicly-traded company. The
agreement calls for the Company's shareholders to receive approximately
55% of the voting interests of the merged company. The completion of
the merger is subject to all necessary shareholder and governmental
approvals. There can be no assurance that all such shareholder or
governmental approvals will be obtained or that the merger will be
completed successfully.
19
APPENDIX A
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
("Agreement") is made and entered into as of December
7, 2001, by and among: SIDEWARE SYSTEMS,INC., a British
Columbia, Canada corporation ("Parent"); KM ACQUISITION
CORP., a Delaware corporation and a wholly owned subsidiary
of Parent ("Merger Sub") and KNOWLEDGEMAX, INC., a Delaware
corporation (the "Company"). The Parent, Company and Merger
Sub are sometimes referred to in this agreement individually
as a "Party" and collectively as the "Parties." Certain
other capitalized terms used in this Agreement are defined
in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a
merger (the "Merger") of Merger Sub into the Company in
accordance with this Agreement and the Delaware General
Corporation Law (the "DGCL"). Upon consummation of the
Merger, Merger Sub will cease to exist, and the Company
will become a wholly owned subsidiary of Parent.
B. It is intended that the Merger qualify as a tax-free
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
C. This Agreement has been approved by the respective
boards of directors of Parent, Merger Sub and the Company.
D. In connection with the execution of this Agreement,
certain stockholders of the Parent and the Company will
enter into a Voting Agreement pursuant to which such
stockholders have agreed to vote their shares in favor of
the Merger and the transactions contemplated herein.
AGREEMENT
The Parties agree as follows:
SECTION 1. DESCRIPTION OF TRANSACTION
1.1 MERGER OF MERGER SUB INTO THE COMPANY. Upon the
terms and subject to the conditions set forth in this Agreement,
at the Effective Time (as defined in Section 1.2), Merger Sub
shall be merged with and into the Company, and the separate
existence of Merger Sub shall cease. The Company will continue
as the surviving corporation in the Merger (the "Surviving
Corporation") and shall succeed to and assume all the rights
and obligations of Merger Sub in accordance with the DGCL.
The Merger shall have the effects set forth in this Agreement
and in Section 259 of the DGCL.
1
1.2 CLOSING; EFFECTIVE TIME.
(A) CLOSING. The closing of the Merger (the "Closing") will
take place at 10:00 a.m. on a date to be specified by the
parties, which shall be no later than the second business day
after satisfaction or waiver of all conditions set forth in
Sections 5, 6 and 7 (as such date may be extended, by mutual
agreement of the Parent and the Company) (the "Closing Date"),
at the offices of Cooley Godward LLP, One Freedom Square,
Reston Town Center, 11951 Freedom Drive, Reston, Virginia
20190-5601, unless another date or place is agreed to in writing
by the parties hereto.
(B) EFFECTIVE TIME. Subject to the provisions of this
Agreement, on the Closing Date, the parties shall file with
the Delaware Secretary of State a certificate of merger (the
"Certificate of Merger") executed in accordance with Section
251(c) of the DGCL. The Merger shall become effective at such
time as the Certificate of Merger is duly filed with the Delaware
Secretary of State, or at such other time as Parent and the Company
shall agree should Be specified in the Certificate of Merger (the
Time the Certificate of Merger is filed being the "Effective Time").
1.3 CERTIFICATE OF INCORPORATION AND BYLAWS; DIRECTORS
AND OFFICERS.
Unless otherwise determined by Parent and the Company prior
to the Effective Time:
(A) CERTIFICATE OF INCORPORATION. The Certificate of
Incorporation of Merger Sub, as in effect immediately prior to
the Effective Time, shall be the Certificate of Incorporation of
the Surviving Corporation until thereafter changed or amended as
provided therein or by applicable law, except that the name of
the Surviving Corporation in such Certificate of Incorporation
will be changed to a name other than KnowledgeMax, Inc.
(B) BYLAWS. The Bylaws of the Merger Sub, as in effect
immediately prior to the Effective Time, shall be the Bylaws of
the Surviving Corporation until thereafter changed or amended as
provided therein or by applicable law, except that the name of
the Surviving Corporation in such Bylaws will be changed to a
name other than KnowledgeMax, Inc.
(C) DIRECTORS. The individuals to be identified prior to
Closing by Parent and the Company shall be the directors of
The Surviving Corporation, until the earlier of their resignation
or removal or until their respective successors are duly elected
and qualified, as the case may be.
(D) OFFICERS. The individuals listed on Exhibit B hereto shall
be the officers of the Surviving Corporation, until the earlier of
their resignation or removal or until their respective successors
are duly elected and qualified, as the case may be.
1.4 CONVERSION OF SHARES
(A) Subject to Sections 1.4(e), 1.8(c) and 1.9, at the Effective
Time, by virtue of the Merger and without any further action on
the part of Parent, Merger Sub and the Company:
2
(i) each share of common stock, par value of $0.01
per share, of the Company ("Company Common Stock")
other than Dissenting Shares (as defined below)
outstanding immediately prior to the Effective Time
shall be converted into the right to receive a number
of shares of the common sock, par value $0.01 per share,
of the Parent ("Parent Common Stock") equal to the
Conversion Ratio (as defined below);
(ii) each share of the capital stock of Merger Sub
outstanding immediately prior to the Effective Time
shall be converted into one share of common stock, par
value $0.001 per share, of the Surviving Corporation;
and
(iii) each share of Company Common Stock that is held by the
Company in treasury shall automatically be canceled and
retired and shall cease to exist, and no Parent Common
Stock or other consideration shall be delivered in
exchange therefor.
(B) The "Conversion Ratio" shall be equal to the quotient
obtained by dividing the Parent Stock Issuance Amount (as
defined below) by the Fully Diluted Company Stock Number (as
defined below).
(C) The "Parent Stock Issuance Amount" shall be equal to
the product of (i) the ratio of 55 divided by 45, multiplied
by (ii) the Fully Diluted Parent Stock Number. The "Fully
Diluted Parent Stock Number" shall be equal to the sum of (a)
the number of shares of Parent Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares held
in the Parent's treasury), (b) subject to the following provisos,
the number of shares of Parent Common Stock issuable upon the
exercise of all stock options to acquire Parent Common Stock
outstanding immediately prior to the Effective Time and (c) subject
to the following provisos, the number of shares of Parent Common
Stock issuable upon the exercise or conversion of all other
securities and instruments exercisable for or convertible into
shares of Parent Common Stock outstanding immediately prior to the
Effective Time, provided, that notwithstanding the foregoing, all
stock options and warrants of Parent outstanding immediately
prior to the Effective Time with an effective exercise price per
share of Parent Common Stock at such time that is "out of the money"
(i.e., greater than the closing price for a share of Parent Common
Stock on the Nasdaq OTC System on the immediately preceding
business day) shall not be included in such sum; but provided,
further, that (1) all stock options granted to Parent employees
on the date that this Agreement is initially approved by the
Parent's Board of Directors shall be included in such sum, whether
such stock options are "in the money" or "out of the money"
immediately prior to the Effective Time and (2) all stock options
granted to employees and contractors of The Chalk Group on the date
that this Agreement is initially approved by the Parent's Board of
Directors shall not be included in such sum unless, and only to the
extent, that any such stock options are exercised prior to the
Effective Date.
(D) The "Fully Diluted Company Stock Number" shall be equal to
the sum of (i) the number of shares of Company Common Stock issued
and outstanding immediately prior to the Effective Time (other
than shares held in the Company's treasury), (ii) the number of
shares of Company Common Stock issuable upon the exercise of all
Company Options (as defined below) outstanding immediately prior
to the Effective Time and (iii) the number of shares of Company
Common Stock issuable upon the exercise or conversion of all
other
3
securities and instruments exercisable for or convertible
into shares of Company Common Stock outstanding immediately prior
to the Effective Time.
(E) The parties acknowledge that, as a condition to Closing,
all outstanding shares of the Company's Series A Convertible
Preferred Stock, par value $0.01 per share ("Series A Preferred
Stock") and Series B Convertible Preferred Stock, par value
$0.01 per share ("Series B Preferred Stock" and, collectively
with the Series A Preferred Stock, the "Company Preferred Stock")
shall be converted into shares of Company Common Stock (the
"Company Preferred Stock Conversion") and, for purposes of this
Section 1.4, such conversion shall in any event be deemed to have
occurred immediately prior to the calculation of the Fully Diluted
Company Stock Number (or such earlier time as the conversion may
have actually occurred).
1.5 EMPLOYEE STOCK OPTIONS. At the Effective Time, each stock
option that is then outstanding under the Company's 2000 Equity
Incentive Plan (the "Plan"), whether vested or unvested (a
"Company Option"), and the Plan, shall be assumed by Parent in
accordance with the terms of the Plan and the stock option
agreement by which such Company Option is evidenced. All rights
with respect to Company Common Stock under outstanding Company
Options shall thereupon be converted into rights with respect to
Parent Common Stock. Accordingly, from and after the Effective
Time, (a) each Company Option assumed by Parent may be exercised
solely for shares of Parent Common Stock, (b) the number of shares
of Parent Common Stock subject to each such assumed Company Option
shall be equal to the number of shares of Company Common Stock
that were subject to such Company Option immediately prior to the
Effective Time multiplied by the Conversion Ratio, rounded down
to the nearest whole number of shares of Parent Common Stock, (c)
the per share exercise price for the Parent Common Stock issuable
upon exercise of each such assumed Company Option shall be
determined by dividing the exercise price per share of Company
Common Stock subject to such Company Option, as in effect
immediately prior to the Effective Time, by the Conversion Ratio,
and rounding the resulting exercise price up to the nearest whole
cent, and (d) all restrictions on the exercise of each such assumed
Company Option shall continue in full force and effect, and the
term, exercisability, vesting schedule and other provisions of such
Company Option shall otherwise remain unchanged; provided, however,
that each such assumed Company Option shall, in accordance with its
terms, be subject to further adjustment as appropriate to reflect
any stock split, reverse stock split, stock dividend,
recapitalization or other similar transaction effected by Parent
after the Effective Time. The Company and Parent shall take all
action that may be necessary (under the Company's Plan and
otherwise) to effectuate the provisions of this Section 1.5.
Following the Closing, Parent will send to each holder of an assumed
Company Option a written notice setting forth (i) the number of
shares of Parent Common Stock subject to such assumed Company Option,
and (ii) the exercise price per share of Parent Common Stock issuable
upon exercise of such assumed Company Option. Promptly after the
Closing Date, Parent shall file with the SEC, a registration
statement on Form S-8 to register the exercise of the Company Options
assumed by Parent pursuant to this Section 1.5.
1.6 COMPANY WARRANTS. All warrants to acquire capital stock of
the Company outstanding as of the Effective Time shall be terminated,
to the extent that any such warrants remain unexercised or otherwise
outstanding as of the Effective Time.
4
1.7 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective
Time, holders of certificates representing shares of the Company's
capital stock that were outstanding immediately prior to the
Effective Time shall cease to have any rights as shareholders of
the Company, and the stock transfer books of the Company shall be
closed with respect to all shares of such capital stock outstanding
immediately prior to the Effective Time. No further transfer of any
such shares of the Company's capital stock shall be made on such
stock transfer books after the Effective Time. If, after the
Effective Time, a valid certificate previously representing any of
such shares of the Company's capital stock (a "Company Stock
Certificate") is presented to the Surviving Corporation or Parent,
such Company Stock Certificate shall be canceled and shall be
exchanged as provided in Section 1.8.
1.8 EXCHANGE OF CERTIFICATES
(A) At or as soon as practicable after the Effective Time,
Parent will send, or cause to be sent, to the holders of Company
Stock Certificates (i) a letter of transmittal in customary form
and containing such provisions as Parent may reasonably specify,
and (ii) instructions for use in effecting the surrender of
Company Stock Certificates in exchange for certificates
representing Parent Common Stock. Upon surrender of a Company
Stock Certificate to Parent for exchange, together with a duly
executed letter of transmittal and such other documents as may
be reasonably required by Parent, the holder of such Company
Stock Certificate shall be entitled to receive in exchange
therefor a certificate representing the number of whole shares
of Parent Common Stock that such holder has the right to receive
pursuant to the provisions of this Section 1, and the Company
Stock Certificate so surrendered shall be canceled. Until
surrendered as contemplated by this Section 1.8, each Company
Stock Certificate shall be deemed, from and after the Effective
Time, to represent only the right to receive upon such surrender
a certificate representing shares of Parent Common Stock as
contemplated by this Section 1. If any Company Stock Certificate
shall have been lost, stolen or destroyed, Parent may, in its
discretion and as a condition precedent to the issuance of any
certificate representing Parent Common Stock, require the owner
of such lost, stolen or destroyed Company Stock Certificate
to provide an appropriate affidavit and to deliver a bond (in
such sum as Parent may reasonably direct) as indemnity against
any claim that may be made against Parent or the Surviving
Corporation with respect to such Company Stock Certificate.
(B) No dividends or other distributions declared or made with
respect to Parent Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered
Company Stock Certificate with respect to the shares of Parent
Common Stock represented thereby, until such holder surrenders
such Company Stock Certificate in accordance with this Section
1.8 (at which time such holder shall be entitled to receive all
such dividends and distributions).
(C) No fractional shares of Parent Common Stock shall be
issued in connection with the Merger, and no certificates for
any such fractional shares shall be issued. Any holder of
Company Common Stock who would otherwise be entitled to
receive a fraction of a share of Parent Common Stock (after
aggregating all fractional shares of Parent Common Stock
issuable to such holder) shall, upon surrender of such
holder's Company Stock Certificate(s), be entitled to
receive one whole share of Parent Common Stock instead
of a fractional share or cash in lieu of such fractional
share.
5
(D) Parent and the Surviving Corporation shall be entitled
to deduct and withhold from any consideration payable or
otherwise deliverable to any holder or former holder of
apital stock of the Company pursuant to this Agreement such
amounts as Parent or the Surviving Corporation may be
required to deduct or withhold therefrom under the Code or
under any provision of state, local or foreign tax law.
To the extent such amounts are so deducted or withheld,
such amounts shall be treated for all purposes under this
Agreement as having been paid to the Person to whom such
amounts would otherwise have been paid.
(E) Neither Parent nor the Surviving Corporation shall be
liable to any holder or former holder of capital stock of
the Company for any shares of Parent Common Stock (or
dividends or distributions with respect thereto), or for
any cash amounts, delivered to any public official pursuant
to any applicable abandoned property, escheat or similar law.
1.9 DISSENTING SHARES.
(A) For purposes of this Agreement, "Dissenting Shares"
means shares of Company Common Stock held as of the Effective
Time by a stockholder of the Company (a "Company Stockholder")
who has not voted such Company Common Stock, or pre-conversion
corresponding shares of Company Preferred Stock, as
applicable, in favor of the adoption of this Agreement and
with respect to which appraisal rights shall have been duly
demanded and perfected in accordance with Section 262 of the
DGCL and not effectively withdrawn or forfeited prior to the
Effective Time. Dissenting Shares shall not be converted into
or represent the right to receive the Parent Common Stock which
the Company Stockholders are entitled to receive pursuant to
Section 1.4, unless such Company Stockholder shall have forfeited
his, her or its right to appraisal under the DGCL or properly
withdrawn his, her or its demand for appraisal. If such Company
Stockholder has so forfeited or withdrawn his, her or its right
to appraisal of Dissenting Shares, then, (i) as of the occurrence
of such event, such holder's Dissenting Shares shall cease to be
Dissenting Shares and shall be converted into and represent the
right to receive the Parent Common Stock pursuant to Section 1.4,
and (ii) promptly following the occurrence of such event, the
Parent or the Surviving Corporation shall deliver to such Company
Stockholder a payment of the Parent Common Stock to which such
holder is entitled pursuant to Section 1.4.
(B) The Company shall give the Parent (i) prompt notice of
any written demands for appraisal of any Company Common Stock,
withdrawals of such demands, and any other instruments that
relate to such demands received by the Company and (ii) the
opportunity to participate in all negotiations and proceedings
with respect to demands for appraisal under the DGCL. The
Company shall not, except with the prior written consent of
the Parent, make any payment with respect to any demands for
appraisal of Company Common Stock or offer to settle or settle
any such demands.
1.10 PARENT/SURVIVING CORPORATION MERGER. Promptly after
the Effective Time, at such time that management of the Parent
determines that it is appropriate (and in any event, promptly
after receipt of all third-party consents that may be required),
the Surviving Corporation shall be merged with and into the
Parent, with the Parent surviving such merger, in accordance
with the DGCL.
6
1.11 TAX CONSEQUENCES. For federal income tax purposes,
the Merger is intended to constitute a reorganization within the
meaning of Section 368 of the Code. The parties to this Agreement
hereby adopt this Agreement as a "plan of reorganization" within
the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United
States Treasury Regulations.
1.12 FURTHER ACTIONS. If, at any time after the Effective Time,
any further action is determined by Parent to be necessary or
desirable to carry out the purposes of this Agreement or to vest
the Surviving Corporation or Parent with full right, title and
possession of and to all rights and property of Merger Sub and
the Company, the officers and directors of the Surviving
Corporation and Parent shall be fully authorized (in the name of
Merger Sub, in the name of the Company and otherwise) to take such
action.
1.13 PARENT CORPORATE NAME. At the Effective Time, Parent shall
amend its Certificate of Incorporation and take all other action
as may be necessary to change its corporate name to "KnowledgeMax,
Inc."
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the disclosure schedule delivered by the
Company to the Parent prior to the execution of this Agreement
(the "Company Disclosure Schedule"), the Company represents and
warrants to the Parent and Merger Sub as follows:
2.1 DUE ORGANIZATION; NO SUBSIDIARIES
(A) ORGANIZATION, STANDING AND CORPORATE POWER. The Company is
a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to carry on its business as
now being conducted. The Company is duly qualified or licensed to
do business and is in good standing (with respect to jurisdictions
that recognize such concept) in each jurisdiction in which the
nature of its business or the ownership, leasing or operation of
its properties makes such qualification or licensing necessary,
other than in such jurisdictions where the failure to be so
qualified or licensed individually or in the aggregate would not
have a Material Adverse Effect (as defined on Exhibit A) on the
Company. The Company has delivered to Parent complete and correct
copies of its Certificate of Incorporation and Bylaws, in each case
as amended to the date hereof.
(B) SUBSIDIARIES. The Company has no subsidiaries, does not own,
directly or indirectly, beneficially or of record, any shares of
capital stock or other equity or profit and loss interest in any
other Entity, and has no investment in any other Entity.
2.2 AUTHORITY; BINDING NATURE. The Company has the requisite
corporate power and authority to enter into this Agreement and,
subject to (a) the approval of the Company Preferred Stock
Conversion by the holders of a majority of the outstanding shares
of Company Preferred Stock, voting together as a single class (the
"Requisite Company Preferred Stock Conversion Vote") and (b) the
adoption of this Agreement by the holders of a majority of the
shares of Company Common Stock and Company Preferred Stock, voting
together as a single class on an as converted basis (the "Requisite
Company Stockholder Vote"), to consummate the transactions
contemplated by
7
this Agreement. The execution and delivery of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated by this Agreement have been duly
authorized by all necessary corporate action on the part of the
Company, subject to the Requisite Company Preferred Stock Conversion
Vote and the Requisite Company Stockholder Vote. This Agreement
has been duly executed and delivered by the Company and, assuming
the due authorization, execution, and delivery of this Agreement by
Parent and Merger Sub, constitutes a valid and binding obligation
of the Company, enforceable against the Company in accordance with
its terms, except as enforcement thereof may be limited by (i)
bankruptcy, insolvency, reorganization, moratorium and similar laws,
both state and federal, affecting the enforcement of creditors'
rights or remedies in general as from time to time in effect or
(ii) the exercise by courts of equity powers.
2.3 NONCONTRAVENTION. Assuming the receipt of the Requisite
Company Preferred Stock Conversion Vote and the Requisite Company
Stockholder Vote, the execution and delivery of this Agreement by
the Company do not, and the consummation by the Company of the
transactions contemplated by this Agreement and compliance by the
Company with the provisions of this Agreement will not, conflict
with, or result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right
of termination, cancellation or acceleration of any obligation
or to loss of a material benefit under, or result in the
creation of any pledge, adverse claim, lien, charge, encumbrance
or security interest of any kind or nature whatsoever
(collectively, "Liens") in or upon any of the properties or
assets of the Company under any provision of (i) the Certificate
of Incorporation or Bylaws of the Company, as each has been
amended, (ii) any loan or credit agreement, note, bond,
mortgage or indenture, or any material lease or other material
agreement, instrument, Permit, concession, franchise or license
applicable to the Company or its properties or assets and to which
the Company is a party or by which the Company is otherwise bound
or (iii) subject to the governmental filings and other matters
referred to in the following sentence, any (A) statute, law,
ordinance, rule or regulation applicable to the Company or (B)
judgment, order or decree applicable to the Company or its
properties or assets, other than, in the case of clause (iii)(A),
any such conflicts, violations, defaults or Liens that
individually or in the aggregate would not (x) have a Material
Adverse Effect on the Company, (y) impair in any material respect
the ability of the Company to perform its obligations under this
Agreement, or (z) prevent or materially delay the consummation
of any of the transactions contemplated by this Agreement.
To the Company's knowledge, no consent, approval, order or
authorization of, or registration, declaration or filing with,
any third party, including any Governmental Body, is required
to be made or obtained by the Company at or before the Effective
Time in connection with the execution and delivery of this
Agreement by the Company or the consummation by the Company of
the transactions contemplated by this Agreement, except for (1)
the receipt of the Requisite Company Preferred Stock Conversion
Vote and the Requisite Company Stockholder Vote, (2) the filing
of the Certificate of Merger with the Delaware Secretary of State
and appropriate documents with the relevant authorities of other
states in which the Company is qualified to do business, and (3)
such other consents, approvals, orders, authorizations,
registrations, declarations and filings, which if not obtained
or made, would not, individually or in the aggregate, have a
Material Adverse Effect on the Company or prevent or materially
delay the consummation of any of the transactions contemplated
by this Agreement.
8
2.4 CAPITALIZATION, ETC.
(A) The authorized capital stock of the Company consists
of: (i) 15,000,000 shares of Company Common Stock, of which
2,111,268 shares have been issued and are outstanding as of
the date of this Agreement; and (ii) 5,000,000 shares of
Preferred Stock, $0.01 par value per share, of which (A)
330,000 have been designated "Series A Preferred Stock,"
of which 328,610 shares have been issued and are outstanding
as of the date of this Agreement; and (B) as of the date
of this Agreement, 775,000 have been designated "Series B
Preferred Stock," of which 792,307 shares have been issued
and are outstanding as of the date of this Agreement. Each
outstanding share of Company Preferred Stock is convertible
into one share of Company Common Stock. All of the
outstanding shares of Company Common Stock and Company
Preferred Stock have been duly authorized and validly issued,
and are fully paid and non-assessable.
(B) As of the date of this Agreement, the Company has
reserved 550,000 shares of Company Common Stock for issuance
under the Plan, of which options to purchase 594,656 shares
are outstanding as of the date of this Agreement. The Company
Disclosure Schedule accurately sets forth, with respect to
each Company Option that is outstanding as of the date of
this Agreement: (i) the name of the holder of such Company
Option; (ii) the total number of shares of Company Common
Stock that are subject to such Company Option and the
number of shares of Company Common Stock with respect to
which such Company Option is immediately exercisable; (iii)
the date on which such Company Option was granted and the
term of such Company Option; (iv) the vesting schedule
or such Company Option; (v) the exercise price per share
of Company Common Stock purchasable under such Company
Option; and (vi) whether such Company Option has been
designated an "incentive stock option" as defined in
Section 422 of the Code. Except as set forth in the
Company Disclosure Schedule, there is no: (i) outstanding
subscription, option, call, warrant or right (whether or not
currently exercisable) to acquire any shares of the capital
stock or other securities of the Company; (ii) outstanding
security, instrument or obligation that is or may become
convertible into or exchangeable for any shares of the
capital stock or other securities of the Company;
(iii) Contract under which the Company is or may become
obligated to sell or otherwise issue any shares of its
capital stock or any other securities; or (iv) to the
best of the knowledge of the Company, condition or
circumstance that may give rise to or provide a basis
for the assertion of a claim by any Person to the effect
that such Person is entitled to acquire or receive
any shares of capital stock or other securities of the
Company.
2.5 FINANCIAL STATEMENTS
(A) The Company has delivered to Parent the following
financial statements and notes (collectively, the "Company
Financial Statements"):
(i) The unaudited balance sheets of the Company as of
December 31, 2000, and the related unaudited
income statements, statements of stockholders'
equity and statements of cash flows of the Company
for the years ended December 31, 2000 and December
31, 1999, together with the notes thereto; and
9
(ii) the unaudited balance sheet of the Company as of
October 31, 2001 (the "Unaudited Interim Balance
Sheet"), and the related unaudited income statement,
statement of stockholders' equity and statement of
cash flows of the Company for the ten months then
ended.
(B) The Company Financial Statements are accurate and complete
in all material respects and present fairly the financial
position of the Company as of the respective dates thereof and
the results of operations and changes in stockholders' equity
and cash flows of the Company for the periods covered thereby.
The Company Financial Statements have been prepared in accordance
with U.S. generally accepted accounting principles applied on a
consistent basis throughout the periods covered (except that the
Company Financial Statements do not contain footnotes required by
U.S. generally accepted accounting principles and are subject to
normal and recurring year-end audit adjustments, which will not,
individually or in the aggregate, be material in magnitude).
2.6 COMPLIANCE WITH LAWS. The Company is in compliance with
all statutes, laws, ordinances, regulations, rules, judgments,
decrees and orders of any Governmental Body (collectively,
"Legal Provisions") applicable to its business, operations,
properties and assets except for instances of possible
noncompliance that, individually or in the aggregate, would not
have a Material Adverse Effect on the Company or prevent or
materially delay the consummation of the Merger. The Company
has in effect all material federal, state, local and foreign
governmental approvals, authorizations, certificates, filings,
franchises, licenses, notices, permits and rights ("Permits"),
necessary for it to own, lease or operate its properties and
assets and to carry on its business substantially as now
conducted, and there currently exists no material default
under, or material violation of, any such Permit, and the
consummation of the transactions contemplated hereby will not
adversely affect any such Permit.
2.7 INTELLECTUAL PROPERTY. The Company owns, or is validly
licensed or otherwise has the right to use, all patents,
patent rights, trademarks, trademark rights, trade names,
trade name rights, domain names, domain name rights, service
marks, service mark rights, copyrights and other proprietary
intellectual property rights and computer programs (other
than commercially available, off-the-shelf software)
(collectively, "Intellectual Property Rights") which are
material to the conduct of the business of the Company. The
Company Disclosure Schedule contains an accurate and
complete list of all material Intellectual Property Rights of
the Company. As of the date of this Agreement, no claims,
suits, actions or proceedings are pending, and to the best
knowledge of the Company, no Person or Entity has threatened
to commence any suit, action or proceeding, alleging that the
Company is infringing the rights of any Person or Entity with
regard to any Intellectual Property Right. To the knowledge
of the Company, the Company's Intellectual Property Rights do
not infringe on the rights of any other Person or Entity, and
no Person or Entity is infringing the rights of the Company
with respect to any Intellectual Property Right, except for
infringements which individually or in the aggregate, would
not have a Material Adverse Effect on the Company. The Company
is not licensing, or otherwise granting, to any third party,
any rights in or to any Intellectual Property Rights which
would have a Material Adverse Effect on the Company. The
Company's Intellectual Property Rights will not be limited or
otherwise adversely affected by virtue of the consummation of
the transactions contemplated hereby.
10
2.8 CONTRACTS. The Company is not in violation of or in
default under (nor does there exist any condition which upon
the passage of time or the giving of notice or both would
cause such a violation of or default under) any material
Contract to which it is a party or by which its properties
or assets is bound. The Company has delivered to Parent a
complete and correct copy of each material written Contract
to which the Company is a party or by which the Company's
properties or assets is bound. With respect to each such
Contract: (1) the Contract is legal, valid, binding,
enforceable, and in full force and effect; (2) the Contract
will not be adversely affected by virtue of the consummation
of the transactions contemplated by this Agreement; (3) no
party is in violation of or in default under (nor does there
exist any condition which upon the passage of time or the
giving of notice or both would cause such a violation of or
default under) such Contract; and (4) no party has repudiated
any provision of the Contract.
2.9 TAX MATTERS. All Tax Returns required to be filed by or
on behalf of the Company with any Governmental Body with
respect to any taxable period ending on or before the Closing
Date (the "Company Returns") (i) have been or will be filed
on or before the applicable due date (including any
extensions of such due date), and (ii) have been, or will be
when filed, accurately and completely prepared in all material
respects in compliance with all applicable Legal Requirements.
All amounts shown on the Company Returns to be due on or
before the Closing Date have been or will be paid on or before
the Closing Date.
2.10 LITIGATION. As of the date of this Agreement, there
are no actions, suits, claims, governmental investigations or
proceedings pending or, to the best knowledge of the Company,
threatened, against the Company or any of its assets or
properties, or against any officer or director of the Company
acting in such capacity, involving a monetary amount in excess
of $25,000 or a request for specific performance, injunctive
relief or other equitable relief.
2.11 LABOR MATTERS. There are no collective bargaining
agreements or other labor union agreements to which the Company
is a party, or by which it is bound. The Company is in compliance
in all material respects with all federal, state and local laws
respecting employment and employment practices, terms and
conditions of employment and wages and hours, and is not
engaged in any unfair labor practice. As of the date of this
Agreement, there is no unfair labor practice complaint against
the Company pending or, to the best knowledge of the Company,
threatened, to commence any unfair labor practices complaint
before the National Labor Relations Board or the United States
Department of Labor against the Company. There is no labor
strike, slowdown or stoppage in progress, and no person has
overtly threatened in a writing delivered to the Company to
commence any strike, slowdown or stoppage, against or involving
the Company. No written Contract restricts the Company from
relocating, closing or terminating any of its operations or
facilities. The Company has not in the past three years,
experienced any labor strike, slowdown or stoppage.
2.12 RELATED PARTY TRANSACTIONS. To the best of the
Company's knowledge: (a) no Company Related Party (as
defined below) has, and no Company Related Party has at
any time since December 31, 2000 had, any direct or indirect
interest in any material asset used in or otherwise relating
to the business of the Company; (b) no Company Related Party
is, or has at any time since December 31, 2000 been, indebted
to the Company; (c) since December 31, 2000, no Company
Related Party has entered into, or has had any direct or
indirect financial interest in, any material Contract,
transaction or business dealing involving the Company; (d)
no
11
Company Related Party is competing, or has at any time
since December 31, 2000 competed, directly or indirectly,
with the Company; and (e) no Company Related Party has any
claim or right against the Company (other than rights under
Company Options and rights to receive compensation for
services performed as an employee of the Company). (For
purposes of this Section 2.12 each of the following shall be
deemed to be a "Company Related Party": (i) each individual
who is, or who has at any time since December 31, 2000 been,
an officer of the Company; (ii) each member of the immediate
family of the individuals referred to in clause "(i)" above;
and (iii) any trust or other Entity (other than the Company)
in which any one of the individuals referred to in clause
"(i)" and "(ii)" above holds (or in which more than one of
such individuals collectively hold), beneficially or
otherwise, a material voting, proprietary or equity
interest.)
2.13 BROKERS. No broker, investment banker, financial
advisor or other person, is entitled to any broker's,
finder's or financial advisor's fee or commission in
connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf
of the Company.
2.14 INSURANCE. The Company has general commercial,
product liability, fire and casualty insurance policies
with coverage customary for similarly situated companies.
2.15 INDEMNIFICATION. To the best knowledge of the
Company, no action or failure to take action by any
present or former director, officer or employee of
the Company has occurred which would give rise to a
claim or a potential claim by any such person for
indemnification from the Company.
2.16 NO UNDISCLOSED LIABILITIIES. The Company has
no accrued, contingent or other liabilities of any
nature, matured or unmatured, with a value
individually in excess of $25,000 except for (a)
liabilities set forth or reserved against in the
balance sheet included in the Company Financial
Statements as of December 31, 2000 or the notes
thereto, (b) liabilities and obligations described
in the Company Disclosure Schedule and (c)
liabilities and obligations occurring in the ordinary
course of business since December 31, 2000 or relating
to the transactions contemplated by this Agreement.
1.1 DISCLOSURE. As of the date of this Agreement,
none of the representations and warranties of the Company
set forth in this Agreement contain an untrue statement of
material fact.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB
Except as set forth on the disclosure schedule delivered
by the Parent to the Company prior to the execution of
this Agreement (the "Parent Disclosure Schedule"), the
Parent and Merger Sub jointly and severally represent
and warrant to the Company as follows. The Parties
acknowledge that, except with respect to Sections 3.2(b),
3.4 and 3.17(b) below, Parent and Merger Sub make no
representations about The Chalk Group and The Chalk Group
will not be deemed to be a subsidiary of Parent for
purposes of any of the representations made by Parent
about any of its subsidiaries.
12
3.1 SEC FILINGS; FINANCIAL STATEMENTS
(a) Parent has delivered to the Company accurate and
complete copies (excluding copies of exhibits) of
each report, registration statement (on a form other
than Form S-8) and definitive proxy statement filed
by Parent with the SEC and any similar documents
required to be filed with the applicable securities
commission in Canada (the "Canadian SEC") since
January 1, 2001 (collectively, the "Parent Securities
Documents"). To the best knowledge of the Parent, as
of the time it was filed with the SEC and the Canadian
SEC (or, if amended or superseded by a filing prior to
the date of this Agreement, then on the date of such
filing): (i) each of the Parent Securities Documents
complied in all material respects with the applicable
requirements of the Securities Act or the Exchange
Act or any applicable securities laws promulgated by
the Canadian SEC or other Canadian law applicable to
the Parent Securities Documents (such Canadian laws
hereinafter referred to as the "Canadian Laws") (as
the case may be); and (ii) none of the Parent Securities
Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be
stated therein or necessary in order to make the
statements therein, in the light of the circumstances
under which they were made, not misleading.
(b) The consolidated financial statements contained in
the Parent Securities Documents: (i) complied as to
form in all material respects with the published rules
and regulations of the SEC and the Canadian SEC
applicable thereto; (ii) were prepared in accordance
with U.S. generally accepted accounting principles
applied on a consistent basis throughout the periods
covered, except as may be indicated in the notes to
such financial statements and (in the case of unaudited
statements) as permitted by Form 10-Q of the SEC, and
except that unaudited financial statements may not
contain footnotes and are subject to year-end audit
Adjustments; and (iii) fairly present the consolidated
financial position of Parent and its subsidiaries as of
the respective dates thereof and the consolidated
results of operations of Parent and its subsidiaries
for the periods covered thereby.
3.2 DUE ORGANIZATION; NO SUBSIDIARIES
(a) ORGANIZATION, STANDING AND CORPORATE POWER. The
Parent and each of its subsidiaries is a corporation or
other legal entity duly organized, validly existing and
in good standing (with respect to jurisdictions that
recognize such concept) under the laws of the
jurisdiction of its incorporation or organization and
has all requisite corporate power and authority to carry
on its business as now being conducted. The Parent and
each of its subsidiaries is duly qualified or licensed
to do business and is in good standing (with respect to
jurisdictions that recognize such concept) in each
jurisdiction in which the nature of its business or the
ownership, leasing or operation of its properties makes
such qualification or licensing necessary, other than
In such jurisdictions where the failure to be so
qualified or licensed individually or in the aggregate
would not have a Material Adverse Effect on the Parent.
The Parent has delivered to the Company complete and
correct copies of the Articles or Certificate of
Incorporation and Bylaws of Parent and Merger Sub, in
each case as amended to the date hereof.
(b) SUBSIDIARIES. Except for the Merger Sub and
except as set forth on the Parent Disclosure Schedule,
the Parent has no subsidiaries, does not own, directly
or indirectly, beneficially or of record, any shares
of capital stock or other equity or profit and loss
interest in
13
any other Entity, and has no investment
in any other Entity. Merger Sub was formed solely
for the purpose of engaging in the transactions
contemplated hereby, has engaged in no other business
activities and has conducted its operations only as
contemplated hereby.
3.3 AUTHORITY; BINDING NATURE. Each of the Parent and
the Merger Sub has the requisite corporate power and
authority to enter into this Agreement and, subject to
the adoption of this Agreement by the holders of the
requisite number of the shares of Parent Common Stock
(the "Requisite Parent Stockholder Vote"), to consummate
the transactions contemplated by this Agreement. The
execution and delivery of this Agreement by the Parent
and Merger Sub and the consummation by the Parent and
Merger Sub of the transactions contemplated by this
Agreement have been duly authorized by all necessary
corporate action on the part of each of the Parent
and the Merger Sub, subject to the receipt of the
Requisite Parent Stockholder Vote. This Agreement
has been duly executed and delivered by the Parent and
the Merger Sub and, assuming the due authorization,
execution, and delivery of this Agreement by the Company,
constitutes a valid and binding obligation of each of the
Parent and the Merger Sub, enforceable against the Parent
and Merger Sub in accordance with its terms, except as
enforcement thereof may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium and similar laws,
both state and federal, affecting the enforcement of
creditors' rights or remedies in general as from time to
time in effect or (ii) the exercise by courts of equity
powers. Parent has all requisite corporate power and
authority to complete the Yukon reorganization referred
to in Section 5.1.
3.4 NONCONTRAVENTION. Assuming the receipt of the
Requisite Parent Stockholder Vote, the execution and
delivery of this Agreement by each of the Parent and the
Merger Sub do not, and the consummation by the Parent and
Merger Sub of the transactions contemplated by this
Agreement and compliance by the Parent and Merger Sub with
the provisions of this Agreement will not, conflict with,
or result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any
obligation or to loss of a material benefit under, or
result in the creation of any Liens in or upon any of the
properties or assets of the each of the Parent and Merger
Sub under any provision of (i) the Articles or Certificate
of Incorporation or Bylaws of each of the Parent and Merger
Sub, as each has been amended, (ii) any loan or credit
agreement, note, bond, mortgage or indenture, or any
material lease or other agreement, instrument, Permit,
concession, franchise or license applicable to each of the
Parent and Merger Sub or its properties or assets and to
which either the Parent or Merger Sub is a party as or by
which either is otherwise bound or (iii) subject to the
governmental filings and other matters referred to in the
following sentence, any (A) statute, law, ordinance, rule
or regulation applicable to each of the Parent and Merger
Sub or (B) judgment, order or decree applicable to either
the Parent or Merger Sub or its properties or assets, other
than, in the case of clause (iii)(A), any such conflicts,
violations, defaults or Liens that individually or in the
aggregate would not (x) have a Material Adverse Effect on
either the Parent or Merger Sub, (y) impair in any material
respect the ability of either the Parent or Merger Sub to
perform its obligations under this Agreement, or (z) prevent
or materially delay the consummation of any of the
transactions contemplated by this Agreement. To the Parent's
knowledge no consent, approval, order or authorization of, or
registration, declaration or filing with, any third party,
including any Governmental Body is required to be made or
obtained by either the Parent or Merger Sub at or before the
Effective Time in connection with the execution and delivery
of this Agreement by the Parent and Merger Sub or the
consummation by the Parent and Merger Sub of the transactions
contemplated by this Agreement, except for (1) the receipt
of
14
the Requisite Parent Stockholder Vote, (2) the filing with
and clearance by the SEC of the Form S-4 inclusive of the
Proxy Statement (as defined below), (3) the filing of the
Certificate of Merger with the Delaware Secretary of State
and appropriate documents with the relevant authorities of
other states in which either the Parent or Merger Sub is
qualified to do business, (4) consents or approvals from the
Toronto Stock Exchange, the corporations registry of British
Columbia, the corporations registry of the Yukon Territory, the
British Columbia Securities Commission, the Alberta Securities
Commission and the Ontario Securities Commission, and (5) such
other consents, approvals, orders, authorizations, registrations,
declarations and filings, which if not obtained or made, would
not, individually or in the aggregate, have a Material Adverse
Effect on either the Parent or Merger Sub or prevent or
materially delay the consummation of any of the transactions
contemplated by this Agreement.
3.5 CAPITALIZATION, ETC.
(a) The authorized capital stock of the Parent consists
of 198,978,997 shares of Parent Common Stock, of which
68,086,965 shares have been issued and are outstanding as
of the date of this Agreement. All of the outstanding
shares of Parent Common Stock have been duly authorized
and validly issued and are fully paid and non-assessable. Each
share of Parent Common Stock to be issued in accordance with
this Agreement will be duly authorized, validly issued, fully
paid, nonassessable and free of all preemptive rights.
(b) Parent has reserved 14,000,000 shares of Parent Common
Stock for issuance under its 2000 and 2001 Stock Option Plans,
as amended, of which options to purchase not more than
9,000,000 shares are outstanding as of the date of this
Agreement (exclusive of any options described in Section 4.14).
In addition, (i) options to purchase not more than 3,500,000
shares of Parent Common Stock outside the 2000 and 2001 Stock
Option Plans are outstanding as of the date hereof and (ii)
share purchase warrants to purchase not more than 9,522,461
shares of Parent Common Stock are outstanding as of the date
hereof (exclusive of any warrants described in Section 4.14).
Except as set forth above or in the Parent Disclosure Schedule,
there is no: (1) outstanding subscription, option, call,
warrant or right (whether or not currently exercisable) to
acquire any shares of the capital stock or other securities of
the Parent or Merger Sub; (2) outstanding security, instrument
or obligation that is or may become convertible into or
exchangeable for any shares of the capital stock or other
securities of the Parent or Merger Sub; (3) Contract under
which the Parent or Merger Sub is or may become obligated to
sell or otherwise issue any shares of its capital stock or any
other securities; or (4) to the best of the knowledge of the
Parent and the Merger Sub, condition or circumstance that may
give rise to or provide a basis for the assertion of a claim by
any Person to the effect that such Person is entitled to acquire
or receive any shares of capital stock or other securities of the
Parent or Merger Sub.
(c) The authorized capital stock of Merger Sub consists of
1,000 shares of Common Stock, $0.01 par value per share, all
of which are issued and outstanding, all of which are held
beneficially and of record by Parent.
3.6 COMPLIANCE WITH LAWS. The Parent and each of its
subsidiaries is in compliance with all Legal Provisions
applicable to their businesses, operations, properties and
assets, except for instances of possible noncompliance that,
individually or in the aggregate, would not have a
15
Material Adverse Effect on the Parent or prevent or
materially delay the consummation of the Merger. The
Parent and each of its subsidiaries has in effect all
material Permits necessary for them to own, lease or operate
their properties and assets and to carry on their business
substantially as now conducted, and there currently exists
no material default under, or material violation of, any
such Permit, and the consummation of the transactions
contemplated by this Agreement will not adversely affect
any such Permit.
3.7 INTELLECTUAL PROPERTY. The Parent and each of its
subsidiaries owns, or is validly licensed or otherwise has
the right to use all Intellectual Property Rights which are
material to the conduct of the business of the Parent and
its subsidiaries taken as a whole. As of the date of this
Agreement, no suits, actions or proceedings are pending,
and, to the best knowledge of the Parent, no Person or
Entity has threatened to commence any suit, action or
proceeding, alleging that the Parent or any of its
subsidiaries is infringing the rights of any person with
regard to any Intellectual Property Right. To the
knowledge of the Parent, the Intellectual Property
Rights of the Parent and its subsidiaries do not
infringe on the rights of any other Person or Entity,
and no Person or Entity is infringing the rights of the
Parent or any of its subsidiaries with respect to any
Intellectual Property Right, except for infringements
which individually or in the aggregate, would not have
a Material Adverse Effect on the Parent or any of its
subsidiaries. Neither the Parent nor any of its
subsidiaries is licensing, or otherwise granting, to
any third party, any rights in or to any Intellectual
Property Rights which would have a Material Adverse
Effect on the Parent or any of its subsidiaries. The
Intellectual Property Rights of the Parent and its
subsidiaries will not be limited or otherwise adversely
affected by virtue of the consummation of the
transactions contemplated hereby.
3.8 CONTRACTS. Neither Parent nor any of its
subsidiaries is in violation of or in default under
(nor does there exist any condition which upon the passage
of time or the giving of notice or both would cause such
a violation of or default under) any material Contract to
which any of them is a party or by which any of their
properties or assets is bound. The Parent has delivered
to the Company a complete and correct copy of each material
written Contract to which the Parent or any of its
subsidiaries is a party or by which any of their properties
or assets is bound. With respect to each such Contract:
(1) the Contract is legal, valid, binding, enforceable,
and in full force and effect; (2) the Contract will not be
adversely affected by virtue of the consummation of the
transactions contemplated by this Agreement; (3) no party
is in violation of or in default under (nor does there exist
any condition which upon the passage of time or the giving
of notice or both would cause such a violation of or default
under) such Contract; and (4) no party has repudiated any
provision of the Contract.
3.9 TAX MATTERS. All Tax Returns required to be filed
by or on behalf of the Parent or any of its subsidiaries
with any Governmental Body with respect to any taxable period
ending on or before the Closing Date (the "Parent Returns")
(i) have been or will be filed on or before the applicable due
date (including any extensions of such due date), and (ii)
have been, or will be when filed, accurately and completely
prepared in all material respects in compliance with all
applicable Legal Requirements. All amounts shown on the
Parent Returns to be due on or before the Closing Date have
been or will be paid on or before the Closing Date.
3.10 LITIGATION. As of the date of this Agreement, there
are no actions, suits, claims, governmental investigations or
proceedings pending or, to the best knowledge of the Parent,
threatened, against the Parent,
16
any of its subsidiaries, or any of their respective assets
or properties, or against any officer or director of the
Company acting in such capacity, involving a monetary amount
in excess of $25,000 or a request for specific performance,
injunctive relief or other equity relief.
3.11 LABOR MATTERS . There are no collective bargaining
agreements or other labor union agreements to which the Parent
or any of its subsidiaries is a party, or by which they are
bound. The Parent and its subsidiaries are in compliance in
all material respects with all federal, state and local laws
respecting employment and employment practices, terms and
conditions of employment and wages and hours, and are not
engaged in any unfair labor practice. As of the date of this
Agreement, there is no unfair labor practice complaint against
the Parent or any of its subsidiaries pending or, to the best
knowledge of the Parent, threatened, to commence any unfair
labor practices complaint before the National Labor Relations
Board or the United States Department of Labor against the
Parent or any of its subsidiaries. There is no labor strike,
slowdown or stoppage in progress, and no person has overtly
threatened in a writing delivered to the Parent or any of its
subsidiaries to commence any strike, slowdown or stoppage,
against or involving the Parent or any of its subsidiaries.
No written Contract restricts the Parent or any of its
subsidiaries from relocating, closing or terminating any of
its operations or facilities. Neither the Parent nor any of
its subsidiaries has in the past three years, experienced
any labor strike, slowdown or stoppage.
3.12 RELATED PARTY TRANSACTIONS. To the best of the
Parent's knowledge, (a) no Parent Related Party (as defined
below) has, and no Parent Related Party has at any time
since December 31, 2000 had, any direct or indirect interest
in any material asset used in or otherwise relating to the
business of the Parent or any of its subsidiaries; (b) no
Parent Related Party is, or has at any time since December
31, 2000 been, indebted to the Parent or any of its
subsidiaries; (c) since December 31, 2000, no Parent
Related Party has entered into, or has had any direct or
indirect financial interest in, any material Contract,
transaction or business dealing involving the Parent or any
of its subsidiaries; (d) no Parent Related Party is competing,
or has at any time since December 31, 2000 competed, directly
or indirectly, with the Parent or any of its subsidiaries;
and (e) no Parent Related Party has any claim or right
against the Parent or any of its subsidiaries (other than
rights under stock option plans and rights to receive
compensation for services performed as an employee of the
Parent or any of its subsidiaries). (For purposes of the
Section 3.12 each of the following shall be deemed to be a
"Parent Related Party": (i) each individual who is, or who
has at any time since December 31, 2000 been, an officer or
director; (ii) each member of the immediate family of each of
the individuals referred to in clause "(i)" above; and (iii)
any trust or other Entity (other than the Parent) in which
any one of the individuals referred to in clauses "(i)" and
"(ii)" above holds (or in which more than one of such
individuals collectively hold), beneficially or otherwise, a
material voting, proprietary or equity interest.)
3.13 BROKERS. No broker, investment banker, financial
advisor or other person, is entitled to any broker's,
finder's or financial advisor's fee or commission in
connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of
Parent.
17
3.14 ISSUANCE OF PARENT COMMON STOCK. The Parent Common
Stock to be issued in connection with the Merger will be
freely tradable under the Securities Act and the rules and
regulations promulgated by the SEC thereunder, except for
restrictions on transfer applicable to affiliates of the
Company. Without limiting the generality of the foregoing,
and subject to the provisions of Rule 145 under the Securities
Act, none of the shares of Parent Common Stock to be issued
in connection with the Merger will constitute "restricted
securities" within the meaning of Rule 144 under the
Securities Act.
3.15 INSURANCE. The Parent and each of its subsidiaries
has general commercial, product liability, fire and casualty
insurance policies with coverage customary for similarly
situated companies.
3.16 INDEMNIFICATION. To the best knowledge of the Parent,
no action or failure to take action by any present or former
director, officer or employee of the Parent or any of its
subsidiaries has occurred which would give rise to a claim
or a potential claim by any such person for indemnification
from the Parent or any of its subsidiaries.
3.17 NO UNDISCLOSED LIABILITIES.
(A) Parent and its subsidiaries have no accrued, contingent
or other liabilities of any nature, matured or unmatured,
with a value individually in excess of $25,000, except for
(a) liabilities set forth or reserved against in the Parent's
consolidated balance sheet as of December 31, 2000 or the
notes thereto contained in the Parent Securities Documents,
(b) liabilities and obligations described in the Parent
Disclosure Schedule and (c) liabilities and obligations
occurring in the ordinary course of business since December
31, 2000 or relating to the transactions contemplated by
this Agreement.
(B) Neither Parent nor any of its subsidiaries other than
The Chalk Group are liable for any of the obligations or
liabilities of The Chalk Group.
3.18 CASH ON HAND. As of the date of this Agreement,
Parent has at least $400,000 of available, unrestricted,
uncommitted cash on hand.
3.19 DISCLOSURE. As of the date of this Agreement,
none of the representations and warranties of the
Parent or the Merger Sub set forth in this Agreement
contain an untrue statement of material fact.
SECTION 4. COVENANTS OF THE PARTIES
4.1 CLOSING EFFORTS. Each of the Parent, the Merger
Sub and the Company, shall use its best efforts, to the
extent commercially reasonable ("Reasonable Best Efforts"),
to take all actions and to do all things necessary, proper
or advisable to consummate the transactions contemplated
by this Agreement, including without limitation using its
Reasonable Best Efforts to ensure that (i) its
representations and warranties remain true and correct in
all material respects through the Closing Date (giving
effect to the Parent Reorganization contemplated under
Section 4.18 and Section 5.1) and (ii) the conditions to
the obligations of the Parties to consummate the Merger
are satisfied on a timely basis.
18
4.2 ACCESS AND INVESTIGATION. During the period from the
date of this Agreement through the Effective Time (the
"Pre-Closing Period"), each Party shall, and shall cause
its Representatives to: (a) provide the other Party and
the other Party's Representatives with reasonable access
to such Party's Representatives, personnel and assets and
to all existing books, records, Tax Returns, work papers
and other documents and information relating to the such
Party; and (b) provide the other Party and the other
Party's Representatives with copies of such existing
books, records, Tax Returns, work papers and other
documents and information relating to such Party, and
with such additional financial, operating and other data
and information regarding such Party, as the other Party
may reasonably request. All information provided by a
Party to another Party or its Representatives, either
prior to or after the date hereof, shall be subject to
the terms of the NDA.
4.3 CONDUCT OF BUSINESS BY PARENT AND COMPANY.
(a) CONDUCT OF BUSINESS BY PARENT. During the
Pre-Closing Period and except (i) to the extent the
Company shall otherwise consent in writing (which
consent will not be unreasonably withheld), (ii) as
set forth in the Parent Disclosure Schedule or (iii)
as contemplated or permitted by or not inconsistent
with this Agreement, Parent shall carry on its business
solely in the ordinary course consistent with the
manner as heretofore conducted and, to the extent consistent
therewith, use Reasonable Best Efforts to preserve intact
its current business organization, keep available the
services of its current officers and employees and preserve
its relationships with customers, suppliers, licensors,
licensees, distributors and others having business dealings
with it. Without limiting the generality of the foregoing,
except (x) as set forth in the Parent Disclosure Schedule,
or (y) in furtherance of the Parent Reorganization as
contemplated under Section 4.18 and Section 5.1, the
Financing as contemplated under Section 7.6, or the
Subsidiary Sale as contemplated under Section 7.7, or (z) as
otherwise contemplated or permitted by or not inconsistent
with this Agreement, Parent shall not, without the written
consent of the Company (which consent will not be
unreasonably withheld):
(i) (x) declare, set aside or pay any dividends
on, or make any other distributions in respect of,
any of its capital stock, (y) split, combine or
reclassify any of its capital stock or issue or
authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares
of its capital stock, or (z) purchase, redeem or
otherwise acquire any shares of capital stock of Parent
or any other securities thereof or any rights, warrants
or options to acquire any such shares or other securities;
(ii) amend its Articles or Certificate of Incorporation
or Bylaws;
(iii) issue, deliver, sell, pledge or otherwise encumber
any shares of its capital stock, any other voting
securities or any securities convertible into, or any
rights, warrants or options to acquire, any such shares,
voting securities or convertible securities (other than
the issuance of shares upon the valid exercise of options
and warrants outstanding as of the date of this Agreement);
(iv) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets
of, or by any other manner (including
19
through any of its subsidiaries), any business or any
corporation, partnership, joint venture, association
or other business organization or division thereof;
(v) sell, lease, license, mortgage or otherwise encumber or
subject to any Lien or otherwise dispose of any of its
(or any of its subsidiaries') material properties, assets
or business, except sales made in the ordinary course of
business;
(vi) make any material payments for purposes of settling any
dispute;
(vii) allow Parent or any of its subsidiaries, or any significant
portion of their respective businesses or assets, to be
acquired (by merger, tender offer, purchase or otherwise);
(viii) enter into (directly or through any subsidiary)
any material transaction outside the ordinary course of
business or enter into any material Contract;
(ix) incur any indebtedness for borrowed money or
guarantee any such indebtedness of another Person
(other than a subsidiary of the Parent), issue or sell any
debt securities or warrants or other rights to acquire any
debt securities of the Parent, guarantee any debt securities
of another person (other than a subsidiary of the Parent),
enter into any "keep well" or other agreement to maintain
any financial statement condition of another person or enter
into any arrangement having the economic effect of any of
the foregoing, except for short-term borrowings incurred in
the ordinary course of business consistent with past
practice;
(x) form any subsidiary or acquire any equity interest or
other interest in any other Entity;
(xi) make any material capital expenditure; or
(xii) authorize any of, or commit or agree to take any
of, or allow any of its subsidiaries to commit to taking
any of the foregoing actions.
(b) CONDUCT OF BUSINESS BY COMPANY. During the Pre-Closing
Period and except (i) to the extent the Parent shall otherwise
consent in writing (which consent will not be unreasonably
withheld), (ii) as set forth in the Company Disclosure Schedule
or (iii) as contemplated or permitted by or not inconsistent with
this Agreement, Company shall carry on its business solely in the
ordinary course consistent with the manner as heretofore conducted
and, to the extent consistent therewith, use reasonable efforts to
preserve intact its current business organization, keep available
the services of its current officers and employees and preserve
its relationships with customers, suppliers, licensors, licensees,
distributors and others having business dealings with it. Without
limiting the generality of the foregoing, except as set forth in
the Company Disclosure Schedule, or as otherwise contemplated or
permitted by or not inconsistent with this Agreement, during the
Pre-Closing Period, Company shall not, without the written
consent of the Parent (which consent will not be unreasonably
withheld):
(i) (x) declare, set aside or pay any dividends on,
or make any other distributions in respect of,
any of its capital stock, (y) split, combine or
reclassify any of
20
its capital stock or issue or authorize the issuance
of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock,
or (z) purchase, redeem or otherwise acquire any
shares of capital stock of Company or any other
securities thereof or any rights, warrants or
options to acquire any such shares or other
securities;
(ii) amend its Certificate of Incorporation or Bylaws;
(iii) issue, deliver, sell, pledge or otherwise encumber
any shares of its capital stock, any other voting
securities or any securities convertible into, or
any rights, warrants or options to acquire, any
such shares, voting securities or convertible
securities (other than the issuance of shares upon
the valid exercise of options and warrants
outstanding as of the date of this Agreement or
as contemplated in the Company Disclosure Schedule);
(iv) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the
assets of, or by any other manner, any business or any
corporation, partnership, joint venture, association or
other business organization or division thereof;
(v) sell, lease, license, mortgage or otherwise encumber
or subject to any Lien or otherwise dispose of any of its
material properties, assets or business, except sales made
in the ordinary course of business;
(vi) make any material payments for purposes of settling
any dispute;
(vii) allow the Company, or any significant portion of its
business or assets, to be acquired (by merger, tender
offer, purchase or otherwise);
(viii) enter into (directly or through any subsidiary)any
material transaction outside the ordinary course of
business or enter into any material Contract;
(ix) incur any indebtedness for borrowed money or
guarantee any such indebtedness of another Person
(other than a subsidiary of the Parent), issue or sell
any debt securities or warrants or other rights to
acquire any debt securities of the Parent, guarantee
any debt securities of another person (other than a
subsidiary of the Parent), enter into any "keep well"
or other agreement to maintain any financial statement
condition of another person or enter into any arrangement
having the economic effect of any of the foregoing,
except for short-term borrowings incurred in the
ordinary course of business consistent with past
practice;
(x) form any subsidiary or acquire any equity interest or
other interest in any other Entity;
(xi) make any material capital expenditures; or
(xii) authorize any of, or commit or agree to take any
of, the foregoing actions.
21
4.4 NOTIFICATOIN; UPDATES TO DISCLOSURE SCHEDULE.
(a) During the Pre-Closing Period, each of the Parties
shall promptly notify the other Party in writing of:
(i) the discovery by a Party of any event, condition,
fact or circumstance that occurred or existed on or
prior to the date of this Agreement and that caused
or constitutes an inaccuracy in or breach of any
representation or warranty made by such Party in this
Agreement;
(ii) any event, condition, fact or circumstance that
occurs, arises or exists after the date of this
Agreement and that would cause or constitute an
inaccuracy in or breach of any representation or
warranty made by such notifying Party in this
Agreement if (A) such representation or warranty
had been made as of the time of the occurrence,
existence or discovery of such event, condition,
fact or circumstance, or (B) such event, condition,
fact or circumstance had occurred, arisen or existed
on or prior to the date of this Agreement (other than
such event, condition, fact or circumstance occurring
pursuant to the obligations of the Parent under
Sections 4.18, 5.1, 7.6 and 7.7 hereof);
(iii) any breach of any covenant or obligation of the
notifying Party; and
(iv) any event, condition, fact or circumstance that
would make the timely satisfaction of any of the
conditions set forth in Sections 5, 6 or 7
impossible or unlikely.
(b) If any event, condition, fact or circumstance that is
required to be disclosed pursuant to Section 4.4(a) requires
any change in a Party's respective Disclosure Schedule, or if
any such event, condition, fact or circumstance would require
such a change assuming the Disclosure Schedule were dated as of
the date of the occurrence, existence or discovery of such event,
condition, fact or circumstance, then the notifying Party shall
promptly deliver to the other Party an update to such Disclosure
Schedule specifying such change. No such update shall be deemed
to supplement or amend such Disclosure Schedule for the purpose
of (i) determining the accuracy of any of the representations
and warranties made by such notifying Party in this Agreement,
or (ii) determining whether any of the conditions set forth in
Sections 5, 6 or 7 have been satisfied.
4.5 EXCLUSIVITY. During the Pre-Closing Period, each Party
shall not, and each Party shall require each of its
Representatives not to, directly or indirectly, except as
otherwise expressly contemplated in this Agreement, (i)
initiate, solicit or encourage any inquiry, proposal, offer or
discussion with any party concerning any merger, reorganization,
consolidation, recapitalization, business combination,
liquidation, dissolution, share exchange, sale of stock, sale of
material assets or similar business transaction involving such
Party or any division or subsidiary of such Party, (ii) furnish
any non-public information concerning the business, properties or
assets of such Party or any division of such Party to any party
in contemplation of a transaction described by Section 4.5(i) or
(iii) engage in discussions or negotiations with any party
concerning any such transaction, provided, however, in the case
of clauses (ii) and (iii), a Party may provide information to or
engage in discussions or negotiations with another Person or
22
Entity if its Board of Directors determines in good faith (after
consultation with and receipt of advice from outside counsel)
that the failure to do so would constitute a breach of its
fiduciary duties to that Party's stockholders under applicable
law; provided, further, that in such event, the Party will
immediately notify the other Parties prior to such furnishing of
information, discussions or negotiations. On the date of this
Agreement, each Party shall immediately notify any Party with
which discussions or negotiations of the nature described above
were pending that such Party is terminating such discussions or
negotiations. If a Party receives any inquiry, proposal or offer of
the nature described above, after the date hereof, such Party shall,
within one business day after such receipt, notify the other Party
of such inquiry, proposal or offer, including the identity of the
other party and the terms of such inquiry, proposal or offer. In no
event will a Party be permitted to provide information to another
Person or Entity that was never provided to the other Parties.
4.6 FILINGS AND CONSENTS. As promptly as practicable after the
execution of this Agreement, each Party (a) shall make all filings
(if any) and give all notices (if any) required to be made and
given by such party in connection with the Merger and the other
transactions contemplated by this Agreement, and (b) shall use all
Reasonable Best Efforts to obtain all Consents (if any) required
to be obtained (pursuant to any applicable Legal Requirement or
Contract, or otherwise) by such Party in connection with the Merger
and the other transactions contemplated by this Agreement. Each
Party shall (upon request) promptly deliver to the other Party a
copy of each such filing made, each such notice given and each such
Consent obtained during the Pre-Closing Period.
4.7 PREPARATION OF FORM S-4, PROXY STATEMENT AND CANADIAN
SECURITIES DOCUMENTS; STOCKHOLDERS MEETINGS
(a) As soon as practicable following the date of this
Agreement, (i) the Company and Parent shall prepare, and the
Parent shall file with the SEC, a proxy statement relating to
the adoption by the Parent's stockholders of this Agreement
(as amended or supplemented from time to time, the "Proxy
Statement"), and Parent shall prepare and file with the SEC
the Form S-4, in which the Proxy Statement will be included
as a prospectus and (ii) the Company and Parent shall prepare,
and the Parent shall file with the applicable securities
exchange commission of Canada (the "Canadian SEC"), any
documents required by the Canadian SEC or under any Canadian
Laws to effect the Merger (hereinafter the "Canadian Securities
Documents"). Each of the Parent and the Company shall ensure
that the Proxy Statement, Form S-4 and the Canadian Securities
Documents, as applicable, do not contain any untrue statement
of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the
circumstances under which they were made, not misleading
(provided that a Party shall not be responsible for the accuracy
or completeness of any information relating to the other Party or
furnished by the other Party in writing for inclusion in the
Proxy Statement, Form S-4 and the Canadian Securities Documents).
Each of the Company and Parent shall use all Reasonable Best
Efforts to have the Form S-4 declared effective under the
Securities Act and any Canadian Securities Documents declared
effective under the Canadian Laws as promptly as practicable
after such filings are made. The Parent will use its Reasonable
Best Efforts to cause the Proxy Statement to be mailed to the
Parent's stockholders as promptly as practicable after the Form
S-4 is declared effective under the Securities Act. Parent
shall also take any action (other than qualifying to do business
in any jurisdiction in which it is not now so
23
qualified) required to be taken under any applicable state
securities laws or other applicable laws, rules or regulations
(including Canadian Laws) in connection with the issuance of
Parent Common Stock pursuant to this Agreement and under the
Plan. Each of Parent and the Company shall furnish all
information concerning itself to the other as may be reasonably
requested in connection with any such action and the preparation,
filing and distribution of the Proxy Statement or any Canadian
Securities Documents.
(b) At or prior to filing of the Form S-4 the Company and
Parent shall execute and deliver to legal counsel for Parent tax
representation letters in customary form. Following delivery
of these tax representation letters, the Parties shall use their
Reasonable Best Efforts to cause such legal counsel to deliver a
tax opinion satisfying the requirements of Item 601 of Regulation
S-K promulgated under the Securities Act. In rendering such
opinion, such counsel shall be entitled to rely on the tax
representation letters referred to in this Section 4.7(b).
(c) The Company will, as soon as reasonably practicable
following the date of this Agreement, establish a record date
(which will be as soon as practicable following the date of
this Agreement) for, and, to the extent that convening and
holding a meeting would not violate or otherwise be inconsistent
with applicable law, duly call, give notice of, convene and
hold a meeting of its stockholders (the "Company Stockholders
Meeting") for the purposes of (i) having the holders of Company
Preferred Stock approve the Company Preferred Stock Conversion
and (ii) having the holders of Company Common Stock and Company
Preferred Stock adopt this Agreement; provided, that the
Company may also seek approval of the Company Preferred Stock
Conversion and adoption of this Agreement via written consent
of its stockholders to the extent permitted by the DGCL. The
Company will, through its Board of Directors, recommend to its
stockholders approval and adoption of the Company Preferred
Stock Conversion and this Agreement.
(d) The Parent will, as soon as reasonably practicable
following the date of this Agreement, establish a record
date (which will be as soon as practicable following the
date of this Agreement) for, and, to the extent that convening
and holding a meeting would not violate or otherwise be
inconsistent with applicable law, duly call, give notice of,
convene and hold a meeting of its stockholders (the "Parent
Stockholders Meeting") for the purpose of adopting this
Agreement. The Parent will, through its Board of Directors,
recommend to its stockholders approval and adoption of this
Agreement; provided, however, that if the Board of Directors
of the Parent concludes in good faith (after consultation with
and upon receipt of advice from its outside counsel) that the
making of (or continuing to make) a favorable recommendation
would violate its fiduciary duties to the Parent's stockholders
under applicable law, then the Board of Directors shall not
be required to make such recommendation, or, if such
recommendation has already been made, it may withdraw, modify
or change such recommendation.
4.8 PUBLIC ANNOUNCEMENTS . During the Pre-Closing Period, (a)
no Party shall (and each Party shall not permit any of its
Representatives to) issue any press release or make any public
statement regarding this Agreement or the Merger, or regarding
any of the other transactions contemplated by this Agreement,
without the other Party's prior written consent, except that
Parent may make any disclosure required to comply with
applicable law or the requirements of the Nasdaq National
Market or the Toronto Stock Exchange applicable to Parent,
provided that Parent shall consult with the Company and seek
and incorporate the
24
Company's reasonable input regarding such disclosure prior
to making such disclosure, and (b) each Party will use
reasonable efforts to consult with the other Party prior
to issuing any press release or making any public statement
regarding the Merger.
4.9 LISTING OF PARENT COMMON STOCK. Parent shall use its
Reasonable Best Efforts to cause the shares of Parent Common
Stock to be issued under the Agreement and pursuant to the
Plan to be approved for listing on the Nasdaq OTC System,
subject to official notice of issuance, on the Closing Date.
If Parent Common Stock is listed on the Toronto Stock
Exchange immediately prior to the Closing Date, Parent shall
also use its Reasonable Best Efforts to cause the shares of
Parent Common Stock to be issued under the Agreement and
pursuant to the Plan to be approved for listing on the
Toronto Stock Exchange, subject to official notice of
issuance, on the Closing Date.
4.10 INDEMNIFCATION
(a) For a period of six years from and after the
Effective Time, Parent will cause the Surviving Corporation
to fulfill and honor in all respects the obligations of the
Company pursuant to (i) each indemnification agreement
currently in effect between the Company and each person
who is or was a director or officer of the Company at or
prior to the Effective Time and (ii) any indemnification
provision under the Company's Certificate of Incorporation
or Bylaws as each is in effect on the date hereof (the
persons to be indemnified pursuant to the agreements or
provisions referred to in clauses (i) and (ii) of this
Section 4.10(a) shall be referred to as, collectively, the
"Indemnified Parties"). The Certificate of Incorporation
and Bylaws of the Surviving Corporation shall contain the
provisions with respect to indemnification and exculpation
from liability set forth in the Company's Restated
Certificate of Incorporation and Bylaws on the date of this
Agreement, which provisions shall not be amended, repealed or
otherwise modified for a period of six years after the
Effective Time in any manner that would adversely affect the
rights thereunder of any Indemnified Party.
(b) For a period of six years from and after the
Effective Time, the Parent does hereby unconditionally
guarantee performance of the Surviving Corporation's
obligations under Section 4.10(a).
(c) Parent and the Surviving Corporation jointly and
severally agree to pay all expenses, including attorneys'
fees, that may be incurred by the Indemnified Parties in
enforcing the indemnity and other obligations provided for
in this Section 4.10.
(d) This Section 4.10 shall survive the consummation of
the Merger and the Effective Time, is intended to benefit
and may be enforced by the Indemnified Parties, and shall
be binding on all successors and assigns of Parent and the
Surviving Corporation.
4.11 FINANCING FOR OPERATIONS OF THE COMPANY. Parent will
make all money raised by Parent pursuant to the Financing
contemplated by Section 7.6 available to fund the operations
of the Company and the Parent during the Pre-Closing Period.
Advances of such funds during the Pre-Closing Period to the
Parent and the Company in this respect will be made in
accordance with a written budget approved in writing by the
Chief Executive Officer of the Parent and the Chief Executive
Officer of the Company. Advances made by Parent to the Company
will be
25
made on a bi-weekly basis in accordance with this budget.
Parent will deposit an amount equal to the amount allocated to
the Company in such budget in an interest-bearing account and
will not expend such funds except pursuant to advances to the
Company. Any advances to the Company will be made in the form
of an unsecured loan (the "Working Capital Loan") to the
Company (or such other form mutually agreed upon by Parent and
the Company). The definitive documentation for such loan
will be negotiated and executed promptly after the date of this
Agreement by the Parties, but will incorporate the applicable
provisions of Section 8.3. Any monies received by Parent
resulting from the exercise of options, warrants or other
instruments to purchase Parent's common stock shall be used by
Parent for its operations and may be advanced to Company at the
Parent's sole discretion.
4.12 YUKON REINCORPORATION. Prior to the Parent
Reorganization, the Parent may reincorporate
in or redomesticate itself to Yukon, Canada.
4.13 ACQUISITION OF ADDITIONAL INTEREST IN CHALK GROUP. In
order to facilitate the Subsidiary Sale as contemplated by
Section 7.7, the Parent may, prior to such sale, acquire up
to an additional 14% of The Chalk Group in exchange for the
issuance of up to 3,300,000 shares of Parent Common Stock and
share purchase warrants to purchase up to 700,000 shares of
Parent Common Stock.
4.14 GRANT OF NEW STOCK OPTIONS BY PARENT. During the
Pre-Closing Period, the Company may issue stock options to
acquire up to 1,300,000 shares of Parent Common Stock and
stock options to acquire up to 3,000,000 shares of The Chalk
Group to key management and other key employees and
contractors of The Chalk Group to assure their continuity of
service in connection with the Subsidiary Sale. In addition,
during the Pre-Closing Period, the Parent may issue options
to its employees to acquire up to 2,500,000 shares of Parent
Common Stock to satisfy the Parent's previous commitment in
August 2001 to provide options to induce such employees to
(a) defer current compensation, (b) significantly reduce
the Parent's contractual severance obligations to them and
(c) continue their employment with Parent and forego other
opportunities. In the event of any discrepancy in these
permitted amounts between this Section 4.14 and the Parent
Disclosure Schedule, the Parent Disclosure Schedule shall
govern with respect to permitted amounts.
4.15 ISSUANCE OF PARENT COMMON STOCK IN THE FINANCING.
During the Pre-Closing Period, Parent shall be permitted
to issue shares of Parent Common Stock to effect the
Financing contemplated by Section 7.6.
4.16 PARENT D&O INSURANCE TAIL POLICY. Parent shall be p
ermitted to obtain runoff D&O insurance for a three year
tail period following the Closing Date with coverage of up
to $2 million, provided, that the Parent may not pay more than
$100,000 for the premiums for such insurance, and any amounts
in excess thereof shall have been paid by parties other than
the Parent.
4.17 COMPANY PRODUCT SALES. Promptly after the date hereof,
Parent and the Company shall negotiate and execute an agreement
pursuant to which Parent will act as a distributor of the
Company's products during the Pre-Closing Period.
26
4.18 DELAWARE REINCORPORATION. Promptly after the date
hereof, Parent shall use its Reasonable Best Efforts to
reincorporate itself into Delaware as a Delaware corporation
in accordance with the applicable provisions of the DGCL,
with terms reasonably acceptable to the Company. For purposes
of this Agreement, such transactions relating to the
reorganization into Delaware shall be referred to as the "Parent
Reorganization."
SECTION 5. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT
THE MERGER.
The respective obligations of each Party to effect the
Merger and otherwise consummate the transactions contemplated
by this Agreement are subject to the satisfaction or written
waiver, at or prior to the Closing, of each of the following
onditions:
5.1 STOCKHOLDER APPROVAL AND REOGANIZATION. The Requisite
Company Stockholder Vote and the Requisite Parent Stockholder
Vote shall have been obtained. Parent shall have completed the
Parent Reorganization. The parties acknowledge that Parent may
reorganize or redomesticate itself as a Yukon, Canada corporation
prior to the Parent Reorganization.
5.2 NO INJUNCTIONS OR RESTRAINTS. No temporary restraining
order, preliminary or permanent injunction or other order issued
by any Canadian and/or U.S. federal or state court of competent
jurisdiction or other material legal restraint or prohibition
issued or promulgated by a Canadian and/or U.S. federal or state
Governmental Body preventing the consummation of the Merger shall
be in effect.
5.3 FORM S-4 AND CANADIAN SECURITIES DOCUMENTS. The Form
S-4 shall have become effective under the Securities Act and
any Canadian Securities Documents shall have become effective
under Canadian Laws and neither shall be the subject of any
stop order or proceedings seeking a stop order.
5.4 DISSENTERS' RIGHTS. The number of Dissenting Shares
shall not exceed 3% of the number of outstanding shares of
Company Common Stock as of the Effective Time (calculated
after giving effect to the conversion into Company Common
Stock of all outstanding shares of Company Preferred Stock),
and the number of shares of Parent that have preserved
appraisal or dissenters' rights under applicable law with
respect to the transactions contemplated hereby shall not
exceed 3% of the number of outstanding shares of Parent
Common Stock as of the Effective Time. Notwithstanding the
foregoing, in the event that one percentage referenced above
is less than 3% and the other percentage is greater than 3%,
as long as the sum of the two percentages does not exceed 6%,
this condition will be deemed satisfied.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT
AND MERGER SUB
The obligations of Parent and Merger Sub to effect the
Merger and otherwise consummate the transactions contemplated
by this Agreement are subject to the satisfaction or written
waiver, at or prior to the Closing, of each of the following
conditions:
6.1 ACCURACY OF REPRESENTATIONS. Each of the representations
and warranties made by the Company in this Agreement shall have
been accurate in all respects as of the date of this
27
Agreement, and (excluding any representations or warranties
that refer to the date of this Agreement or any date other
than the Closing Date) shall continue to be accurate in all
material respects as of the Closing Date as if made at the
Closing Date.
6.2 PERFORMANCE OF COVENANTS. All of the covenants and
obligations that the Company is required to comply with or to
perform at or prior to the Closing shall have been complied
with and performed in all material respects.
6.3 CONSENTS. All material Consents required to be
obtained by the Company in connection with the Merger and
the other transactions contemplated by this Agreement
(including any Consents required in order to cause all
material Contracts of the Company to remain in full force
and effect after the Closing) shall have been obtained and
shall be in full force and effect.
6.4 OFFICER'S CERTIFICATE. The Company shall have delivered
to the Parent and the Merger Sub a certificate issued by
the Company's Chief Executive Officer to the effect that
each of the conditions specified in Sections 5.1 (other than
the Requisite Company Stockholder Vote), 6.1, 6.2, 6.3, 6.5,
6.6, 6.8 and 6.9 have been satisfied.
6.5 CONVERSION OF COMPANY PREFERRED STOCK. All outstanding
shares of Company Preferred Stock shall have been converted
into shares of Company Common Stock.
6.6 COMPANY WARRANTS. All warrants to acquire shares of
capital stock of the Company shall have been exercised,
converted or otherwise terminated.
6.7 AUDIT. Parent's independent accountant shall have
completed an audit of the Company's financial statements as
of and for the periods ending December 31, 1998, 1999 and
2000. It is anticipated that such audit shall be completed
by December 31, 2001.
6.8 CLAIMS OR LITIGATION. There shall be no actions,
suits, claims, governmental investigations or proceedings
pending or threatened in writing against the Company or any
of its assets or properties, or against any of its officers,
directors or employees acting in such capacity, that are
reasonably likely, individually or in the aggregate, to
result in material monetary exposure to the Company or
significant or material limitations on the manner in which
the Company may conduct its business, including, without
limitation, any significant or material limitation on any
material Intellectual Property Rights of the Company.
6.9 NO MATERIAL ADVERSE CHANGE. There shall have been
no material adverse change in the business, condition,
assets, liabilities, or results of operations of the
Company since the date of this Agreement; provided, however,
that for purposes of determining whether there has been any
such material adverse change, (i) any adverse change resulting
from or relating to general business or economic conditions
shall be disregarded, (ii) any adverse change resulting from or
relating to conditions generally affecting the industry in which
the Company competes shall be disregarded, (iii) any adverse
change resulting from or relating to the announcement or pendency
of the Merger or any of the other transactions contemplated by
this Agreement shall be disregarded and (iv) any adverse change
resulting from or relating to the taking of any action
contemplated by this Agreement shall be disregarded.
28
6.10 VOTING AGREEMENT. The Company shall have provided the
Parent with stockholder signatures to the Voting Agreement
representing a reasonably acceptable number of shares of
the Company within 10 working days from the date of this
Agreement.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE
COMPANY
The obligations of the Company to effect the Merger and
otherwise consummate the transactions contemplated by this
Agreement are subject to the satisfaction or written waiver,
at or prior to the Closing, of the following conditions:
7.1 ACCURACY OF REPRESENTATIONS. Each of the
representations and warranties made by Parent and Merger
Sub in this Agreement shall have been accurate in all respects
as of the date of this Agreement, and (except for the changes
contemplated in Sections 4.18, 5.1, 7.6 and 7.7, and excluding
any representations or warranties that refer to the date of
this Agreement or any date other than the Closing Date) shall
be accurate in all material respects as of the Closing Date
as if made at the Closing Date.
7.2 PERFORMANCE OF COVENANTS. All of the covenants and
obligations that Parent and Merger Sub are required to comply
with or to perform at or prior to the Closing shall have been
complied with and performed in all material respects.
7.3 CONSENTS. All material Consents required to be
obtained by Parent and Merger Sub in connection with the
Merger and the other transactions contemplated by this
Agreement (including any Consents required in order to cause
all material Contracts of the Parent and its subsidiaries to
remain in full force and effect after the Closing) shall have
been obtained and shall be in full force and effect.
7.4 OFFICER'S CERTIFICATE. Parent shall have delivered to
the Company a certificate issued by the Parent's Chief
Executive Officer to the effect that each of the conditions
specified in Sections 5.1 (other than the Requisite Company
Stockholder vote), 7.1, 7.2, 7.3, 7.6, 7.7, 7.8, 7.9, 7.10
and 7.12 have been satisfied.
7.5 [INTENTIONALLY OMITTED BY THE PARTIES ]
7.6 FINANCING. Parent shall have raised at least U.S.
$1,000,000 in an equity financing with terms reasonably
acceptable to the Company. For purposes of this Agreement,
such equity financing shall be referred to herein as the
"Financing."
7.7 SUBSIDIARY SALE. Parent shall have entered into a
binding sale agreement with a third party, with terms reasonably
acceptable to the Company, for the sale of some of the interest
of Parent in its subsidiary, The Chalk Group (the "Subsidiary
Sale"), such agreement to provide for (i) consideration of not
less than U.S.$2,000,000 in cash to be paid to Parent, and (ii)
the sale transaction to close not later than the later of (A)
January 14, 2002 and (B) 14 days after the Closing Date. In
addition, not less than U.S.$2,000,000 shall have been paid
into escrow on account of the purchase price for this sale
prior to Closing.
7.8 CLAIMS OR LITIGATION. There shall be no actions,
suits, claims, governmental investigations or proceedings
pending or threatened in writing against the Parent or any
of its
29
subsidiaries or any of their assets or properties,
or against any of their officers, directors or employees
acting in such capacity, that are reasonably likely,
individually or in the aggregate, to result in material
monetary exposure to the Parent or any of its subsidiaries
or significant or material limitations on the manner in
which the Parent or its subsidiaries may conduct their
business, including, without limitation, any significant
or material limitation on any material Intellectual Property
Rights of the Parent or any of its subsidiaries.
7.9 NO MATERIAL ADVERSE CHANGE. There shall have been no
material adverse change in the business, condition, assets,
liabilities, or results of operations of the Parent and its
subsidiaries since the date of this Agreement; provided,
however, that for purposes of determining whether there has
been any such material adverse change, (i) any adverse change
resulting from or relating to general business or economic
conditions shall be disregarded, (ii) any adverse change
resulting from or relating to conditions generally affecting
the industry in which the Parent and its subsidiaries compete
shall be disregarded, (iii) any adverse change resulting from
or relating to the announcement or pendency of the Merger or
any of the other transactions contemplated by this Agreement
shall be disregarded and (iv) any adverse change resulting
from or relating to the taking of any action contemplated
by this Agreement shall be disregarded.
7.10 DIRECTORS AND OFFICERS. The Parent shall provide
evidence that the individuals listed on Exhibit B shall have
been elected or appointed to serve as officers and directors
of the Parent (as specified on Exhibit B), until their
successors are duly elected and qualified, provided that such
election and/or appointment shall be conditioned upon
consummation of the Merger and shall not take effect until
the Effective Time; provided, that either party may substitute
an individual for those directors specified on Exhibit B prior
to Closing if any listed individual does not consent
to serve as a director of Parent at the Effective Time. In
this regard, Parent shall also provide evidence that any
individual not listed as a director on Exhibit B shall have
resigned as a director of Parent at or prior to the Effective
Time. The directors listed on Exhibit B shall serve from the
Effective Time until the Parent's next succeeding annual
meeting of stockholders.
7.11 LISTING OF PARENT COMMON STOCK. The shares of Parent Common
Stock to be issued under the Agreement and the Plan shall have
been approved for listing on the Nasdaq OTC System, subject to
official notice of issuance. If Parent Common Stock is listed
on the Toronto Stock Exchange immediately prior to the Closing
Date, the shares of Parent Common Stock to be issued under this
Agreement and the Plan shall have been approved for listing on
the Toronto Stock Exchange, subject to official notice of issuance.
7.12 EMPLOYMENT CONTRACTS. No employee of Parent shall be
entitled to severance of more than 12 months base salary plus
any earned but unpaid bonus upon termination of employment.
7.13 VANCOUVER LEASES. Parent shall have provided the
Company with evidence showing that beginning the later of April 1,
2002 or the Closing date, another party shall have assumed the
liability of Parent's Vancouver office lease subject to the
approval of the landlord. Nothing in the foregoing is
intended to require Parent to be released from the lease of its
Vancouver office.
30
7.14 2000 TAX RETURN. The Parent shall have filed its 2000
income tax return on or before December 31, 2001, and said
tax return shall not provide for the payment of any material
taxes for year 2000 for the Parent or any of its subsidiaries
other than for the payment of Canadian provincial taxes in an
amount equal to approximately U.S. $38,000.
7.15 VOTING AGREEMENT. The Parent shall have provided the
Company with stockholder signatures to the Voting Agreement
representing a reasonably acceptable number of shares of the
Parent within 10 working days from the date of this Agreement.
SECTION 8. TERMINATION
8.1 TERMINATION EVENTS. This Agreement may be terminated
prior to the Effective Time as follows:
(a) by Parent if Parent reasonably determines that the
timely satisfaction of any condition set forth in Sections
5 or 6 has become impossible (other than as a result of any
failure on the part of Parent or Merger Sub to comply with
or perform any covenant or obligation of Parent or Merger Sub
set forth in this Agreement);
(b) by the Company if the Company reasonably determines
that the timely satisfaction of any condition set forth in
Sections 5 or 7 has become impossible (other than as a result
of any failure on the part of the Company to comply with or
perform any covenant or obligation set forth in this Agreement
or in any other agreement or instrument delivered to Parent);
(c) by Parent by giving written notice to the Company in
the event the Company is in breach of any representation,
warranty or covenant contained in this Agreement, and such
breach, individually or in combination with any other such
breach, (i) would cause the conditions set forth in Section
7.1 and Section 7.2 not to be satisfied and (ii) is not
cured within 15 days following delivery by the Parent
to the Company of written notice of such breach;
(d) by the Company by giving written notice to the Parent
in the event the Parent or the Merger Sub is in breach of any
representation, warranty or covenant contained in this
Agreement, and such breach, individually or in combination
with any other such breach, (i) would cause the conditions
set forth in Section 6.1 and Section 6.2 not to be satisfied
and (ii) is not cured within 15 days following delivery by
the Company to the Parent of written notice of such breach;
(e) by Parent if the Closing has not taken place on or
before July 31, 2002 (other than as a result of any failure
on the part of Parent or Merger Sub to comply with or perform
any covenant or obligation of Parent or Merger Sub set forth
in this Agreement);
(f) by the Company if the Closing has not taken place on
or before July 31, 2002 (other than as a result of the
failure on the part of the Company to comply with or perform
any covenant or obligation set forth in this Agreement);
(g) by Parent if, within five (5) business days after
delivery of the audited financial statements of the Company
as of and for the fiscal years ended December 31, 1998,
31
1999 and 2000, the Parent determines in its reasonable
discretion that the audits demonstrate Material Differences,
provided, that the Parent has given the Company at least
ten (10) days prior written notice of its intention to
terminate pursuant to this Section 8.1(g), and such Material
Differences are not resolved to the Parent's reasonable
satisfaction within ten (10) days following delivery by
the Company to the Parent of such written notice;
(h) by the Company by giving written notice to the Parent
in the event the Board of Directors of the Parent fails to
favorably recommend adoption of this Agreement by the
stockholders of the Parent or withdraws, modifies or changes
such recommendation in any manner that is adverse to the
Company; or
(i) by the mutual consent of Parent and the Company.
8.2 TERMINATION PROCEDURES. If Parent wishes to terminate
this Agreement pursuant to Section 8.1(a), Section 8.1(c),
Section 8.1(e) or Section 8.1(g), Parent shall deliver to the
Company a written notice stating that Parent is terminating this
Agreement and setting forth a brief description of the basis on
which Parent is terminating this Agreement. If the Company wishes
to terminate this Agreement pursuant to Section 8.1(b), Section
8.1(d), Section 8.1(f) or Section 8.1(h), the Company shall
deliver to Parent a written notice stating that the Company is
terminating this Agreement and setting forth a brief description
of the basis on which the Company is terminating this Agreement.
8.3 EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to Section 8.1, all further obligations of the Parties
shall terminate, except as provided below. In addition, upon
any termination of this Agreement, the Parties shall, in all
events, remain bound by and continue to be subject to the
provisions set forth in Section 4.8 and Section 9. The remedies
set forth in this Section 8.3 shall be the sole and exclusive
remedies of the parties with respect to any breach of this
Agreement.
(a) If this Agreement is terminated by the Parent pursuant
to Section 8.1(c) on account of an intentional and material
breach by the Company of any representation made herein or
the willful uncured material breach by the Company of any
covenant or agreement made herein, then upon such termination:
(i) the Company shall pay the Parent cash in the amount of
$1,000,000 in immediately available funds, as agreed upon
liquidated damages and not as a penalty; (ii) all principal
and interest due under the Working Capital Loan as of the
date of such termination (the "Working Capital Indebtedness")
shall be immediately due and payable by the Company to the
Parent; and (iii) the Company shall immediately reimburse
the Parent for $15,000 of the Parent's expenses in procuring
the audit of the Company's financial statements contemplated
in this Agreement.
(b) If this Agreement is terminated by the Parent for any
reason other than as set forth in subsection (a) above, then
upon such termination, the Working Capital Indebtedness shall
be due and payable by the Company to the Parent on the date
six months after the date of such termination. If such
termination is pursuant to Section 8.1(c), then the Company
shall reimburse the Parent for its reasonable fees and expenses
associated with this transaction.
32
(c) In the event of the termination of this Agreement by
the Company pursuant to Section 8.1(d) on account of an
intentional and material breach by the Parent of any
representation made herein or the willful uncured material
breach by the Parent of any covenant or agreement made herein,
then upon such termination: (i) the Parent shall pay the
Company cash in the amount of $1,000,000 in immediately
available funds, as agreed upon liquidated damages and
not as a penalty; and (ii) the Company shall have the right
to set off against the Working Capital Indebtedness, any amounts
due to the Company from the Parent pursuant to this
Section 8.3 (c).
(d) In the event of the termination of this Agreement by the
Company pursuant to Section 8.1(h), then upon such termination:
(i) the Parent shall pay the Company cash in the amount of
$430,000 (which the Parties acknowledge represents
approximately 3% of the value of the consideration to be
delivered to Company stockholders based on currently prevailing
market conditions), in immediately available funds, as agreed
upon liquidated damages and not as a penalty; (ii) the Working
Capital Indebtedness shall be due and payable by the Company to
the Parent on the date six months after the date of such
termination and (iii) the Company shall have the right to
set-off against the Working Capital Indebtedness, any amounts
due to the Company from the Parent pursuant to this Section 8.3 (d).
(e) In the event of the termination of this Agreement by
the Company for any reason other than as set forth in
subsections (c) and (d) above, then upon any such termination,
the Working Capital Indebtedness shall be due and payable by
the Company to the Parent on the date six months after the
date of such termination. If such termination is pursuant to
Section 8.1(d), then the Parent shall reimburse the Company
for its reasonable fees and expenses associated with this
transaction.
SECTION 9. MISCELLANEOUS PROVISIONS
9.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES.
None of the representations or warranties contained in this
Agreement or in any certificate or instrument delivered
pursuant hereto shall survive the Effective Time. This
Section 9.1 shall not limit any covenant or agreement of
the Parties which by its terms contemplates performance after
the Effective Time.
9.2 FURTHER ASSURANCES. Each Party shall execute and
cause to be delivered to each other Party hereto such
instruments and other documents, and shall take such other
actions, as such other Party may reasonably request (prior to,
at or after the Closing) for the purpose of carrying out
or evidencing any of the transactions contemplated by
this Agreement.
9.3 FEES AND EXPENSES. Each Party shall bear and pay all
fees, costs and expenses (including legal fees and accounting
fees) that have been incurred or that are incurred by such
Party in connection with the transactions contemplated by this
Agreement, including all fees, costs and expenses incurred by
such party in connection with or by virtue of (a) the
investigation and review conducted by each Party and its
Representatives with respect to the other Party's business
(and the furnishing of information to each Party and its
Representatives in connection with such investigation and
review), (b) the negotiation, preparation and review of
this Agreement (including the Disclosure Schedules) and all
Agreements, certificates, opinions and other instruments and
documents delivered or to be delivered in connection with the
transactions
33
contemplated by this Agreement, (c) the preparation and
submission of any filing or notice required to be made or
given in connection with any of the transactions
contemplated by this Agreement, and the obtaining of any
consent required to be obtained in connection with any of
such transactions, and (d) the consummation of the Merger.
9.4 ATTORNEYS' FEES . If any action or proceeding relating
to this Agreement or the enforcement of any provision of this
Agreement is brought against any Party, the prevailing Party
shall be entitled to recover reasonable attorneys' fees, costs
and disbursements (in addition to any other relief to which
the prevailing Party may be entitled).
9.5 NOTICES . Any notice or other communication required
or permitted to be delivered to any Party under this Agreement
shall be in writing and shall be deemed properly delivered,
given and received when delivered (by hand, by registered
mail, by courier or express delivery service or by facsimile)
to the address or facsimile telephone number set forth beneath
the name of such Party below (or to such other address or
facsimile telephone number as such party shall have specified
in a written notice given to Parties hereto):
IF TO PARENT:
SIDEWARE SYSTEMS, INC.
1810 Samuel Morse Drive,
Reston, VA USA 20190
Fax: (703) 437-9065
Attn: General Counsel
with a copy to:
SILVER, FREEDMAN & TAFF, LLP
1100 New York Avenue, N.W.
Suite 700E
Washington, D.C. 20005
Fax: (202) 682-0354
Attention: Barry P. Taff, Esq.
IF TO THE COMPANY:
KNOWLEDGEMAX, INC.
6110 Executive Boulevard
N. Bethesda, MD 20852
Fax: (301) 468-8978
Attention: E. Linwood Pearce
34
with a copy to:
COOLEY GODWARD LLP
One Freedom Square
Reston Town Center
11951 Freedom Drive
Reston, VA 20190
Fax:(703) 456-8100
Attention: Joseph W. Conroy, Esq.
9.6 CONFIDENTIALITY. Without limiting the generality
of anything contained in Section 4.8, on and at all times
after the Closing Date, each Party shall keep confidential,
and shall not use or disclose to any other Person or Entity,
any non-public document or other non-public information in
such Party's possession that relates to the business of the
Company or Parent (or its subsidiaries) and shall otherwise
continue to comply with the NDA.
9.7 TIME OF THE ESSENCE. Time is of the essence of this
Agreement.
9.8 HEADINGS. The underlined headings contained in this
Agreement are for convenience of reference only, shall
not be deemed to be a part of this Agreement and shall
not be referred to in connection with the construction
or interpretation of this Agreement.
9.9 COUNTERPARTS. This Agreement may be executed in
several counterparts, each of which shall constitute
an original and all of which, when taken together, shall
constitute one agreement.
9.10 GOVERNING LAW. This Agreement shall be construed
in accordance with, and governed in all respects by, the
internal laws of the State of Delaware (without giving
effect to principles of conflicts of laws).
9.11 SUCCESSORS AND ASSIGNS. Neither this Agreement nor
any of the rights, interests or obligations hereunder may
be assigned, in whole or in part, by operation of law or
otherwise, by any Party without the prior written consent
of the other Parties. Subject to the preceding sentence,
this Agreement shall be binding upon: the Company and its
successors and assigns (if any); the Indemnified Parties
(to the extent set forth in Section 4.10), Parent and its
successors and assigns (if any); and Merger Sub and its
successors and assigns (if any). This Agreement shall inure
to the benefit of: the Company; the Company's stockholders
(to the extent set forth in Section 1.4); the holders of
assumed Company Options (to the extent set forth in Section
1.5); and the respective successors and assigns (if any)
of the foregoing.
9.12 REMEDIES LIMITED; SPECIFIC PERFORMANCE. The rights
and remedies of the Parties are limited as set forth in
Section 8.3. The Parties agree that, in the event of any
breach or threatened breach by any Party of any covenant,
obligation or other provision set forth in this Agreement
for the benefit of any other Party, such other Party shall
be entitled (in lieu of the remedy, if any, available to
it under Section 8.3) to (a) a decree or order of specific
performance
35
or mandamus to enforce the observance and performance of
such covenant, obligation or other provision, and (b) an
injunction restraining such breach or threatened breach.
9.13 WAIVER.
(a) No failure on the part of any Person to exercise any
power, right, privilege or remedy under this Agreement, and
no delay on the part of any Person in exercising any power,
right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right,
privilege or remedy shall preclude any other or further
exercise thereof or of any other power, right, privilege or
remedy.
(b) No Person shall be deemed to have waived any claim
arising out of this Agreement, or any power, right, privilege
or remedy under this Agreement, unless the waiver of such
claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered
on behalf of such Person; and any such waiver shall not be
applicable or have any effect except in the specific
instance in which it is given.
9.14 AMENDMENTS. This Agreement may not be amended,
modified, altered or supplemented other than by means of
a written instrument duly executed and delivered on behalf
of all of the Parties hereto.
9.15 SEVERABILITY. In the event that any provision of
this Agreement, or the application of any such provision
to any Person or set of circumstances, shall be determined
to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application
of such provision to Persons or circumstances other than
those as to which it is determined to be invalid, unlawful,
void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to
the fullest extent permitted by law.
9.16 PARTIES IN INTEREST. Except for the provisions
of Sections 1.4, 1.5 and 4.10, none of the provisions of
this Agreement is intended to provide any rights or
remedies to any Person other than the Parties and their
respective successors and assigns (if any).
9.17 ENTIRE AGREEMENT. This Agreement and the other
agreements referred to herein set forth the entire
understanding of the parties hereto relating to the
subject matter hereof and thereof and supersede all
prior agreements and understandings among or between
any of the parties relating to the subject matter hereof
and thereof (except that the NDA shall continue in full
force and effect).
9.18 CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and
vice versa; the masculine gender shall include the feminine
and neuter genders; the feminine gender shall include the
masculine and neuter genders; and the neuter gender shall
include the masculine and feminine genders.
36
(b) The parties hereto agree that any rule of construction
to the effect that ambiguities are to be resolved against
the drafting party shall not be applied in the construction
or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and
"including," and variations thereof, shall not be deemed
to be terms of limitation, but rather shall be deemed to
be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this
Agreement to "Sections" and "Exhibits" are intended to refer
to Sections of this Agreement and Exhibits to this Agreement.
[SIGNATURE PAGE FOLLOWS]
37
The parties hereto have caused this Agreement and Plan of
Merger and Reorganization to be executed and delivered as
of the date first written above.
SIDEWARE SYSTEMS, INC., a British
Columbia corporation
By:
James L. Speros, President
KM ACQUISITION CORP., a Delaware
corporation
By:
Name:___________________________
Title:__________________________
KNOWLEDGEMAX, INC., a Delaware
corporation
By:
E. Linwood Pearce, Chairman
and Co-Chief Executive
Officer
AND
By:
Edwin S. Grosvenor, Co-
Chief Executive Officer
38
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
AGREEMENT. "Agreement" shall mean the Agreement and Plan of
Merger and Reorganization to which this Exhibit A is attached
(including the Disclosure Schedules), as it may be amended
from time to time.
CONSENT. "Consent" shall mean any approval, consent,
ratification, permission, waiver or authorization (including
any authorization by a Government Body).
CONTRACT. "Contract" shall mean any written, oral or other
agreement, contract, subcontract, lease, understanding,
instrument, note, warranty, insurance policy, benefit plan
or legally binding commitment or undertaking of any nature.
DISCLOSURE SCHEDULES. "Disclosure Schedules" shall mean the
Company Disclosure Schedule and Parent Disclosure Schedule
attached to the Agreement (dated as of the date of the Agreement).
ENTITY. "Entity" shall mean any corporation (including any non-
profit corporation), general partnership, limited partnership,
limited liability partnership, joint venture, estate, trust,
company (including any limited liability company or joint
stock company), firm or other enterprise, association,
organization or entity.
EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
GOVERNMENTAL BODY. "Governmental Body" shall mean any: (a)
nation, state, commonwealth, province, territory, county,
municipality, district or other jurisdiction of any nature;
(b) federal, state, local, municipal, foreign or other
government; or (c) governmental or quasi-governmental authority
of any nature (including any governmental division, department,
agency, commission, instrumentality, official, organization,
unit, body or Entity and any court or other tribunal).
LEGAL REQUIREMENT. "Legal Requirement" shall mean any federal,
state, local, municipal, foreign or other law, statute,
constitution, principle of common law, resolution, ordinance,
code, edict, decree, rule, regulation, ruling or requirement
issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental
Body.
MATERIAL ADVERSE EFFECT. A violation or other matter will be
deemed to have a "Material Adverse Effect" on a Party if such
violation or other matter (considered together with all other
matters that would constitute exceptions to the
representations and warranties of such Party set forth in the
Agreement but for the presence of "Material Adverse Effect"
or other materiality qualifications, or any similar
qualifications, in such representations and warranties)
would have a Material Adverse Effect on the a Party's
business, condition, assets, liabilities, operations,
financial performance or prospects.
MATERIAL DIFFERENCES. "Material Differences" shall mean a 33-
1/3% or more understatement in the Company's total liabilities
as reflected on the balance sheets in the audited financial
statements of the Company delivered in accordance with this
Agreement as compared to the corresponding balance sheets in
the Company Financial Statements referred to in Section 2.5.
NDA. "NDA" shall mean that certain confidentiality agreement
previously entered by Parent and the Company.
PERSON. "Person" shall mean any individual, Entity or
Governmental Body.
REPRESENTATIVES. "Representatives" shall mean officers,
directors, employees, agents, attorneys, accountants,
advisors and representatives.
SEC. "SEC" shall mean the United States Securities and
Exchange Commission.
Securities Act. "Securities Act" shall mean the Securities Act
of 1933, as amended.
TAX. "Tax" shall mean any tax (including any income tax,
franchise tax, capital gains tax, gross receipts tax,
value-added tax, surtax, excise tax, ad valorem tax, transfer
tax, stamp tax, sales tax, use tax, property tax, business tax,
withholding tax or payroll tax), levy, assessment, tariff, duty
(including any customs duty), deficiency or fee, and any related
charge or amount (including any fine, penalty or interest),
imposed, assessed or collected by or under the authority of any
Governmental Body.
TAX RETURN. "Tax Return" shall mean any return (including any
information return), report, statement, declaration, estimate,
schedule, notice, notification, form, election, certificate or
other document or information filed with or submitted to, or
required to be filed with or submitted to, any Governmental Body
in connection with the determination, assessment, collection or
payment of any Tax or in connection with the administration,
implementation or enforcement of or compliance with any Legal
Requirement relating to any Tax.
2
EXHIBIT B
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
BOARD OF DIRECTORS
There shall be 11 board members. Six shall be appointed
by Company and five by Parent. It is anticipated that
the members shall be as follows:
COMPANY DIRECTORS
E. Linwood Pearce (Chairman)
Edwin Grosvenor
Donna Lynn
Edward Gross
Joe Boivin
Alan Sultan
PARENT DIRECTORS
Ken Thornton (Vice Chairman)
James L. Speros
Jay H. Nussbaum
Jack Kemp
John Shoemaker
OFFICERS
E. Linwood Pearce, Chairman & Chief Executive Officer
Ken Thornton, Vice Chairman
James L. Speros, President
Edwin Grosvenor, Founder and Executive Vice President
Donna Lynn, Chief Operating Officer
Alan Sultan, Senior Vice President
Michael Finn, General Counsel
*Chief Financial Officer - to be selected post-merger
*Others to be determined later
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
among:
SIDEWARE SYSTEMS, INC.,
a British Columbia corporation;
KM ACQUISITION CORP.,
a Delaware corporation;
and
KNOWLEDGEMAX, INC.,
a Delaware corporation
___________________________
Dated as of December 7, 2001
___________________________
SECTION 1. DESCRIPTION OF TRANSACTION 1
1.1 Merger of Merger Sub into the Company 1
1.2 Closing; Effective Time 2
1.3 Certificate of Incorporation and
Bylaws; Directors and Officers 2
1.4 Conversion of Shares 2
1.5 Employee Stock Options 4
1.6 Company Warrants 4
1.7 Closing of the Company's Transfer Books 5
1.8 Exchange of Certificates 5
1.9 Dissenting Shares 6
1.10 Parent/Surviving Corporation Merger 6
1.11 Tax Consequences 7
1.12 Further Action 7
1.13 Parent Corporate Name 7
SECTION 2. REPRESENTATIONS AND WARRANTIES OF
THE COMPANY 7
2.1 Due Organization; No Subsidiaries 7
2.2 Authority; Binding Nature 7
2.3 Noncontravention 8
2.4 Capitalization, Etc. 9
2.5 Financial Statements 9
2.6 Compliance with Laws 10
2.7 Intellectual Property 10
2.8 Contracts 11
2.9 Tax Matters 11
2.10 Litigation 11
2.11 Labor Matters 11
2.12 Related Party Transactions 11
2.13 Brokers 12
2.14 Insurance 12
2.15 Indemnification 12
2.16 No Undisclosed Liabilities 12
2.17 Disclosure 12
SECTION 3. REPRESENTATIONS AND WARRANTIES
OF PARENT AND MERGER SUB 12
3.1 SEC Filings; Financial Statements 13
3.2 Due Organization; No Subsidiaries 13
3.3 Authority; Binding Nature 14
3.4 Noncontravention 14
3.5 Capitalization, Etc. 15
3.6 Compliance with Laws 15
3.7 Intellectual Property 16
3.8 Contracts 16
3.9 Tax Matters 16
3.10 Litigation 16
3.11 Labor Matters 17
3.12 Related Party Transactions 17
3.13 Brokers 17
3.14 Issuance of Parent Common Stock 18
3.15 Insurance 18
3.16 Indemnification 18
3.17 No Undisclosed Liabilities 18
3.18 Cash on Hand 18
3.19 Disclosure 18
SECTION 4. COVENANTS OF THE PARTIES 18
4.1 Closing Efforts 18
4.2 Access and Investigation 19
4.3 Conduct of Business by
Parent and the Company 19
4.4 Notification; Updates to
Disclosure Schedule 22
4.5 Exclusivity 22
4.6 Filings and Consents 23
4.7 Preparation of Form S-4,
Proxy Statement and Canadian
Securities Documents; Stockholders
Meetings. 23
4.8 Public Announcements 24
4.9 Listing of Parent Common Stock 25
4.10 Indemnification 25
4.11 Financing for Operations of the Company 25
4.12 Yukon Reincorporation 26
2
4.13 Acquisition of Additional
Interest in The Chalk Group 26
4.14 Grant of New Stock Options by Parent 26
4.15 Issuance of Parent Common Stock in
the Financing 27
4.16 Parent D&O Insurance Tail Policy 27
4.17 Company Product Sales 27
4.18 Delaware Reincorporation 27
SECTION 5. CONDITIONS TO EACH PARTY'S OBLIGATION
TO EFFECT THE MERGER. 27
5.1 Stockholder Approval and Reorganization. 27
5.2 No Injunctions or Restraints. 27
5.3 Form S-4 and Canadian Securities
Documents. 27
5.4 Dissenters' Rights. 27
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS
OF PARENT AND MERGER SUB 28
6.1 Accuracy of Representations 28
6.2 Performance of Covenants 28
6.3 Consents 28
6.4 Officer's Certificate. 28
6.5 Conversion of Company Preferred Stock 28
6.6 Company Warrants 28
6.7 Audit 28
6.8 Claims or Litigation 28
6.9 No Material Adverse Change 29
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE COMPANY 29
7.1 Accuracy of Representations 29
7.2 Performance of Covenants 29
7.3 Consents 29
7.4 Officer's Certificate. 29
7.5 [Intentionally Omitted by the Parties] 29
7.6 Financing. 29
7.7 Subsidiary Sale. 29
7.8 Claims or Litigation 30
7.9 No Material Adverse Change 30
7.10 Directors and Officers 30
7.11 Listing of Parent Common Stock 30
3
7.12 Employment Contracts 30
7.13 Vancouver Lease 31
SECTION 8. TERMINATION 31
8.1 Termination Events 31
8.2 Termination Procedures 32
8.3 Effect of Termination 32
SECTION 9. MISCELLANEOUS PROVISIONS 33
9.1 Nonsurvival of Representations
and Warranties. 33
9.2 Further Assurances 33
9.3 Fees and Expenses 33
9.4 Attorneys' Fees 33
9.5 Notices 33
9.6 Confidentiality 34
9.7 Time of the Essence 34
9.8 Headings 34
9.9 Counterparts 35
9.10 Governing Law 35
9.11 Successors and Assigns 35
9.12 Remedies Limited; Specific Performance 35
9.13 Waiver 35
9.14 Amendments 35
9.15 Severability 35
9.16 Parties in Interest 36
9.17 Entire Agreement 36
9.18 Construction 36
4
EXHIBITS
Exhibit A - Certain Definitions
Exhibit B - Officers of Surviving Corporation
APPENDIX B
[Lettter head of Paradigm Capital Inc.]
December 5, 2001
Mr. Ken Thornton, Chairman
Board of Directors and
Special Committee of
Sideware Systems Inc.
1810 Samuel Morse Drive
Reston, Virginia 20190
U.S.A.
Dear Sirs,
Paradigm Capital Inc. ("Paradigm Capital") understands that
Sideware Systems Inc. ("Sideware") and KnowledgeMax, Inc.
("KnowledgeMax") plan to enter into an agreement dated December
5, 2001 (the "Acquisition Agreement") pursuant to which Sideware
will make an offer to purchase KnowledgeMax.
The independent special committee (the "Special Committee") of
the Board of Directors of Sideware (the "Board") has retained
Paradigm Capital to, among other things, provide advise and
assistance to the Board and the Special Committee including
evaluating the Acquisition Agreement and the preparation and
delivery to the Special Committee and the Board of an opinion as
to the fairness of the Acquisition Agreement from a financial
view point to the shareholders of Sideware (the "Opinion").
Paradigm Capital has not prepared a valuation of Sideware or any
of its securities or assets and the Opinion should not be
construed as such.
ENGAGEMENT
Paradigm Capital was formally engaged by the Special Committee
pursuant to an agreement dated November 30, 2001 (the "Engagement
Agreement"). The terms of the Engagement Agreement provide that
Paradigm Capital is to be paid a fee for its services as
financial advisor. In addition, Paradigm Capital is to be
indemnified by Sideware in respect of certain liabilities, which
may be incurred by Paradigm Capital with respect to the
engagement.
Subject to the terms of the Engagement Agreement, Paradigm
Capital consents to the inclusion of this Opinion in its
entirety, together with a summary thereof in a form acceptable to
Paradigm Capital, in a director's circular to be prepared by
Sideware (the "Directors' Circular") in connection with the
Acquisition Agreement and to the filing thereof with the
securities commission or similar regulatory authorities in each
relevant province of Canada and in the United States of America.
CREDENTIALS OF PARADIGM CAPITAL
Paradigm Capital is one of Canada's independent niche investment
banking firm with a sales, trading, research and corporate
finance focus providing services for institutional investors.
Paradigm Capital was founded in 1999 and is a member of The
Toronto Stock Exchange,
Canadian Venture Exchange and the Investment Dealers Association
of Canada. Paradigm Capital has participated in many transactions
involving both public and private companies. Paradigm Capital has
undertaken three fairness opinions: Sherritt Power Corporation,
Connor Clark Ltd. and Vienna Systems Ltd.
The Opinion expressed herein represents the opinion of Paradigm
Capital and the form and content thereof has been approved for
release by a committee of directors and other professionals of
Paradigm Capital, each of whom is experienced in mergers and
acquisitions and valuation matters. The principal individual
responsible for preparation was Mr. John M. Warwick. Mr. Warwick
has over 23 years of experience in financial services industry.
INDEPENDENCE OF PARADIGM CAPITAL
None of Paradigm Capital, its associates or affiliates, is an
insider, associate or affiliate (as those terms are defined in
the Securities Act, or related entity of Sideware, or any of its
associates or affiliates. Paradigm Capital has not provided any
financial advisory services or participated in any equity
financing involving Sideware or its associates or affiliates
within the past two years, of a material nature, other than the
services related to or provided under the Engagement Agreement as
described below.
There are no understandings, agreements or commitments between
Paradigm Capital and Sideware or any of its associates or
affiliates with respect to any future business dealings.
Paradigm Capital may, in the future, in the ordinary course of
its business, perform financial advisory and/or investment
banking services for Sideware or any of its associates or
affiliates. Paradigm Capital does not believe that any of these
relationships affect Paradigm Capital's independence with respect
to the opinion.
SCOPE OF THE REVIEW
In connection with this Opinion, Paradigm Capital has reviewed
and relied upon or carried out, among other things, the
following:
a) the November 30, 2001 Draft Agreement of Merger and
Reorganization;
b) a draft of the Directors' Presentation to be dated
December 5, 2001;
c) unaudited financial statements of KnowledgeMax for the
fiscal years ending December 31, 1999, December 31,
2000 and the three, six and nine months ending March
31, June 30, and September 30, 2001, respectively;
d) KnowledgeMax's internal management income statement
estimates for fiscal 2002 through 2004;
e) the Annual Reports to Shareholders including the
audited consolidated financial statements of Sideware
for each of the fiscal years ending December 31, 1999
and December 31, 2000 and the unaudited financial
statements for three, six and nine months ending March
31, June 30 and September 30, 2001 respectively;
f) the Annual Information Form of Sideware dated June 13,
2001;
g) discussions with senior management of Sideware;
h) forecasts of the financial and operating performance
of Sideware prepared by senior management;
i) discussions with management of Sideware with regard
to, among other things, the business, operations,
financial position, quality of assets, future
potential and prospects of Sideware
j) other financial, operating, legal, corporate and other
information and projections, with respect to
KnowledgeMax and Sideware obtained from Sideware
management;
k) relevant stock market and other trading information
relating to the Common Shares of Sideware and the
securities of comparable public companies to
KnowledgeMax;
l) data with respect to merger and acquisition
transactions considered by Paradigm Capital to be
relevant;
m) representations obtained from senior management of
Sideware as to matters of fact relevant to Paradigm
Capital's engagement;
n) such other financial, market, technical and industry
information and such other analyses and reports as we
considered relevant and appropriate in the
circumstances.
Paradigm Capital was granted free access by Sideware to its
senior management and was to its knowledge, provided all material
information and, to its knowledge was not denied any information
which it requested.
ASSUMPTIONS AND LIMITATIONS
With the Special Committee's approval and as provided in the
Engagement Agreement, Paradigm Capital has relied, without
independent verification, upon all financial and other
information that was obtained by us from public sources or that
was provided to us by Sideware and its affiliates, associates,
advisors or otherwise. We have assumed that this information was
complete and accurate and did not omit to state any material fact
or any fact necessary to be stated to make that information not
misleading. Our Opinion is conditional upon such completeness
and accuracy. In accordance with the terms of our engagement,
but subject to the exercise of our professional judgement, we
have not conducted any independent investigation to verify the
completeness or accuracy of such information. Specifically we
note that all historic financial statements reviewed regarding
KnowledgeMax were unaudited. With respect to the financial
forecasts and budgets provided to us and used in our analysis, we
have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgements
of management of Sideware and KnowledgeMax and both companies
affiliates and associates as to the matters covered thereby.
Senior management of Sideware has represented to us, verbally as
of the date hereof, amongst other things, that the information,
opinions and other materials (the "Information") provided to us
and that since the date of the Information, there has been no
material change, financial or otherwise, in the financial
position of Sideware, or in its assets, liabilities (contingent
or otherwise), business or operations and there has been no
change in any material fact which is of a nature as to render the
Information untrue or misleading in any material respect.
The Opinion is based on the securities markets, economic, general
business and financial conditions prevailing as of the date of
this opinion and the conditions and prospects, financial and
otherwise, of Sideware and KnowledgeMax as they were reflected in
the information reviewed by us. In its analysis and in preparing
the Opinion, Paradigm Capital has made numerous assumptions with
respect to industry performance, general business and economic
conditions, and other matters, any of which are beyond control of
Paradigm Capital, Sideware, KnowledgeMax or any party involved in
connection with the Acquisition Agreement.
The Opinion has been provided for the use of the Special
Committee and the Board and for inclusion in the Directors'
Circular (together with a summary thereof in a form acceptable to
Paradigm Capital) and may not be used by any other person or
relied upon by any other person without the express consent of
Paradigm Capital. The Opinion is given as of the date hereof and
Paradigm Capital disclaims any undertakings or obligation to
advise any person of any change in any fact of matter affecting
the Opinion which may come or be brought to Paradigm Capital's
attention after the date hereof. Without limiting the foregoing,
in the event that there us any material change in any fact or
matter after the date hereof, Paradigm Capital reserves the right
to change, modify or withdraw the Opinion.
CONCLUSION
Based upon and subject to the foregoing, Paradigm Capital is of
the opinion that, as of the date hereof, the Acquisition
Agreement is fair, from a financial point of view, to the
shareholders of Sideware.
Yours very Truly,
/s/ Paradigm Capital Inc.
Paradigm Capital Inc.
APPENDIX C
CERTIFICATE OF INCORPORATION
OF
SIDEWARE SYSTEMS INC.
The undersigned, a natural person (the "Sole Incorporator"), for
the purpose of organizing a corporation to conduct the business and
promote the purposes hereinafter stated, under the provisions and
subject to the requirements of the laws of the State of Delaware
hereby certifies that:
I.
The name of this corporation is Sideware Systems Inc.
II.
The address of the registered office of the corporation in the
State of Delaware is 2711 Centerville Road, Suite 400, Wilmington,
19808, County of New Castle, and the name of the registered agent of
the corporation in the State of Delaware at such address is the
Corporation Service Company.
III.
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the Delaware
General Corporation Law ("DGCL").
IV.
A. This corporation is authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the corporation is
authorized to issue is [Three Hundred Fifty Million (350,000,000)]
shares. Three Hundred Million (300,000,000) shares shall be Common
Stock, each having a par value of one-tenth of one cent ($.001).
[Fifty Million (50,000,000) shares shall be Preferred Stock, each
having a par value of one-tenth of one cent ($.001).]
B. The Preferred Stock may be issued from time to time in one
or more series. The Board of Directors is hereby expressly authorized
to provide for the issue of all or any of the shares of the Preferred
Stock in one or more series, and to fix the number of shares and to
determine or alter for each such series, such voting powers, full or
limited, or no voting powers, and such designation, preferences, and
relative, participating, optional, or other rights and such
qualifications, limitations, or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions adopted by the
Board of Directors providing for the issuance of such shares and as
may be permitted by the DGCL. The Board of Directors is also
expressly authorized to increase or decrease the number of shares of
any series subsequent to the issuance of shares of that series, but
not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be decreased in
accordance with the foregoing sentence, the shares constituting such
decrease shall resume the status that they had prior to the adoption
of the resolution originally fixing the number of shares of such
series. The number of authorized shares of Preferred Stock may be
increased or decreased (but not below the number of shares thereof
then outstanding) by the affirmative vote of the holders of a majority
of the Common Stock, without a vote of the holders of the Preferred
Stock, or of any series thereof, unless a vote of any such holders is
required pursuant to the terms of any certificate of designation filed
with respect to any series of Preferred Stock
C. Each outstanding share of Common Stock shall entitle the
holder thereof to one vote on each matter properly submitted to the
stockholders of the Corporation for their vote; provided, however,
that, except as otherwise required by law, holders of Common Stock
shall not be entitled to vote on any amendment to this Certificate of
Incorporation (including any certificate of designation filed with
respect to any series of Preferred Stock) that relates solely to the
terms of one ore more outstanding series of Preferred Stock if the
holders of such affected series are entitled, either separately or
together as a class with the holders of one or more other such series,
to vote thereon by law or pursuant to this Certificate of
Incorporation (including any certificate of designation filed with
respect to any series of Preferred Stock).
V.
For the management of the business and for the conduct of the
affairs of the corporation, and in further definition, limitation and
regulation of the powers of the corporation, of its directors and of
its stockholders or any class thereof, as the case may be, it is
further provided that:
A.
1. The management of the business and the conduct of the
affairs of the corporation shall be vested in its Board of Directors.
The number of directors which shall constitute the Board of Directors
shall be fixed exclusively by resolutions adopted by a majority of the
authorized number of directors constituting the Board of Directors.
2. BOARD OF DIRECTORS
Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified
circumstances, the directors shall be divided into three classes
designated as Class I, Class II and Class III, respectively. At the
first annual meeting of stockholders following the initial
classification of the Board of Directors, the term of office of the
Class I directors shall expire and Class I directors shall be elected
for a full term of three years. At the second annual meeting of
stockholders following such initial classification, the term of office
of the Class II directors shall expire and Class II directors shall be
elected for a full term of three years. At the third annual meeting
of stockholders following such initial classification, the term of
office of the Class III directors shall expire and Class III directors
shall be elected for a full term of three years. At each succeeding
annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms
expire at such annual meeting.
2
Notwithstanding the foregoing provisions of this section, each
director shall serve until his successor is duly elected and qualified
or until his death, resignation or removal. No decrease in the number
of directors constituting the Board of Directors shall shorten the
term of any incumbent director.
The names and classes of the initial Board of Directors who shall
act until the first meeting of the stockholders or until their
successors are duly elected and qualified are: Class I Directors:
Donna Lynn, Joe Boivin and James L. Speros; Class II Directors: Edwin
Grosvenor, Edward Gross, Jay H. Nussbaum and John Shoemaker; and Class
III Directors: E. Linwood Pearce, Alan Sultan, Ken Thornton and Jack
Kemp.
3. REMOVAL OF DIRECTORS
a. Subject to the rights of any series of Preferred
Stock to elect additional directors under specified circumstances,
following the closing of the Initial Public Offering, neither the
Board of Directors nor any individual director may be removed without
cause.
b. Subject to any limitation imposed by law, any
individual director or directors may be removed with cause by the
affirmative vote of the holders of sixty-six and two-thirds percent
(66 2/3%) of the voting power of all then-outstanding shares of capital
stock of the corporation entitled to vote generally at an election of
directors.
4. VACANCIES
a. Subject to the rights of the holders of any
series of Preferred Stock, any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other
causes and any newly created directorships resulting from any increase
in the number of directors, shall, unless the Board of Directors
determines by resolution that any such vacancies or newly created
directorships shall be filled by the stockholders, except as otherwise
provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the
Board of Directors, and not by the stockholders. Any director elected
in accordance with the preceding sentence shall hold office for the
remainder of the full term of the director for which the vacancy was
created or occurred and until such director's successor shall have
been elected and qualified.
B.
1. The Board of Directors is expressly empowered to
adopt, amend or repeal the Bylaws of the corporation. Any adoption,
amendment or repeal of the Bylaws of the corporation by the Board of
Directors shall require the approval of a majority of the Board of
Directors. The stockholders shall also have power to adopt, amend or
repeal the Bylaws of the corporation; provided, however, that, in
addition to any vote of the holders of any class or series of stock of
the corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of at least sixty-
six and two-thirds percent (66 2/3%) of the voting power of all of the
then-outstanding shares of the capital stock of the corporation
entitled to vote generally in the election of directors, voting
together as a single class, shall be required to adopt, amend or
repeal any provision of the Bylaws of the corporation.
3
2. The directors of the corporation need not be elected
by written ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the
corporation except at an annual or special meeting of stockholders
called in accordance with the Bylaws or by written consent or
electronic transmission of stockholders in accordance with the Bylaws
prior to the closing of the Initial Public Offering and following the
closing of the Initial Public Offering no action shall be taken by the
stockholders by written consent or electronic transmission.
4. Advance notice of stockholder nominations for the
election of directors and of business to be brought by stockholders
before any meeting of the stockholders of the corporation shall be
given in the manner provided in the Bylaws of the corporation.
VI.
A. The liability of the directors for monetary damages shall
be eliminated to the fullest extent under applicable law. If the DGCL
is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a
director of the corporation shall be eliminated to the fullest extent
permitted by the DGCL, as so amended.
B. Any repeal or modification of this Article VI shall be
prospective and shall not affect the rights under this Article VI in
effect at the time of the alleged occurrence of any act or omission to
act giving rise to liability or indemnification.
VII.
A. The corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute,
except as provided in paragraph B. of this Article VII, and all rights
conferred upon the stockholders herein are granted subject to this
reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a
lesser vote or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the corporation required
by law or by this Certificate of Incorporation or any certificate of
designation filed with respect to a series of Preferred Stock, the
affirmative vote of the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the voting power of all of the then-outstanding
shares of capital stock of the corporation entitled to vote generally
in the election of directors, voting together as a single class, shall
be required to alter, amend or repeal Articles V, VI, and VII.
4
VIII.
The name and the mailing address of the Sole Incorporator is as
follows:
Name MAILING ADDRESS
Darren K. DeStefano Cooley Godward LLP
One Freedom Square
11951 Freedom Drive
Reston, VA 20190-5601
The powers of the incorporator shall terminate upon the filing of
this Certificate of Incorporation.
IN WITNESS WHEREOF, this Certificate has been subscribed this
day of , 2002 by the undersigned who affirms that
the statements made herein are true and correct.
Darren K. DeStefano
Sole Incorporator
APPENDIX D
BYLAWS
OF
SIDEWARE SYSTEMS INC.
(A DELAWARE CORPORATION)
ARTICLE I
Offices
Section 1. Registered Office. The registered office of the corporation
in the State of Delaware shall be in the City of Wilmington, County of New
Castle. (Del. Code Ann., tit. 8, # 131)
Section 2. Other Offices. The corporation shall also have and maintain an
office or principal place of business at such place as may be fixed by the
Board of Directors, and may also have offices at such other places, both
within and without the State of Delaware as the Board of Directors may
from time to time determine or the business of the corporation may
require. (Del. Code Ann., tit. 8, # 122(8))
ARTICLE II
Corporate Seal
Section 3. Corporate Seal. The Board of Directors may adopt a corporate
seal. The corporate seal shall consist of a die bearing the name of the
corporation and the inscription, "Corporate Seal-Delaware." Said seal
may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise. (Del. Code Ann., tit. 8,
# 122(3))
ARTICLE III
Stockholders' Meetings
Section 4. Place Of Meetings. Meetings of the stockholders of the
corporation may be held at such place, either within or without the
State of Delaware, as may be determined from time to time by the Board of
Directors. The Board of Directors may, in its sole discretion,
determine that the meeting shall not be held at any place, but may
instead be held solely by means of remote communication as provided
under the Delaware General Corporation Law ("DGCL"). (Del. Code Ann.,
tit. 8, # 211(a))
1
Section 5. Annual Meetings.
(a) The annual meeting of the stockholders of the
corporation, for the purpose of election of directors and for such
other business as may lawfully come before it, shall be held on such
date and at such time as may be designated from time to time by the
Board of Directors. Nominations of persons for election to the Board
of Directors of the corporation and the proposal of business to be
considered by the stockholders may be made at an annual meeting of
stockholders: (i) pursuant to the corporation's notice of meeting of
stockholders; (ii) by or at the direction of the Board of Directors;
or (iii) by any stockholder of the corporation who was a stockholder
of record at the time of giving of notice provided for in the
following paragraph, who is entitled to vote at the meeting and who
complied with the notice procedures set forth in Section 5. (Del.
Code Ann., tit. 8, # 211(b)).
(b) At an annual meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before
the meeting. For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (iii) of
Section 5(a) of these Bylaws, (i) the stockholder must have given
timely notice thereof in writing to the Secretary of the corporation,
(ii) such other business must be a proper matter for stockholder
action under DGCL, (iii) if the stockholder, or the beneficial owner
on whose behalf any such proposal or nomination is made, has provided
the corporation with a Solicitation Notice (as defined in this
Section 5(b)), such stockholder or beneficial owner must, in the case
of a proposal, have delivered a proxy statement and form of proxy to
holders of at least the percentage of the corporation's voting shares
required under applicable law to carry any such proposal, or, in the
case of a nomination or nominations, have delivered a proxy statement
and form of proxy to holders of a percentage of the corporation's
voting shares reasonably believed by such stockholder or beneficial
owner to be sufficient to elect the nominee or nominees proposed to be
nominated by such stockholder, and must, in either case, have included
in such materials the Solicitation Notice, and (iv) if no Solicitation
Notice relating thereto has been timely provided pursuant to this
section, the stockholder or beneficial owner proposing such business
or nomination must not have solicited a number of proxies sufficient
to have required the delivery of such a Solicitation Notice under this
Section 5. To be timely, a stockholder's notice shall be delivered to
the Secretary at the principal executive offices of the Corporation
not later than the close of business on the ninetieth (90th) day nor
earlier than the close of business on the one hundred twentieth (120th)
day prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the
annual meeting is advanced more than thirty (30) days prior to or
delayed by more than thirty (30) days after the anniversary of the
preceding year's annual meeting, notice by the stockholder to be
timely must be so delivered not earlier than the close of business on
the one hundred twentieth (120th) day prior to such annual meeting and
not later than the close of business on the later of the ninetieth
(90th) day prior to such annual meeting or the tenth (10th) day
following the day on which public announcement of the date of such
meeting is first made. In no event shall the public announcement of
an adjournment of an annual meeting commence a new time period for the
giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth: (A) as to each person whom the
stockholder proposed to nominate for election or reelection as a
2
director all information relating to such person that is required to
be disclosed in solicitations of proxies for election of directors in
an election contest, or is otherwise required, in each case pursuant
to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "1934 Act") and Rule 14a-11 thereunder (including such
person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected); (B) as to any other
business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and
(C) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the
name and address of such stockholder, as they appear on the
corporation's books, and of such beneficial owner, (ii) the class and
number of shares of the corporation which are owned beneficially and
of record by such stockholder and such beneficial owner, and (iii)
whether either such stockholder or beneficial owner intends to deliver
a proxy statement and form of proxy to holders of, in the case of the
proposal, at least the percentage of the corporation's voting shares
required under applicable law to carry the proposal or, in the case of
a nomination or nominations, a sufficient number of holders of the
corporation's voting shares to elect such nominee or nominees (an
affirmative statement of such intent, a "Solicitation Notice").
(c) Notwithstanding anything in the second sentence of
Section 5(b) of these Bylaws to the contrary, in the event that the
number of directors to be elected to the Board of Directors of the
Corporation is increased and there is no public announcement naming
all of the nominees for director or specifying the size of the
increased Board of Directors made by the corporation at least one
hundred (100) days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this
Section 5 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall
be delivered to the Secretary at the principal executive offices of
the corporation not later than the close of business on the tenth
(10th) day following the day on which such public announcement is first
made by the corporation.
(d) Only such persons who are nominated in accordance with
the procedures set forth in this Section 5 shall be eligible to serve
as directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in
accordance with the procedures set forth in this Section 5. Except as
otherwise provided by law, the Chairman of the meeting shall have the
power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made, or proposed, as
the case may be, in accordance with the procedures set forth in these
Bylaws and, if any proposed nomination or business is not in
compliance with these Bylaws, to declare that such defective proposal
or nomination shall not be presented for stockholder action at the
meeting and shall be disregarded.
(e) Notwithstanding the foregoing provisions of this
Section 5, in order to include information with respect to a
stockholder proposal in the proxy statement and form of proxy for a
stockholders' meeting, stockholders must provide notice as required by
the regulations promulgated under the 1934 Act. Nothing in these
Bylaws shall be deemed to affect any rights of stockholders to request
inclusion of proposals in the corporation proxy statement pursuant to
Rule 14a-8 under the 1934 Act.
3
(f) For purposes of this Section 5, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service or
in a document publicly filed by the corporation with the Securities
and Exchange Commission pursuant to Section 13, 14 or 15(d) of the
1934 Act.
Section 6. Special Meetings.
(a) Special meetings of the stockholders of the
corporation may be called, for any purpose or purposes, by (i) the
Chairman of the Board of Directors, (ii) the Chief Executive Officer,
or (iii) the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not
there exist any vacancies in previously authorized directorships at
the time any such resolution is presented to the Board of Directors
for adoption).
(b) If a special meeting is properly called by any person
or persons other than the Board of Directors, the request shall be in
writing, specifying the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by certified or
registered mail, return receipt requested, to the Chairman of the
Board of Directors, the Chief Executive Officer, or the Secretary of
the corporation. No business may be transacted at such special
meeting otherwise than specified in such notice. The Board of
Directors shall determine the time and place of such special meeting,
which shall be held not less than thirty-five (35) nor more than one
hundred twenty (120) days after the date of the receipt of the
request. Upon determination of the time and place of the meeting, the
officer receiving the request shall cause notice to be given to the
stockholders entitled to vote, in accordance with the provisions of
Section 7 of these Bylaws. Nothing contained in this paragraph (b)
shall be construed as limiting, fixing, or affecting the time when a
meeting of stockholders called by action of the Board of Directors may
be held.
(c) Nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the corporation's notice of
meeting (i) by or at the direction of the Board of Directors or (ii)
by any stockholder of the corporation who is a stockholder of record
at the time of giving notice provided for in these Bylaws who shall be
entitled to vote at the meeting and who complies with the notice
procedures set forth in this Section 6(c). In the event the
corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such
stockholder may nominate a person or persons (as the case may be), for
election to such position(s) as specified in the corporation's notice
of meeting, if the stockholder's notice required by Section 5(b) of
these Bylaws shall be delivered to the Secretary at the principal
executive offices of the corporation not earlier than the close of
business on the one hundred twentieth (120th) day prior to such special
meeting and not later than the close of business on the later of the
ninetieth (90th) day prior to such meeting or the tenth (10th) day
following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board
of Directors to be elected at such meeting. In no event shall the
public announcement of an adjournment of a special meeting commence a
new time period for the giving of a stockholder's notice as described
above.
Section 7. Notice Of Meetings. Except as otherwise provided by law,
notice, given in writing or by electronic transmission, of each
4
meeting of stockholders shall be given not less than ten (10) nor more
than sixty (60) days before the date of the meeting to each stockholder
entitled to vote at such meeting, such notice to specify the place, if
any, date and hour, in the case of special meetings, the purpose or
purposes of the meeting, and the means of remote communications, if
any, by which stockholders and proxy holders may be deemed to be
present in person and vote at any such meeting. If mailed, notice is
given when deposited in the United States mail, postage prepaid,
directed to the stockholder at such stockholder's address as it
appears on the records of the corporation. Notice of the time, place,
if any, and purpose of any meeting of stockholders may be waived in
writing, signed by the person entitled to notice thereof, or by
electronic transmission by such person, either before or after such
meeting, and will be waived by any stockholder by his attendance
thereat in person, by remote communication, if applicable, or by
proxy, except when the stockholder attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called
or convened. Any stockholder so waiving notice of such meeting shall
be bound by the proceedings of any such meeting in all respects as if
due notice thereof had been given. (Del. Code Ann., tit. 8, ## 222,
229, 232)
Section 8. Quorum. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation,
or by these Bylaws, the presence, in person, by remote communication,
if applicable, or by proxy duly authorized, of the holders of a majority
of the outstanding shares of stock entitled to vote shall constitute a
quorum for the transaction of business. In the absence of a quorum, any
meeting of stockholders may be adjourned, from time to time, either by the
chairman of the meeting or by vote of the holders of a majority of the
shares represented thereat, but no other business shall be transacted
at such meeting. The stockholders present at a duly called or
convened meeting, at which a quorum is present, may continue to
transact business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum. Except as otherwise
provided by statute or by applicable stock exchange or Nasdaq rules,
or by the Certificate of Incorporation or these Bylaws, in all matters
other than the election of directors, the affirmative vote of the
majority of shares present in person, by remote communication, if
applicable, or represented by proxy at the meeting and entitled to
vote generally on the subject matter shall be the act of the
stockholders. Except as otherwise provided by statute, the
Certificate of Incorporation or these Bylaws, directors shall be
elected by a plurality of the votes of the shares present in person,
by remote communication, if applicable, or represented by proxy at the
meeting and entitled to vote generally on the election of directors.
Where a separate vote by a class or classes or series is required,
except where otherwise provided by the statute or by the Certificate
of Incorporation or these Bylaws, a majority of the outstanding shares
of such class or classes or series, present in person, by remote
communication, if applicable, or represented by proxy duly authorized,
shall constitute a quorum entitled to take action with respect to that
vote on that matter. Except where otherwise provided by statute or by
the Certificate of Incorporation or these Bylaws, the affirmative vote
of the majority (plurality, in the case of the election of directors)
of shares of such class or classes or series present in person, by
remote communication, if applicable, or represented by proxy at the
meeting shall be the act of such class or classes or series. (Del.
Code Ann., tit. 8, # 216)
Section 9. Adjournment And Notice Of Adjourned Meetings. Any meeting
5
of stockholders, whether annual or special, may be
adjourned from time to time either by the chairman of the meeting or
by the vote of a majority of the shares present in person, by remote
communication, if applicable, or represented by proxy at the meeting.
When a meeting is adjourned to another time or place, if any, notice
need not be given of the adjourned meeting if the time and place, if
any, thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting, the corporation may transact any
business which might have been transacted at the original meeting. If
the adjournment is for more than thirty (30) days or if after the
adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting. (Del. Code Ann., tit. 8,
# 222(c))
Section 10. Voting Rights. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except
as otherwise provided by law, only persons in whose names shares stand
on the stock records of the corporation on the record date, as provided
in Section 12 of these Bylaws, shall be entitled to vote at any meeting of
stockholders. Every person entitled to vote shall have the right to
do so either in person, by remote communication, if applicable, or by
an agent or agents authorized by a proxy granted in accordance with
Delaware law. An agent so appointed need not be a stockholder. No
proxy shall be voted after three (3) years from its date of creation
unless the proxy provides for a longer period. (Del. Code Ann.,
tit. 8, ## 211(e), 212(b))
Section 11. Joint Owners Of Stock. If shares or other securities having
voting power stand of record in the names of two (2) or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in
common, tenants by the entirety, or otherwise, or if two (2) or more
persons have the same fiduciary relationship respecting the same
shares, unless the Secretary is given written notice to the contrary
and is furnished with a copy of the instrument or order appointing
them or creating the relationship wherein it is so provided, their
acts with respect to voting shall have the following effect: (a) if
only one (1) votes, his act binds all; (b) if more than one (1) votes,
the act of the majority so voting binds all; (c) if more than one (1)
votes, but the vote is evenly split on any particular matter, each
faction may vote the securities in question proportionally, or may
apply to the Delaware Court of Chancery for relief as provided in the
DGCL, Section 217(b). If the instrument filed with the Secretary
shows that any such tenancy is held in unequal interests, a majority
or even-split for the purpose of subsection (c) shall be a majority or
even-split in interest. (Del. Code Ann., tit. 8, # 217(b))
Section 12. List Of Stockholders. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at said meeting, arranged in
alphabetical order, showing the address of each stockholder and the
number of shares registered in the name of each stockholder. Such
list shall be open to the examination of any stockholder, for any
purpose germane to the meeting, (a) on a reasonably accessible
electronic network, provided that the information required to gain
access to such list is provided with the notice of the meeting, or (b)
during ordinary business hours, at the principal place of business of
the corporation. In the event that the corporation determines to make
the list available on an electronic network, the corporation may take
reasonable steps to ensure that such information is
6
available only to stockholders of the corporation. The list shall be
open to examination of any stockholder during the time of the meeting as
provided by law. (Del. Code Ann., tit. 8, # 219)
Section 13. Action Without Meeting. No action shall be taken by the
stockholders except at an annual or special meeting of stockholders
called in accordance with these Bylaws, and no action shall be taken
by the stockholders by written consent or by electronic transmission.
Section 14. Organization.
(a) At every meeting of stockholders, the Chairman of the
Board of Directors, or, if a Chairman has not been appointed or is
absent, the President, or, if the President is absent, a chairman of
the meeting chosen by a majority in interest of the stockholders
entitled to vote, present in person or by proxy, shall act as
chairman. The Secretary, or, in his absence, an Assistant Secretary
directed to do so by the President, shall act as secretary of the
meeting.
(b) The Board of Directors of the corporation shall be
entitled to make such rules or regulations for the conduct of meetings
of stockholders as it shall deem necessary, appropriate or convenient.
Subject to such rules and regulations of the Board of Directors, if
any, the chairman of the meeting shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such
acts as, in the judgment of such chairman, are necessary, appropriate
or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for
the meeting, rules and procedures for maintaining order at the meeting
and the safety of those present, limitations on participation in such
meeting to stockholders of record of the corporation and their duly
authorized and constituted proxies and such other persons as the
chairman shall permit, restrictions on entry to the meeting after the
time fixed for the commencement thereof, limitations on the time
allotted to questions or comments by participants and regulation of
the opening and closing of the polls for balloting on matters which
are to be voted on by ballot. The date and time of the opening and
closing of the polls for each matter upon which the stockholders will
vote at the meeting shall be announced at the meeting. Unless and to
the extent determined by the Board of Directors or the chairman of the
meeting, meetings of stockholders shall not be required to be held in
accordance with rules of parliamentary procedure.
ARTICLE IV
Directors
Section 15. Number And Term Of Office. The authorized number of
directors of the corporation shall be fixed in accordance with the
Certificate of Incorporation. Directors need not be stockholders unless
so required by the Certificate of Incorporation. If for any cause, the
directors shall not have been elected at an annual meeting, they may be
elected as soon thereafter as convenient at a special meeting of the
stockholders called for that purpose in the manner provided in these
Bylaws. (Del. Code Ann., tit. 8, ## 141(b), 211(b), (c))
7
Section 16. Powers. The powers of the corporation shall be exercised,
its business conducted and its property controlled by the Board of
Directors, except as may be otherwise provided by statute or by the
Certificate of Incorporation. (Del. Code Ann., tit. 8, # 141(a))
Section 17. Classes of Directors. Subject to the rights of the holders
of any series of Preferred Stock to elect additional directors under
specified circumstances, the directors shall be divided into three
classes designated as Class I, Class II and Class III, respectively.
At the first annual meeting of stockholders following the initial
classification of the Board of Directors, the term of office of the
Class I directors shall expire and Class I directors shall be elected
for a full term of three years. At the second annual meeting of
stockholders following such initial classification, the term of office
of the Class II directors shall expire and Class II directors shall be
elected for a full term of three years. At the third annual meeting
of stockholders following such initial classification, the term of
office of the Class III directors shall expire and Class III directors
shall be elected for a full term of three years. At each succeeding
annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms
expire at such annual meeting.
Notwithstanding the foregoing provisions of this section, each
director shall serve until his successor is duly elected and qualified
or until his death, resignation or removal. No decrease in the number
of directors constituting the Board of Directors shall shorten the
term of any incumbent director.
Section 18. Vacancies.
(a) Unless otherwise provided in the Certificate of
Incorporation and subject to the rights of the holders of any series
of Preferred Stock, any vacancies on the Board of Directors resulting
from death, resignation, disqualification, removal or other causes and
any newly created directorships resulting from any increase in the
number of directors shall, unless the Board of Directors determines by
resolution that any such vacancies or newly created directorships
shall be filled by stockholders, be filled only by the affirmative
vote of a majority of the directors then in office, even though less
than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the
remainder of the full term of the director for which the vacancy was
created or occurred and until such director's successor shall have
been elected and qualified. A vacancy in the Board of Directors shall
be deemed to exist under this Section 18 in the case of the death,
removal or resignation of any director. (Del. Code Ann., tit. 8,
# 223(a), (b))
Section 19. Resignation. Any director may resign at any time by
delivering his or her notice in writing or by electronic transmission
to the Secretary, such resignation to specify whether it will be
effective at a particular time, upon receipt by the Secretary or at the
pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors.
When one or more directors shall resign from the Board of Directors,
effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy
or vacancies, the vote thereon to take effect when such resignation or
resignations shall
8
become effective, and each Director so chosen shall
hold office for the unexpired portion of the term of the Director
whose place shall be vacated and until his successor shall have been
duly elected and qualified. (Del. Code Ann., tit. 8, ## 141(b),
223(d))
Section 20. Removal.
(a) Subject to the rights of any series of Preferred
Stock to elect additional directors under specified circumstances,
neither the Board of Directors nor any individual director may be
removed without cause.
(b) Subject to any limitation imposed by law, any
individual director or directors may be removed with cause by the
affirmative vote of the holders of sixty-six and two-thirds percent
(66 2/3%) of the voting power of all then outstanding shares of
capital stock of the corporation entitled to vote generally at an
election of directors.
Section 21. Meetings.
(a) Regular Meetings. Unless otherwise restricted by the
Certificate of Incorporation, regular meetings of the Board of
Directors may be held at any time or date and at any place within or
without the State of Delaware which has been designated by the Board
of Directors and publicized among all directors, either orally or in
writing, by telephone, including a voice-messaging system or other
system designed to record and communicate messages, facsimile,
telegraph or telex, or by electronic mail or other electronic means.
No further notice shall be required for regular meetings of the Board
of Directors. (Del. Code Ann., tit. 8, # 141(g))
(b) Special Meetings. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of
Directors may be held at any time and place within or without the
State of Delaware whenever called by the Chairman of the Board, the
President or a majority of the number of directors. (Del. Code Ann.,
tit. 8, # 141(g))
(c) Meetings by Electronic Communications Equipment. Any
member of the Board of Directors, or of any committee thereof, may
participate in a meeting by means of conference telephone or other
communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting by
such means shall constitute presence in person at such meeting. (Del.
Code Ann., tit. 8, # 141(i))
(d) Notice of Special Meetings. Notice of the time and
place of all special meetings of the Board of Directors shall be
orally or in writing, by telephone, including a voice messaging system
or other system or technology designed to record and communicate
messages, facsimile, telegraph or telex, or by electronic mail or
other electronic means, during normal business hours, at least twenty-
four (24) hours before the date and time of the meeting. If notice is
sent by US mail, it shall be sent by first class mail, charges
prepaid, at least three (3) days before the date of the meeting.
Notice of any meeting may be waived in writing, or by electronic
transmission, at any time before or after the meeting and will be
waived by any director by attendance thereat, except when the director
attends the meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because
the meeting is not lawfully called or convened. (Del. Code Ann.,
tit. 8, # 229)
9
(e) Waiver of Notice. The transaction of all business at
any meeting of the Board of Directors, or any committee thereof,
however called or noticed, or wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice, if a
quorum be present and if, either before or after the meeting, each of
the directors not present who did not receive notice shall sign a
written waiver of notice or shall waive notice by electronic
transmission. All such waivers shall be filed with the corporate
records or made a part of the minutes of the meeting. (Del. Code Ann.,
tit. 8, # 229)
Section 22. Quorum And Voting.
(a) Unless the Certificate of Incorporation requires a
greater number, a quorum of the Board of Directors shall consist of a
majority of the exact number of directors fixed from time to time by
the Board of Directors in accordance with the Certificate of
Incorporation; provided, however, at any meeting whether a quorum be
present or otherwise, a majority of the directors present may adjourn
from time to time until the time fixed for the next regular meeting of
the Board of Directors, without notice other than by announcement at
the meeting. (Del. Code Ann., tit. 8, # 141(b))
(b) At each meeting of the Board of Directors at which a
quorum is present, all questions and business shall be determined by
the affirmative vote of a majority of the directors present, unless a
different vote be required by law, the Certificate of Incorporation or
these Bylaws. (Del. Code Ann., tit. 8, # 141(b))
Section 23. Action Without Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting, if all members
of the Board of Directors or committee, as the case may be, consent
thereto in writing or by electronic transmission, and such writing or
writings or transmission or transmissions are filed with the minutes
of proceedings of the Board of Directors or committee. Such filing
shall be in paper form if the minutes are maintained in paper form and
shall be in electronic form if the minutes are maintained in
electronic form. (Del. Code Ann., tit. 8, # 141(f))
Section 24. Fees And Compensation. Directors shall be entitled to
such compensation for their services as may be approved by the Board
of Directors, including, if so approved, by resolution of the Board
of Directors, a fixed sum and expenses of attendance, if any, for
attendance at each regular or special meeting of the Board of
Directors and at any meeting of a committee of the Board of Directors.
Nothing herein contained shall be construed to preclude any director
from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
(Del. Code Ann., tit. 8, # 141(h))
Section 25. Committees.
(a) Executive Committee. The Board of Directors may
appoint an Executive Committee to consist of one (1) or more members
of the Board of
10
Directors. The Executive Committee, to the extent
permitted by law and provided in the resolution of the Board of
Directors shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs
of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee
shall have the power or authority in reference to (i) approving or
adopting, or recommending to the stockholders, any action or matter
expressly required by the DGCL to be submitted to stockholders for
approval, or (ii) adopting, amending or repealing any bylaw of the
corporation. (Del. Code Ann., tit. 8, # 141(c))
(b) Other Committees. The Board of Directors may, from
time to time, appoint such other committees as may be permitted by
law. Such other committees appointed by the Board of Directors shall
consist of one (1) or more members of the Board of Directors and shall
have such powers and perform such duties as may be prescribed by the
resolution or resolutions creating such committees, but in no event
shall any such committee have the powers denied to the Executive
Committee in these Bylaws. (Del. Code Ann., tit. 8, # 141(c))
(c) Term. The Board of Directors, subject to any
requirements of any outstanding series of Preferred Stock and the
provisions of subsections (a) or (b) of this Bylaw, may at any time
increase or decrease the number of members of a committee or terminate
the existence of a committee. The membership of a committee member
shall terminate on the date of his death or voluntary resignation from
the committee or from the Board of Directors. The Board of Directors
may at any time for any reason remove any individual committee member
and the Board of Directors may fill any committee vacancy created by
death, resignation, removal or increase in the number of members of
the committee. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee, and, in
addition, in the absence or disqualification of any member of a
committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or
disqualified member. (Del. Code Ann., tit. 8, #141(c))
(d) Meetings. Unless the Board of Directors shall
otherwise provide, regular meetings of the Executive Committee or any
other committee appointed pursuant to this Section 25 shall be held at
such times and places as are determined by the Board of Directors, or
by any such committee, and when notice thereof has been given to each
member of such committee, no further notice of such regular meetings
need be given thereafter. Special meetings of any such committee may
be held at any place which has been determined from time to time by
such committee, and may be called by any Director who is a member of
such committee, upon notice to the members of such committee of the
time and place of such special meeting given in the manner provided
for the giving of notice to members of the Board of Directors of the
time and place of special meetings of the Board of Directors. Notice
of any special meeting of any committee may be waived in writing at
any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends such
special meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Unless otherwise provided by the
Board of Directors in the resolutions authorizing the creation of the
committee, a majority of the authorized number of members of any such
committee shall constitute a quorum for the
11
transaction of business,
and the act of a majority of those present at any meeting at which a
quorum is present shall be the act of such committee. (Del. Code
Ann., tit. 8, ## 141(c), 229)
Section 26. Organization. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been
appointed or is absent, the President (if a director), or if the President
is absent, the most senior Vice President (if a director), or, in the
absence of any such person, a chairman of the meeting chosen by a majority
of the directors present, shall preside over the meeting. The Secretary,
or in his absence, any Assistant Secretary directed to do so by the
President, shall act as secretary of the meeting.
ARTICLE V
Officers
Section 27. Officers Designated. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman
of the Board of Directors, the Chief Executive Officer, the President,
one or more Vice Presidents, the Secretary, the Chief Financial Officer,
the Treasurer and the Controller, all of whom shall be elected at the
annual organizational meeting of the Board of Directors. The Board of
Directors may also appoint one or more Assistant Secretaries,
Assistant Treasurers, Assistant Controllers and such other officers
and agents with such powers and duties as it shall deem necessary.
The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may
hold any number of offices of the corporation at any one time unless
specifically prohibited therefrom by law. The salaries and other
compensation of the officers of the corporation shall be fixed by or
in the manner designated by the Board of Directors. (Del. Code Ann.,
tit. 8, ## 122(5), 142(a), (b))
Section 28. Tenure And Duties Of Officers.
(a) General. All officers shall hold office at the
pleasure of the Board of Directors and until their successors shall
have been duly elected and qualified, unless sooner removed. Any
officer elected or appointed by the Board of Directors may be removed
at any time by the Board of Directors. If the office of any officer
becomes vacant for any reason, the vacancy may be filled by the Board
of Directors. (Del. Code Ann., tit. 8, # 141(b), (e))
(b) Duties of Chairman of the Board of Directors. The
Chairman of the Board of Directors, when present, shall preside at all
meetings of the stockholders and the Board of Directors. The Chairman
of the Board of Directors shall perform other duties commonly incident
to the office and shall also perform such other duties and have such
other powers, as the Board of Directors shall designate from time to
time. If there is no President, then the Chairman of the Board of
Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in
paragraphs (c) and (d) of this Section 28. (Del. Code Ann., tit. 8,
# 142(a))
12
(c) Duties of Chief Executive Officer. The Chief Executive Officer
shall preside at all meetings of the stockholders and at all meetings
of the Board of Directors, unless the Chairman of the Board of Directors
has been appointed and is present. The Chief Executive Officer shall,
subject to the control of the Board of Directors, have general
supervision, direction and control of the business and officers of the
Corporation and shall also perform such other duties and have such
other powers, as the Board of Directors shall designate from time to
time. (Del. Code Ann., Tit. 8, # 142(a))
(d) Duties of President. The President shall preside at
all meetings of the stockholders and at all meetings of the Board of
Directors, unless the Chairman of the Board of Directors has been
appointed and is present. The President shall perform other duties
commonly incident to the office and shall also perform such other
duties and have such other powers, as the Board of Directors shall
designate from time to time. (Del. Code Ann., Tit. 8, # 142(a))
(e) Duties of Vice Presidents. The Vice Presidents may
assume and perform the duties of the President in the absence or
disability of the President or whenever the office of President is
vacant. The Vice Presidents shall perform other duties commonly
incident to their office and shall also perform such other duties and
have such other powers as the Board of Directors or the President
shall designate from time to time. (Del. Code Ann., tit. 8, # 142(a))
(f) Duties of Secretary. The Secretary shall attend all
meetings of the stockholders and of the Board of Directors and shall
record all acts and proceedings thereof in the minute book of the
corporation. The Secretary shall give notice in conformity with these
Bylaws of all meetings of the stockholders and of all meetings of the
Board of Directors and any committee thereof requiring notice. The
Secretary shall perform all other duties provided for in these Bylaws
and other duties commonly incident to the office and shall also
perform such other duties and have such other powers, as the Board of
Directors shall designate from time to time. The President may direct
any Assistant Secretary to assume and perform the duties of the
Secretary in the absence or disability of the Secretary, and each
Assistant Secretary shall perform other duties commonly incident to
the office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall
designate from time to time. (Del. Code Ann., tit. 8, # 142(a))
(g) Duties of Chief Financial Officer. The Chief
Financial Officer shall keep or cause to be kept the books of account
of the corporation in a thorough and proper manner and shall render
statements of the financial affairs of the corporation in such form
and as often as required by the Board of Directors or the President.
The Chief Financial Officer, subject to the order of the Board of
Directors, shall have the custody of all funds and securities of the
corporation. The Chief Financial Officer shall perform other duties
commonly incident to the office and shall also perform such other
duties and have such other powers as the Board of Directors or the
President shall designate from time to time. The President may direct
the Treasurer or any Assistant Treasurer, or the Controller or any
Assistant Controller to assume and perform the duties of the Chief
Financial Officer in the absence or disability of the Chief Financial
Officer, and each Treasurer and Assistant Treasurer and each
Controller and Assistant Controller shall perform other duties
commonly incident to the office and shall also perform such other
duties and have such other powers as the Board of Directors or the
President shall designate from time to time. (Del. Code Ann., tit. 8,
# 142(a))
13
Section 29. Delegation Of Authority. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other
officer or agent, notwithstanding any provision hereof.
Section 30. Resignations. Any officer may resign at any time by giving
notice in writing or by electronic transmission to the Board of Directors
or to the President or to the Secretary. Any such resignation shall be
effective when received by the person or persons to whom such notice
is given, unless a later time is specified therein, in which event the
resignation shall become effective at such later time. Unless
otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any
resignation shall be without prejudice to the rights, if any, of the
corporation under any contract with the resigning officer. (Del. Code
Ann., tit. 8, # 142(b))
Section 31. Removal. Any officer may be removed from office at any time,
either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of
the directors in office at the time, or by any committee or superior
officers upon whom such power of removal may have been conferred by
the Board of Directors.
ARTICLE VI
Execution Of Corporate Instruments And Voting Of Securities Owned By
The Corporation
Section 32. Execution Of Corporate Instruments. The
Board of Directors may, in its discretion, determine the method and
designate the signatory officer or officers, or other person or
persons, to execute on behalf of the corporation any corporate
instrument or document, or to sign on behalf of the corporation the
corporate name without limitation, or to enter into contracts on
behalf of the corporation, except where otherwise provided by law or
these Bylaws, and such execution or signature shall be binding upon
the corporation. (Del. Code Ann., tit. 8, ## 103(a), 142(a), 158)
All checks and drafts drawn on banks or other depositaries on
funds to the credit of the corporation or in special accounts of the
corporation shall be signed by such person or persons as the Board of
Directors shall authorize so to do.
Unless authorized or ratified by the Board of Directors or within
the agency power of an officer, no officer, agent or employee shall
have any power or authority to bind the corporation by any contract or
engagement or to pledge its credit or to render it liable for any
purpose or for any amount. (Del. Code Ann., tit. 8, ## 103(a),
142(a), 158).
Section 33. Voting Of Securities Owned By The Corporation. All
stock and other securities of other corporations owned or
held by the corporation for itself, or for other
14
parties in any capacity, shall be voted, and all proxies with respect
thereto shall be executed, by the person authorized so to do by resolution
of the Board of Directors, or, in the absence of such authorization, by the
Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President. (Del. Code Ann., tit. 8, # 123)
ARTICLE VII
Shares Of Stock
Section 34. Form And Execution Of Certificates.
Certificates for the shares of stock of the corporation shall be in
such form as is consistent with the Certificate of Incorporation and
applicable law. Every holder of stock in the corporation shall be
entitled to have a certificate signed by or in the name of the
corporation by the Chairman of the Board of Directors, or the
President or any Vice President and by the Treasurer or Assistant
Treasurer or the Secretary or Assistant Secretary, certifying the
number of shares owned by him in the corporation. Any or all of the
signatures on the certificate may be facsimiles. In case any officer,
transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such
officer, transfer agent, or registrar at the date of issue. Each
certificate shall state upon the face or back thereof, in full or in
summary, all of the powers, designations, preferences, and rights, and
the limitations or restrictions of the shares authorized to be issued
or shall, except as otherwise required by law, set forth on the face
or back a statement that the corporation will furnish without charge
to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional, or other special
rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or
rights. Within a reasonable time after the issuance or transfer of
uncertificated stock, the corporation shall send to the registered
owner thereof a written notice containing the information required to
be set forth or stated on certificates pursuant to this section or
otherwise required by law or with respect to this section a statement
that the corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative
participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights. (Del. Code Ann., tit. 8, # 158)
Section 35. Lost Certificates. A new certificate or certificates
shall be issued in place of any certificate or certificates theretofore
issued by the corporation alleged to have been lost, stolen, or destroyed,
upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen, or destroyed. The
corporation may require, as a condition precedent to the issuance of a
new certificate or certificates, the owner of such lost, stolen, or
destroyed certificate or certificates, or the owner's legal
representative, to agree to indemnify the corporation in such manner
as it shall require or to give the corporation a surety bond in such
form and amount as it may direct as indemnity against any claim that
may be made against the corporation with respect to the certificate
alleged to have been lost, stolen, or destroyed. (Del. Code Ann.,
tit. 8, # 167)
15
Section 36. Transfers.
(a) Transfers of record of shares of stock of the
corporation shall be made only upon its books by the holders thereof,
in person or by attorney duly authorized, and upon the surrender of a
properly endorsed certificate or certificates for a like number of
shares. (Del. Code Ann., tit. 8, # 201, tit. 6, # 8- 401(1))
(b) The corporation shall have power to enter into and
perform any agreement with any number of stockholders of any one or
more classes of stock of the corporation to restrict the transfer of
shares of stock of the corporation of any one or more classes owned by
such stockholders in any manner not prohibited by the DGCL. (Del.
Code Ann., tit. 8, # 160 (a))
Section 37. Fixing Record Dates.
(a) In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors may
fix, in advance, a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which record date shall, subject to
applicable law, not be more than sixty (60) nor less than ten (10)
days before the date of such meeting. If no record date is fixed by
the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be
at the close of business on the day next preceding the day on which
notice is given, or if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the Board of Directors may fix a
new record date for the adjourned meeting.
(b) In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders entitled
to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action, the
Board of Directors may fix, in advance, a record date, which record
date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than
sixty (60) days prior to such action. If no record date is fixed, the
record date for determining stockholders for any such purpose shall be
at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto. (Del. Code Ann., tit. 8,
# 213)
Section 38. Registered Stockholders. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and
shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person whether
or not it shall have express or other notice thereof, except as otherwise
provided by the laws of Delaware. (Del. Code Ann., tit. 8, ## 213(a),
219)
ARTICLE VIII
Other Securities Of The Corporation
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Section 39. Execution Of Other Securities. All bonds,
debentures and other corporate securities of the corporation, other
than stock certificates (covered in Section 34), may be signed by the
Chairman of the Board of Directors, the Chief Executive Officer,
President or any Vice President, or such other person as may be
authorized by the Board of Directors, and the corporate seal impressed
thereon or a facsimile of such seal imprinted thereon and attested by
the signature of the Secretary or an Assistant Secretary, or the Chief
Financial Officer or Treasurer or an Assistant Treasurer; provided,
however, that where any such bond, debenture or other corporate
security shall be authenticated by the manual signature, or where
permissible facsimile signature, of a trustee under an indenture
pursuant to which such bond, debenture or other corporate security
shall be issued, the signatures of the persons signing and attesting
the corporate seal on such bond, debenture or other corporate security
may be the imprinted facsimile of the signatures of such persons.
Interest coupons appertaining to any such bond, debenture or other
corporate security, authenticated by a trustee as aforesaid, shall be
signed by the Treasurer or an Assistant Treasurer of the corporation
or such other person as may be authorized by the Board of Directors,
or bear imprinted thereon the facsimile signature of such person. In
case any officer who shall have signed or attested any bond, debenture
or other corporate security, or whose facsimile signature shall appear
thereon or on any such interest coupon, shall have ceased to be such
officer before the bond, debenture or other corporate security so
signed or attested shall have been delivered, such bond, debenture or
other corporate security nevertheless may be adopted by the
corporation and issued and delivered as though the person who signed
the same or whose facsimile signature shall have been used thereon had
not ceased to be such officer of the corporation.
ARTICLE IX
Dividends
Section 40. Declaration Of Dividends. Dividends upon the
capital stock of the corporation, subject to the provisions of the
Certificate of Incorporation and applicable law, if any, may be
declared by the Board of Directors pursuant to law at any regular or
special meeting. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the
Certificate of Incorporation and applicable law. (Del. Code Ann.,
tit. 8, ## 170, 173)
Section 41. Dividend Reserve. Before payment of any dividend, there
may be set aside out of any funds of the corporation available for
dividends such sum or sums as the Board of Directors from time to time,
in their absolute discretion, think proper as a reserve or reserves to
meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purpose
as the Board of Directors shall think conducive to the interests of
the corporation, and the Board of Directors may modify or abolish any
such reserve in the manner in which it was created. (Del. Code Ann.,
tit. 8, # 171)
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ARTICLE X
Fiscal Year
Section 42. Fiscal Year. The fiscal year of the corporation shall
be fixed by resolution of the Board of Directors.
ARTICLE XI
Indemnification
Section 43. Indemnification Of Directors, Executive Officers,
Other Officers, Employees And Other Agents.
(a) Directors and Executive Officers. The corporation
shall indemnify its directors and Executive Officers to the fullest
extent not prohibited by the DGCL or any other applicable law;
provided, however, that the corporation may modify the extent of such
indemnification by individual contracts with its directors and
Executive Officers; and, provided, further, that the corporation shall
not be required to indemnify any director and Executive Officers in
connection with any proceeding (or part thereof) initiated by such
person unless (i) such indemnification is expressly required to be
made by law, (ii) the proceeding was authorized by the Board of
Directors of the corporation, (iii) such indemnification is provided
by the corporation, in its sole discretion, pursuant to the powers
vested in the corporation under the DGCL or any other applicable law
or (iv) such indemnification is required to be made under subsection
(d).
(b) Employees and Other Agents. The corporation shall
have power to indemnify its employees and other agents as set forth in
the DGCL or any other applicable law. The Board of Directors shall
have the power to delegate the determination of whether
indemnification shall be given to any such person except Executive
Officers to such officers or other persons as the Board of Directors
shall determine.
(c) Expenses. The corporation shall advance to any person
who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the
fact that he is or was a director or Executive Officers, of the
corporation, or is or was serving at the request of the corporation as
a director or executive officer of another corporation, partnership,
joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor,
all expenses incurred by any director or and Executive Officers in
connection with such proceeding provided, however, that if the DGCL
requires, an advancement of expenses incurred by a director or and
Executive Officers in his or her capacity as a director or and
Executive Officers (and not in any other capacity in which service was
or is rendered by
18
such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery
to the corporation of an undertaking (hereinafter an "undertaking"),
by or on behalf of such indemnitee, to repay all amounts so advanced
if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified
for such expenses under this Section 43 or otherwise.
Notwithstanding the foregoing, unless otherwise determined
pursuant to paragraph (e) of this Section 43, no advance shall be made
by the corporation to an Executive Officer of the corporation (except
by reason of the fact that such Executive Officer is or was a director
of the corporation in which event this paragraph shall not apply) in
any action, suit or proceeding, whether civil, criminal,
administrative or investigative, if a determination is reasonably and
promptly made (i) by a majority vote of directors who were not parties
to the proceeding, even if not a quorum, or (ii) by a committee of
such directors designated by a majority vote of such directors, even
though less than a quorum, or (iii) if there are no such directors, or
such directors so direct, by independent legal counsel in a written
opinion, that the facts known to the decision-making party at the time
such determination is made demonstrate clearly and convincingly that
such person acted in bad faith or in a manner that such person did not
believe to be in or not opposed to the best interests of the
corporation.
(d) Enforcement. Without the necessity of entering into
an express contract, all rights to indemnification and advances to
directors and Executive Officers under this Bylaw shall be deemed to
be contractual rights and be effective to the same extent and as if
provided for in a contract between the corporation and the director or
Executive Officer. Any right to indemnification or advances granted
by this Section 43 to a director or Executive Officer shall be
enforceable by or on behalf of the person holding such right in any
court of competent jurisdiction if (i) the claim for indemnification
or advances is denied, in whole or in part, or (ii) no disposition of
such claim is made within ninety (90) days of request therefor. The
claimant in such enforcement action, if successful in whole or in
part, shall be entitled to be paid also the expense of prosecuting the
claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action
that the claimant has not met the standards of conduct that make it
permissible under the DGCL or any other applicable law for the
corporation to indemnify the claimant for the amount claimed. In
connection with any claim by an executive officer of the corporation
(except in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such
executive officer is or was a director of the corporation) for
advances, the corporation shall be entitled to raise a defense as to
any such action clear and convincing evidence that such person acted
in bad faith or in a manner that such person did not believe to be in
or not opposed to the best interests of the corporation, or with
respect to any criminal action or proceeding that such person acted
without reasonable cause to believe that his conduct was lawful.
Neither the failure of the corporation (including its Board of
Directors, independent legal counsel or its stockholders) to have made
a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because
he has met the applicable standard of conduct set forth in the DGCL or
any other applicable law, nor an actual determination by the
corporation (including its Board of Directors, independent legal
counsel or its stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or
create a presumption that claimant has not met the applicable standard
of conduct. In any suit brought by
19
a director or executive officer to
enforce a right to indemnification or to an advancement of expenses
hereunder, the burden of proving that the director or executive
officer is not entitled to be indemnified, or to such advancement of
expenses, under this Section 43 or otherwise shall be on the
corporation.
(e) Non-Exclusivity of Rights. The rights conferred on
any person by this Bylaw shall not be exclusive of any other right
which such person may have or hereafter acquire under any applicable
statute, provision of the Certificate of Incorporation, Bylaws,
agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action
in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or
all of its directors, officers, employees or agents respecting
indemnification and advances, to the fullest extent not prohibited by
the DGCL, or by any other applicable law.
(f) Survival of Rights. The rights conferred on any
person by this Bylaw shall continue as to a person who has ceased to
be a director or Executive Officer and shall inure to the benefit of
the heirs, executors and administrators of such a person.
(g) Insurance. To the fullest extent permitted by the
DGCL or any other applicable law, the corporation, upon approval by
the Board of Directors, may purchase insurance on behalf of any person
required or permitted to be indemnified pursuant to this Section 43.
(h) Amendments. Any repeal or modification of this
Section 43 shall only be prospective and shall not affect the rights
under this Bylaw in effect at the time of the alleged occurrence of
any action or omission to act that is the cause of any proceeding
against any agent of the corporation.
(i) Saving Clause. If this Bylaw or any portion hereof
shall be invalidated on any ground by any court of competent
jurisdiction, then the corporation shall nevertheless indemnify each
director and executive officer to the full extent not prohibited by
any applicable portion of this Section 43 that shall not have been
invalidated, or by any other applicable law. If this Section 43 shall
be invalid due to the application of the indemnification provisions of
another jurisdiction, then the corporation shall indemnify each
director and Executive Officer to the full extent under any other
applicable law.
(j) Certain Definitions. For the purposes of this Bylaw,
the following definitions shall apply:
(1) The term "proceeding" shall be broadly construed
and shall include, without limitation, the investigation, preparation,
prosecution, defense, settlement, arbitration and appeal of, and the
giving of testimony in, any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative.
(2) The term "expenses" shall be broadly construed
and shall include, without limitation, court costs, attorneys' fees,
witness fees, fines, amounts paid in settlement or judgment and any
other costs and expenses of any nature or kind incurred in connection
with any proceeding.
20
(3) The term the "corporation" shall include, in
addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who
is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this
Section 43 with respect to the resulting or surviving corporation as
he would have with respect to such constituent corporation if its
separate existence had continued.
(4) References to a "director," "executive officer,"
"officer," "employee," or "agent" of the corporation shall include,
without limitation, situations where such person is serving at the
request of the corporation as, respectively, a director, executive
officer, officer, employee, trustee or agent of another corporation,
partnership, joint venture, trust or other enterprise.
(5) References to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan;
and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee
benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in
the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to
the best interests of the corporation" as referred to in this
Section 43.
ARTICLE XII
Notices
Section 44. Notices.
(a) Notice To Stockholders. Written notice to stockholders
of stockholder meetings shall be given as provided in Section 7
herein. Without limiting the manner by which notice may otherwise be
given effectively to stockholders under any agreement or contract with
such stockholder, and except as otherwise required by law, written
notice to stockholders for purposes other than stockholder meetings
may be sent by US mail or nationally recognized overnight courier, or
by facsimile, telegraph or telex or by electronic mail or other
electronic means. (Del. Code Ann., tit. 8, ## 222, 232)
(b) Notice To Directors. Any notice required to be given
to any director may be given by the method stated in subsection (a),
or by overnight delivery service, facsimile, telex or telegram, except
that such notice other than one which is delivered personally shall be
sent to
21
such address as such director shall have filed in writing with
the Secretary, or, in the absence of such filing, to the last known
post office address of such director.
(c) Affidavit Of Mailing. An affidavit of mailing,
executed by a duly authorized and competent employee of the
corporation or its transfer agent appointed with respect to the class
of stock affected, or other agent, specifying the name and address or
the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were
given, and the time and method of giving the same, shall in the
absence of fraud, be prima facie evidence of the facts therein
contained. (Del. Code Ann., tit. 8, # 222)
(d) Methods of Notice. It shall not be necessary that the
same method of giving notice be employed in respect of all recipients
of notice, but one permissible method may be employed in respect of
any one or more, and any other permissible method or methods may be
employed in respect of any other or others.
(e) Notice To Person With Whom Communication Is Unlawful.
Whenever notice is required to be given, under any provision of law or
of the Certificate of Incorporation or Bylaws of the corporation, to
any person with whom communication is unlawful, the giving of such
notice to such person shall not be required and there shall be no duty
to apply to any governmental authority or agency for a license or
permit to give such notice to such person. Any action or meeting
which shall be taken or held without notice to any such person with
whom communication is unlawful shall have the same force and effect as
if such notice had been duly given. In the event that the action
taken by the corporation is such as to require the filing of a
certificate under any provision of the DGCL, the certificate shall
state, if such is the fact and if notice is required, that notice was
given to all persons entitled to receive notice except such persons
with whom communication is unlawful.
ARTICLE XIII
Amendments
Section 45. The Board of Directors is expressly empowered to
adopt, amend or repeal the Bylaws of the corporation. Any
adoption, amendment or repeal of the Bylaws of the corporation by the
Board of Directors shall require the approval of a majority of the
Board of Directors. The stockholders shall also have power to adopt,
amend or repeal the Bylaws of the corporation; provided, however,
that, in addition to any vote of the holders of any class or series of
stock of the corporation required by law or by the Certificate of
Incorporation, the affirmative vote of the holders of at least sixty-
six and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the capital stock of the corporation
entitled to vote generally in the election of directors, voting
together as a single class, shall be required to adopt, amend or
repeal any provision of the Bylaws of the corporation.
ARTICLE XIV
22
Loans To Officers
Section 46. Loans To Officers. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other
employee of the corporation or of its subsidiaries, including any officer
or employee who is a Director of the corporation or its subsidiaries,
whenever, in the judgment of the Board of Directors, such loan,
guarantee or assistance may reasonably be expected to benefit the
corporation. The loan, guarantee or other assistance may be with or
without interest and may be unsecured, or secured in such manner as
the Board of Directors shall approve, including, without limitation, a
pledge of shares of stock of the corporation. Nothing in these Bylaws
shall be deemed to deny, limit or restrict the powers of guaranty or
warranty of the corporation at common law or under any statute. (Del.
Code Ann., tit. 8, #143)
ARTICLE I OFFICES 1
Section 1. Registered Office 1
Section 2. Other Offices 1
ARTICLE II CORPORATE SEAL 1
Section 3. Corporate Seal 1
ARTICLE III STOCKHOLDERS' MEETINGS 1
Section 4. Place Of Meetings 1
Section 5. Annual Meetings 2
Section 6. Special Meetings 4
Section 7. Notice Of Meetings 5
Section 8. Quorum 5
Section 9. Adjournment And Notice Of Adjourned Meetings 6
Section 10. Voting Rights 6
Section 11. Joint Owners Of Stock 6
Section 12. List Of Stockholders 6
Section 13. Action Without Meeting 7
Section 14. Organization 7
ARTICLE IV DIRECTORS 7
Section 15. Number And Term Of Office 7
Section 16. Powers 7
Section 17. Classes of Directors 7
Section 18. Vacancies 8
Section 19. Resignation 8
Section 20. Removal. 9
Section 21. Meetings 9
Section 22. Quorum And Voting 10
Section 23. Action Without Meeting 10
Section 24. Fees And Compensation 10
Section 25. Committees 10
Section 26. Organization 11
ARTICLE V OFFICERS 12
Section 27. Officers Designated 12
Section 28. Tenure And Duties Of Officers 12
Section 29. Delegation Of Authority 13
Section 30. Resignations 13
Section 31. Removal 14
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF
SECURITIES OWNED BY THE CORPORATION 14
Section 32. Execution Of Corporate Instruments 14
Section 33. Voting Of Securities Owned By The Corporation 14
ARTICLE VII SHARES OF STOCK 14
Section 34. Form And Execution Of Certificates 14
Section 35. Lost Certificates 15
Section 36. Transfers 15
Section 37. Fixing Record Dates 15
Section 38. Registered Stockholders 16
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION 16
Section 39. Execution Of Other Securities 16
ARTICLE IX DIVIDENDS 17
Section 40. Declaration Of Dividends 17
Section 41. Dividend Reserve 17
ARTICLE X FISCAL YEAR 17
Section 42. Fiscal Year 17
ARTICLE XI INDEMNIFICATION 17
Section 43. Indemnification Of Directors, Executive
Officers, Other Officers, Employees And
Other Agents 17
ARTICLE XII NOTICES 21
Section 44. Notices 21
Section 45. The Board of Directors is expressly empowered
to adopt, amend or repeal the Bylaws of
the corporation. 22
ARTICLE XIII AMENDMENTS 22
ARTICLE XIV LOANS TO OFFICERS 22
Section 46. Loans To Officers 22
Appendix E
Shareholder's right to dissent
193.(1) Subject to sections 194 and 243, a holder of shares of
any class of a corporation may dissent if the corporation
resolves to
(a) amend its articles under section 175 or 176 to add, change or
remove any provisions restricting or constraining the issue or
transfer of shares of that class,
(b) amend its articles under section 175 to add, change or remove
any restrictions on the business or businesses that the
corporation may carry on,
(c) amalgamate with another corporation, otherwise than under
section 186 or 189,
(d) be continued under the laws of another jurisdiction under
section 191, or
(e) sell, lease or exchange all or substantially all its property
under section 192.
(2) A holder of shares of any class or series of shares
entitled to vote under section 178 may dissent if the corporation
resolves to amend its articles in a manner described in that
section.
(3) In addition to any other right he may have, but subject to
subsection (20), a shareholder entitled to dissent under this
section and who complies with this section is entitled to be paid
by the corporation the fair value of the shares held by him in
respect of which he dissents, determined as of the close of
business on the last business day before the day on which the
resolution from which he dissents was adopted.
(4) A dissenting shareholder may only claim under this section
with respect to all the shares of a class held by him or on
behalf of any one beneficial owner and registered in the name of
the dissenting shareholder.
(5) A dissenting shareholder shall send to the corporation a
written objection to a resolution referred to in subsection (1)
or (2)
(a) at or before any meeting of shareholders at which the
resolution is to be voted on, or
(b) if the corporation did not send notice to the shareholder of
the purpose of the meeting or of his right to dissent, within a
reasonable time after he learns that the resolution was adopted
and of his right to dissent.
(6) An application may be made to the Supreme Court after the
adoption of a resolution referred to in subsection (1) or (2),
(a) by the corporation, or
(b) by a shareholder if he has sent an objection to the
corporation under subsection (5),
to fix the fair value in accordance with subsection (3) of the
shares of a shareholder who dissents under this section.
(7) If an application is made under subsection (6), the
corporation shall, unless the Supreme Court otherwise orders,
send to each dissenting shareholder a written offer to pay him an
amount considered by the directors to be the fair value of the
shares.
(8) Unless the Supreme Court otherwise orders, an offer
referred to in subsection (7) shall be sent to each dissenting
shareholder
(a) at least ten days before the date on which the application is
returnable, if the corporation is the applicant, or
(b) within ten days after the corporation is served with a copy
of the originating notice, if a shareholder is the applicant.
(9) Every offer made under subsection (7) shall
(a) be made on the same terms, and
(b) contain or be accompanied by a statement showing how the fair
value was determined.
(10) A dissenting shareholder may make an agreement with the
corporation for the purchase of his shares by the corporation, in
the amount of the corporation's offer under subsection (7) or
otherwise, at any time before the Supreme Court pronounces an
order fixing the fair value of the shares.
(11) A dissenting shareholder
(a) is not required to give security for costs in respect of an
application under subsection (6), and
(b) except in special circumstances shall not be required to pay
the costs of the application or appraisal.
(12) In connection with an application under subsection (6),
the Supreme Court may give directions for
(a) joining as parties all dissenting shareholders whose shares
have not been purchased by the corporation and for the
representation of dissenting shareholders who, in the opinion of
the Supreme Court, are in need of representation,
(b) the trial of issues and interlocutory matters, including
pleadings and examinations for discovery,
(c) the payment to the shareholder of all or part of the sum
offered by the corporation for the shares,
(d) the deposit of the share certificates with the Supreme Court
or with the corporation or its transfer agent,
(e) the appointment and payment of independent appraisers, and
the procedures to be followed by them,
(f) the service of documents, and
(g) the burden of proof on the parties.
(13) On an application under subsection (6), the Supreme Court
shall make an order
(a) fixing the fair value of the shares in accordance with
subsection (3) of all dissenting shareholders who are parties to
the application,
(b) giving judgment in that amount against the corporation and in
favour of each of those dissenting shareholders, and
(c) fixing the time within which the corporation must pay that
amount to a shareholder.
(14) On
(a) the action approved by the resolution from which the
shareholder dissents becoming effective,
(b) the making of an agreement under subsection (10) between the
corporation and the dissenting shareholder as to the payment to
be made by the corporation for his shares, whether by the
acceptance of the corporation's offer under subsection (7) or
otherwise, or
(c) the pronouncement of an order under subsection (13),
whichever first occurs, the shareholder ceases to have any rights
as a shareholder other than the right to be paid the fair value
of his shares in the amount agreed to between the corporation and
the shareholder or in the amount of the judgment, as the case may
be.
(15) Paragraph (14)(a) does not apply to a shareholder
referred to in paragraph (5)(b).
(16) Until one of the events mentioned in subsection (14)
occurs,
(a) the shareholder may withdraw his dissent, or
(b) the corporation may rescind the resolution,
and in either event proceedings under this section shall be
discontinued.
(17) The Supreme Court may in its discretion allow a
reasonable rate of interest on the amount payable to each
dissenting shareholder, from the date on which the shareholder
ceases to have any rights as a shareholder by reason of
subsection (14) until the date of payment.
(18) If subsection (20) applies, the corporation shall, within
ten days after
(a) the pronouncement of an order under subsection (13), or
(b) the making of an agreement between the shareholder and the
corporation as to the payment to be made for his shares,
notify each dissenting shareholder that it is unable lawfully to
pay dissenting shareholders for their shares.
(19) Notwithstanding that a judgment has been given in favour
of a dissenting shareholder under paragraph (13)(b), if
subsection (20) applies, the dissenting shareholder, by written
notice delivered to the corporation within 30 days after
receiving the notice under subsection (18), may withdraw his
notice of objection, in which case the corporation is deemed to
consent to the withdrawal and the shareholder is reinstated to
his full rights as a shareholder, failing which he retains a
status as a claimant against the corporation, to be paid as soon
as the corporation is lawfully able to do so or, in a
liquidation, to be ranked subordinate to the rights of creditors
of the corporation but in priority to its shareholders.
(20) A corporation shall not make a payment to a dissenting
shareholder under this section if there are reasonable grounds
for believing that
(a) the corporation is or would after the payment be unable to
pay its liabilities as they become due, or
(b) the realizable value of the corporation's assets would
thereby be less than the aggregate of its liabilities.
APPENDIX F
Section 262 of Delaware General Corporation Law
262. Appraisal Rights.
(a) Any stockholder of a corporation of this State who holds shares
of stock on the date of the making of a demand pursuant to subsection
(d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this
section and who has neither voted in favor of the merger or
consolidation nor consented thereto in writing pursuant to s.228 of
this title shall be entitled to an appraisal by the Court of Chancery
of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As
used in this section, the word "stockholder" means a holder of record
of stock in a stock corporation and also a member of record of a
nonstock corporation; the words "stock" and "share" mean and include
what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued
by a depository representing an interest in one or more shares, or
fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class
or series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to s.251 (other than a merger
effected pursuant to s.251(g) of this title), s.252, s.254, s.257, s.258,
s.263 or s.264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series
of stock, which stock, or depository receipts in respect thereof,
at the record date fixed to determine the stockholders entitled
to receive notice of and to vote at the meeting of stockholders
to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or
(ii) held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger
if the merger did not require for its approval the vote of the
stockholders of the surviving corporation as provided in
subsection (f) of s.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of
any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of
merger or consolidation pursuant to ss.251, 252, 254, 257, 258,
263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in
respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or depository receipts
at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated
as a national market system security on an interdealer
quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of
this paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and
c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under s.253 of this title
is not owned by the parent corporation immediately prior to the
merger, appraisal rights shall be available for the shares of the
subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the
shares of any class or series of its stock as a result of an amendment
to its certificate of incorporation, any merger or consolidation in
which the corporation is a constituent corporation or the sale of all
or substantially all of the assets of the corporation. If the
certificate of incorporation contains such a provision, the procedures
of this section, including those set forth in subsections (d) and (e)
of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for
approval at a meeting of stockholders, the corporation, not less
than 20 days prior to the meeting, shall notify each of its
stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation,
before the taking of the vote on the merger or consolidation, a
written demand for appraisal of such stockholder's shares. Such
demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such
stockholder's shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder
electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not
voted in favor of or consented to the merger or consolidation of
the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to
s.228 or s.253 of this title, then, either a constituent
corporation before the effective date of the merger or
consolidation, or the surviving or resulting corporation within
ten days thereafter, shall notify each of the holders of any
class or series of stock of such constituent corporation who are
entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this
section. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may,
within 20 days after the date of mailing of such notice, demand
in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand
the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall
send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or
series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation
shall send such a second notice to all such holders on or within
10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the
sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who
has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant
secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not
more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective
date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the
close of business on the day next preceding the day on which the
notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof and
who is otherwise entitled to appraisal rights, may file a petition in
the Court of Chancery demanding a determination of the value of the
stock of all such stockholders. Notwithstanding the foregoing, at any
time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective
date of the merger or consolidation, any stockholder who has complied
with the requirements of subsections (a) and (d) hereof, upon written
request, shall be entitled to receive from the corporation surviving
the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger
or consolidation and with respect to which demands for appraisal have
been received and the aggregate number of holders of such shares. Such
written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is
received by the surviving or resulting corporation or within 10 days
after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of
a copy thereof shall be made upon the surviving or resulting
corporation, which shall within 20 days after such service file in the
office of the Register in Chancery in which the petition was filed a
duly verified list containing the names and addresses of all
stockholders who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed
by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if
so ordered by the Court, shall give notice of the time and place fixed
for the hearing of such petition by registered or certified mail to
the surviving or resulting corporation and to the stockholders shown
on the list at the addresses therein stated. Such notice shall also be
given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City
of Wilmington, Delaware or such publication as the Court deems
advisable. The forms of the notices by mail and by publication shall
be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders
who have demanded an appraisal for their shares and who hold stock
represented by certificates to submit their certificates of stock to
the Register in Chancery for notation thereon of the pendency of the
appraisal proceedings; and if any stockholder fails to comply with
such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value
exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation, together with a fair rate
of interest, if any, to be paid upon the amount determined to be the
fair value. In determining such fair value, the Court shall take into
account all relevant factors. In determining the fair rate of
interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would
have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the
final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or
resulting corporation pursuant to subsection (f) of this section and
who has submitted such stockholder's certificates of stock to the
Register in Chancery, if such is required, may participate fully in
all proceedings until it is finally determined that such stockholder
is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be
simple or compound, as the Court may direct. Payment shall be so made
to each such stockholder, in the case of holders of uncertificated
stock forthwith, and the case of holders of shares represented by
certificates upon the surrender to the corporation of the certificates
representing such stock. The Court's decree may be enforced as other
decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or
of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the
circumstances. Upon application of a stockholder, the Court may order
all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including, without
limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares
entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock
for any purpose or to receive payment of dividends or other
distributions on the stock (except dividends or other distributions
payable to stockholders of record at a date which is prior to the
effective date of the merger or consolidation); provided, however,
that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written
withdrawal of such stockholder's demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after
the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval
of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in
the Court of Chancery shall be dismissed as to any stockholder without
the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had
they assented to the merger or consolidation shall have the status of
authorized and unissued shares of the surviving or resulting
corporation.
APPENDIX G
SIDEWARE SYSTEMS INC.
2002 EQUITY INCENTIVE PLAN
ADOPTED: January 4, 2002
APPROVED BY STOCKHOLDERS: , 2002
TERMINATION DATE: January 3, 2012
1. PURPOSES.
(a) Eligible Stock Award Recipients. The persons eligible to
receive Stock Awards are the Employees, Directors and Consultants of
the Company and its Affiliates.
(b) Available Stock Awards. The purpose of the Plan is to
provide a means by which eligible recipients of Stock Awards may be
given an opportunity to benefit from increases in value of the Common
Stock through the granting of the following Stock Awards: (i)
Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock
bonuses and (iv) rights to acquire restricted stock.
(c) General Purpose. The Company, by means of the Plan, seeks
to retain the services of the group of persons eligible to receive
Stock Awards, to secure and retain the services of new members of this
group and to provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.
2. DEFINITIONS.
(a) "Affiliate" means any parent corporation or subsidiary
corporation of the Company, whether now or hereafter existing, as
those terms are defined in Sections 424(e) and (f), respectively, of
the Code.
(b) "Board" means the Board of Directors of the Company.
(c) "Capitalization Adjustment" has the meaning ascribed to
that term in Section 11(a).
(d) "Change in Control" means the occurrence, in a single
transaction or in a series of related transactions, of any one or more
of the following events:
(i) any Exchange Act Person becomes the Owner, directly or
indirectly, of securities of the Company representing more than fifty
percent (50%) of the combined voting power of the Company's then
outstanding securities other than by virtue of a merger, consolidation
or similar transaction;
(ii) there is consummated a merger, consolidation or
similar transaction involving (directly or indirectly) the Company
and, immediately after the consummation of such merger, consolidation
or similar transaction, the stockholders of the Company immediately
prior thereto do not Own, directly or indirectly, outstanding voting
securities representing more than
fifty percent (50%) of the combined
outstanding voting power of the surviving Entity in such merger,
consolidation or similar transaction or more than fifty percent (50%)
of the combined outstanding voting power of the parent of the
surviving Entity in such merger, consolidation or similar transaction;
provided, however, notwithstanding the foregoing, a Change in Control
shall not be deemed to occur solely because the level of Ownership
held by any Exchange Act Person (the "Subject Person") exceeds the
designated percentage threshold of the outstanding voting securities
as a result of a repurchase or other acquisition of voting securities
by the Company reducing the number of shares outstanding, provided
that if a Change in Control would occur (but for the operation of this
sentence) as a result of the acquisition of voting securities by the
Company, and after such share acquisition, the Subject Person becomes
the Owner of any additional voting securities that, assuming the
repurchase or other acquisition had not occurred, increases the
percentage of the then outstanding voting securities Owned by the
Subject Person over the designated percentage threshold, then a Change
in Control shall be deemed to occur.
(iii) the stockholders of the Company approve or the Board
approves a plan of complete dissolution or liquidation of the Company,
or a complete dissolution or liquidation of the Company shall
otherwise occur;
(iv) there is consummated a sale, lease, license or other
disposition of all or substantially all of the consolidated assets of
the Company and its Subsidiaries, other than a sale, lease, license or
other disposition of all or substantially all of the consolidated
assets of the Company and its Subsidiaries to an Entity, more than
fifty percent (50%) of the combined voting power of the voting
securities of which are Owned by stockholders of the Company in
substantially the same proportions as their Ownership of the Company
immediately prior to such sale, lease, license or other disposition;
or
(v) individuals who, on the date this Plan is adopted by
the Board, are members of the Board (the "Incumbent Board") cease for
any reason to constitute at least a majority of the members of the
Board; (provided, however, that any new Board member shall, for
purposes of this Plan, be considered as a member of the Incumbent
Board if the appointment or election (or nomination for election) of
such new Board member was approved or recommended by at least fifty
percent (50%) of the members of the Incumbent Board, provided that the
members of the Incumbent Board, at the time of such election or
nomination, constitute a majority of the Board).
Notwithstanding the foregoing or any other provision of this
Plan, the definition of Change in Control (or any analogous term) in
an individual written agreement between the Company or any Affiliate
and the Participant shall supersede the foregoing definition with
respect to Stock Awards subject to such agreement (it being
understood, however, that if no definition of Change in Control or any
analogous term is set forth in such an individual written agreement,
the foregoing definition shall apply).
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee" means a committee of one or more members of the
Board appointed by the Board in accordance with Section 3(c).
2
(g) "Common Stock" means the common stock of the Company.
(h) "Company" means Sideware Systems Inc., a Delaware
corporation.
(i) "Consultant" means any person, including an advisor, (i)
engaged by the Company or an Affiliate to render consulting or
advisory services and who is compensated for such services or (ii)
serving as a member of the Board of Directors of an Affiliate and who
is compensated for such services. However, the term "Consultant"
shall not include Directors who are not compensated by the Company for
their services as Directors, and the payment of a director's fee by
the Company for services as a Director shall not cause a Director to
be considered a "Consultant" for purposes of the Plan.
(j) "Continuous Service" means that the Participant's service
with the Company or an Affiliate, whether as an Employee, Director or
Consultant, is not interrupted or terminated. A change in the
capacity in which the Participant renders service to the Company or an
Affiliate as an Employee, Consultant or Director or a change in the
entity for which the Participant renders such service, provided that
there is no interruption or termination of the Participant's service
with the Company or an Affiliate, shall not terminate a Participant's
Continuous Service. For example, a change in status from an Employee
of the Company to a Consultant of an Affiliate or a Director shall not
constitute an interruption of Continuous Service. The Board or the
chief executive officer of the Company, in that party's sole
discretion, may determine whether Continuous Service shall be
considered interrupted in the case of any leave of absence approved by
that party, including sick leave, military leave or any other personal
leave. Notwithstanding the foregoing, a leave of absence shall be
treated as Continuous Service for purposes of vesting in a Stock Award
only to such extent as may be provided in the Company's leave of
absence policy or in the written terms of the Participant's leave of
absence.
(k) "Corporate Transaction" means the occurrence, in a single
transaction or in a series of related transactions, of any one or more
of the following events:
(i) a sale or other disposition of all or substantially
all, as determined by the Board in its discretion, of the consolidated
assets of the Company and its Subsidiaries;
(ii) a sale or other disposition of at least ninety percent
(90%) of the outstanding securities of the Company;
(iii) a merger, consolidation or similar transaction
following which the Company is not the surviving corporation; or
(iv) a merger, consolidation or similar transaction
following which the Company is the surviving corporation but the
shares of Common Stock outstanding immediately preceding the merger,
consolidation or similar transaction are converted or exchanged by
virtue of the merger, consolidation or similar transaction into other
property, whether in the form of securities, cash or otherwise.
(l) "Covered Employee" means the chief executive officer and
the four (4) other highest compensated officers of the Company for
whom total compensation is required to be
3
reported to stockholders
under the Exchange Act, as determined for purposes of Section 162(m)
of the Code.
(m) "Director" means a member of the Board of Directors of the
Company.
(n) "Disability" means the permanent and total disability of a
person within the meaning of Section 22(e)(3) of the Code.
(o) "Employee" means any person employed by the Company or an
Affiliate. Service as a Director or payment of a director's fee by
the Company or an Affiliate shall not be sufficient to constitute
"employment" by the Company or an Affiliate.
(p) "Entity" means a corporation, partnership or other entity.
(q) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(r) "Exchange Act Person" means any natural person, Entity or
"group" (within the meaning of Section 13(d) or 14(d) of the Exchange
Act), except that "Exchange Act Person" shall not include (A) the
Company or any Subsidiary of the Company, (B) any employee benefit
plan of the Company or any Subsidiary of the Company or any trustee or
other fiduciary holding securities under an employee benefit plan of
the Company or any Subsidiary of the Company, (C) an underwriter
temporarily holding securities pursuant to an offering of such
securities, or (D) an Entity Owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as
their Ownership of stock of the Company.
(s) "Fair Market Value" means, as of any date, the value of the
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq
SmallCap Market, the Fair Market Value of a share of Common Stock
shall be the closing sales price for such stock (or the closing bid,
if no sales were reported) as quoted on such exchange or market (or
the exchange or market with the greatest volume of trading in the
Common Stock) on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable, except that so long as the
Company's Common Stock trades on the Toronto Stock Exchange in no
case shall Fair Market Value be less than market value determined
in accordance with the rules of the Toronto Stock Exchange.
(ii) In the absence of such markets for the Common Stock,
the Fair Market Value shall be determined in good faith by the Board.
(t) "Incentive Stock Option" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422
of the Code and the regulations promulgated thereunder.
(u) "Non-Employee Director" means a Director who either (i) is
not a current Employee or Officer of the Company or its parent or a
subsidiary, does not receive compensation (directly or indirectly)
from the Company or its parent or a subsidiary for services rendered
as a
4
consultant or in any capacity other than as a Director (except
for an amount as to which disclosure would not be required under Item
404(a) of Regulation S-K promulgated pursuant to the Securities Act
("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a)
of Regulation S-K and is not engaged in a business relationship as to
which disclosure would be required under Item 404(b) of Regulation S-
K; or (ii) is otherwise considered a "non-employee director" for
purposes of Rule 16b-3.
(v) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(w) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(x) "Option" means an Incentive Stock Option or a Nonstatutory
Stock Option granted pursuant to the Plan.
(y) "Option Agreement" means a written agreement between the
Company and an Optionholder evidencing the terms and conditions of an
individual Option grant. Each Option Agreement shall be subject to
the terms and conditions of the Plan.
(z) "Optionholder" means a person to whom an Option is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Option.
(aa) "Outside Director" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (within
the meaning of Treasury Regulations promulgated under Section 162(m)
of the Code), is not a former employee of the Company or an
"affiliated corporation" receiving compensation for prior services
(other than benefits under a tax-qualified pension plan), was not an
officer of the Company or an "affiliated corporation" at any time and
is not currently receiving direct or indirect remuneration from the
Company or an "affiliated corporation" for services in any capacity
other than as a Director or (ii) is otherwise considered an "outside
director" for purposes of Section 162(m) of the Code.
(bb) "Own," "Owned," "Owner," "Ownership" A person or Entity
shall be deemed to "Own," to have "Owned," to be the "Owner" of, or to
have acquired "Ownership" of securities if such person or Entity,
directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares voting power,
which includes the power to vote or to direct the voting, with respect
to such securities.
(cc) "Participant" means a person to whom a Stock Award is
granted pursuant to the Plan or, if applicable, such other person who
holds an outstanding Stock Award.
(dd) "Plan" means this Sideware Systems Inc. 2002 Equity
Incentive Plan.
(ee) "Rule 16b-3" means Rule 16b-3 promulgated under the
Exchange Act or any successor to Rule 16b-3, as in effect from time to
time.
(ff) "Securities Act" means the Securities Act of 1933, as
amended.
5
(gg) "Stock Award" means any right granted under the Plan,
including an Option, a stock bonus and a right to acquire restricted
stock.
(hh) "Stock Award Agreement" means a written agreement between
the Company and a holder of a Stock Award evidencing the terms and
conditions of an individual Stock Award grant. Each Stock Award
Agreement shall be subject to the terms and conditions of the Plan.
(ii) "Subsidiary" means, with respect to the Company, (i) any
corporation of which more than fifty percent (50%) of the outstanding
capital stock having ordinary voting power to elect a majority of the
board of directors of such corporation (irrespective of whether, at
the time, stock of any other class or classes of such corporation
shall have or might have voting power by reason of the happening of
any contingency) is at the time, directly or indirectly, Owned by the
Company, and (ii) any partnership in which the Company has a direct or
indirect interest (whether in the form of voting or participation in
profits or capital contribution) of more than fifty percent (50%).
(jj) "Ten Percent Stockholder" means a person who Owns (or is
deemed to Own pursuant to Section 424(d) of the Code) stock possessing
more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or of any of its Affiliates.
3. ADMINISTRATION.
(a) Administration by Board. The Board shall administer the
Plan unless and until the Board delegates administration to a
Committee, as provided in Section 3(c).
(b) Powers of Board. The Board shall have the power, subject
to, and within the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons
eligible under the Plan shall be granted Stock Awards; when and how
each Stock Award shall be granted; what type or combination of types
of Stock Award shall be granted; the provisions of each Stock Award
granted (which need not be identical), including the time or times
when a person shall be permitted to receive Common Stock pursuant to a
Stock Award; and the number of shares of Common Stock with respect to
which a Stock Award shall be granted to each such person.
(ii) To construe and interpret the Plan and Stock Awards
granted under it, and to establish, amend and revoke rules and
regulations for its administration. The Board, in the exercise of
this power, may correct any defect, omission or inconsistency in the
Plan or in any Stock Award Agreement, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in
Section 12.
(iv) To terminate or suspend the Plan as provided in
Section 13.
(v) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to promote the best
interests of the Company and that are not in conflict with the
provisions of the Plan.
6
(c) Delegation to Committee.
(i) General. The Board may delegate administration of the
Plan to a Committee or Committees of one (1) or more members of the
Board, and the term "Committee" shall apply to any person or persons
to whom such authority has been delegated. If administration is
delegated to a Committee, the Committee shall have, in connection with
the administration of the Plan, the powers theretofore possessed by
the Board, including the power to delegate to a subcommittee any of
the administrative powers the Committee is authorized to exercise (and
references in this Plan to the Board shall thereafter be to the
Committee or subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from
time to time by the Board. The Board may abolish the Committee at any
time and revest in the Board the administration of the Plan.
(ii) Section 162(m) and Rule 16b-3 Compliance. In the
discretion of the Board, the Committee may consist solely of two or
more Outside Directors, in accordance with Section 162(m) of the Code,
and/or solely of two or more Non-Employee Directors, in accordance
with Rule 16b-3. Within the scope of such authority, the Board or the
Committee may (1) delegate to a committee of one or more members of
the Board who are not Outside Directors the authority to grant Stock
Awards to eligible persons who are either (a) not then Covered
Employees and are not expected to be Covered Employees at the time of
recognition of income resulting from such Stock Award or (b) not
persons with respect to whom the Company wishes to comply with Section
162(m) of the Code and/or (2) delegate to a committee of one or more
members of the Board who are not Non-Employee Directors the authority
to grant Stock Awards to eligible persons who are not then subject to
Section 16 of the Exchange Act.
(d) Effect of Board's Decision. All determinations,
interpretations and constructions made by the Board in good faith
shall not be subject to review by any person and shall be final,
binding and conclusive on all persons.
4. SHARES SUBJECT TO THE PLAN.
(a) Share Reserve. Subject to the provisions of Section 11(a)
relating to Capitalization Adjustments, the Common Stock that may be
issued pursuant to Stock Awards shall not exceed in the aggregate
ten million (10,000,000)] shares of Common Stock.
(b) Reversion of Shares to the Share Reserve. If any Stock
Award shall for any reason expire or otherwise terminate, in whole or
in part, without having been exercised in full, or if any shares of
Common Stock issued to a Participant pursuant to a Stock Award are
forfeited back to or repurchased by the Company because of or in
connection with the failure to meet a contingency or condition
required to vest such shares in the Participant, the shares of Common
Stock not acquired, forfeited or repurchased under such Stock Award
shall revert to and again become available for issuance under the
Plan; provided, however, that subject to the provisions of Section
11(a) relating to Capitalization Adjustments, the aggregate maximum
number of shares of Common Stock that may be issued as Incentive Stock
Options shall be ten million (10,000,000) shares of
Common Stock.
7
(b) Source of Shares. The shares of Common Stock subject to
the Plan may be unissued shares or reacquired shares, bought on the
market or otherwise.
5. ELIGIBILITY.
(a) Eligibility for Specific Stock Awards. Incentive Stock
Options may be granted only to Employees. Stock Awards other than
Incentive Stock Options may be granted to Employees, Directors and
Consultants.
(b) Ten Percent Stockholders. A Ten Percent Stockholder shall
not be granted an Incentive Stock Option unless the exercise price of
such Option is at least one hundred ten percent (110%) of the Fair
Market Value of the Common Stock on the date of grant and the Option
is not exercisable after the expiration of five (5) years from the
date of grant.
(c) Section 162(m) Limitation on Annual Grants. Subject to the
provisions of Section 11(a) relating to Capitalization Adjustments, no
Employee shall be eligible to be granted Options covering more than
five million (5,000,000)shares of Common Stock during any
calendar year.
(d) Consultants. A Consultant shall not be eligible for the
grant of a Stock Award if, at the time of grant, a Form S-8
Registration Statement under the Securities Act ("Form S-8") is not
available to register either the offer or the sale of the Company's
securities to such Consultant because of the nature of the services
that the Consultant is providing to the Company, because the
Consultant is not a natural person, or because of any other rule
governing the use of Form S-8, unless the Company determines both (i)
that such grant (A) shall be registered in another manner under the
Securities Act (e.g., on a Form S-3 Registration Statement) or (B)
does not require registration under the Securities Act in order to
comply with the requirements of the Securities Act, if applicable, and
(ii) that such grant complies with the securities laws of all other
relevant jurisdictions.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms
and conditions as the Board shall deem appropriate. All Options shall
be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and, if certificates are issued, a
separate certificate or certificates shall be issued for shares of
Common Stock purchased on exercise of each type of Option. The
provisions of separate Options need not be identical, but each Option
shall include (through incorporation of provisions hereof by reference
in the Option or otherwise) the substance of each of the following
provisions:
(a) Term. Subject to the provisions of Section 5(b) regarding
Ten Percent Stockholders, no Incentive Stock Option shall be
exercisable after the expiration of ten (10) years from the date on
which it was granted.
(b) Exercise Price of an Incentive Stock Option. Subject to
the provisions of Section 5(b) regarding Ten Percent Stockholders, the
exercise price of each Incentive Stock Option shall be not less than
one hundred percent (100%) of the Fair Market Value of the Common
Stock subject to the Option on the date the Option is granted.
Notwithstanding the
8
foregoing, an Incentive Stock Option may be
granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption
or substitution for another option in a manner satisfying the
provisions of Section 424(a) of the Code.
(c) Exercise Price of a Nonstatutory Stock Option. The
exercise price of each Nonstatutory Stock Option shall be not less
than eighty-five percent (85%) of the Fair Market Value of the Common
Stock subject to the Option on the date the Option is granted.
Notwithstanding the foregoing, a Nonstatutory Stock Option may be
granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption
or substitution for another option in a manner satisfying the
provisions of Section 424(a) of the Code. [Notwithstanding anything
to the contrary in this Section 6(c), for so long as the Company's
Common Stock is listed for trading on the Toronto Stock Exchange, the
exercise price of a Nonstatutory Stock Option shall be not less than
the Fair Market Value of the Common Stock subject to the Option on the
date the Option is granted.]
(d) Consideration. The purchase price of Common Stock acquired
pursuant to an Option shall be paid, to the extent permitted by
applicable statutes and regulations, either (i) in cash at the time
the Option is exercised or (ii) at the discretion of the Board at the
time of the grant of the Option (or subsequently in the case of a
Nonstatutory Stock Option) (1) by delivery to the Company of other
Common Stock, (2) according to a deferred payment or other similar
arrangement with the Optionholder or (3) in any other form of legal
consideration that may be acceptable to the Board. Unless otherwise
specifically provided in the Option, the purchase price of Common
Stock acquired pursuant to an Option that is paid by delivery to the
Company of other Common Stock acquired, directly or indirectly from
the Company, shall be paid only by shares of the Common Stock of the
Company that have been held for more than six (6) months (or such
longer or shorter period of time required to avoid a charge to
earnings for financial accounting purposes). At any time that the
Company is incorporated in Delaware, payment of the Common Stock's
"par value," as defined in the Delaware General Corporation Law, shall
not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall
be compounded at least annually and shall be charged at the minimum
rate of interest necessary to avoid (1) the treatment as interest,
under any applicable provisions of the Code, of any amounts other than
amounts stated to be interest under the deferred payment arrangement
and (2) the treatment of the Option as a variable award for financial
accounting purposes.
(e) Transferability of an Incentive Stock Option. An Incentive
Stock Option shall not be transferable except by will or by the laws
of descent and distribution and shall be exercisable during the
lifetime of the Optionholder only by the Optionholder.
Notwithstanding the foregoing, the Optionholder may, by delivering
written notice to the Company, in a form satisfactory to the Company,
designate a third party who, in the event of the death of the
Optionholder, shall thereafter be entitled to exercise the Option.
(f) Transferability of a Nonstatutory Stock Option. A
Nonstatutory Stock Option shall be transferable to the extent provided
in the Option Agreement. If the Nonstatutory Stock Option does not
provide for transferability, then the Nonstatutory Stock Option shall
not be
9
transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the
Optionholder only by the Optionholder. Notwithstanding the foregoing,
the Optionholder may, by delivering written notice to the Company, in
a form satisfactory to the Company, designate a third party who, in
the event of the death of the Optionholder, shall thereafter be
entitled to exercise the Option.
(g) Vesting Generally. The total number of shares of Common
Stock subject to an Option may, but need not, vest and therefore
become exercisable in periodic installments that may, but need not, be
equal. The Option may be subject to such other terms and conditions
on the time or times when it may be exercised (which may be based on
performance or other criteria) as the Board may deem appropriate. The
vesting provisions of individual Options may vary. The provisions of
this Section 6(g) are subject to any Option provisions governing the
minimum number of shares of Common Stock as to which an Option may be
exercised.
(h) Termination of Continuous Service. In the event that an
Optionholder's Continuous Service terminates (other than upon the
Optionholder's death or Disability), the Optionholder may exercise his
or her Option (to the extent that the Optionholder was entitled to
exercise such Option as of the date of termination) but only within
such period of time ending on the earlier of (i) the date three (3)
months following the termination of the Optionholder's Continuous
Service (or such longer or shorter period specified in the Option
Agreement or (ii) the expiration of the term of the Option as set
forth in the Option Agreement. If, after termination, the
Optionholder does not exercise his or her Option within the time
specified in the Option Agreement, the Option shall terminate.
(i) Extension of Termination Date. An Optionholder's Option
Agreement may also provide that if the exercise of the Option
following the termination of the Optionholder's Continuous Service
(other than upon the Optionholder's death or Disability) would be
prohibited at any time solely because the issuance of shares of Common
Stock would violate the registration requirements under the Securities
Act, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in Section 6(a) or (ii)
the expiration of a period of three (3) months after the termination
of the Optionholder's Continuous Service during which the exercise of
the Option would not be in violation of such registration
requirements.
(j) Disability of Optionholder. In the event that an
Optionholder's Continuous Service terminates as a result of the
Optionholder's Disability, the Optionholder may exercise his or her
Option (to the extent that the Optionholder was entitled to exercise
such Option as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period
specified in the Option Agreement or (ii) the expiration of the term
of the Option as set forth in the Option Agreement. If, after
termination, the Optionholder does not exercise his or her Option
within the time specified herein, the Option shall terminate.
(k) Death of Optionholder. In the event that (i) an
Optionholder's Continuous Service terminates as a result of the
Optionholder's death or (ii) the Optionholder dies within the period
(if any) specified in the Option Agreement after the termination of
the Optionholder's Continuous Service for a reason other than death,
then the Option may be exercised (to the extent the Optionholder was
entitled to exercise such Option as of the date of death) by the
10
Optionholder's estate, by a person who acquired the right to exercise
the Option by bequest or inheritance or by a person designated to
exercise the option upon the Optionholder's death pursuant to Section
6(e) or 6(f), but only within the period ending on the earlier of (1)
the date eighteen (18) months following the date of death (or such
longer or shorter period specified in the Option Agreement or (2) the
expiration of the term of such Option as set forth in the Option
Agreement. If, after death, the Option is not exercised within the
time specified herein, the Option shall terminate.
(l) Early Exercise. The Option may, but need not, include a
provision whereby the Optionholder may elect at any time before the
Optionholder's Continuous Service terminates to exercise the Option as
to any part or all of the shares of Common Stock subject to the Option
prior to the full vesting of the Option. Any unvested shares of
Common Stock so purchased may be subject to a repurchase option in
favor of the Company or to any other restriction the Board determines
to be appropriate. The Company will not exercise its repurchase
option until at least six (6) months (or such longer or shorter period
of time required to avoid a charge to earnings for financial
accounting purposes) have elapsed following exercise of the Option
unless the Board otherwise specifically provides in the Option.
7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(a) Stock Bonus Awards. Each stock bonus agreement shall be in
such form and shall contain such terms and conditions as the Board
shall deem appropriate. The terms and conditions of stock bonus
agreements may change from time to time, and the terms and conditions
of separate stock bonus agreements need not be identical, but each
stock bonus agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the
substance of each of the following provisions:
(i) Consideration. A stock bonus may be awarded in
consideration for past services actually rendered to the Company or an
Affiliate for its benefit.
(ii) Vesting. Shares of Common Stock awarded under the
stock bonus agreement may, but need not, be subject to a share
repurchase option in favor of the Company in accordance with a vesting
schedule to be determined by the Board.
(iii) Termination of Participant's Continuous Service. In
the event that a Participant's Continuous Service terminates, the
Company may reacquire any or all of the shares of Common Stock held by
the Participant that have not vested as of the date of termination
under the terms of the stock bonus agreement.
(iv) Transferability. Rights to acquire shares of Common
Stock under the stock bonus agreement shall be transferable by the
Participant only upon such terms and conditions as are set forth in
the stock bonus agreement, as the Board shall determine in its
discretion, so long as Common Stock awarded under the stock bonus
agreement remains subject to the terms of the stock bonus agreement.
(b) Restricted Stock Awards. Each restricted stock purchase
agreement shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The terms and
conditions of the restricted stock purchase agreements may change from
time to time,
11
and the terms and conditions of separate restricted
stock purchase agreements need not be identical, but each restricted
stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the
substance of each of the following provisions:
(i) Purchase Price. The purchase price of restricted
stock awards shall not be less than eighty-five percent (85%) of the
Common Stock's Fair Market Value on the date such award is made or at
the time the purchase is consummated.
(ii) Consideration. The purchase price of Common Stock
acquired pursuant to the restricted stock purchase agreement shall be
paid either: (i) in cash at the time of purchase; (ii) at the
discretion of the Board, according to a deferred payment or other
similar arrangement with the Participant; or (iii) in any other form
of legal consideration that may be acceptable to the Board in its
discretion; provided, however, that at any time that the Company is
incorporated in Delaware, then payment of the Common Stock's "par
value," as defined in the Delaware General Corporation Law, shall not
be made by deferred payment.
(iii) Vesting. Shares of Common Stock acquired under the
restricted stock purchase agreement may, but need not, be subject to a
share repurchase option in favor of the Company in accordance with a
vesting schedule to be determined by the Board.
(iv) Termination of Participant's Continuous Service. In
the event that a Participant's Continuous Service terminates, the
Company may repurchase or otherwise reacquire any or all of the shares
of Common Stock held by the Participant that have not vested as of the
date of termination under the terms of the restricted stock purchase
agreement.
(v) Transferability. Rights to acquire shares of Common
Stock under the restricted stock purchase agreement shall be
transferable by the Participant only upon such terms and conditions as
are set forth in the restricted stock purchase agreement, as the Board
shall determine in its discretion, so long as Common Stock awarded
under the restricted stock purchase agreement remains subject to the
terms of the restricted stock purchase agreement.
8. COVENANTS OF THE COMPANY.
(a) Availability of Shares. During the terms of the Stock
Awards, the Company shall keep available at all times the number of
shares of Common Stock required to satisfy such Stock Awards.
(b) Securities Law Compliance. The Company shall seek to
obtain from each regulatory commission or agency having jurisdiction
over the Plan such authority as may be required to grant Stock Awards
and to issue and sell shares of Common Stock upon exercise of the
Stock Awards; provided, however, that this undertaking shall not
require the Company to register under the Securities Act the Plan, any
Stock Award or any Common Stock issued or issuable pursuant to any
such Stock Award. If, after reasonable efforts, the Company is unable
to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance
and sale of Common Stock under the Plan, the Company shall be relieved
from any liability for failure to issue and sell Common Stock upon
exercise of such Stock Awards unless and until such authority is
obtained.
12
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Common Stock pursuant to Stock Awards
shall constitute general funds of the Company.
10. MISCELLANEOUS.
(a) Acceleration of Exercisability and Vesting. The Board
shall have the power to accelerate the time at which a Stock Award may
first be exercised or the time during which a Stock Award or any part
thereof will vest in accordance with the Plan, notwithstanding the
provisions in the Stock Award stating the time at which it may first
be exercised or the time during which it will vest.
(b) Stockholder Rights. No Participant shall be deemed to be
the holder of, or to have any of the rights of a holder with respect
to, any shares of Common Stock subject to such Stock Award unless and
until such Participant has satisfied all requirements for exercise of
the Stock Award pursuant to its terms.
(c) No Employment or other Service Rights. Nothing in the Plan
or any instrument executed or Stock Award granted pursuant thereto
shall confer upon any Participant any right to continue to serve the
Company or an Affiliate in the capacity in effect at the time the
Stock Award was granted or shall affect the right of the Company or an
Affiliate to terminate (i) the employment of an Employee with or
without notice and with or without cause, (ii) the service of a
Consultant pursuant to the terms of such Consultant's agreement with
the Company or an Affiliate or (iii) the service of a Director
pursuant to the Bylaws of the Company or an Affiliate, and any
applicable provisions of the corporate law of the state in which the
Company or the Affiliate is incorporated, as the case may be.
(d) Incentive Stock Option $100,000 Limitation. To the extent
that the aggregate Fair Market Value (determined at the time of grant)
of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionholder during any calendar
year (under all plans of the Company and its Affiliates) exceeds one
hundred thousand dollars ($100,000), the Options or portions thereof
that exceed such limit (according to the order in which they were
granted) shall be treated as Nonstatutory Stock Options,
notwithstanding any contrary provision of any Stock Award Agreement.
(e) Investment Assurances. The Company may require a
Participant, as a condition of exercising or acquiring Common Stock
under any Stock Award, (i) to give written assurances satisfactory to
the Company as to the Participant's knowledge and experience in
financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and
that he or she is capable of evaluating, alone or together with the
purchaser representative, the merits and risks of exercising the Stock
Award; and (ii) to give written assurances satisfactory to the Company
stating that the Participant is acquiring Common Stock subject to the
Stock Award for the Participant's own account and not with any present
intention of selling or otherwise distributing the Common Stock. The
foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (1) the issuance of the shares
of Common Stock
13
upon the exercise or acquisition of Common Stock under
the Stock Award has been registered under a then currently effective
registration statement under the Securities Act or (2) as to any
particular requirement, a determination is made by counsel for the
Company that such requirement need not be met in the circumstances
under the then applicable securities laws. The Company may, upon
advice of counsel to the Company, place legends on stock certificates
issued under the Plan as such counsel deems necessary or appropriate
in order to comply with applicable securities laws, including, but not
limited to, legends restricting the transfer of the Common Stock.
(f) Withholding Obligations. To the extent provided by the
terms of a Stock Award Agreement, the Participant may satisfy any
federal, state or local tax withholding obligation relating to the
exercise or acquisition of Common Stock under a Stock Award by any of
the following means (in addition to the Company's right to withhold
from any compensation paid to the Participant by the Company) or by a
combination of such means: (i) tendering a cash payment; (ii)
authorizing the Company to withhold shares of Common Stock from the
shares of Common Stock otherwise issuable to the Participant as a
result of the exercise or acquisition of Common Stock under the Stock
Award; provided, however, that no shares of Common Stock are withheld
with a value exceeding the minimum amount of tax required to be
withheld by law (or such lesser amount as may be necessary to avoid
variable award accounting); or (iii) delivering to the Company owned
and unencumbered shares of Common Stock.
(g) Cancellation and Re-Grant of Options.
Cancellation and Re-Grant of Options.
(i) Authority to Reprice. The Board shall have the
authority to effect, at any time and from time to time, with the
consent of any adversely affected Optionholders, (1) the reduction of
the exercise price of any outstanding Options under the Plan and/or
(2) the cancellation of any outstanding Options under the Plan and the
grant in substitution therefor of new Options under the Plan covering
the same or a different numbers of shares of Common Stock. The
exercise price per share of Common Stock shall be not less than that
specified under the Plan for newly granted Stock Awards, except that
the Board may grant an Option with a lower exercise price if such
Option is granted as part of a transaction to which Section 424(a) of
the Code applies.
(ii) Effect of Repricing under Section 162(m) of the Code.
Shares of Common Stock subject to an Option that is amended or
canceled in order to set a lower exercise price per share of Common
Stock shall continue to be counted against the maximum award of
Options permitted to be granted pursuant to Section 5(c). The
repricing of an Option under this Section 10(g) resulting in a
reduction of the exercise price shall be deemed to be a cancellation
of the original Option and the grant of a substitute Option; in the
event of such repricing, both the original and the substituted Options
shall be counted against the maximum awards of Options permitted to be
granted pursuant to Section 5(c). The provisions of this Section
10(g)(ii) shall be applicable only to the extent required by Section
162(m) of the Code.
14
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) Capitalization Adjustments. If any change is made in, or
other event occurs with respect to, the Common Stock subject to the
Plan or subject to any Stock Award without the receipt of
consideration by the Company (through merger, consolidation,
reorganization, recapitalization, reincorporation, stock dividend,
dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in
corporate structure or other transaction not involving the receipt of
consideration by the Company (each a "Capitalization Adjustment"), the
Plan will be appropriately adjusted in the class(es) and maximum
number of securities subject to the Plan pursuant to Sections 4(a) and
4(b) and the maximum number of securities subject to award to any
person pursuant to Section 5(c), and the outstanding Stock Awards will
be appropriately adjusted in the class(es) and number of securities
and price per share of Common Stock subject to such outstanding Stock
Awards. The Board shall make such adjustments, and its determination
shall be final, binding and conclusive. (The conversion of any
convertible securities of the Company shall not be treated as a
transaction "without receipt of consideration" by the Company.)
(b) Dissolution or Liquidation. In the event of a dissolution
or liquidation of the Company, then all outstanding Stock Awards shall
terminate immediately prior to the completion of such dissolution or
liquidation.
(c) Corporate Transaction. In the event of a Corporate
Transaction, any surviving corporation or acquiring corporation may
assume any or all Stock Awards outstanding under the Plan or may
substitute similar stock awards for Stock Awards outstanding under the
Plan (it being understood that similar stock awards include, but are
not limited to, awards to acquire the same consideration paid to the
stockholders or the Company, as the case may be, pursuant to the
Corporate Transaction). In the event that any surviving corporation
or acquiring corporation does not assume any or all such outstanding
Stock Awards or substitute similar stock awards for such outstanding
Stock Awards, then with respect to Stock Awards that have been neither
assumed nor substituted and that are held by Participants whose
Continuous Service has not terminated prior to the effective time of
the Corporate Transaction, the vesting of such Stock Awards (and, if
applicable, the time at which such Stock Awards may be exercised)
shall (contingent upon the effectiveness of the Corporate Transaction)
be accelerated in full to a date prior to the effective time of such
Corporate Transaction as the Board shall determine (or, if the Board
shall not determine such a date, to the date that is five (5) days
prior to the effective time of the Corporate Transaction), and the
Stock Awards shall terminate if not exercised (if applicable) at or
prior to such effective time. With respect to any other Stock Awards
outstanding under the Plan that have been neither assumed nor
substituted, the vesting of such Stock Awards (and, if applicable, the
time at which such Stock Award may be exercised) shall not be
accelerated unless otherwise provided in a written agreement between
the Company or any Affiliate and the holder of such Stock Award, and
such Stock Awards shall terminate if not exercised (if applicable)
prior to the effective time of the Corporate Transaction.
(d) Change in Control. A Stock Award held by any Participant
whose Continuous Service has not terminated prior to the effective
time of a Change in Control may be subject to additional acceleration
of vesting and exercisability upon or after such event as may be
provided in the Stock Award Agreement for such Stock Award or as may
be provided in any other written
15
agreement between the Company or any
Affiliate and the Participant, but in the absence of such provision,
no such acceleration shall occur.
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) Amendment of Plan. The Board at any time, and from time to
time, may amend the Plan. However, except as provided in Section
11(a) relating to Capitalization Adjustments, no amendment shall be
effective unless approved by the stockholders of the Company to the
extent stockholder approval is necessary to satisfy the requirements
of Section 422 of the Code.
(b) Stockholder Approval. The Board, in its sole discretion,
may submit any other amendment to the Plan for stockholder approval,
including, but not limited to, amendments to the Plan intended to
satisfy the requirements of Section 162(m) of the Code and the
regulations thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation
paid to Covered Employees.
(c) Contemplated Amendments. It is expressly contemplated that
the Board may amend the Plan in any respect the Board deems necessary
or advisable to provide eligible Employees with the maximum benefits
provided or to be provided under the provisions of the Code and the
regulations promulgated thereunder relating to Incentive Stock Options
and/or to bring the Plan and/or Incentive Stock Options granted under
it into compliance therewith.
(d) No Impairment of Rights. Rights under any Stock Award
granted before amendment of the Plan shall not be impaired by any
amendment of the Plan unless (i) the Company requests the consent of
the Participant and (ii) the Participant consents in writing.
(e) Amendment of Stock Awards. The Board at any time, and from
time to time, may amend the terms of any one or more Stock Awards;
provided, however, that the rights under any Stock Award shall not be
impaired by any such amendment unless (i) the Company requests the
consent of the Participant and (ii) the Participant consents in
writing.
13. TERMINATION OR SUSPENSION OF THE PLAN. TC
(a) Plan Term. The Board may suspend or terminate the Plan at
any time. Unless sooner terminated, the Plan shall terminate on the
day before the tenth (10th) anniversary of the date the Plan is
adopted by the Board or approved by the stockholders of the Company,
whichever is earlier. No Stock Awards may be granted under the Plan
while the Plan is suspended or after it is terminated.
(b) No Impairment of Rights. Suspension or termination of the
Plan shall not impair rights and obligations under any Stock Award
granted while the Plan is in effect except with the written consent of
the Participant.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but
no Stock Award shall be exercised (or, in the case of a stock bonus,
shall be granted) unless and until the Plan has been
16
approved by the
stockholders of the Company, which approval shall be within twelve
(12) months before or after the date the Plan is adopted by the Board.
15. CHOICE OF LAW.
The law of the State of Delaware shall
govern all questions concerning the construction, validity and
interpretation of this Plan, without regard to such state's conflict
of laws rules.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under section 126 of the Business Corporations Act of the Yukon
Territory, except in respect of any action by or on behalf of a
corporation to procure a judgment in its favor, a company may
indemnify a director or officer of the corporation, a former
director or officer of the corporation or a person who acted at
the corporations' request as a director or officer of a body
corporate of which the corporation was a stockholder or creditor,
and his heirs and legal representatives, against all costs,
charges and expenses, including an amount paid to settle an
action or satisfy a judgment, reasonably incurred by him in
respect of any civil, criminal or administrative action or
proceeding to which he is made a party by reason of being or
having been a director or officer of the corporation if:
(a) he acted honestly and in good faith with a view to the
best interests of the corporation; and(b
(b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he had
reasonable grounds for believing that his conduct was
lawful.
With court approval, a company may also indemnify a person
referred to above in respect of an action by or on behalf of the
corporation to procure a judgment in its favor, if the person
fulfils the conditions set out as (a) and (b), above.
In addition, a person referred to above is entitled to indemnity
from the corporation in respect of all costs, charges and
expenses reasonably incurred by him in connection with the
defense of any civil, criminal or administrative action or
proceeding to which he is a party by reason of having been a
director or officer of the corporation if the person seeking
indemnity:
(a) was substantially successful on the merits in his defense
of the action or proceeding;
(b) fulfils the conditions set out in (a) and (b), above; and
(c) is fairly and reasonably entitled to indemnity.
A corporation may also purchase and maintain insurance for the
benefit of any person referred to above against any liability
incurred by him in his capacity as a director and officer of the
corporation, except when the liability relates to his failure to
act honestly and in good faith with a view to the best interests
of the corporation.
Effective June 13, 2001 Sideware has entered into indemnity
agreements with each of its existing directors, under which it
has agreed to indemnify the directors in respect of all
liabilities (including legal and other professional fees), which
the directors may incur as a result of acting as an officer or
director of Sideware or any of its subsidiaries. The indemnity
agreements do not apply if:
- - the director was not acting honestly and in good faith with
a view to the best interests of Sideware or its subsidiary,
as the case may be; or
- - in the case of a criminal or administrative action or
proceeding, the director did not have reasonable grounds
for believing that his conduct was lawful.
1
Under the indemnity agreements Sideware is also required to pay
any costs incurred by the directors in defending any proceedings
brought against them, and can be required to pay reasonably
anticipated defence costs in advance.
Under section 145 of the General Corporation Law of the State of
Delaware, except in respect of any action by or on behalf of a
corporation to procure a judgment in its favor, a company may
indemnify a director or officer of the corporation, a former
director or officer of the corporation, or a person who acted at
the corporations' request as a director or officer of another
corporation, joint venture, trust, or other enterprise against
expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by
the person in relation to an action, suit, or proceeding if:
- - he acted in good faith and in a manner that the person
reasonably believed to be in or not opposed to the best
interests of the corporation; and
- - in the case of a criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful.
With approval of the Court of Chancery, a corporation may also
indemnify a person referred to above in respect of any claim,
issue, or matter as to which the person has been adjudged to be
liable to the corporation, if in view of all of the circumstances
of the case, he is fairly and reasonably entitled to indemnity.
In addition, a person referred to above is entitled to indemnity
from the corporation against expenses (including attorneys' fees)
reasonably and actually incurred by him in the defense of any
action, suit, or proceeding, if he has been successful on the
merits or otherwise in defense of the action, suit, or
proceeding.
The proposed new bylaws for Sideware, to be adopted on
continuation of Sideware to Delaware, provide that directors and
officers will be indemnified to the maximum extent permitted
under the General Corporation Law of Delaware.
In addition, under the Merger Agreement, Sideware will assume the
obligations of KnowledgeMax under its existing contracts of
indemnification with its directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Index of exhibits
Number Exhibit
2.1 Agreement and Plan of Merger and Reorganization
(included as Appendix A to the joint proxy statement -
prospectus
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
2
3.9(5) Special Resolution dated June 28, 2000
3.10 Articles of Continuation of Sideware to the Yukon
Territory
3.11 Bylaws of Sideware
3.12 Proposed Certificate of Incorporation of Sideware
(included as Appendix C to the joint proxy statement -
prospectus)
3.13 Proposed Bylaws of Sideware (included as Appendix D to
the joint proxy statement - prospectus)
5.1 Form of opinion of Silver Freedman Taff L.L.P. (final
opinion to be filed by amendment)
8.1 Opinion of Thorsteinsson's (to be filed by amendment)
8.2 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky &
Popeo, P.C. (to be filed by amendment)
9.1 Form of Voting Agreement of KnowledgeMax, Inc.
9.2 Form of Voting Agreement of Sideware Systems Inc.
9.3 Schedule of voting agreements
10.1* NonTechnical Services Agreement dated March 16, 2001
between KnowledgeMax and IBM Corporation
10.2* Database License Agreement dated July 2, 1998 between
KnowledgeMax and Baker & Taylor Inc.
10.3(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.
10.4(2) Lease effective as of July 1, 1999 between the
Company, Techwest Management Ltd., Braintech, Inc. and
Pacific Centre Leaseholds Ltd.
10.5(2) Assignment Agreement effective as of July 1, 1999
between the Company, Techwest Management Ltd.,
Braintech, Inc., and SJM Management Ltd.
10.6(6) Change of Control Severance Agreement with Rahul
Bardhan
10.7 Change of Control Severance Agreement with James
Speros
10.8 Amendment agreement between James Speros and Sideware
10.9 Amendment agreement between Rahul Bardhan and Sideware
10.10(6) Assignment of Lease
10.11 KnowledgeMax 2000 Equity Incentive Plan
10.12 Form of stock option agreement under KnowledgeMax 2000
Incentive Equity Plan
10.13(4) 2000 Stock Option Plan
10.14(4) Amended 2000 Stock Option Plan
10.15(6) Stock Option Plan (2001)
10.16 Sideware 2002 Equity Incentive Plan (included as
Appendix G to the joint proxy statement - prospectus)
10.17 Form of stock option agreement under Sideware 2002
Incentive Equity Plan
10.18* First Amendment to Database License Agreement dated
December 7, 2001 between KnowledgeMax and Baker &
Taylor Inc.
10.19 Lease dated January 9, 2002 between KnowledgeMax and
WRIT Limited Partnership
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.3 Consent of Silver Freedman & Taff LLP (to be contained
in Exhibit 5.1)
23.4 Consent of Mintz, Levin, Cohn, Ferris, Glovsky, &
Popeo, P.C. (to be contained in Exhibit 8.2)
23.5 Consent of Thorsteinsson's (to be contained in Exhibit
8.3)
99.1 Consent of E. Linwood Pearce
3
99.2 Consent of Edwin Grosvenor
99.3 Consent of Donna Lynn
99.4 Consent of Alan Sultan
99.5 Consent of Edward Gross
99.6 Consent of Joseph Boivin
99.7 Form of Proxy of Sideware Systems Inc.
99.8 Form of Proxy of KnowledgeMax, Inc.
99.9 Consent of Paradigm Capital Inc.
* Confidential treatment has been requested with respect to
certain portions of this exhibit. Omitted portions have been
filed separately with the Securities and Exchange Commission.
(1) Exhibit already on file - exhibit to Sideware's Form
20-F registration statement filed in May 1999, file number
0-29974.
(2) Exhibit already on file - exhibit to Sideware's Form
F-1 registration statement 333-90893 filed in December
1999.
(3) Exhibit already on file - exhibit to Sideware's Form
20-F annual report covering the year ended December 31,
1999, file number 0-29974.
(4) Exhibit already on file - exhibit to Sideware's Form
F-3 registration statement no. 333-34984 filed in April
2000.
(5) Exhibit already on file - exhibit to Sideware's Form
10-Q for the quarter ended September 30, 2000 filed in
November 2000, file number 0-29974.
(6) Exhibit already on file - exhibit to Sideware's Form
10-K for the year ended December 31, 2000 filed in March
2001, file number 0-29974.
ITEM 22. UNDERTAKINGS
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers
or sales are being made, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
Registration Statement (or the most recent post-
effective amendment thereof) which, individually
or in the aggregate, represent a fundamental
change in the information set forth in the
Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which
was registered) and any deviation from the low or
high end of the estimated maximum offering range
may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price
represent no more than 20% change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement;
4
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the Registration Statement or any
material change to such information in the
Registration Statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the registration statement is on Form S-3, and the
information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed with
or furnished to the Commission by the Registrant pursuant to
section 13 or 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any
liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) (1) The undersigned Registrant hereby undertakes as
follows: That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part
of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration
form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by other
Items of the applicable forms.
(2) The Registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately proceeding, or (ii)
that purports to meet the requirements of section 10(a)(3) of the
Act and is used in conjunction with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to respond for
requests for information that is incorporated by reference into
the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the
registration statement through the date of responding to the
request.
(d) The undersigned Registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a
transaction, and the company being involved therein, that was not
the subject of and included in the registration statement when it
became effective.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to its
articles of incorporation or its bylaws or otherwise, the
Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public
policy as expressed
5
in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by one of
the Registrant directors, officers, or controlling persons in the
successful defence of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether the indemnification is against public policy as
expressed in the Securities Act. The Registrant will be governed
by the final judgment of that issue.
6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized in
Reston, Virginia, on January 10, 2002.
SIDEWARE SYSTEMS INC.
By: /s/ James L. Speros
James L. Speros
President, Chief Executive
Officer, and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints James Speros 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 substitutes, may lawfully do or cause to be done
by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
Signature Title Date
/s/ James Speros President, Chief Executive January 10, 2002
- -------------------- Officer, and Director
James L. Speros (Principal Executive Officer)
/s/ Kenneth R. Thornton Director, Chairman of the January 10, 2002
- ------------------- Board of Directors
Kenneth R. Thornton
/s/ Peter Kozicki Director January 10, 2002
- --------------------
Peter Kozicki
/s/ Edward White Director January 10, 2002
- --------------------
Edward A. White
7
/s/ Grant Sutherland Director January 10, 2002
- --------------------
W. Grant Sutherland
/s/ Stewart Walchli Chief Financial Officer January 10, 2001
- -------------------- (Principal financial officer,
Stewart F. Walchli Principal accounting officer)
8