UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
(Mark One)
|X| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
|_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended ________________________________________________
OR
|_| TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from _________________________ to ______________
Commission file number:_________________________________________________________
MICROFORUM INC.
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(Exact name of Registrant as specified in its charter)
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(Translation of Registrant's name into English)
Ontario, Canada
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(Jurisdiction of incorporation or organization)
6050 Tomken Road, Mississauga, Ontario L5T 1X8 Canada
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
None
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Shares
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
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Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
Common Shares: 33,860,105
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |_| Yes |X| No
Indicate by check mark which financial statement item the registrant has elected
to follow. |_| Item 17 |X| Item 18
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MICROFORUM INC.
TABLE OF CONTENTS
Page
----
Currency and Exchange Rate Information.................................... 1
Financial Statement Presentation.......................................... 1
Enforceability of Civil Liabilities....................................... 1
Forward Looking Statements................................................ 2
PART I
Item 1 Description of Business........................................ 2
Item 2 Description of Properties...................................... 16
Item 3 Legal Proceedings.............................................. 16
Item 4 Control of Registrant.......................................... 16
Item 5 Nature of Trading Market....................................... 17
Item 6 Exchange Controls and Other Limitations Affecting Security
Holders........................................................ 17
Item 7 Taxation....................................................... 18
Item 8 Selected Financial Data........................................ 23
Item 9 Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 24
Item 9A Quantitative and Qualitative Disclosures About Market Risk..... 30
Item 10 Directors and Officers of Registrant........................... 31
Item 11 Compensation of Directors and Officers......................... 33
Item 12 Options to Purchase Securities from Registrant or Subsidiaries. 35
Item 13 Interest of Management in Certain Transactions................. 38
PART II
Item 14 Description of Securities to be Registered..................... 39
PART III
Item 15 Defaults upon Senior Securities................................ 39
Item 16 Changes in Securities and Changes in Security for Registered
Securities..................................................... 40
PART IV
Item 17 Financial Statements........................................... 41
Item 18 Financial Statements........................................... 41
Item 19 Financial Statements and Exhibits.............................. 41
Index to Financial Statements............................................. F-1
Signatures................................................................ S-1
Exhibit Index............................................................. E-1
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CURRENCY AND EXCHANGE INFORMATION
Microforum Inc. ("Microforum" or the "Company") publishes its consolidated
financial statements in Canadian dollars. In this registration statement, except
where otherwise indicated, all dollar amounts are expressed in Canadian dollars.
References to "US$" are to United States dollars.
The following table sets forth, for each period indicated, the high and
low exchange rates for United States dollars expressed in Canadian dollars, the
average of such exchange rates on the last day of each month during such period,
and the exchange rate at the end of such period, based on the noon buying rate
in The City of New York for cable transfers in Canadian dollars as certified for
customs purposes by the Federal Reserve Bank of New York (the "US$ Noon Buying
Rate"):
Fiscal Year Ended February 28 or 29,
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1995 1996 1997 1998 1999
------ ------ ------ ------ ------
Low........................ 1.3410 1.3455 1.3310 1.3633 1.4075
High....................... 1.4238 1.4074 1.3775 1.4637 1.5747
End........................ 1.3937 1.3722 1.3670 1.4236 1.5090
Average.................... 1.3782 1.3755 1.3607 1.3990 1.4955
On August 12, 1999, the US$ Noon Buying Rate was US$1.00 = $1.4853.
FINANCIAL STATEMENT PRESENTATION
Microforum's audited consolidated financial statements as at February 28,
1998 and 1999 and for the three fiscal years ended February 28, 1999, and
related notes, together with the auditors' report thereon, are referred to
herein as the "Consolidated Financial Statements" and are included elsewhere in
this registration statement. The calendar year in which a fiscal year ends is
designated as that fiscal year; for example, the fiscal year ended February 28,
1999 is referred to as "fiscal 1999". Microforum's Consolidated Financial
Statements included in this Form 20-F have been prepared in accordance with U.S.
generally accepted accounting principles ("GAAP").
ENFORCEABILITY OF CIVIL LIABILITIES
Microforum is an Ontario corporation. Most of the directors, controlling
persons and officers of Microforum and certain of the experts named herein, are
residents of Canada and all of the assets of Microforum are located in Canada.
As a result, it may be difficult for investors to effect service of process
within the United States upon such directors, controlling persons, officers and
experts or to realize in the United States upon judgments of courts of the
United States predicated upon the civil liability under the federal securities
laws of the United States. There is substantial doubt as to the enforceability
in Canada against Microforum against any of its directors, controlling persons,
officers or experts, in original actions or in actions for enforcement of
judgments of U.S. courts, of liabilities predicated solely upon the federal
securities laws of the United States.
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FORWARD LOOKING STATEMENTS
This Registration Statement includes forward-looking statements,
regarding, among other items:
o acceptance of the Company's services in the marketplace
o the Company's marketing and sales plans
o the Company's expectations about the market for its products and
services
o the Company's future capital needs
o the acceptance of e-commerce as a viable commercial medium
The Company has based these forward-looking statements largely on its
expectations. Forward-looking statements are subject to risks and uncertainties,
certain of which are beyond the Company's control. Actual results could differ
materially from those anticipated as a result of the factors described in the
"Risks Factors" section beginning on page 11, including, among others:
o uncertainty about e-commerce as a viable commercial medium
o uncertainty of market acceptance of the Company's services
o the timing of future capital needs and inability to raise additional
capital when needed
o the Company's ability to compete with others
The Company does not undertake any obligation to publicly update or revise
any forward-looking statements contained in this Registration Statement, whether
as a result of new information, future events or otherwise. Because of these
risks and uncertainties, the forward-looking events and circumstances discussed
in this Registration Statement might not transpire.
PART I
ITEM 1 DESCRIPTION OF BUSINESS.
Microforum is an integrated Internet applications and marketing
communications company providing a broad range of e-commerce, creative and
database marketing and advertising solutions. Our products and services include
e-commerce and related financial and other software development, Web design,
leading-edge animation, video and digital design, strategic marketing, direct
marketing, advertising, public relations, contest and incentive programs,
special event management, distribution and fulfillment services and database
development and management. Our customers include Ford Motor Company of Canada,
Ford Motor Company (U.S.), National Leasing Group, National Bank of Canada,
Business Depot (aka Staples), Sony Music of Canada, StorageTek, Rapp Colins, a
division of Omnicom, Cadbury Schweppes, Canon, Newcourt Capital, CasinoRama,
Federated Financial Reserve Corporation, Petopia.com and Canadian Black Book.
Microforum was incorporated on February 27, 1987 in Ontario. Our material
subsidiaries consist of Internet Frontier Inc. ("iFront"), PPL Marketing
Services Inc. ("PPL"), Marshall Fenn Communications Inc. ("Marshall Fenn") and
Poste Haste Systems Inc. ("Poste Haste"), each of which is incorporated in
Ontario and is wholly-owned by us. Our head office is located at 6050 Tomken
Road, Mississauga, Ontario L5T 1X8. Our Internet address is www.microforum.com.
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Strategic Overview
Microforum began operations in 1987 as a developer of consumer software.
In the third quarter of fiscal 1998, we began to re-position ourselves as an
integrated Internet applications and marketing communications company. iFront, a
Microsoft Certified Solution Provider Partner, provides customers with a full
suite of proprietary applications that allow the rapid development of
plug-n-play e-commerce solutions. In April 1998, Microforum acquired PPL,
Marshall Fenn and Poste Haste (collectively, the "PPL Companies") adding
integrated marketing companies that provides complete turnkey marketing
communications solutions to its customers. In March 1999, Microforum acquired
Software Guaranty Inc. ("Software Guaranty"), which specializes in financial
applications for the Internet, intranets and extranets. Software Guaranty was
subsequently amalgamated with iFront on April 1, 1999. Our iFront Internet
services complement the marketing services delivered by the PPL Companies to
provide one-stop solutions for e-commerce and total marketing and communications
needs.
We intend to expand our sales and marketing activities in the United
States in fiscal 2000 and to seek out additional opportunities for enhancing the
competitive strength of our combined services. We also believe that there are
significant opportunities to further market our e-commerce and other Internet
solutions to the customers of the PPL Companies and of Software Guaranty. See
also "-- Corporate Acquisitions and Reorganization."
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Electronic Commerce
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Synergy
Marketing Communications
---------------------------------------------
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Creative Advertising Public Direct Packaging
Services Relations Marketing Fulfillment
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Internet Frontier Inc.
iFront creates high-quality e-commerce business solutions and Internet
content through licensing and implementation of the iFrontECS(TM), its suite of
proprietary applications, and is a Microsoft Certified Solutions Provider
Partner. iFront's initial objective to create, host and maintain Internet sites
for Microforum in addition to third parties, has evolved into the development of
customized, plug-n-play e-commerce solutions for companies seeking an
alternative global distribution channel for their products and services, and for
those seeking two-way information exchange with their targeted audience. iFront
also provides e-based financial applications solutions, including the
proprietary CALMS(TM) on-line credit approval system, formerly offered by
Software Guaranty.
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Electronic Commerce
The iFrontECS(TM) e-commerce suite of applications, provides a
customizable, feature-rich e-commerce solution for corporations looking to
create an alternative channel for global distribution of products and services.
The iFrontECS(TM) is easily adaptable to any on-line store or
business-to-business needs. Providing a secure, robust and proven e-commerce
environment, the iFrontECS(TM), based on Microsoft Site Server Commerce Edition,
has open modular architecture that provides a plug-n-play e-commerce solution
for retail or distribution applications. iFrontECS(TM) provides on-line
marketing and store management tools and provides brand name managers with up to
the minute sales, demographic and marketing data.
The iFrontECS(TM) solution has been chosen by Business Depot (aka
Staples), Sony Music of Canada, Petopia.com (formerly Paw.Net) and StorageTek.
The iFrontECS(TM) is applicable to virtually any retail product suitable for
direct marketing, and we believe that its plug-n-play template positions us to
be a leader in offering cost-effective solutions to retailers and corporate
clients throughout the world.
The iFrontECS(TM) has been market tested through the Company's own
Softmania(TM) site, an on-line software store located on the web at
www.softmania.com. Softmania is an on-going beta test site for the effectiveness
of e-commerce in an on-line retail application and the enhanced features
presented in the iFrontECS(TM).
iFront intends to leverage its relationship with Microsoft through joint
marketing efforts, which will include introductions to other Microsoft Certified
Solution Provider Partners in the U.S. marketplace that offer complementary
integration services. iFront regularly meets with Microsoft's team of developers
to discuss e-commerce technologies in an effort to ensure that future
development and enhancements to the iFrontECS(TM) will be compliant with the
Microsoft Back Office and Commerce Server product line. In addition, as a result
of its Microsoft Partner status, Microforum is a designated beta test site for
several Microsoft products and technologies. In April 1999, iFront was selected
as one of 25 Microsoft Certified Solution Providers across North America to
participate in Microsoft's Commerce Partner Advisory Council, a prestigious
industry strategy group whose mission is to develop protocols for digital
commerce.
Web Site Development
iFront creates dynamic and exciting Web pages for companies wanting to
have a presence on the Internet. iFront has developed Web sites or portions
thereof for Bell Canada, Canon Canada, Universal Canada and The Microsoft
Network.
Sales and Marketing
We expect our distribution channels for Internet e-commerce services and
creative marketing services will develop around our expansion into the U.S.
market. iFront sells directly to major accounts and is beginning to identify and
recruit regional system integrators, value added resellers and consultants to
license and sell the iFrontECS(TM). We are emphasizing the "branding" of the
iFrontECS(TM) as a robust Internet and e-commerce service. Significant
Internet-related marketing activities include:
o trade show participation;
o targeted public relations;
o targeted Internet advertising;
o targeted trade magazine advertising;
o association memberships; and
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o partnership opportunities.
The ability to provide Internet services business solutions to corporate
clients provides a strong entree into most companies. In our experience, most
significant North American companies have an Internet presence and are receptive
to learning about Internet business processes and solutions that may positively
impact their business prospects. We believe that we have developed the expertise
and credibility to offer e-commerce solutions to such entities.
Software Guaranty
Through the acquisition of Software Guaranty, a Microsoft Certified
Solution Provider Partner that began operations in 1994, iFront now provides
financial applications and related services for the Internet, intranets and
extranets. The financial applications and related services include project
management, process re-engineering, business analysis, systems analysis and
design, coding, testing, hardware installation and configuration, and technical
support services. iFront utilizes the Microsoft Solution Framework methodology
for project management and solution development. Utilizing modeling techniques,
the client can visualize the end result before development, avoiding unnecessary
changes during or after development.
Software Guaranty has concentrated its sales within North America although
it has also successfully implemented systems in Australia. Software Guaranty has
provided object oriented, Internet-based lending software to some of North
America's largest financial and business services companies including Newcourt
Credit Group, AT&T Capital Canada, National Bank of Canada and National Leasing
Group.
Software Guaranty has developed CALMS(TM) (Credit Adjudication Lending
Measurement Systems), an integrated suite of products that originate and
facilitate lending transactions over the Internet/extranet. The CALMS(TM) system
provides connection online and in real-time to many of the major credit bureaus
in North America, including Equifax (U.S. and Canada), Trans Union (U.S. and
Canada), Dun & Bradstreet (U.S. and Canada) and Experian (U.S.), and enables
equipment dealers, vendors, brokers and other indirect lenders to quickly
perform credit check approval and documentation over the Internet/extranet. In
most cases, the installation of CALMS(TM) requires customization in order to
meet the customer specifications and user requirements.
Software Guaranty has received numerous awards, including Microsoft's 1998
SIA Best Infrastructure Award, and was a worldwide finalist for Microsoft's Best
Independent Solution and a finalist for the Best Structured Workflow Product.
The PPL Companies
PPL Marketing Services Inc.
PPL Marketing Services Inc. is an integrated marketing company providing
complete turnkey marketing and communications solutions. PPL primarily markets
its solutions to the automotive industry and competes on the basis of
creativity, innovation and quality. PPL has ISO 9001-94 certification and was
one of the first Canadian marketing services company to achieve the Q1 quality
operating standards established by Ford Motor Company of Canada ("Ford Canada").
There is a continuing trend by major sophisticated marketers to out-source
marketing services and Microforum believes PPL is well positioned to take
advantage of these opportunities. The ability to execute either single elements
or entire marketing programs positions PPL to build long-term
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relationships with a select client base. PPL's strengths include the development
of strategic marketing plans, production of support materials, special event
management, call center management, and contest and incentive programs.
PPL services include:
o strategic marketing and planning;
o creative services - graphic design;
o production execution;
o point of sale support;
o direct response marketing;
o contest and incentives design and administration;
o special event management;
o corporate conference co-ordination;
o telemarketing - inbound and outbound call centers;
o warehousing - physical distribution and fulfillment; and
o on-line inventory management and distribution.
PPL has developed an expertise in the automobile industry. PPL's largest
account is Ford Canada. Pursuant to a Memorandum of Agreement dated May 1, 1997
between Ford and PPL (the "Ford Agreement"), PPL creates, designs and develops
marketing projects assigned and authorized by Ford Canada. No minimum amount of
services is guaranteed to PPL in connection with the Ford Agreement and the Ford
Agreement is cancellable upon 120 days notice.
PPL has developed a diverse range of services that have resulted in
business opportunities outside the automotive market with organizations
including Canada Trust, Cadbury Schweppes, Converse, Canon, Sharpe, StorageTek,
Merisel, Robotic Technology Services, Johnson & Johnson, Pepsi Cola Canada and
Rapp Colins, a division of Omnicom.
Marshall Fenn Communications Inc.
Marshall Fenn is an integrated communications and full service advertising
agency, including advertising, public relations, direct marketing and
Internet/new media. We believe that a key strength of Marshall Fenn is its
ability to combine these historically independent and distinct communications
disciplines into cohesive marketing communications solutions for diverse
clients. Where clients do not require an integrated solution, Marshall Fenn can
provide a single communications discipline, such as advertising or public
relations. Where a client already has an established relationship with a
complementary agency, Marshall Fenn provides those disciplines that may be
missing to create strong, effective and comprehensive communications solutions.
Marshall Fenn has developed a vertical presence in the gaming industry.
Marshall Fenn's largest account is with CasinoRama. Pursuant to an agency
agreement dated April 17, 1999 between CasinoRama and Marshall Fenn (the
"CasinoRama Agreement"), Marshall Fenn shall be engaged as the Agency of Record
in a non-exclusive capacity for the provision of advertising services for a one
year period commencing May 6, 1999. No minimum amount of services is guaranteed
to Marshall Fenn in connection with the CasinoRama Agreement. Marshall Fenn
shall receive compensation on a fee basis as set forth in a schedule to the
CasinoRama Agreement.
The advertising and public relations industry is based on professional
consultancy. Sales are generated as a result of existing business relationships,
referrals, cold calling, networking activities and
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advertising in trade publications. Much of its new business is generated through
the cross-selling of services. Marshall Fenn focuses on promoting its expertise
in specific industry sectors including high technology, sports and entertainment
marketing and capitalizing on its reputation in the North American gaming
industry as it is one of only two advertising agencies in the Province of
Ontario to be licensed by the Ontario Gaming Commission to provide non-gambling
services to Ontario.
Marshall Fenn's clients include:
o CasinoRama o Carnival Hotels & Casinos
o KPMG (National Marketing) o ESSO
o Greater Toronto Marketing Alliance o International Leisure Systems
o Star Data o Players Island Casino
Poste Haste Systems Inc.
Poste Haste provides clients with added control, innovation and security
in direct mail marketing and enables Microforum to internalize variable imaging
and lettershop capabilities. We believe that the sophistication of data
manipulation and the sensitivity of the identities contained in the customer
database has led existing PPL clients to find a level of comfort and security
with our in-house ability to manage and convert their data. Current Poste Haste
clients include Ford Canada, GS Systems Inc., Quebecor Inc., ManuLife, Bimm
Communications and Rapp Colins, a division of Omnicom.
The range of services Poste Haste offers includes:
o database creation, management, data storage and retrieval;
o data entry and optical scanning;
o response management, processing, reporting and measurement;
o inventory management;
o high speed laser variable imaging;
o inkjet personalization;
o lettershop;
o custom package assembly and distribution; and
o warehousing and fulfillment.
Sales and Marketing Strategy
The strategic entry into the U.S. marketplace is central to our marketing
and sales. In order to create an awareness in the U.S. marketplace of our
services, we have entered into a consulting arrangement with a senior marketing
executive based in Atlanta, Georgia, who is familiar with our products and
services and also the U.S. marketplace and distribution channels. We expect to
have a competitive advantage in expanding our sales into the United States,
while producing our services in Canada.
Competition
The markets for our products and services are competitive and rapidly
expanding. We have numerous competitors in each of our markets, many of whom
compete with us in one or more of such markets. We believe that our ability to
compete successfully depends primarily upon our broad range of Internet
marketing, creative and database services and our ability to provide end-to-end
marketing communications solutions. iFront's main competitors in Canada for its
iFrontECS(TM) solution include
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Cyberplex, Bratch Communications, Grey Interactive, Digital Rennaissance and IBM
Global Services. Main competitors in Canada for iFront's CALMS(TM) application
include System 1 and S.R. Research. PPL's main competitors in Canada include
Barry Raynor & Associates Inc, Meritz Canada Inc. and, in the area of creative
services, ICE Communications & Entertainment, Digital Rennaissance, McGill
Multimedia, Sutjava.com and Tudhope Associates. Marshall Fenn's main competitors
in Canada include Bradworks, Ginko Group and Communique. Poste Haste's main
competitors in Canada include First Avenue and Bradford Direct. We are not aware
of any Canadian competitor that has as broad an array of marketing communication
and Internet commerce capabilities as we offer.
Employees
As of July 31, 1999, Microforum had approximately 177 full time employees,
17 part-time employees and 27 consultants. Of the total personnel, approximately
seven were in management; 16 were in finance and administration; 20 were in
creative services and program design; 39 were in Internet development; 39 were
in sales and marketing; 48 were in direct customer support; and 52 were in
production or production support. We believe that human resources constitute our
greatest asset and provide us with significant competitive advantages. We employ
a number of highly skilled programmers, technicians and graphic artists, most of
whom have received training and experience with larger companies in developing
business applications and solutions.
Corporate Acquisitions and Reorganization
Starting in the first quarter of fiscal 1998, Microforum began a series of
acquisitions and dispositions in order to concentrate on our core competencies
in the face of shrinking margins and escalating expenses related to the
development of consumer software.
Acquisition of the PPL Companies
On April 6, 1998, Microforum acquired, directly and indirectly, all the
issued and outstanding common shares of each of the PPL Companies for an
aggregate purchase price of $6.7 million, payable $502,500 in cash, $502,500 by
means of a non-interest bearing promissory note with a six-month term secured by
a pledge of the shares of PPL Marketing, and the balance payable by the issuance
of 1,627,143 common shares. In January 1999, $250,000 of the note was converted
into 339,674 common shares at a conversion price of approximately $0.736 per
share and the maturity date with respect to the balance of the note was extended
to March 31, 2000. See also Note 4 to the Consolidated Financial Statements.
Acquisition of Software Guaranty Inc.
On March 9, 1999, Microforum acquired all of the issued and outstanding
shares of Software Guaranty from its shareholders for $2,250,000 in each and the
issuance of 674,207 common shares at an ascribed value of $1.82 per share,
representing the average closing price for the 20 trading days preceding the
acquisition plus a premium of 30%. Microforum used a portion of the $3,325,500
gross proceeds of the special warrant financing completed on March 8, 1999 to
fund the cash component of the purchase price. See "March 1999 Special Warrant
Financing". The 674,207 common shares issued in connection with the Software
Guaranty transaction are subject to, in certain cases, contractual or statutory
hold periods that restrict these securities from being traded until March 9,
2000. The principal shareholder also entered into a Non-Competition,
Non-Solicitation and Confidentiality Agreement. As part of the terms of the
Software Guaranty transaction, the principal shareholder agreed to deposit
317,083 common shares into escrow with Montreal Trust Company of Canada
("Montreal Trust"), as escrow agent, for a period of one year to satisfy any
breach of the representations and warranties contained in the acquisition
agreement.
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March 1999 Special Warrant Financing
On March 8, 1999, Microforum issued by way of private placement an
aggregate of 2,891,739 special warrants at a price of $1.15 per special warrant
to purchasers resident in the Province of Ontario for gross proceeds of
$3,325,500. An aggregate fee of $232,785 was paid to the placement agents for
payment of their commission and out-of-pocket expenses. As additional
consideration for services rendered, the placement agents were granted
non-assignable warrants (the "March 1999 Compensation Warrants") to acquire for
no additional consideration, compensation options to purchase an aggregate of
202,422 common shares at an exercise price of $1.38 per common share at any time
on or before March 8, 2001. As of the date hereof, all of the March 1999
Compensation Warrants and 142,293 of the compensation options have been
exercised.
May 1999 Special Warrant Financing
On May 10, 1999, Microforum issued by way of a "bought deal" private
placement an aggregate of 3,100,000 special units at a price of $6.50 per
special unit to purchasers resident in the provinces of Ontario, British
Columbia and Alberta and resident in the United States for gross proceeds of
$20,150,000. An aggregate fee of $1,460,875 was paid to the underwriters for
payment of their commission and out-of-pocket expenses. Each special unit
entitles the holder upon exercise to receive one common share and one-half of
one common share purchase warrant. Each whole common share purchase warrant
entitles the holder to subscribe for one common share at an exercise price of
$10.00 at any time on or before 5:00 p.m. (Toronto time) on September 10, 2000.
As additional consideration for services rendered, the underwriters were granted
non-assignable warrants (the "May 1999 Compensation Warrants") to acquire for no
additional consideration, compensation options to purchase an aggregate of
310,000 special units at an exercise price of $6.50 per special unit,
exercisable into 310,000 common shares and 155,000 common share purchase
warrants until 5:00 p.m. (Toronto time) on November 10, 2000. Each underwriter's
common share purchase warrant entitles the holder to subscribe for one common
share at an exercise price of $10.00 until 5:00 p.m. (Toronto time) on September
10, 2000. A final receipt qualifying the distribution of the common shares and
common share purchase warrants was issued by the securities regulatory
authorities in the provinces of Ontario, British Columbia and Alberta on June
30, 1999. As of the date hereof, all of the May 1999 Compensation Warrants have
been exercised and all of the compensation options remain unexercised.
Joint Venture -- eFINCOM.com
On May 11, 1999, Microforum entered into a letter of intent to establish a
joint venture with SIBN Inc. ("SIBN"), a wholly-owned subsidiary of the National
Bank of Canada, to create a universal e-commerce platform for financial services
that will provide online approval for credit, insurance and leasing
transactions. The creation of the joint venture, to be called e-FINCOM.com Inc.
("eFINCOM.com"), is subject to finalization of definitive documentation, board
of director and regulatory approvals.
Microforum will own 49% and SIBN will own 51% of e-FINCOM.com, which is
subject to change as the joint venture is structured to provide for equity
participation should other financial institutions join the platform. To date,
Tim Dealer Services Inc. and Canadian Black Book have agreed to participate.
The e-FINCOM.com platform provides financial services intermediaries with
the ability to process online transactions with multiple financial institutions
from one site on the Internet. The initial introduction of this platform will
focus on the automotive credit approval market and will be expanded to other
intermediary services including leasing, insurance and deposits. This universal
platform will utilize iFront's CALMS(TM) solution.
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Strategic Partnership - Quartet Service Corporation
On July 26, 1999, Microforum entered into a strategic partnership with
Quartet Service Corporation ("Quartet"), a leader in providing integrated
telecommunication and information technology to services businesses located in
commercial office buildings. In connection with this partnership, Microforum
purchased 100,000 common shares of Quartet (the "Quartet Shares"), which amounts
to approximately 3% of the issued and outstanding shares of Quartet. Microforum
purchased the Quartet Shares for an aggregate purchase price of $300,000 and the
issuance of 100,000 options, exercisable, for no additional consideration, into
100,000 warrants to purchase common shares of Microforum. Each warrant is
exercisable by Quartet into one Microforum share at an exercise price of $8.05
at any time on or before July 6, 2001. As a result of this strategic investment,
iFront will develop and maintain Quartet's e-commerce solutions including the
integration of content for its real estate clients across North America.
Acquisition of Q-Inter
On August 4, 1999, Microforum entered into a Share Purchase Agreement with
Dawson Lane and Lynda Tardif-Lane (collectively, the "Sellers"), pursuant to
which Microforum acquired all of the issued and outstanding shares of Q-Inter
Applications Inc. ("Q-Inter"), an enterprise software systems integration and
industry specific solution provider. Microforum paid the Sellers an aggregate
purchase price of $1,350,000, consisting of $750,000 cash and 86,153 shares of
Microforum's common stock at an ascribed value of $6.50 per share. These shares
will be subject to a regulatory hold period of twelve months from the date of
issuance. All of the 86,153 shares being issued to the principals of Q-Inter are
held in escrow by Montreal Trust Company of Canada in support of the
representations and warranties provided by the Sellers of Q-Inter.
Founded in 1990 and based in Markham, Canada, Q-Inter is a Microsoft
Certified Solution Provider Partner which provides full life cycle, systems
implementation services to a wide range of industries. Q-Inter offers its
clients a broad range of business solution development and support services,
from advising clients on strategic technology plans to developing and
implementing appropriate information technology application solutions based on
an assessment of each client's needs. Services include strategic planning and
consulting services, project management, ERP implementation and integration,
software development and maintenance, Internet/Intranet solutions and technology
support services. Geographically, Q-Inter has concentrated its sales within
North America although it has also successfully implemented systems in Europe
and the Pacific Rim. Q-Inter's web site is located at www.qinter.com.
Microforum intends to amalgamate Q-Inter with its wholly-owned subsidiary,
Internet Frontier, Inc., as iFront's Professional Services Division, playing a
key role in the definition, management and deployment of iFront's electronic
commerce solutions.
Divestitures and Discontinued Operations
Microforum has closed or disposed of the following businesses: (1)
wholesale distribution of hardware equipment, completed during fiscal 1998; (2)
internal development of software products, effective as of June 30, 1997; and
(3) all software publishing activities, announced in May 1998. See Note 3 to the
Consolidated Financial Statements.
In addition, in August 1997, Microforum sold its interest in Microforum
Italia s.r.1. ("Italia"), its software publication division located in Italy, to
Microforum's founding shareholders. Under the terms of the agreement, the
purchasers agreed to tender to Microforum 200,000 common shares, at an ascribed
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value of $1.00 per common share, over a two year period expiring no later than
September 1999. Price adjustment provisions apply in the event the purchasers
substitute cash in lieu of common shares at the prescribed installment dates.
In January 1999, Microforum sold the assets associated with Gamesmania, an
electronic Internet magazine reviewing computer games, to CryptoLogic Inc., a
Toronto Stock Exchange-listed Internet gaming company, for approximately
$413,000, of which approximately $375,000 was paid at closing and the balance of
approximately $38,000 was paid on April 6, 1999.
Risk Factors
An investment in Microforum is subject to a number of risk factors,
including those risk factors set forth elsewhere herein and those factors listed
below:
We have a history of losses and may need additional financing.
Microforum has had net losses and losses from continuing operations in
each of the last three fiscal years. In the future, we may not generate
sufficient sales to pay all our operating or other expenses. If we fail to
generate sufficient cash from operations to pay these expenses, management will
need to identify other sources of funds. We may not be able to borrow money or
issue more shares to meet our cash needs. Even if we can complete such
transactions, they may not be on terms that are favorable or reasonable from our
perspective. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a more complete description of our historical
results of operations, financial condition and liquidity.
Our recent acquisitions have created financial and other challenges, which, if
not resolved, could have an adverse effect on our business.
Microforum completed significant acquisitions in April 1998 and March 1999
that have refocused our business. Integrating these acquisitions presents
financial, operational and managerial challenges. To the extent management must
devote significant time and attention to the integration of our operations,
technology and personnel, our ability to service current clients and win new
clients may suffer.
We may be unable to implement our acquisition growth strategy, which could have
an adverse effect on our business and competitive position in our markets.
A key element of our business strategy is to acquire companies and take
advantage of other growth opportunities that will complement and expand our
operations on acceptable terms. These opportunities may also require more rapid
expansion or acquisitions of complementary businesses or technologies, the
development of new products and other responses to competitive pressures. We may
not be able to identify or complete future acquisitions or realize the
anticipated results of future acquisitions. Some of the risks that we may
encounter in implementing our acquisition growth strategy include:
o expenses and difficulties in identifying potential targets and the
costs associated with incomplete acquisitions;
o expenses, delays and difficulties of integrating the acquired
company into our existing organization;
o diversion of management's attention;
o expenses of amortizing the acquired company's intangible assets;
o impact on our financial condition due to the timing of the
acquisition; and
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o expense of any undisclosed or potential legal liabilities of the
acquired company.
In addition, financing may not be available on terms favorable to us or at all.
If adequate funds are not available or are not available on acceptable terms, we
may not be able to take advantage of strategic opportunities, develop new
products and services or otherwise respond to competitive pressures. If
realized, any of these risks could have a material adverse effect on our
business, results of operations and financial condition.
We compete in highly competitive markets that have low barriers to entry.
The markets for Internet development, e-commerce activities and multimedia
services are highly competitive. We also expect competition in the Internet
development and multimedia services markets to intensify as new market entrants
develop in-house capabilities for multimedia production and turnkey software
solutions for on-line retail environments. Increased competition results in:
o significant price competition
o reduced profit margins; and/or
o reduction in sell-through of our products.
We believe that the principal competitive factors in the market for e-commerce
products and services include:
o functionality;
o performance and reliability of technology and methodology;
o depth and experience of the service provider;
o availability and productivity of personnel; and
o price.
Many of our competitors have longer operating histories, larger client bases,
longer relationships with clients, greater brand or name recognition and
significantly greater financial, technical, marketing and public relations
resources than we have.
There are relatively few barriers preventing competitors from entering the
multimedia services and Internet development markets. We do not have any
patented technology for these markets that precludes or inhibits competitors.
Existing or future competitors may develop or offer services that are comparable
or superior to ours at a lower price, which could have a material adverse effect
on our business, results of operations and financial condition.
We derive a large part of our sales from a small number of customers.
Ford Canada and CasinoRama accounted for approximately 34.4% and 20.6%,
respectively, of our net sales for the fiscal year ended February 28, 1999.
Neither customer has any contractual obligation to continue to retain our
services. The volume of work performed for these customers may not be sustained
from year to year, and there is a risk that these principal clients may not
retain us in the future. Any cancellation, deferral or significant reduction in
work performed for either of these customers would have a material adverse
effect on our business, results of operations and financial condition.
Our continued growth may further strain our resources, which could adversely
affect our business and results of operations.
Our recent growth has strained our managerial, operational and financial
resources. A key part of our strategy is to grow, both by hiring more personnel
and by acquiring companies, which may continue
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to strain our resources. To manage future growth, management must continue to
improve our operational and financial systems, procedures and controls, and
expand, train, retain and manage our employees. If our systems, procedures and
controls are inadequate to support our operations, our expansion would be
halted, and we could lose our opportunity to gain significant market share. Any
inability to manage growth effectively could have a material adverse effect on
our business, results of operations and financial condition.
The loss of certain key management could adversely affect our business and
results of operations.
Our future success will depend, in part, upon our ability to retain our
existing management team and add new qualified personnel as required.
Conversely, the loss of the services of one or more of these key employees could
have a materially adverse effect on our business and results of operations. We
maintain key man insurance on the life of Howard Pearl, our President and Chief
Executive Officer, and certain other executive officers but there can be no
assurance that such amounts will be adequate if any of them were to terminate
his employment.
Mr. Pearl was convicted of a felony in 1983 in California relating to
importation of a narcotic drug. Mr. Pearl was offered early release in 1984 and
was granted early termination of his parole in 1995. This matter was disclosed
to our Board of Directors prior to the acquisition of the PPL Companies in April
1998. The Board of Directors believes that this offense, which occurred 17 years
ago, has no present bearing on Mr. Pearl's ability to manage our business and
affairs. This offense has been disclosed to The Toronto Stock Exchange and to
staff of the Ontario Securities Commission. These matters have also recently
been reported in the Canadian financial press and particulars concerning this
offense have been disclosed to our key clients, financial advisors and bankers.
The loss of our professionals would make it difficult to complete existing
projects and bid for new projects, which could adversely affect our business and
results of operations.
Our business is labor intensive, and our success depends in part on
identifying, hiring, training and retaining professionals. If a significant
number of our current employees or any of our senior managers or key project
managers leave, we may be unable to complete or retain existing projects or bid
for new projects of similar scope and sales. We have entered into employment
agreements and non-competition agreements with all of our senior employees.
There is no guarantee that the non-competition provisions would be enforced by a
court if we were to seek to enforce our rights under them. Even if we retain our
current employees, management must continually recruit talented professionals in
order to grow. These professionals must have skills in business strategy,
advertising, commerce, branding, multimedia technology and creative design.
There is currently a shortage of qualified personnel in the Internet development
and programming market, which shortage is likely to continue. We compete
intensely for qualified personnel with our competitors. If we cannot attract,
motivate and retain qualified professionals, our business and results of
operations could be materially adversely affected.
We need to keep pace with changing e-commerce technologies in order to provide
effective solutions to our customers.
E-commerce is undergoing rapid changes, including development of industry
standards, increases in Internet processing speeds, development of secured
operating platforms and changes in consumer requirements and preferences. Our
success is dependent upon, among other things, our ability to achieve and
maintain technological and quality leadership by anticipating and developing new
technologies in order to ensure that we will remain competitive from the
perspective of both product performance and price. Similarly, we must ensure the
iFrontECS(TM) and CALMS(TM) systems are secure and state-of-the-art. There can
be no assurance that we will respond effectively to market or technological
changes or compete
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successfully in the future. If we cannot meet the challenge of a rapidly
changing Internet development and e-commerce industry in a timely manner, there
could be a material adverse effect on our business and results of operations.
Our business depends on growth of the multimedia services and e-commerce
markets.
Our success in the multimedia services market is premised on consumers
adopting interactive multimedia solutions as a means of communicating with their
constituents in addition to traditional print media. E-commerce on the Internet
is also in its infancy stage. There is no assurance that this medium of commerce
will gain widespread acceptance by business or by the public in general. The
lack of acceptance of e-commerce may have an adverse impact on the revenues
generated by us for developing such Internet sites. The use and acceptance of
the Internet may not increase for a number of reasons, including:
o actual or perceived lack of security of information, such as credit
card numbers;
o high cost or lack of availability of access;
o congestion of traffic or other usage delays on the Internet;
o inconsistent quality of service or the lack of availability of
cost-effective, high-speed service;
o possible outages due to Year 2000 difficulties or other damage to
the Internet;
o governmental regulation;
o uncertainty regarding intellectual property ownership; and
o lack of high-speed modems and other communications equipment.
Revenues from e-commerce currently represent a small percentage of our revenue
base. Although we believe that this segment of our operations will experience
significant future growth, there can be no assurance that such growth will
occur.
Misappropriation of our trademarks and other proprietary rights could harm our
reputation, affect our competitive position and cost us money.
We rely on a combination of copyright and trade secret laws and
contractual provisions to establish and protect our rights in the iFrontECS(TM)
and CALMS(TM) software and our proprietary technology. We generally enter into
non-disclosure agreements with employees and customers and historically have
restricted access to our software products' source codes. We regard our source
codes as proprietary information, and attempt to protect the source code
versions of our products as trade secrets and as unpublished copyrighted works.
In a few cases, we have provided copies of source codes for certain products to
customers and strategic partners, for the purpose of special customization for
identified projects. In these cases, we rely on non-disclosure and other
contractual provisions to protect our proprietary rights. Despite precautions,
it may be possible for unauthorized parties to copy or otherwise reverse
engineer portions of our products or otherwise obtain and use information that
we regard as proprietary.
Existing copyright and trade secret laws offer only limited protection,
and the laws of certain countries in which our products are used do not protect
our products and intellectual property rights to the same extent as the laws of
Canada and the United States. Certain provisions of our license and strategic
alliance agreements, including provisions protecting against unauthorized use,
transfer and disclosure, may be unenforceable under the laws of certain
jurisdictions, and we may be required to negotiate limits on these provisions
from time to time.
There can be no assurance that the steps taken by us to protect our
proprietary rights will be adequate to deter misappropriation of our technology
or independent development by others of
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technologies that are substantially equivalent or superior to our technology. As
the number of competitors providing e-commerce products increases, it is more
likely that substantially similar tools and methodologies will be used in
providing such services. Any misappropriation of our technology or development
of competitive technologies could have a material adverse effect on our
business, results of operations and financial condition. We could incur
substantial costs in protecting and enforcing our intellectual property rights.
Moreover, from time to time, third parties may assert patent, trademark,
copyright and other intellectual property rights to technologies that are
important to us. There can be no assurance that the assertion of such claims
will not result in litigation or that we would prevail in such litigation or be
able to obtain a license for the use of any infringed intellectual property from
a third party or, if such a license is required, that it would be available on
terms acceptable to us. Furthermore, litigation, regardless of its outcome,
could result in substantial cost and divert management's attention and resources
from our operations. Any infringement claim or litigation against us could,
therefore, materially adversely affect our business, results of operations and
financial condition.
Our business is subject to Canadian, U.S. and foreign government regulation of
the Internet.
Both Canada and the United States, at the federal, state or provincial and
local government levels, and the European Union have recently passed legislation
relating to the Internet. Because these laws are still being implemented, we are
not certain how, if at all, our business will be affected by them. We may be
indirectly affected by this new legislation to the extent it affects our
customers and potential customers. In addition, Canadian, U.S. and foreign
governmental bodies are considering, and may consider in the future, other
legislative proposals that would regulate the Internet. We cannot predict if or
how any future legislation would affect our business, results of operation or
financial condition.
The volume of trading and price of our common shares could fluctuate
significantly, which could adversely affect our stock price.
The market price of the common shares is highly volatile. There currently
is no trading market for the common shares in the United States and we do not
know the extent to which investor interest will lead to the development of a
trading market or how liquid it may be. Although in recent months, investors
have shown great interest in technology companies focused on the Internet, many
publications indicate that the stock of these companies trade at overly inflated
prices. Whether or not our common shares trade at any particular price, if
investor interest in these stocks declines, the price for our common shares
could drop suddenly and significantly, even if our operating results are
positive. In addition, trading volumes of Internet-related stocks has been
volatile in recent months. If the trading volume of our common shares
experiences significant changes, the price of our common shares could be
adversely affected.
The price of our common shares could also be significantly affected by
factors such as:
o actual or anticipated fluctuations in our operating results;
o announcements of technological innovations, new products or new
contracts by us or our competitors;
o developments with respect to patents, copyrights or proprietary
rights, conditions and trends in the industry;
o changes in financial estimates by securities analysts;
o general market conditions;
and other factors, many of which are beyond our control. The Company's operating
results in one or more future quarters may be below the expectations of
securities analysts and investors. In such event, the trading price of the
common shares would likely decline, perhaps substantially.
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The Year 2000 problem may adversely affect our business.
Certain computer software and microprocessors use two digits rather than
four to define the applicable year. Computer programs that have date-sensitive
software and microprocessors may recognize a date using "00" as the year 1900
rather than the year 2000. In addition, a year 2000 compliant product will
recognize the year 2000 as a leap year. This phenomenon (the "Year 2000 Issue")
could cause a disruption of our operations, including, among other things, the
temporary inability to utilize equipment, send invoices or engage in similar
normal business activities. We have conducted an internal review of our computer
systems to ensure Year 2000 compliance, which review should be completed by the
second half of fiscal 2000. There can be no guarantee that systems of other
companies on which our systems rely will be converted on a timely basis, or that
a failure to convert by another company, or a conversion is incompatible with
our systems would not have a material adverse effect on our business and results
of operations. Based on our current assessment, management believes that the
Year 2000 Issue will not have a material adverse impact on our business, results
of operations or financial condition, but there can be no assurance that this
will be the case. We also believe we have sufficient internal resources and
commitments from external providers to have substantially all of our computer
programs revised by September 30, 1999. In management's view, the cost to revise
the programs will not be material. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation - Year 2000 Issue".
ITEM 2 DESCRIPTION OF PROPERTIES.
Microforum's principal executive offices are located at 6010 and 6050
Tomken Road in Mississauga, Ontario. The combined premises contain approximately
57,000 square feet of office/warehouse/distribution space and are leased at an
annual lease cost of approximately $525,000 per year until July 2000. Marshall
Fenn leases approximately 4,500 square feet of office space at 1246 Yonge
Street, Toronto, at an annual lease cost of approximately $110,000 per annum
until October 2001. iFront leases approximately 8,800 square feet of office
space at 111 Gordon Baker Road, Toronto, at an annual lease cost of
approximately $220,000 per annum until August 31, 2003.
ITEM 3 LEGAL PROCEEDINGS.
There are no material legal proceedings to which Microforum is a party, or
to which our property is subject, nor, to the best knowledge of management, are
any material legal proceedings threatened or contemplated.
ITEM 4 CONTROL OF REGISTRANT.
As of July 31, 1999, to Microforum's knowledge and belief, (i) no person
is known by the Company to beneficially own more than 10% of its outstanding
common shares; (ii) Microforum is not directly or indirectly controlled by
another corporation or by any foreign government; and (iii) based on information
provided by the directors and executive officers of the Company, directors,
officers and members of their immediate families owned 3,448,212 common shares
representing 10.2% of the issued and outstanding common shares.
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ITEM 5 NATURE OF TRADING MARKET.
There currently is no trading market for the common shares in the United
States. The shares of the Company have traded on The Toronto Stock Exchanges
since September 1996. Set forth below is a summary of the volume of trading and
price range in Canadian dollars for the Company's shares for the calendar
quarters indicated:
High Low Volume
---- --- ------
Calendar 1997
First Quarter C$5.50 C$1.85 85,151
Second Quarter 1.80 0.25 600,800
Third Quarter 4.30 1.00 3,683,231
Fourth Quarter 5.20 3.00 2,333,074
Calendar 1998
First Quarter 4.00 2.55 4,176,451
Second Quarter 3.30 1.05 2,898,862
Third Quarter 1.50 0.50 1,788,023
Fourth Quarter 1.47 0.43 16,365,125
Calendar 1999
First Quarter 2.55 1.10 31,987,600
Second Quarter 9.85 1.25 114,674,600
Third Quarter (through July 31, 1999) 9.05 5.80 40,054,800
No dividends have been paid on any shares of the Company since the date of
its incorporation and it is not contemplated that any dividends will be paid in
the immediate or foreseeable future. Any decision by the Company to pay
dividends on its Common Shares in the future will be dependent upon the
financial requirements of the Company to finance future growth, the overall
financial condition of the Company and other factors the board of directors may
consider appropriate in the circumstances.
ITEM 6 EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
There are no foreign or currency controls in Canada, and there are no
exchange restrictions on borrowing from abroad, on the repatriation of capital,
or the ability to remit dividends, profits, interests, royalties, other payments
to non-resident holders of the Company's common stock. However, any such
remittance to a resident of the United States is subject to a 15% withholding
tax pursuant to Article XI of the reciprocal tax treaty between Canada and the
United States. For further information concerning such withholding tax, see Item
7, "Taxation" below.
There are no limitations under the laws of Ontario, Canada, or in the
charter or other constituent documents of Microforum with respect to the right
of non-resident or foreign owners to hold and/or vote our common shares.
However, under the provisions of the Investment Canada Act (the "I.C.A."), the
acquisition of control (as defined in the I.C.A.) of a corporation carrying on a
business in Canada with assets of $179,000,000 or more by a non-Canadian person
or entity (also as defined) is subject to the prior
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approval of the Investment Canada Agency, an agency of the Canadian Federal
government, in order to determine whether such acquisition is likely to be of
benefit to Canada. Under the I.C.A., there is a rebuttable presumption that
control is acquired if one-third of the voting shares of a Canadian corporation
or an equivalent individual interest in the voting shares of the Corporation are
held by a non-Canadian person or entity. In addition, if a Canadian corporation
is controlled by a non-Canadian person or entity, the acquisition of control of
any other Canadian corporation by such a corporation may be subject to the prior
approval of the Investment Canada Agency unless it can be established that the
corporation is not in fact controlled by the acquirer through the ownership of
voting shares. Certain small acquisitions (as defined) are exempted from review
by the I.C.A.
ITEM 7 TAXATION.
Canadian Federal Tax Considerations
Generally, dividends that are paid or credited by Canadian corporations to
non-resident shareholders are subject to a non-resident tax of 25%. However,
Paragraph 2 of Article X of the Canada-United States Income Tax Convention, 1980
(the "Treaty") provides that dividends paid by a Canadian corporation to a
corporation resident of the United States (with no permanent establishment in
Canada), which owns at least 10% of the voting stock of the Corporation paying
the dividend, are subject to the Canadian non-resident withholding tax of 5%. In
all other cases, when a dividend is paid by a Canadian corporation to the
beneficial owner resident in the United States, the Canadian non-resident
withholding tax is 15% of the amount of the dividend.
The reduced withholding tax rates do not apply if the beneficial owner of
the shares carries on business through a permanent establishment in Canada and
the stock holding in respect of which the dividends are paid is effectively
connected with such permanent establishment. In such a case, the dividends are
taxable in Canada as general business profits at rates that may exceed the 5% or
15% rates applicable to dividends that are not effectively connected with a
Canadian permanent establishment.
Paragraph 3 of Article X of the treaty permits Canada to apply its
domestic law rules for differentiating dividends from interest and other
disbursements. Stock dividends are subject to the normal Canadian non-resident
withholding tax rules on the amount of the dividend. The amount of a stock
dividend is equal to the increase in the paid-up capital of the corporation by
virtue of the dividend.
Generally, interest paid or credited to a non-resident is subject to a 25%
Canadian withholding tax. If, at a time when interest has accrued but is not yet
payable, the holder of the debt transfers it to a Canadian resident or, in
certain circumstances, a non-resident who carries on business in Canada, part of
the proceeds of the disposition may be considered to be interest for Canadian
income tax purposes. Under the Treaty, the rate of withholding tax on interest
paid to a United States resident is 10%. For Treaty purposes, interest means
interest as defined by domestic Canadian income tax rules. The withholding tax
applies to the gross amount of the interest payment.
Non-residents are subject to Canadian income tax on dispositions of
"taxable Canadian property." Taxable Canadian property includes shares of a
publicly traded Canadian corporation if, at any time during the preceding five
years, the non-resident and persons with whom the non-resident did not deal at
arm's length owned at least 25% of the issued and outstanding shares of any
class of stock of the corporation.
The applicable tax rate on capital gains realized by a non-resident is the
same as the rate applicable to capital gains realized by Canadian residents
which is 39% for corporations and from 20% to 39% for individuals. Under the
Treaty, capital gains realized by a United States resident on the disposition
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of shares of a Canadian corporation are exempt from Canadian income tax, unless
(i) the value of the shares is derived principally from Canadian real property,
or (ii) the shares are effectively connected with a permanent Canadian
establishment of such non-resident, the capital gains are attributable to such
permanent establishment, and the gains are realized not later than twelve months
after the termination of such permanent establishment.
Certain United States Federal Income Tax Consequences
The following is a general discussion of certain possible United States
federal income tax consequences, under current law, generally applicable to a
U.S. Holder (as defined below) of our common shares. This discussion does not
address all potentially relevant federal income tax matters and it does not
address consequences peculiar to persons subject to special provisions of
federal income tax law, such as those described below. In addition, this
discussion does not cover any state, local or foreign tax consequences. (See
"Taxation - Canadian Federal Tax Consequences" above.)
The following discussion is based upon the current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations,
published Internal Revenue Service ("IRS") rulings, published administrative
positions of the IRS and court decisions that are currently applicable, any or
all of which could be materially and adversely changed, possibly on a
retroactive basis, at any time. This discussion does not consider the potential
effects, both adverse and beneficial, of any recently proposed legislation
which, if enacted, could be applied, possibly on a retroactive basis, at any
time. This discussion is for general information only and it is not intended to
be, nor should it be construed to be, legal or tax advice to any holder or
prospective holder of our common shares and no opinion or representation with
respect to the United States federal income tax consequences to any such holder
or prospective holders is made. Accordingly, holders and prospective holders of
our common shares should consult their own tax advisors about the federal,
state, local, and foreign tax consequences of purchasing, owning and disposing
of such shares.
U.S. Holders
As used herein, a "U.S. Holder" includes a holder of Microforum common
shares who is a citizen or individual resident of the United States and a
corporation or partnership created or organized in or under the laws of the
United States or of any state, an estate, the income of which is includable in
gross income for United States federal income tax purposes regardless of its
source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more U. S.
persons has the authority to control all substantial decisions of the trust.
This discussion does not address all aspects of United States federal income
taxation that may be relevant to any particular shareholder based on such
shareholder's particular circumstances or the tax consequences to a U.S. Holder
subject to special provisions of federal income tax law, such as tax-exempt
organizations, qualified retirement plans, individual retirement accounts and
other tax-deferred accounts, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, broker-dealers,
holders of securities held as part of a "straddle," "hedge" or "conversion
transaction" with other investments or shareholders who acquired their stock
through the exercise of employee stock options or otherwise as compensation.
This discussion is limited to U.S. Holders who hold Microforum common shares as
capital assets. Additionally, the discussion does not consider the tax treatment
of persons who hold Microforum common shares through a partnership or other
pass-through entity.
Distributions on Microforum Common Shares
U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to Microforum common shares are required to include in
gross income for United States federal income tax
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purposes the gross amount of such distributions equal to the U.S. dollar value
of such dividends on the date of receipt (based on the exchange rate on such
date) to the extent that the Company has current or accumulated earnings and
profits, without reduction for any Canadian income tax withheld from such
distributions. Such Canadian tax withheld may be credited, subject to certain
limitations, against the U.S. Holder's United States federal income tax
liability or, alternatively, may be deducted in computing the U.S. Holder's
United States federal taxable income in certain circumstances. (See more
detailed discussion at "Foreign Tax Credit" below.) To the extent that
distributions exceed current or accumulated earnings and profits of the Company,
they will be treated first as a return of capital up to the U.S. Holder's
adjusted basis in the common shares and thereafter as gain from the sale or
exchange of the common shares. Preferential tax rates for long-term capital
gains are applicable to a U.S. Holder which is an individual, estate or trust.
U. S. Holders should consult their own tax advisors concerning the tax treatment
of any gain or loss recognized upon a subsequent sale or other disposition of
foreign currency received as a distribution from the Company.
Dividends paid on Microforum common shares will not generally be eligible
for the dividends received deduction provided to corporations receiving
dividends from certain United States corporations. A U.S. Holder that is a
corporation may, under certain circumstances, be entitled to a specified
dividends received deduction with respect to the United States source portion of
dividends received from Microforum (unless Microforum qualifies as a "`foreign
personal holding company" or a "passive foreign investment company," as defined
below) if such U.S. Holder owns shares representing at least 10% of the voting
power and value of Microforum. The availability of this deduction is subject to
several complex limitations that are beyond the scope of this discussion.
Under current temporary Treasury Regulations, dividends paid on Microforum
common shares, if any, generally will not be subject to information reporting
and generally will not be subject to U.S. backup withholding tax; however,
dividends paid on Microforum's common shares, in the United States through a
U.S. or U.S.-related paying agent (including a broker) will be subject to U.S.
information reporting requirements and may also be subject to the 31% U.S.
backup withholding tax, unless the paying agent is furnished with a duly
completed and signed Form W-9. Any amounts withheld under the U.S. backup
withholding tax rules will be allowed as a refund or a credit against the U.S.
Holder's U.S. federal income tax liability, provided the required information is
furnished to the IRS. It should be noted, however, that under Treasury
Regulations that are not yet effective and that are only to be applied
prospectively to payments of dividends after December 31, 1999, any dividends
paid on Microforum common shares will be subject to information reporting and
potential 31% U.S. backup withholding tax.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian
income tax with respect to the ownership of Microforum common shares may be
entitled, at the option of the U.S. Holder, to either a deduction or a tax
credit for such foreign tax paid or withheld. This election is made on a
year-by-year basis and applies to all foreign taxes paid by (or withheld from)
the U.S. Holder during that year. There are significant and complex limitations
which apply to the credit, among which is the general limitation that the credit
cannot exceed the proportionate share of the U.S. Holder's federal United States
income tax liability that the U.S. Holder's foreign source income bears to his
or its worldwide taxable income. In the determination of the application of this
limitation, the various items of income and deduction must be classified into
foreign and domestic sources. Complex rules govern this classification process.
There are further limitations on the foreign tax credit for certain types of
income such as "`passive income", "high withholding tax interest", "financial
services income", "shipping income", and certain other classifications of
income. Dividends distributed by Microforum will generally constitute "passive
income" or, in the case of certain U.S. Holders, "financial services income" for
these purposes. In tax years beginning after 1997, the limitation on the use of
foreign tax credits based on the amount of foreign
20
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source income generally will not apply to electing individual U.S. Holders whose
creditable foreign taxes during the year do not exceed $300 ($600 for joint
filers) if such individual's gross income for the tax year from non-U.S. sources
consists solely of certain "passive income". In addition, as a result of
recently enacted legislation, a U.S. Holder will be denied a foreign tax credit
with respect to income tax withheld from dividends received to the extent such
U.S. Holder has not held the shares for a minimum period or to the extent such
U.S. Holder is under an obligation to make certain related payments with respect
to substantially similar or related property. The availability of the foreign
tax credit and the application of the limitations on the credit are fact
specific, and holders and prospective holders of Microform common shares should
consult their own tax advisors regarding their individual circumstances.
Disposition of Microforum Common Shares
A U.S. Holder will recognize gain or loss upon the sale of Microforum
common shares equal to the difference, if any, between (1) the amount of cash
plus the fair market value of any property received, and (ii) the shareholder's
tax basis in the Microforum common shares. Preferential tax rates apply to
long-term capital gains of U.S. Holders who are individuals, estates or trusts.
Gain or loss will be capital gain or loss if the Microforum common shares are a
capital asset in the hands of the U.S. Holder and will be long-term capital gain
or loss if the Microforum common shares are held for more than one year.
Deductions for net capital losses are subject to significant limitations. For
U.S. Holders which are individuals, any unused portion of such net capital loss
may be carried over to be used in later tax years until such net capital loss is
thereby exhausted. For U.S. Holders that are corporations (other than
corporations subject to Subchapter S of the Code), an unused net capital loss
may be carried back three years from the loss year and carried forward five
years from the loss year to be offset against capital gains until such net
capital loss is thereby exhausted. Proceeds from the sale, exchange or other
disposition of Microforum common shares may in certain circumstances be subject
to information reporting and backup withholding.
Other Considerations
In the following circumstances, the above sections of this discussion may
not describe the United States federal income tax consequences resulting from
the holding and disposition of Microforum common shares.
Foreign Personal Holding Company
If at any time during a taxable year more than 50% of the total combined
voting power or the total value of Microforum outstanding shares is owned,
directly or indirectly, by five or fewer individuals who are citizens or
residents of the United States and 60% or more of Microforum's gross income for
such year was derived from certain passive sources (e.g., from dividends
received from its subsidiaries), Microforum may be treated as a "foreign
personal holding company". In that event, U.S. Holders that hold Microforum
common shares would be required to include in gross income for such year their
allocable portions of such passive income to the extent Microforum does not
actually distribute such income.
Foreign Investment Company
If 50% or more of the combined voting power or total value of Microforum
outstanding shares are held, directly or indirectly, by citizens or residents of
the United States, United States domestic partnerships or corporations, estates
other than foreign estates (as defined by the Code Section 7701(a) (31)), or
certain trusts treated as U.S. persons pursuant to Code Section 7701(a)(30), and
Microforum is
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found to be engaged primarily in the business of investing, reinvesting, or
trading in securities, commodities, or any interest therein, Microforum may be
treated as a "foreign investment company" as defined in Section 1246 of the
Code, causing all or part of any gain realized by a U.S. Holder selling or
exchanging Microforum common shares to be treated as ordinary income rather than
capital gain.
Passive Foreign Investment Company
As a foreign corporation with U.S. Holders, Microforum could potentially
be treated as a passive foreign investment company ("PFIC"), as defined in
Section 1297 of the Code, depending upon the percentage of Microforum's income
that is passive, or the percentage of Microforum's assets that is producing
passive income. U.S. Holders owning shares of stock of a PFIC upon receipt of
certain distributions by the PFIC and upon disposition of the shares at a gain
are subject to an additional tax at ordinary income rates and to an interest
charge based on the value of deferral of tax for the period during which the
shares of the PFIC are owned. However, if the U.S. Holder makes a timely
election to treat a PFIC as a qualified electing fund ("QEF") with respect to
such shareholder's interest therein, the above-described rules generally will
not apply. Instead, the electing U.S. Holder would include annually in his gross
income his pro rata share of the PFIC's ordinary earnings and net capital gain
regardless of whether such income or gain was actually distributed. A U.S.
Holder of a QEF can, however, elect to defer the payment of United States
federal income tax on such income inclusions. Special rules apply to U.S.
Holders who own their interests in a PFIC through intermediate entities or
persons.
A U.S. Holder of certain PFIC stock that is regularly traded on certain
public exchanges can elect to mark the stock to market annually, recognizing as
ordinary income or loss each year an amount equal to the difference between the
holder's adjusted basis in the PFIC stock and its fair market value. Losses are
allowed only to the extent of net mark-to-market gain previously included by the
U.S. Holder under the election for prior taxable years. If the mark-to-market
election is made, then the rules set forth above for taxation of distributions
by Microforum and dispositions of shares at a gain would not apply for periods
covered by the election.
Microforum believes that it is not a PFIC. If in a subsequent year
Microforum concludes that it is a PFIC, it intends to make information available
to enable a U.S. Holder to make a QEF election in that year. There can be no
assurance that Microforum's determination concerning its PFIC status will not be
challenged by the IRS, or that Microforum will be able to satisfy record keeping
requirements which will be imposed on QEFs.
Controlled Foreign Corporation
If more than 50% of the voting power of all classes of stock or the total
value of Microforum stock is owned, directly or indirectly, by citizens or
residents of the United States, United States domestic partnerships and
corporations or estates or trusts other than foreign estates or trusts, each of
whom own 10% or more of the total combined voting power of all classes of
Microforum stock ("United States Shareholder"), Microforum could be treated as a
"controlled foreign corporation" under Subpart F of the Code.
This classification would effect many complex results including the
required inclusion by such United States Shareholders in income of their pro
rata shares of "Subpart F income" (as specially defined by the Code) of
Microforum. Generally, Subpart F would require current inclusions in the income
of United States Shareholders to the extent of certain kinds of income of the
controlled foreign corporation as set forth in the Code. In addition, under
Section 1248 of the Code, gain from the sale or exchange of stock by a holder of
common shares who is or was a United States Shareholder at any time during the
five year period ending with the sale or exchange when Microforum was a
controlled foreign corporation is
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treated as ordinary dividend income to the extent of certain earnings and
profits of the Company attributable to the stock sold or exchanged. Because of
the complexity of Subpart F, a more detailed review of these rules is outside of
the scope of this discussion.
ITEM 8 SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below as of and for each of
the years in the two-year period ended February 28, 1999, have been excerpted
from or are derived from the consolidated financial statements of Microforum
Inc. as of and for each of the two years then ended, prepared in accordance with
U.S. GAAP and audited by PricewaterhouseCoopers LLP, Chartered Accountants in
Canada. The selected consolidated financial data presented below in accordance
with Canadian GAAP as of and for each of the five years in the five year period
ended February 28, 1999, have been excerpted from or are derived from the
consolidated financial statements of Microforum Inc. as of and for each of the
years then ended, prepared in accordance with Canadian GAAP and audited by
PricewaterhouseCoopers LLP, Chartered Accountants in Canada. Canadian GAAP
differs in certain significant respects from U.S. GAAP.
The selected consolidated financial data set forth below should be read in
conjunction with, and are qualified in their entirety by reference to, the
Consolidated Financial Statements.
February 28
1999 1998
US GAAP $ $
Sales 29,148,575 5,230,268
Loss from continuing (3,629,601) (3,861,453)
Operations
Basic loss per share from
continuing operations (0.22) (0.49)
Total assets 18,616,156 7,345,787
Long term debt 1,245,954 1,086,225
<TABLE>
<CAPTION>
February 28
1999 1998 1997 1996(1) 1995(1)
<S> <C> <C> <C> <C> <C>
Canadian GAAP $ $ $ $ $
Sales 29,148,575 5,230,268 5,909,928 12,315,350 12,142,338
Earnings (loss) from (3,780,468) (3,720,428) (6,875,893) 325,913 346,346
continuing operations
Basic earnings (loss) per
share from continuing (0.23) (0.47) (1.50) 0.09 1.65
operations
Total assets 18,616,156 7,876,453 9,996,709 10,941,169 6,105,693
Long term debt 1,245,954 1,086,225 3,448,545 1,485,988 1,293,606
</TABLE>
(1) Selected consolidated financial data for 1995 to 1996 discloses operations
discontinued in 1998 combined with continuing operations.
23
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ITEM 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Overview
Microforum is an integrated Internet applications and marketing
communications company providing a broad range of e-commerce, creative and
database marketing and advertising solutions. Our products and services include
e-commerce and related financial and other software development, Web design,
leading-edge animation, video and digital design, strategic marketing, direct
marketing, advertising, public relations, contest and incentive programs,
special event management, distribution and fulfillment services and database
development and management.
Highlights
o Effective March 1, 1998, the Company acquired all of the issued and
outstanding shares of PPL, Marshall Fenn and Poste Haste. These
multimedia, marketing and related technology companies were acquired at a
purchase price of $6.7 million, funded by a combination of $502,500 cash,
a non-interest bearing promissory note in the principal amount of $502,500
and the issuance of 1,627,143 common shares. Further, Mr. Howard A. Pearl,
President of PPL, was elected to the board of directors of the Company.
o On December 2, 1998, the Company completed a private placement of
4,000,000 special warrants for gross proceeds of $2,000,000, before
deducting estimated fees and expenses of $305,000. Each special warrant
entitles the holder to acquire one unit consisting of one common share and
one-half of one common share purchase warrant upon exercise. Each whole
common share purchase warrant entitled the holder to purchase one common
share at an exercise price of $0.52 until December 2, 2000. A final
receipt qualifying the distribution of the common shares and common share
purchase warrants was issued by the Ontario Securities Commission on March
31, 1999, after which time all of the special warrants were deemed
exercised.
o On January 5, 1999, the Company sold its interest in Gamesmania, an
electronic magazine reviewing computer games, for approximately $413,000,
under which the Company received cash consideration of approximately
$375,000 at closing, and a promissory note of approximately $38,000 which
was received in full by the Company on April 6, 1999.
o On March 8, 1999, the Company completed a private placement of 2,891,739
special warrants for gross proceeds of $3,325,500 before deducting
estimated fees and expenses of $425,000. Each special warrant entitled the
holder to acquire one common share upon exercise. A final prospectus
qualifying the distribution of the common shares was issued by the Ontario
Securities Commission on June 25, 1999, after which time all of the
special warrants were deemed exercised.
o On March 9, 1999, the Company acquired all of the issued and outstanding
shares of Software Guaranty. Software Guaranty was acquired at a purchase
price of $3,126,000 which was established as at November 30, 1998 and
funded at closing by a combination of $2,250,000 in cash and the issuance
of 674,207 common shares. For the three-month period ending February 28,
1999, Software Guaranty reported revenues of $909,913 and a net profit of
$80,456.
o On May 10, 1999, the Company completed a private placement of 3,100,000
special units for gross proceeds of $20,150,000 before deducting estimated
fees and expenses of $1,675,000. Each special unit entitled the holder to
acquire upon exercise one common share and one-half of one common
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share purchase warrant for no additional consideration. Each whole common
share purchase warrant shall entitle the holder to acquire one common
share at an exercise price of $10.00 per common share until September 10,
2000. A final prospectus qualifying the issuance of the common shares and
common share purchase warrants was issued by the securities regulatory
authorities in the provinces of Ontario, British Columbia and Alberta on
June 30, 1999.
o On August 4, 1999, the Company acquired all of the issued and outstanding
shares of Q-Inter. Q-Inter was acquired at a purchase price of $1,310,000
and funded at closing by a combination of $750,000 cash and the issuance
of 86,153 shares of Microforum at an ascribed value of $6.50 per share.
For the six-month period ending May 31, 1999, Q-Inter reported revenues of
$1.45 million.
Fiscal 1999 Compared to Fiscal 1998
The Company reported a loss from continuing operations of $3.63 million for the
year ended February 28, 1999 compared to a loss from continuing operations of
$3.86 million for the year ended February 28, 1998. Including discontinued
software/hardware and subsidiary operations, the Company reported a consolidated
net loss of $2.70 million for the year ended February 28, 1999 compared to a
consolidated net loss of $8.15 million for the year ended February 28, 1998.
Included in the net loss of $2.70 million for the 1999 fiscal year are net
non-recurring and restructuring expenses of approximately $1.31 million
comprised as follows:
($000's)
--------
Cost of shares issued on renegotiation of acquisition of PPL $1,104
Marketing Services Inc.
Severance expenses 375
Financing fees and writedown of leasehold improvements 235
------
Sub-total $1,714
Gain on sale of Gamesmania (408)
------
Net $1,306
------
Net non-recurring and restructuring expenses per share (on a (0.08)
non-diluted basis)
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Results of Continuing Operations
The Company's revenues from continuing operations have been primarily
derived in the North American market. The following table provides a comparative
breakdown of revenues by segment as at February 28, 1999 and February 28, 1998
and includes revenues of the PPL Group which was acquired effective March 1,
1998:
(in 000's Canadian except REVENUES BY SEGMENT
for percentages)
February 28
1999 1998
Internet and multimedia services
Content $ 137 0% $ 47 1%
Services 559 2% 247 5%
Intercompany sales adjustments (64) 0% -- 0%
---------------------------------------
Internet 632 2% 294 6%
---------------------------------------
Duplication / Replication $ 3,177 11% $ 3,222 62%
Contract services 1,408 5% 1,406 27%
Other 100 0% 308 6%
Intercompany sales adjustments (111) 0% -- 0%
---------------------------------------
Multimedia 4,574 16% 4,936 94%
---------------------------------------
$ 5,206 18% $ 5,230 100%
---------------------------------------
Marketing, programs and distribution
Marketing $ 10,557 36% -- 0%
Fixed programs 2,246 8% -- 0%
Distribution - PPL Marketing 1,761 6% -- 0%
Distribution - Poste Haste 1,077 4% -- 0%
Intercompany sales adjustments (169) -1% -- 0%
---------------------------------------
$ 15,472 53% $ -- 0%
---------------------------------------
Advertising and public relations
Consulting and production fees $ 2,556 9% -- 0%
Media revenue 5,405 19% -- 0%
Other 510 2% -- 0%
---------------------------------------
$ 8,471 29% $ -- 0%
---------------------------------------
Total revenue $ 29,149 100% $ 5,230 100%
=======================================
Internet content revenues for the year ended February 28, 1999 include
advertising revenues for the Company's Gamesmania e-zine of approximately
$62,000 and software sales of approximately $75,000
26
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generated by the Company's Softmania on-line store. Internet services revenues
for the year ended February 28, 1999 increased 100% over the comparable period
in 1998 reflecting new business obtained primarily for e-commerce web design and
hosting services.
The sales decline in multimedia contract services at February 28, 1999 reflects
a combination of reduced multimedia servicing requirements from a major account
compared to the prior year as well as extended time cycles relative to
completion of contracts on hand.
Overall gross margin performance declined at February 28, 1999 to 32.7% from
47.6% at February 28, 1998 and reflects the impact of lower comparative gross
margins derived from marketing, programs and distribution and advertising and
public relations revenue segments. These segments represent approximately 82% of
total revenue for the year ended February 28, 1999. Set out below are the gross
margin percentages derived from each revenue segment:
February 28
1999 1998
Internet and multimedia services 46.6% 47.6%
Marketing, programs and distribution 35.4% n/a
Advertising and public relations 18.4% n/a
----- -----
Overall gross margin 32.7% 47.6%
----- -----
Operating expenses increased approximately $6.12 million at February 28, 1999 to
$12.47 million from $6.35 million at February 28, 1998 and includes:
o An increase in general and administration expenses of approximately $4.92
million from $3.83 million at February 28, 1998 to $8.75 million at
February 28, 1999. The increase is mostly attributable to consolidation of
the PPL Group of Companies' general and administration expenses of $3.64
million, restructuring expenses described above of $0.61 million and
amortization of goodwill arising on the PPL Group acquisition of $0.33
million
o An increase in sales and marketing expenses of approximately $1.23 million
from $1.55 million at February 28, 1998 to $2.78 million at February 28,
1999. The increase includes consolidation of the PPL Group of Companies'
sales and marketing expenses of $1.59 million, partially offset by a
reduction of sales and marketing expenses at Microforum of $0.36 million.
o A decrease in interest expenses associated with long-term lease
obligations of approximately $34,000 from $0.305 million at February 28,
1998 to $0.271 million at February 28, 1999.
Fiscal 1998 Compared to Fiscal 1997
Microforum reported a loss from continuing operations of $3.86 million for
the year ended February 28, 1998 compared to a loss from continuing operations
of $6.77 million for the year ended February 28, 1997.
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More than 85% of Microforum's revenues from continuing operations have
been derived in the North American market. The following table provides a
comparative breakdown of revenues by source:
Revenues by Source
(in $000's Canadian except
for percentages)
Year ended February 28,
-------------------------------------------
1998 1997
------------------- -------------------
Internet
Content 7 1% 60 1%
Services 247 5% 72 1%
-------------------------------------------
294 6% 132 2%
-------------------------------------------
Multimedia
Duplication/replication $3,222 62% $3,809 64%
Contract services 1,406 27% 1,440 24%
Other 308 6% 529 9%
-------------------------------------------
4,936 94% 5,778 98%
-------------------------------------------
Internet and Multimedia $5,230 100% $5,910 100%
===========================================
The sales decline in multimedia duplication/replication reflected a
substantial shift in sales mix from disk duplication to CD ROM duplication
during fiscal 1999.
Gross margin performance improved for the year ended February 28, 1998 to
47.6% from 9.5% for the year ended February 28, 1997 and reflects:
o During fiscal 1997 write-downs of computer accessories inventories
amounted to approximately $665,000 and gross margin losses associated with
discontinued projects and special programs were approximately $430,000.
Combined, these unusual items represented a negative gross margin impact
of approximately 19% for fiscal 1997.
o Pricing policies were amended in fiscal 1998 such that price quotations
required a minimum recapture of fixed and variable overhead burdens.
Operating expenses decreased approximately $1.09 million for the year
ended February 28, 1998 to $6.35 million from $7.44 million for the year ended
February 28, 1997. This decrease includes:
o A decrease in general and administration expenses of approximately
$585,000 to $3.83 million for the year ended February 28, 1998 from $4.41
million for the year ended February 28, 1997. Major reductions in various
expense categories during fiscal 1998 arose in salaries (approximately
$400,000), professional fees (approximately $60,000) and bank interest and
service charges (approximately $55,000).
o An increase in sales and marketing expenses of approximately $250,000 to
$1.55 million for the year ended February 28, 1998 from $1.30 million for
the year ended February 28, 1997 . This increase arose mainly from
additional expenses incurred to more actively advertise and promote
Microforum's business to a broader number of potential investors.
o A decrease in research and development expenses of approximately $720,000
to $670,000 for the year ended February 28, 1998 from $1.39 million for
the year ended February 28, 1997. This
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decrease was largely attributable to a write-down of $750,000, recorded
during fiscal 1997, in connection with impairment in the carrying value of
capital assets.
o A decrease in interest expenses associated with long-term lease
obligations of approximately $34,000 to $300,000 for the year ended
February 28, 1998 from $340,000 for the year ended February 28, 1997. This
decrease largely arose from the conversion of approximately $1.8 million
of long-term debt to equity in September, 1997.
Liquidity and Capital Resources
Excluding cash / bank borrowings and assets and liabilities of
discontinued software and hardware operations, the Company reported a positive
working capital of $2,730,601 at February 28, 1999 compared with a negative
working capital of $490,074 at February 28, 1998, representing an increase of
$3,220,675. At February 28, 1999, the Company had borrowings under its operating
lines of credit of $1,354,554 compared with cash on hand of $2,222,386 at
February 28, 1998, representing a decrease in cash of $3,576,940.
Accounts receivable, inventories, work-in-progress and other current
assets at February 28, 1999 increased $7,047,832 compared to February 28, 1998
largely because of increases in trade accounts receivable of $5,621,114,
increases in work-in-progress inventory of $1,378,225 and increased prepaid
expenses of 177,715, offset by reductions in inventories of $129,222. Non-cash
current liabilities at February 28, 1999 increased $3,827,157 compared to
February 28, 1998 chiefly due to increases in accounts payable and accrued
liabilities of $3,669,709, increases in deferred revenue of $106,587 and an
increase of $50,861 in amounts due within the year under long-term debt
obligations.
The Company utilized $753,445 in cash from its operating activities before
net changes in non-cash working capital balances at February, 1999, mostly
attributable to the consolidated net loss, adjusted for the amortization of
capital assets and goodwill as well as non-cash charges accrued for shares
issued on renegotiation of the PPL acquisition and amortization of deferred
expenses relating to options granted to a service provider. By comparison, the
Company utilized $2,811,274 in its operating activities before net changes in
non-cash working capital balances at February 28, 1998.
Net changes in non-cash working capital balances utilized $1,144,003 of
cash during the year ended February 28, 1999, increasing cash utilized by
continuing operating activities to $1,897,448. By comparison, net changes in
non-cash working capital balances generated $136,418 of cash during the year
ended February 28, 1998, decreasing cash used in continuing operating activities
to $2,674,856.
For the year ended February 28, 1999, the Company raised $2.376 million on
issue of special warrants ($1.489 million, net), net cash proceeds from the
exercise of stock options ($475,000), repayments received on loans to a former
senior officer ($306,000) and shares issued for debt conversion and director
compensation ($106,000). The Company received common shares of $100,000 in
partial settlement of the note receivable on the sale of Microforum Italia,
repaid $738,000 under its long-term debt obligations and reduced net amounts due
to related parties by $438,000. By comparison, for the year ended February 28,
1998, the Company raised $7.480 million from the net proceeds on issue of
special warrants ($7.112 million) and net cash proceeds from the exercise of
stock options ($368,000), and repaid $1.126 million under its long-term debt
obligations.
During the year ended February 28, 1999, the Company generated $6.297
million on issue of common shares to acquire the PPL Group ($5.695 million), a
promissory note in connection with the acquisition of the PPL Group ($502,500)
and settlement of a note receivable ($100,000). The Company utilized $9.173
million in connection with the costs of acquisition of the PPL Group ($7.015
million),
29
<PAGE>
bank indebtedness of the PPL Group assumed at acquisition ($1.964 million) and
investment to acquire capital assets ($194,000). During the year ended February
28, 1998, the Company generated $37,000 from the sale of capital assets.
Year 2000 Issue
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems and
applications may recognize the year 2000 as 1900 or some other date, resulting
in errors when information using year 2000 dates is processed. Software relying
primarily on two-digit identifiers may not function as expected before, on, or
after January 1, 2000. In addition, a year 2000 compliant product will recognize
the year 2000 as a leap year.
The Company and its subsidiaries are actively responding to the goal of
ensuring that its information technology infrastructure is year 2000 compliant
in all areas of operations, including, to the extent possible, relationships
with vendors, suppliers and customers. To this end, comprehensive inventories of
hardware and software applications have been catalogued and preliminary risk
impact determinations have been performed to assess the degree of compliance
with year 2000 compliance. In mid-1998, the Company established cross-functional
teams to identify direct and non-direct impact suppliers and to obtain completed
year 2000 compliance questionnaires identifying potential areas of exposure. The
Company has assessed the impact of compliance by third party suppliers and
examined its customer interfaces.
At this time, management believes that the Company's exposure to year 2000
problems in relation to older internally developed customized applications is
manageable and will be largely addressed through implementation of new
accounting and other software, which is year 2000 compliant. As of the date
hereof, the Company has replaced approximately 80% of all non-compliant PC's,
has ensured that all leased equipment providers are year 2000 compliant and has
replaced 60% of all third party software applications which are not compliant.
The Company estimates that its total external expenditures to ensure year
2000 readiness will be approximately $240,000, which is allocated to custom
software updates, commercial software upgrades and hardware upgrades. As of
February 28, 1999, the Company has completed approximately 65% of its custom
software upgrades, 60% of its commercial software upgrades and 80% of its
hardware upgrades. The Company expects to be year 2000 compliant by September
30, 1999. Maintenance or modification costs will be expensed as incurred, while
the costs of new information technology systems will be capitalized and
amortized in accordance with Company policy. Management does not expect the
associated incremental costs of year 2000 compliance to have a material impact
on the Company's consolidated financial position, liquidity, cash flows or
results from operations. It should be noted that currently unforeseen
developments or delays could cause this expectation to change. In addition,
there is no guarantee that the Company's vendors, suppliers and customers will
achieve year 2000 compliance, or that such failure to do so will not have a
material adverse impact on the Company or its subsidiaries.
ITEM 9A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not own and have not issued any market risk sensitive instruments
about which disclosure is required to be provided pursuant to this Item.
30
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ITEM 10 DIRECTORS AND OFFICERS OF REGISTRANT.
The following table sets forth the names of the directors and officers of
the Company, their age and position with the Company and their respective
principal occupations:
Name Age Position with the Company
The Honourable David R. 55 Chairman of the Board
Peterson, P.C., Q.C.(1)(2)
Marco Argenti 32 Vice-President, Internet Services of
Microforum and President of iFront
J. Efrim Boritz(1)(2) 48 Director
Dwight B. Crane 62 Director
Francois M. de Gaspe Beaubien 37 Director
Frank Iadipaolo 47 Chief Financial Officer and Secretary
Donald W. Paterson(1)(2) 66 Director
Howard A. Pearl 49 President, Chief Executive Officer and
Director
- ----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
The Honourable David R. Peterson has been the Chairman of the Board of
Directors of Microforum since June 1996. Since 1991, Mr. Peterson has been a
partner at the law firm of Cassels Brock & Blackwell in Toronto. Prior to
joining Cassels Brock & Blackwell, Mr. Peterson served as the Premier of the
Province of Ontario.
Marco Argenti is Vice-President, Internet Services, of Microforum and
President of its wholly-owned subsidiary Internet Frontiers Inc. Mr. Argenti
joined Microforum in November 1997 when the Company acquired his software
development company, Dreamware s.r.l. Mr. Argenti is a pioneer in the
development of e-commerce technologies including the iFront ECS(TM), and has
been recognized in his field by market leader Microsoft Corporation. Mr. Argenti
has founded and operated several high technology companies and has utilized his
extensive experience in Internet technologies to develop the strategies of
iFront. Mr. Argenti is currently one of 25 North American members of the
Commerce Partner Advisory Board for Microsoft Corporation. Mr. Argenti holds a
Master's degree in Computer Engineering from the University of Pisa, Italy.
J. Efrim Boritz has been a director of Microforum since September 1997.
Since 1983, Mr. Boritz has been a professor at the School of Accounting at the
University of Waterloo, Ontario. Mr. Boritz is a Chartered Accountant, Certified
Information Systems Auditor and holds a Doctorate degree from the University of
Minnesota and a Bachelor of Arts and a Masters of Business Administration from
York University, Toronto.
Dwight B. Crane has been a director of Microforum since July 1999. A
Professor of Finance and Banking at Harvard Business School, Mr. Crane has
extensive knowledge of the banking industry, having been active in the financial
institution field for many years. He coordinated the Global Financial System
Project at the Harvard Business School, which examined the role and organization
of financial
31
<PAGE>
institutions in the future. He is co-author of such financial books as: The
Global Financial System: A Functional Perspective; Doing Deals: Investment Banks
at Work; and The Effects of Banking Deregulation. Mr. Crane also serves as a
member of the Board of Directors of the Smith Barney Appreciation Fund and other
mutual fund companies sponsored by Salomon Smith Barney.
Francois M. de Gaspe Beaubien has been a director of the Company since May
1999. Since 1996, Mr. de Gaspe Beaubien has been the President, Publishing
Division and since 1998 has also held the position of Executive Vice President,
Business Development of Telemedia Communications Inc., where he is responsible
for the North American publication of various magazines which include Canadian
Living, Coup de pouce, TV Guide, Style at Home, Homemakers and Sympatico Net
Life. Prior to joining Telemedia Communications Inc., Mr. de Gaspe Beaubien was
President of Quebec's leading publishing company Les Editions Telemedia (July
1994-December 1995), Group Publisher of Telemedia Communications (U.S.A.) Inc.,
(1992-1994), Vice-President, Operations of Telemedia Communications (U.S.A.)
Inc. (1990-1991), and Vice-President, Operations of New England Monthly Magazine
(1989-1990). Mr. de Gaspe Beaubien holds a Bachelor of Arts from Haverford
College and a Masters of Business Administration from the Harvard Business
School.
Frank Iadipaolo is the Chief Financial Officer of Microforum. Mr.
Iadipaolo joined Microforum in February 1997 and assumed responsibility for
financial and treasury related planning, reporting and control functions. Mr.
Iadipaolo is a Chartered Accountant with senior management experience gained in
the financial services sectors as well as with major corporations having
significant international sales and distribution activities. He has also
provided consulting services to facilitate the orderly expansion or commencement
of operations for companies in the software, environmental remediation and
applied technology sectors.
Donald W. Paterson has been a director of Microforum since June 1996.
Since 1989, Mr. Paterson has been the President and founder of Cavandale
Corporation, a strategic corporate consulting firm that specializes in providing
corporate consulting to emerging growth companies largely in the technology
sector. Prior thereto, Mr. Paterson was a director and Vice-President of Wood
Gundy Inc., a major Canadian investment dealer where he was principally involved
in the identification and financing of emerging growth companies.
Howard A. Pearl is the President and Chief Executive Officer of
Microforum. Mr. Pearl initially joined the Company's management team in April
1998 as President of each of the PPL Companies, and assumed the President and
Chief Executive Officer position in November 1998. Prior to joining Microforum,
Mr. Pearl established a number of successful business ventures in a variety of
fields. Mr. Pearl acquired a controlling interest in PPL in May 1993, Marshall
Fenn in December 1995 and Poste Haste in July 1997. Mr. Pearl has been a guest
lecturer at the Institute of Dynamic Business Management in Geneva, and is
currently a participant in the OPM Program at Harvard Business School.
Committees of the Board of Directors
The Audit Committee consists of a majority of independent directors and
reviews Microforum's financial statements and its internal controls, reviews the
work of Microforum's independent auditors and reports to the board of directors.
The Compensation Committee reviews the level and form of compensation
payable to the executive officers of Microforum, and makes recommendations to
the board of directors respecting such compensation. The Compensation Committee
is also responsible for making recommendations to the board of directors with
respect to the granting of stock options pursuant to Microforum's stock option
plan. See Item 12, "Options to Purchase Securities from Registrant or
Subsidiaries".
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<PAGE>
ITEM 11 COMPENSATION OF DIRECTORS AND OFFICERS.
Compensation of Directors
Subject to shareholder approval and effective January 20, 1999, each of
the non-management directors, other than David R. Peterson, Francois M. de Gaspe
Beaubien and Dwight B. Crane, will be compensated for services rendered to the
board of directors in the form of Common Shares (the "Retainer Shares") as
follows:
Name Value of Retainer Shares Number of Retainer Shares
J. Efrim Boritz........ $10,000 4,348
Donald W. Paterson..... $10,000 4,348
------- -----
Totals $20,000 8,696
The number of Retainer Shares is computed by dividing the annual retainer
of $10,000 for services rendered to the board of directors and a fee of $500 for
each meeting of the board of directors which they attend, in person or by
telephone conference, based on 12 meetings per annum, divided by $2.35,
representing the closing market price on January 19, 1999. One-half of the total
number of shares issued to each director under this arrangement is to be
delivered on August 31, 1999 with the remaining balance to be delivered on
January 31, 2000. In the event that a director resigns or otherwise leaves the
board of directors of the Company during the year, only a pro-rata amount of the
Retainer Shares will be released to such director with the balance being
surrendered to the Company for cancellation. This compensation arrangement has
been approved by the board of directors for a one-year period. Instead of
receiving Retainer Shares, David R. Peterson, Francois M. de Gaspe Beaubien and
Dwight B. Crane have elected to receive an annual cash retainer of $10,000
($25,000 in the case of Mr. Peterson, the Chairman of the Board) for services
rendered to the board of directors and a fee of $500 for each meeting of the
board of directors which each attends, in person or by telephone conference.
At its next annual and special meeting of the shareholders scheduled on
August 16, 1999, the shareholders of the Company will be asked to approve a
share plan for the outside directors of the Company (the "Outside Directors
Share Plan") to be effective commencing January 1, 2000. The purpose of the
Outside Directors Share Plan is to promote the interests of the Company by
attracting and retaining qualified persons to serve on the board of directors by
affording each outside director an opportunity to receive some or all of their
remuneration in the form of common shares. An outside director who so elects
will be issued common shares at a value equal to the weighted average trading
price of the common shares on The TSE, or such stock exchange on which the
common shares are listed and posted for trading, for the first twenty
consecutive trading days in January of each year. The common shares to be issued
under the Outside Directors Share Plan shall be subject to pro-rata adjustment
in the event that an outside director ceases to serve on the board of directors.
Directors' and Officers' Liability Insurance and Key Man Insurance
Microforum has a directors' and officers' insurance policy in the amount
of $5 million per occurrence containing industry standard exclusions and
deductibles. The Company pays an annual premium of $17,150 for this policy. No
claims under the policy have been made to date.
The Company has also assumed life insurance contracts for the following
"key persons": Howard Pearl, President and Chief Executive Officer, in the
amount of $1,000,000; Eric Snyder, Vice-President of Marketing of PPL, in the
amount of $250,000; Marco Argenti, President of iFront and Vice-President,
33
<PAGE>
Internet Services, in the amount of $500,000; and Frank Helwig, Chief Operating
Officer of iFront, in the amount of $250,000. Microforum has not obtained any
other "key person" insurance.
Summary Compensation Table
The following table contains information about the compensation earned by
Microforum's Chief Executive Officer and each of its other executive officers
who served as executive officers as of February 28, 1999 and whose aggregate
salary and bonus exceeded $100,000 (collectively, the "Named Executive
Officers") during the applicable fiscal year.
<TABLE>
<CAPTION>
Annual Compensation Long-Term
--------------------------------------------- Compensation
Name and Principal Year ended Other Annual Securities Under All Other
Position Feb. 28 Salary ($) Bonus ($) Compensation(4)($) Options Granted (#) Compensation ($)
- -------------------- ---------- ---------- --------- ------------------ ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Howard A. Pearl(1), 1999 $600,000 Nil Nil 220,000 Nil
President and Chief
Executive Officer
Frank Iadipaolo(2), 1999 $125,000 Nil $6,600 310,000 Nil
Chief Financial Officer 1998 $112,000 Nil $6,600 66,667 Nil
Marco Argenti(3), 1999 $120,000 Nil $6,600 47,500 Nil
Vice-President, 1998 $100,000 Nil $6,600 72,500 Nil
Internet Services
</TABLE>
- ----------
(1) On November 11, 1998, Mr. Pearl was appointed as President and Chief
Executive Officer and the board of directors increased his salary to
$600,000 per annum. Does not include options granted on April 20, 1999 to
acquire up to 250,000 common shares at an exercise price of $2.45 per
share, subject to vesting.
(2) Does not include options granted on April 20, 1999 to acquire up to
150,000 common shares at an exercise price of $2.45 per share, subject to
vesting.
(3) Does not include options granted on April 20, 1999 to acquire up to
125,000 common shares at an exercise price of $2.45 per share and options
granted on July 20, 1999 to acquire up to 100,000 common shares at an
exercise price of $8.05 per share, all subject to vesting.
(4) These figures represent a car allowance payable by the Company.
In addition, for the fiscal year ended February 28, 1999, Microforum paid
$801,862 aggregate compensation to all directors and officers as a group,
including approximately $296,402 to officers and/or directors who resigned their
employment with Microforum prior to February 28, 1999.
Current Executive Compensation
In connection with the acquisition of the PPL Companies, Microforum
entered into an employment agreement with Howard Pearl, dated April 3, 1998 (as
amended, the "Pearl Employment Agreement"), whereby Mr. Pearl assumed the
positions of President of each of the PPL Companies. The Pearl Agreement
provided that he receive an annual salary of $500,000 per annum for three years
plus options pursuant to the Stock Option Plan (as hereinafter defined) to
acquire up to 140,000 common shares at a price of $3.50 per share, representing
the closing market price on March 9, 1998, the day preceding the date of grant.
A total of 100,000 of the options vested immediately with the balance vesting in
equal amounts over a three-year period. On November 11, 1998, the board of
directors appointed Mr. Pearl Chief Executive Officer and President and
increased his annual salary from $500,000 to $600,000. In addition, on November
11, 1998, the term of Mr. Pearl's employment was extended to November 10, 2001
with successive one year periods unless otherwise terminated. In the event of
termination other than
34
<PAGE>
for cause or incapacity, Mr. Pearl will be entitled to be paid the balance of
his base salary owing up to a maximum of three years and a minimum of two years.
Pursuant to an employment agreement entered into between Frank Iadipaolo
and Microforum on November 1, 1997, as amended, Mr. Iadipaolo received options
to purchase an aggregate of 100,000 common shares at an exercise price of $1.13,
representing a premium of 25% to the existing market price on the date of grant,
one-third of which options vested on November 11, 1997 and the remaining
two-thirds which vest in equal amounts over a two-year period commencing June
25, 1998. On January 5, 1998, Mr. Iadipaolo exercised options for a total of
33,333 common shares for consideration of $37,666. On March 24, 1998, the
shareholders approved the agreement entered into by Mr. Iadipaolo and the board
of directors on January 23, 1998 whereby Mr. Iadipaolo agreed to an approximate
20% reduction in his base salary from $112,000 per annum to $90,000 per annum in
consideration for the grant of options on January 23, 1998 pursuant to the Stock
Option Plan to acquire up to 142,000 common shares at a price of $3.15 per
share, representing the closing market price on the day preceding the date of
grant. Subject to Mr. Iadipaolo's continued services to Microform, such options
vest as follows: options to purchase 47,333 common shares vested immediately,
options to purchase 47,333 common shares vested on January 23, 1999; options to
purchase 23,667 common shares vested at such time as the market price for the
common shares is equal to or greater than $10.00 per share; and options to
purchase 23,667 common shares to vest on July 23, 1999. On July 15, 1998, the
board of the directors approved an increase in the salary paid to Mr. Iadipaolo
from $90,000 to $125,000.
On April 22, 1999, Mr. Iadipaolo exercised options for a total of 33,333
common shares for consideration of $37,666. On April 29, 1999, Mr. Iadipaolo
exercised options for a total of 118,334 common shares for consideration of
$372,752. By agreement dated December 29, 1998, in the event of termination of
his employment, Mr. Iadipaolo will be entitled to receive a severance payment
equal to 12 months of his existing salary, including employment benefits, and
all outstanding options granted to Mr. Iadipaolo will immediately vest, having
an exercise period that expires on the day that is twelve months following the
date of vesting.
ITEM 12 OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
Microforum's stock option plan (the "Stock Option Plan"), as adopted by
the board of directors and ratified by the shareholders, provides incentive
compensation to its directors, officers, employees, consultants and service
providers. The salient provisions of the Stock Option Plan, which comply with
the requirements of the TSE are set forth below.
The maximum number of common shares reserved for issuance pursuant to
stock options granted under the Stock Option Plan is 3,400,000 common shares.
After giving effect to the exercise of 956,158 options through July 9, 1999, the
balance of common shares reserved for issuance pursuant to the Stock Option Plan
is 2,443,842. At the upcoming 1999 annual and special meeting of shareholders
scheduled for August 16, 1999, shareholders will be asked to approve an increase
in the number of common shares reserved for issuance under the Stock Option Plan
by 3,100,000 options such that the maximum number of common shares reserved for
issuance under the Stock Option Plan is 6,500,000.
The option price of any shares cannot be less than the closing price of
the shares on the day immediately preceding the date upon which the option is
granted. Options granted under the Stock Option Plan may be exercised during a
period not exceeding 10 years subject to earlier termination upon the
termination of the optionee's employment, upon the optionee ceasing to be an
employee, senior officer, director or consultant of Microforum or any of its
subsidiaries, as applicable, or upon the optionee
35
<PAGE>
retiring, becoming apparently disabled or dying. The options are
non-transferable. The board of directors may from time to time amend or revise
the terms of the Stock Option Plan or may terminate the Stock Option Plan at any
time. The Stock Option Plan authorizes the Compensation Committee of the board
of directors to provide financial assistance to certain senior officers by means
of secured non-interest bearing loans, against the options and common shares
upon exercise thereof, to allow such officers to exercise options and acquire
Common Shares of the Company up to an aggregate limit of $2,000,000. In
addition, the Stock Option Plan provides that if Microforum accepts an offer to
amalgamate, merge or consolidate with any other company (other than a
wholly-owned subsidiary) or in the event that holders of greater than 50% of the
Company's common shares accept an offer made to all or substantially all of the
holders of the Common Shares of Microforum to purchase in excess of 50.1% of the
current issued and outstanding common shares, then all of the then unvested
options shall, without any further action on behalf of Microforum, be
automatically vested.
As of July 31, 1999, options to employees, executive officers and
directors of Microforum to purchase up to an aggregate of 2,631,508 common
shares were granted pursuant to the Stock Option Plan, as described in the
following table:
<TABLE>
<CAPTION>
Common Shares
Under Option Exercise Price Grant Date Expiration Date
<S> <C> <C> <C> <C>
Non-Executive Directors 55,000 $6.50 August 27, 1996 August 27, 2006
(5 individuals) (1) 120,000 $1.25 September 8, 1997 September 8, 2007
105,000 $3.15 January 23, 1998 January 23, 2008
105,000 $2.35 January 20, 1999 January 20, 2009
60,000 $5.80 May 27, 1999 May 27, 2009
Executive officers of the Company 58,334 $1.13 June 25, 1997 June 25, 2007
(8 individuals) (2) 39,334 $4.90 November 11, 1997 November 11, 2007
23,666 $3.15 January 23, 1998 January 23, 2008
146,667 $3.50 March 10, 1998 March 10, 2008
3,000 $1.35 July 8, 1998 July 8, 2008
41,667 $1.30 June 29, 1998 June 29, 2008
183,999 $0.60 September 30, 1998 September 30, 2008
110,000 $1.24 December 16, 1998 December 16, 2008
603,000 $2.45 April 20, 1999 April 20, 2009
165,000 $8.05 July 20, 1999 July 20, 2009
Employees of the Company 7,000 $1.13 April 15, 1996 April 15, 2006
(105 individuals) (1)(2) 6,668 $1.13 June 25, 1997 June 25, 2007
26,000 $4.90 November 11, 1997 November 11, 2007
162,633 $3.50 March 10, 1998 March 10, 2008
79,342 $1.30 June 29, 1998 June 29, 2008
121,636 $1.35 July 8, 1998 July 8, 2008
74,162 $0.60 September 30, 1998 September 30, 2008
47,500 $1.24 December 16, 1998 December 16, 2008
132,500 $2.45 April 20, 1999 April 20, 2009
129,400 $5.80 May 27, 1999 May 27, 2009
25,000 $8.05 July 20, 1999 July 20, 2009
</TABLE>
(1) For options granted prior to the closing of the Company's initial public
offering on September 12, 1996, the market price at the date of grant was
indeterminate.
36
<PAGE>
(2) At a meeting held on June 25, 1997, the board of directors of the Company
approved the re-pricing of certain options granted to insiders and
non-insiders of the Company. The shareholders approved the re-pricing of
such options at the annual and special meeting held on August 25, 1997 and
the Toronto Stock Exchange consented to such re-pricing on September 22,
1997.
Aggregated Options Exercised and Outstanding During Fiscal Year Ended February
28, 1999
The following table provides detailed information regarding options
exercised by the Executive Officers during the fiscal year ended February 28,
1999. In addition, details on outstanding and unexercised options held are
provided:
<TABLE>
<CAPTION>
Securities Aggregate Value of Unexercised
Acquired on Value Unexercised Options at in-the-money Options at
Name Exercise (#) Realized ($) February 28, 1999 February 28, 1999
- --------------------- ------------ ------------ ------------------------------------ ----------------------------
Exercis- Unexercis-
Exercisable (#) Unexercisable (#) able($) able($)
--------------- ----------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Howard A. Pearl(1) Nil Nil 100,000 120,000 Nil $54,400
Eric H. Winston(2) 1,100,000 $755,500 Nil Nil Nil Nil
Frank Iadipaolo(3) Nil Nil 94,666 223,666 Nil $74,373
G. William Butcher(4) Nil Nil 49,999 40,001 Nil Nil
Marco Argenti(5) Nil Nil 24,166 48,334 $3,625 $ 5,000
</TABLE>
Notes:
(1) Does not include options granted on April 20, 1999 to acquire up to
250,000 common shares at an exercise price of $2.45 per share, subject to
vesting. See "Executive Compensation - Summary Compensation Table".
(2) On October 14, 1997, Mr. Winston exercised options for a total of 285,250
common shares for consideration of $222,495, representing $0.78 per share,
and was issued 164,750 common shares for consideration of $128,505,
representing $0.78 per share and on December 30, 1997, Mr. Winston was
issued an additional 150,000 shares for consideration of $117,000,
representing $0.78 per share. On April 16, 1998, Mr. Winston exercised
options for a total of 246,832 common shares for consideration of
$777,521, representing $3.15 per share, and was issued 86,502 common
shares for consideration of $272,481 representing $3.15 per share. On
November 5, 1998, Mr. Winston exercised options to acquire a total of
250,000 common shares for consideration of $150,000. On January 28, 1999,
Mr. Winston was issued 250,000 common shares for consideration of
$137,500. See "Executive Compensation - Summary Compensation Table".
(3) On January 5, 1998 and April 22, 1999, Mr. Iadipaolo exercised options for
an aggregate total of 66,666 common shares for consideration of
$75,332.58, representing $1.13 per share. On April 29, 1999, Mr. Iadipaolo
exercised options for a total of 118,334 common shares for consideration
of $372,752. Does not include options granted on April 20, 1999 to acquire
up to 150,000 Common Shares at an exercise price of $2.45 per share,
subject to vesting. See "Executive Compensation - Summary Compensation
Table".
(4) On December 22, 1997, Mr. Butcher exercised options for a total of 20,000
common shares for consideration of $25,000, representing $1.25 per share.
On April 29, 1999, Mr. Butcher exercised options for a total of 46,666
common shares for consideration of $228,663. See "Executive Compensation -
Summary Compensation Table".
(5) On April 22, 1999, Mr. Argenti exercised options for a total of 30,000
common shares for consideration of $33,900. Does not include options
granted on April 20, 1999 to acquire up to 125,000 common shares at an
exercise price of $2.45 per share and options granted on July 20, 1999 to
acquire up to 100,000 common shares at an exercise price of $8.05 per
share, all subject to vesting. See "Executive Compensation - Summary
Compensation Table".
37
<PAGE>
ITEM 13 INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
Pursuant to financial assistance approved by the shareholders of the
Company on March 24, 1998, the following executive officers of Microforum
received interest-free secured loans as follows: Frank Iadipaolo, the Chief
Financial Officer of the Company, in the amount of $37,666, and two former
officers, in the aggregate amount of $1,087,168. See Note 4 to the Consolidated
Financial Statements. All of these loans were repaid in April 1999.
In connection with the April 1998 acquisition of the PPL Companies,
1,627,143 common shares of Microforum, representing all of the common shares
issued in the acquisition, are to be released pursuant to a guarantee, share
pledge and escrow agreement among Howard Pearl, the other selling shareholders,
Microforum and Montreal Trust, which agreement provides for the following
release dates:
(1) 2,000 common shares are being released to Howard Pearl on Friday of each
week for a period of three years, commencing April 3, 1998;
(2) approximately 168,700 common shares are being released to Howard Pearl,
and 28,572 common shares are being released to the selling shareholders on
each of July 31, 1998, January 29, 1999, July 30, 1999 and January 28,
2000; and
(3) approximately 224,933 common shares will be released to Howard Pearl and
approximately 20,094 common shares will be released to the selling
shareholders on each of July 28, 2000 and January 26, 2000.
The release of common shares pursuant to sub-paragraph (3) above may be
accelerated if the PPL Companies achieve certain performance targets. Such
acceleration could cause all of the shares in sub-paragraph (iii) to be released
within a period of two years following the closing date.
In addition, in connection with the acquisition of the PPL Companies,
Microforum issued to Mr. Pearl consideration in the amount of $502,500 paid in
cash, 1,627,143 common shares and a non-interest bearing promissory note in the
principal amount of $502,500 which was due October 2, 1998 (the "Pearl Note").
As security for the unpaid portion of the Pearl Note, granted Mr. Pearl a pledge
in respect of the shares (the "Pledged Collateral") of PPL Marketing pursuant to
a pledge agreement between Mr. Pearl and Microforum (the "Pledge Agreement").
The Pledge Agreement provides, among other things, that Mr. Pearl shall be
entitled to realize on the Pledged Collateral and regain his ownership in the
shares of PPL Marketing previously sold to Microforum if Microforum failed to
pay the outstanding principal of the Pearl Note on or before the maturity date.
Due to market conditions, Microform was forced to abandon its financing plans
scheduled for mid-1998 and was not able to pay the scheduled payment on the
Pearl Note on October 2, 1998.
As consideration for Mr. Pearl's forbearance on realizing on the Pledged
Collateral, on November 6, 1998 the board of directors agreed that: (1) Mr.
Pearl may convert $250,000 of the principal amount outstanding under the Pearl
Note into common shares at a price of $0.736 per share; and (ii) that the Pearl
Note be extended until March 31, 2000 during which period the outstanding
balance may not be repaid, redeemed or converted nor the terms thereof amended.
As an adjustment to the original purchase price of the PPL Companies, the board
of directors agreed to issue to Mr. Pearl an additional 1,500,000 common shares
at a prescribed value of $0.736 per share. Microforum shareholders approved of
this share issuance at a special meeting of shareholders held on January 20,
1999. On November 11, 1998, the board of directors also appointed Mr. Pearl as
Microform's Chief Executive Officer and President. Mr. Pearl executed a release
of his interest to the Pledged Collateral on December 2, 1998 in consideration
of the closing of the equity financing occurring on that date. An Extension
Agreement and Release dated
38
<PAGE>
February 4, 1999 was entered into between Mr. Pearl and Microform with regard to
the restructuring of the Pearl Note.
In connection with the acquisition of the PPL Companies, Microforum
assumed the debt obligations of PPL to Howard Pearl of $519,124 in support of
amounts due to PPL of $370,000 from Elliot & Andrews Studios Inc. and $149,124
from Tribco Communications Group Inc. Both of these companies are ultimately
controlled by Mr. Pearl, the President and Chief Executive Officer of
Microforum. Each of these loans are non-interest bearing and due on demand. See
Note 13 to the Financial Statements.
PART II
ITEM 14 DESCRIPTION OF SECURITIES TO BE REGISTERED.
The authorized capital of the Company consists of an unlimited number of
Common Shares and an unlimited number of preference shares issuable in series.
There were 33,860,105 Common Shares issued and outstanding as fully-paid and
non-assessable shares as of July 31, 1999. There are no preference shares
outstanding.
Common Shares
The holders of common shares are entitled, subject to the rights of
holders of preference shares and any other shares ranking senior to the holders
of common shares, to dividends if, as and when declared by the board of
directors, to one vote per share at meetings of shareholders and, upon
liquidation, to receive such assets of Microforum as are distributable to the
holders of the common shares.
Preference Shares
The preference shares may be issued in one or more series. Prior to the
issue of any such series, the directors are required to fix the number,
designation and the rights attaching to the shares of such series. With respect
to dividends and the distribution of assets in the event of the liquidation,
dissolution or wind-up of the Company, the preference shares of each series will
rank on a parity with the preference shares of every other series and are
entitled to preference over the common shares. The preference shares of any
series also are entitled to such other preference over the common shares and the
shares of any other class-ranking junior to the preference shares as may be
fixed by the directors.
Registrar and Transfer Agent
Montreal Trust Company of Canada is the registrar and transfer agent for
our common shares through its principal office in Toronto, Ontario.
PART III
ITEM 15 DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
39
<PAGE>
ITEM 16 CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS.
Not applicable.
PART IV
ITEM 17 FINANCIAL STATEMENTS.
Not applicable.
ITEM 18 FINANCIAL STATEMENTS.
See Item 19(a).
ITEM 19 FINANCIAL STATEMENTS AND EXHIBITS.
(a) The consolidated financial statements and related schedules together
with the report thereon of PricewaterhouseCoopers LLP filed as part of this Form
20F are listed on page F-1.
(b) See page E-1 for the Exhibit Index.
40
<PAGE>
MICROFORUM INC
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of February 28, 1999 and 1998............. F-3
Consolidated Statements of Operations for the Years Ended February 28,
1999, 1998 and 1997................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended February 28, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Cash Flows for the Years Ended February 28,
1999, 1998 and 1997................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Microforum Inc.
We have audited the consolidated balance sheets of Microforum Inc. as at
February 28, 1999 and 1998 and the consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at February 28, 1999
and 1998 and the results of its operations and the changes in its stockholders'
equity and cash flows for each of the three years then ended in accordance with
generally accepted accounting principles in the United States of America.
On May 10, 1999, we reported separately to the shareholders of Microforum Inc.
on financial statements for the same period, prepared in accordance with
generally accepted accounting principles in Canada.
Chartered Accountants
Toronto, Canada
May 10, 1999
F-2
<PAGE>
Microforum Inc.
Consolidated Balance Sheets
As at February 28, 1999 and 1998
(in accordance with generally accepted accounting principles in the United
States of America)
(expressed in Canadian dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents (note 14) -- 2,222,386
Accounts receivable 6,859,997 1,238,883
Inventories -- 129,222
Work-in-progress 1,378,225 --
Assets of discontinued software and hardware operations (note 3) 150,000 300,000
Current portion of note receivable on sale of Microforum Italia s.r.l. (note 3) 100,000 100,000
Prepaid expenses and other assets 215,449 37,734
--------------------------
8,703,671 4,028,225
Property and equipment (note 5) 3,120,531 3,217,562
Goodwill (note 2) 6,272,830 --
Due from related parties (note 13) 519,124 --
Note receivable on sale of Microforum Italia s.r.l. (note 3) -- 100,000
--------------------------
18,616,156 7,345,787
==========================
Liabilities
Current liabilities
Bank indebtedness (note 6) 1,354,554 --
Accounts payable and accrued liabilities 5,021,828 1,352,119
Deferred revenue 106,587 --
Liabilities of discontinued software and hardware operations (note 3) 299,860 1,384,000
Current portion of long-term debt (note 7) 694,655 643,794
--------------------------
7,477,484 3,379,913
Long-term debt (note 7) 474,330 1,086,225
Due to stockholder (note 13) 771,624 --
--------------------------
8,723,438 4,466,138
--------------------------
Stockholders' Equity
Common shares (note 8) - authorized unlimited;
Issued and outstanding - 20,005,296 and 15,610,324 28,131,818 19,467,159
Special warrants (note 8) - issued and outstanding - 4,000,000 and nil 1,488,975 --
Additional paid-in capital 815,312 1,417,114
Loans to officers (note 4) (512,167) (530,666)
Deferred expense (55,096) (197,435)
Accumulated deficit (19,976,124) (17,276,523)
--------------------------
Total stockholders' equity 9,892,718 2,879,649
--------------------------
18,616,156 7,345,787
==========================
</TABLE>
Commitments (note 10)
F-3
<PAGE>
Microforum Inc.
Consolidated Statements of Operations
For the years ended February 28, 1999, 1998 and 1997
(in accordance with generally accepted accounting principles in the United
States of America)
(expressed in Canadian dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
<S> <C> <C> <C>
Sales (notes 11 and 14(b)) 29,148,575 5,230,268 5,909,928
Cost of sales 19,615,902 2,741,383 5,347,289
----------------------------------------
Gross profit 9,532,673 2,488,885 562,639
----------------------------------------
Operating expenses
General and administration 8,749,169 3,827,151 4,412,365
Sales and marketing 2,783,977 1,551,911 1,299,182
Research and development 662,193 666,643 1,388,454
Interest on long-term debt 270,635 304,633 338,531
----------------------------------------
12,465,974 6,350,338 7,438,532
----------------------------------------
Loss before undernoted items (2,933,301) (3,861,453) (6,875,893)
Cost of shares issued on renegotiation of acquisition of PPL
Marketing Services Inc. (1,104,000) -- --
Gain on sale of Gamesmania (note 3(c)) 407,700 -- --
----------------------------------------
Loss from continuing operations before income taxes (3,629,601) (3,861,453) (6,875,893)
Recovery of income taxes -- -- 105,123
----------------------------------------
Loss from continuing operations (3,629,601) (3,861,453) (6,770,770)
Recovery (loss) from discontinued software and hardware
operations (note 3(a)) 930,000 (4,152,422) (3,410,546)
Loss from discontinued subsidiary - Microforum Italia s.r.l
(note 3(b)) -- (138,432) (348,113)
----------------------------------------
Net loss for the year (2,699,601) (8,152,307) (10,529,429)
========================================
Basic and diluted earnings (loss) per share (note 8(f))
From continuing operations (0.22) (0.49) (1.50)
From discontinued operations and discontinued subsidiary 0.06 (0.54) (0.80)
----------------------------------------
(0.16) (1.03) (2.30)
----------------------------------------
</TABLE>
F-4
<PAGE>
Microforum Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended February 28, 1999, 1998 and 1997
(in accordance with generally accepted accounting principles in the United
States of America)
(expressed in Canadian dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common shares Special warrants Additional
------------------------- ------------------------ paid-in Deferred
Number Amount Number of Amount capital expense
of shares $ warrants $ $ $
<S> <C> <C> <C> <C> <C> <C>
Balance - February 28, 1996 3,605,000 700 1,100,000 5,252,034 -- --
Issued on initial public offering - net of
issue costs 1,000,000 5,472,279 -- -- -- --
Issued on conversion of special warrants 1,100,000 5,252,034 (1,100,000) (5,252,034) -- --
Net loss for the year -- -- -- -- -- --
------------------------------------------------------------------------------------
Balance - February 28, 1997 5,705,000 10,725,013 -- -- -- --
Options issued to service provider -- -- -- -- 338,460 (338,460)
Amortization of deferred expense -- -- -- -- -- 141,025
Issued to officers for non-interest
bearing loans 653,333 530,666 -- -- -- --
Issued for cash - net of issue costs -- -- 8,000,000 5,386,275 1,725,846 --
Issued on conversion of special warrants 8,000,000 5,386,275 (8,000,000) (5,386,275) -- --
Exercise of stock options 347,091 1,015,405 -- -- (647,192) --
Issued on conversion of long-term debt 904,900 1,809,800 -- -- -- --
Net loss for the year -- -- -- -- -- --
------------------------------------------------------------------------------------
Balance - February 28, 1998 15,610,324 19,467,159 -- -- 1,417,114 (197,435)
Issued on acquisition of PPL Group (note 2) 1,627,143 5,695,000 -- -- -- --
Issued on renegotiation of the terms of
the original agreement to acquire PPL
Marketing Services Inc. and settlement
of promissory note (note 2) 1,839,674 1,354,000 -- -- -- --
Exercise of stock options 462,332 1,356,108 -- -- (881,288) --
Issued for cash - net of issue costs -- -- 4,000,000 1,488,975 206,025 --
Received in satisfaction of note
receivable (note 3(b)) (100,000) (100,000) -- -- -- --
Issued to directors for services rendered 7,000 22,050 -- -- -- --
Issued on conversion of trade accounts
payable 58,823 50,000 -- -- -- --
Issued to officers for non-interest
bearing loans - net of repayments and
severance arrangements (note 4) 500,000 287,501 -- -- -- --
Options issued to service provider -- -- -- -- 73,461 (73,461)
Amortization of deferred expense -- -- -- -- -- 215,800
Net loss for the year -- -- -- -- -- --
------------------------------------------------------------------------------------
Balance - February 28, 1999 20,005,296 28,131,818 4,000,000 1,488,975 815,312 (55,096)
====================================================================================
<CAPTION>
Accumulated Loans to
deficit officers Total
$ $ $
<S> <C> <C> <C>
Balance - February 28, 1996 1,405,213 -- 6,657,947
Issued on initial public offering - net of
issue costs -- -- 5,472,279
Issued on conversion of special warrants -- -- --
Net loss for the year (10,529,429) -- (10,529,429)
-------------------------------------------
Balance - February 28, 1997 (9,124,216) -- 1,600,797
Options issued to service provider -- -- --
Amortization of deferred expense -- -- 141,025
Issued to officers for non-interest
bearing loans -- (530,666) --
Issued for cash - net of issue costs -- -- 7,112,121
Issued on conversion of special warrants -- -- --
Exercise of stock options -- -- 368,213
Issued on conversion of long-term debt -- -- 1,809,800
Net loss for the year (8,152,307) -- (8,152,307)
-------------------------------------------
Balance - February 28, 1998 (17,276,523) (530,666) 2,879,649
Issued on acquisition of PPL Group (note 2) -- -- 5,695,000
Issued on renegotiation of the terms of
the original agreement to acquire PPL
Marketing Services Inc. and settlement
of promissory note (note 2) -- -- 1,354,000
Exercise of stock options -- -- 474,820
Issued for cash - net of issue costs -- -- 1,695,000
Received in satisfaction of note
receivable (note 3(b)) -- -- (100,000)
Issued to directors for services rendered -- -- 22,050
Issued on conversion of trade accounts
payable -- -- 50,000
Issued to officers for non-interest
bearing loans - net of repayments and
severance arrangements (note 4) -- 18,499 306,000
Options issued to service provider -- -- --
Amortization of deferred expense -- -- 215,800
Net loss for the year (2,699,601) -- (2,699,601)
-------------------------------------------
Balance - February 28, 1999 (19,976,124) (512,167) 9,892,718
===========================================
</TABLE>
F-5
<PAGE>
Microforum Inc.
Consolidated Statements of Cash Flows
For the years ended February 28, 1999, 1998 and 1997
(in accordance with generally accepted accounting principles in the United
States of America)
(expressed in Canadian dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
<S> <C> <C> <C>
Cash provided by (used in) operating activities
Loss from continuing operations (3,629,601) (3,861,453) (6,875,893)
Items not affecting cash
Depreciation and amortization of capital assets 1,204,157 909,154 1,743,171
Amortization of goodwill 330,149 -- --
Cost of shares issued on renegotiation of acquisition
of PPL Marketing Services Inc. 1,104,000 -- --
Amortization of deferred expense 215,800 141,025 --
Shares issued for services rendered 22,050 -- --
Changes in non-cash working capital items
Accounts receivable (1,552,158) (175,392) 260,182
Inventories (370,625) 371,002 1,337,913
Prepaid expenses and other assets 202,070 35,930 117,680
Accounts payable and accrued liabilities 883,567 (95,122) 223,367
Deferred revenue (118,398) -- --
Income taxes payable (188,459) -- --
----------------------------------------
Cash used in continuing operations (1,897,448) (2,674,856) (3,193,580)
Cash used in discontinued operations (4,140) (134,770) (3,018,998)
----------------------------------------
(1,901,588) (2,809,626) (6,212,578)
----------------------------------------
Cash provided by (used in) financing activities
Proceeds on issue of common shares - net 580,845 7,480,334 5,472,279
Long-term debt incurred -- -- 1,213,228
Long-term debt repayments (737,690) (1,126,164) (950,345)
Due to related parties (437,561) -- --
Purchase of shares by officers 306,000 -- --
Proceeds on issue of special warrants 1,488,975 -- --
Bank indebtedness assumed on acquisition of subsidiaries (1,963,861) -- --
Repayment of loans payable -- -- (100,000)
----------------------------------------
(763,292) 6,354,170 5,635,162
----------------------------------------
Cash provided by (used in) investing activities
Acquisition of property and equipment - net (194,560) 37,010 (1,136,935)
Acquisition of subsidiaries (817,500) -- --
Settlement of note receivable 100,000 -- --
----------------------------------------
(912,060) 37,010 (1,136,935)
----------------------------------------
Increase (decrease) in cash during the year (3,576,940) 3,581,554 (1,714,351)
Cash and cash equivalents (bank indebtedness) - Beginning of year 2,222,386 (1,359,168) 355,183
----------------------------------------
Cash and cash equivalents (bank indebtedness) - End of year (1,354,554) 2,222,386 (1,359,168)
========================================
Supplemental information
Interest paid 340,211 354,824 459,065
Income taxes paid -- -- --
Shares issued on acquisition of subsidiary 5,695,000 -- --
Shares issued on conversion of long-term debt -- 1,809,800 --
Shares issued on conversion of accounts payable 50,000 -- --
</TABLE>
F-6
<PAGE>
Microforum Inc.
Notes to Consolidated Financial Statements
February 28, 1999, 1998 and 1997
(in accordance with generally accepted accounting principles in the United
States of America)
(expressed in Canadian dollars)
- --------------------------------------------------------------------------------
1. Summary of significant accounting policies
Consolidation
These consolidated financial statements include the accounts of the
Company and its subsidiaries, Internet Frontier Inc., a wholly owned
subsidiary of the Company which was incorporated and started business on
June 6, 1996 and the PPL Group of Companies (the PPL Group) (note 2).
Inventories/work-in-progress
Inventories are valued at the lower of cost and net realizable value. Cost
is determined generally on a first-in, first-out basis.
Work-in-progress inventory is recorded at the lower of cost and net
realizable value and is comprised of billable labour production and
creative material costs for ongoing projects.
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided on
computer equipment and software, duplication and packaging equipment,
furniture, automotive and office equipment using the diminishing balance
basis at rates of 20% - 30% per annum. Leasehold improvements are
amortized using the straight-line basis over the terms of the respective
leases.
Revenue recognition
Revenue from sale of multimedia services, Internet content and Internet
services is recognized as the services are performed under the terms of
the contract. Marketing programs, distribution, advertising and public
relations revenues are recognized on a completed contract basis. Revenue
from product sales is recognized upon shipment of the product to the
customer and is net of discounts and allowances for estimated future
returns.
Use of estimates
Financial statements prepared in conformity with generally accepted
accounting principles require management to make estimates and assumptions
about reported assets and liabilities, disclosure of contingent assets and
liabilities and reported amounts of revenues and expenses. Management also
makes estimates and judgements about future results of operations related
to specific elements of the business and operating units in assessing
recoverability of assets and recorded values of liabilities. Actual
results could differ from those estimates.
Foreign currency translation
Monetary assets and liabilities are translated at year-end exchange rates.
Revenues and expenses are translated at average rates of exchange during
the year. Gains and losses on translation are included in the consolidated
statements of operations.
F-7
<PAGE>
Goodwill
The excess of the purchase price over the fair value of net assets
acquired is recorded as goodwill and is amortized on a straight-line basis
over twenty years. The Company evaluates the carrying value of goodwill
for potential impairment on an ongoing basis. Any impairment in value of
goodwill is written off against earnings in the year such impairment is
recognized.
Fair value of financial instruments
The carrying amounts reported in the balance sheets for accounts
receivable, accounts payable and accrued liabilities approximate fair
values due to the short-term maturity of those instruments. The carrying
value for capital leases and term loans approximate fair value because the
rates available for similar types of borrowing arrangements have not
changed significantly since the Company executed those financing
agreements. The carrying amounts for bank loans approximate fair value
because they bear interest at variable rates. It is not practicable to
estimate the fair value of amounts due to related parties due to the
nature of the relationship.
Income taxes
Income taxes are accounted for using an asset and liability approach,
which requires the recognition of taxes payable or refundable for the
current year and deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in the company's
financial statements or tax returns. The measurement of current and
deferred tax assets and liabilities are based on provisions of the enacted
tax law; the effects of future changes in tax laws or rates are not
anticipated. A valuation allowance is recognized if, based on available
evidence, it is more likely than not that some portion of the deferred tax
asset will not be realized.
Stock-based compensation
The Company has adopted the disclosure provisions of the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), "Accounting for Stock-based
Compensation." The Company has elected to continue accounting for
stock-based compensation issued to employees using Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, pro forma disclosures required under SFAS No. 123 have
been presented (see note 8). Under APB No. 25, compensation expense is
based on the difference, if any, on the date of the grant, between the
fair value of the company's stock and the exercise price. Stock issued to
non-employees has been accounted for in accordance with SFAS No. 123 and
valued using the Black-Scholes model.
Research and development
Research and development costs are expensed as incurred.
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
issued by the Financial Accounting Standards Board requires capitalization
of certain software development costs subsequent to the establishment of
technological feasibility. To date, no costs have been incurred following
the establishment of technological feasibility, but prior to general
release.
F-8
<PAGE>
Comprehensive income
Effective for the fiscal years commencing December 15, 1997, the Company
adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting comprehensive income and
its components in financial statements. Comprehensive income, as defined,
includes all changes in equity during a period from non-owner sources. The
Company's total comprehensive loss was the same as its net loss for the
year ended February 28, 1999.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities and requires companies to recognize all derivatives as either
assets or liabilities in the statement of financial position and measures
those instruments at fair value. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Management
does not believe that the implementation of SFAS No. 133 will have any
impact on the financial statements since the Company does not engage in
derivative or hedging activities.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with
original maturities of 90 days or less to be cash equivalents.
2. Acquisition of the PPL Group
Effective March 1, 1998, the Company acquired directly and indirectly all
the issued and outstanding common shares of PPL Marketing Services Inc.
("PPL"), Marshall Fenn Communications Inc. ("MFC") and Poste Haste Systems
Inc., collectively, the PPL Group. The purchase price for the transaction
was $6,700,000, of which $5,695,000 was paid by way of issue of 1,627,143
common shares of the Company, $502,500 was paid by way of cash, and
$502,500 was paid by way of a non-interest bearing promissory note
maturing six months after the closing of the transaction secured by a
pledge of shares of PPL Marketing Services Inc.
As consideration for the previous shareholder's forbearance on realizing
on security of the shares of PPL Marketing Services Inc., on January 20,
1999, the Company's shareholders approved arrangements under which:
o $250,000 of this short-term liability was converted into 339,674
common shares;
o the maturity date with respect to a further $252,500 of this
short-term liability was extended to March 31, 2000; and
o 1,500,000 common shares were issued to the previous shareholder.
F-9
<PAGE>
The acquisition has been accounted for using the purchase method as follows:
$
Purchase price 6,700,000
Fees and expenses attributable to the acquisition 315,000
-----------
Total costs of acquisition 7,015,000
===========
Net assets acquired
Current assets 5,345,974
Property and equipment and other assets 1,456,690
Goodwill 6,602,979
-----------
13,405,643
Liabilities assumed
Bank indebtedness (1,963,861)
Current liabilities (3,791,899)
Long-term and other liabilities (634,883)
-----------
Net assets 7,015,000
===========
Goodwill arising on acquisition 6,602,979
Amortization (330,149)
-----------
Goodwill at February 28, 1999 6,272,830
===========
Supplemental unaudited pro forma information for the year ended February 28,
1998 is based on the individual statements of Microforum Inc. (for the year
ended February 28, 1998), PPL (for the ten-month period ended February 28, 1998)
and MFC (for the year ended December 31, 1997), and combine the results of
operations of Microforum Inc. with PPL and MFC as if the acquisition occurred
on March 1, 1997:
$
(unaudited)
Revenue 23,297
Net loss for the year (8,016)
Basic and diluted loss per share from continuing operations (0.36)
F-10
<PAGE>
3. Discontinued operations and disposals
a. Discontinued software development/publishing and hardware
distribution operations
In accordance with its restructuring strategy, the Company
discontinued wholesale distribution of hardware equipment during
fiscal 1998. The Company ceased its internal development of software
products June 30, 1997 and announced May 14, 1998 (the measurement
date) that it would discontinue all software publishing activities.
Selected financial information:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
<S> <C> <C> <C>
Revenue
Software 839,427 4,925,409 5,721,377
Hardware distribution -- 158,793 3,877,961
-------------------------------------
839,427 5,084,202 9,599,338
Cost of sales and operating expenses 117,877 8,406,265 13,009,884
-------------------------------------
Recovery (loss) from discontinued software
development/publishing and hardware
distributions before other items 721,550 (3,322,063) (3,410,546)
Royalty income 208,450 -- --
Estimated loss from discontinued software publishing to
disposal date -- (830,359) --
-------------------------------------
Recovery (loss) from discontinued software
development/publishing and hardware
distribution operations 930,000 (4,152,422) (3,410,546)
=====================================
</TABLE>
Summary of assets and liabilities:
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Assets
Trade accounts receivable - net of allowances 150,000 300,000
--------------------
Total assets attributed to discontinued operations 150,000 300,000
====================
Liabilities
Accounts payable - trade -- 470,000
Accrued liabilities 299,860 914,000
--------------------
Total liabilities attributed to discontinued operations 229,860 1,384,000
====================
</TABLE>
b. Sale of Microforum Italia s.r.l.
In accordance with its restructuring strategy, the Company concluded an
agreement to sell its interest in its subsidiary, Microforum Italia
s.r.l., to the Company's founding stockholders for $200,000. Under the
terms of the agreement, the purchasers shall tender to the Company 200,000
common shares presently held in Microforum Inc. over a two-year period
expiring in September 1999. Price adjustment provisions apply in the event
the purchasers elect to substitute cash in lieu of common shares otherwise
due to be tendered. The purchasers were also obliged to arrange for
adequate refinancing such that a $200,000 letter of credit issued by the
Company in support of indebtedness incurred by Microforum Italia s.r.l.
was released in full
F-11
<PAGE>
in June 1998. The purchasers acquired effective control of Microforum
Italia s.r.l. and its subsidiary, Dreamware s.r.l., on July 1, 1997.
During November 1998, the Company received 100,000 common shares of
Microforum Inc. from the purchasers. In April 1999, the Company sold these
shares for proceeds of approximately $214,000.
Selected financial information:
4 months to 12 months to
June 30, February 28,
1997 1997
$ $
Revenue 758,678 592,013
Cost of sales, operating expenses 897,110 940,126
-------------------------
Net loss from discontinued operations (138,432) (348,113)
=========================
c. Sale of Gamesmania
In accordance with its restructuring strategy, on January 6, 1999, the
Company concluded an agreement to sell its interest in its electronic
magazine, Gamesmania, for approximately $413,000. Under the terms of the
agreement, the Company received cash consideration of approximately
$375,000 at closing, and a promissory note of approximately $38,000, which
was paid approximately 90 days after the closing of the transaction.
4. Loans to officers
1999 1998
$ $
Non-interest bearing loans 1,868,169 530,666
Loan repayments received (306,000) --
Settlement of loan by return of shares (1,050,002) --
-------------------------
512,167 530,666
=========================
In accordance with the terms of arrangements approved by the Company's
stockholders at March 24, 1998, the Company may provide financial
assistance to allow certain senior officers to exercise options and
acquire common shares of the Company up to an aggregate limit of
$2,000,000. Such loans totalling $512,167 at February 28, 1999 (1998 -
$530,666) are secured by 703,333 (1998 - 653,333) common shares acquired
or issued upon exercise of the granted options and, prior to amendment of
the terms of such loans, were repayable on the earlier of such date that
the officer disposed of his stockholdings or ceased to act as an officer
of the Company.
The terms of the loans were amended on November 6, 1998 (the valuation
date) to be on a non-recourse basis and to extend the period of repayment
to November 30, 2000. Future loan repayments will result in a
corresponding increase in share capital. During December 1998 and January
1999, loan repayments totalling $306,000 were received from a former
officer of the Company. Subsequent to year-end, the Company received
repayments of $512,167 representing all loans outstanding at February 28,
1999.
Pursuant to severance arrangements entered into with the former President
and Chief Executive Officer, the Company received share certificates of
the Company representing 333,334 common shares issued on April 16, 1998.
Subsequent to year-end, these shares and the related promissory note were
cancelled.
F-12
<PAGE>
5. Property and equipment
1999 1998
$ $
Cost
Computer equipment and software 4,938,390 4,468,691
Duplication and packaging equipment 1,240,744 1,023,473
Furniture, automotive and office equipment 951,565 688,066
Leasehold improvements 966,410 809,753
----------------------
8,097,109 6,989,983
----------------------
Less: Accumulated depreciation and amortization
Computer equipment and software 2,809,354 2,266,523
Duplication and packaging equipment 866,176 702,668
Furniture, automotive and office equipment 456,110 329,509
Leasehold improvements 844,938 473,721
----------------------
4,976,578 3,772,421
----------------------
3,120,531 3,217,562
======================
Included in the above capital assets are assets under capital lease with a
cost of $3,477,010 (1998 - $3,477,010) and accumulated depreciation of
$2,309,684 (1998 - $2,017,536).
6. Bank line of credit
The Company has a revolving line of credit for borrowings up to
$3,000,000, of which $340,000 was utilized at February 28, 1999, and
aggregate non-revolving loan facilities of $267,083 at February 28, 1999
(1998 - $354,472). Advances under the non-revolving loans are repayable
over three years. Bank indebtedness arising from the revolving line of
credit and the non-revolving loans bear interest at prime plus 1.5% and
prime plus 1%, respectively. The weighted average interest rate on
short-term borrowings is prime plus 1.3%. Included in the security for
bank indebtedness under the revolving line of credit and the bank debt
described in note 7 is a registered general assignment of book debts and a
first fixed charge over the assets of the Company. The Company is subject
to certain financial covenants under its loan arrangements with its
banker, which requires them to maintain certain working capital and
tangible net worth ratios.
F-13
<PAGE>
7. Long-term debt
Future minimum payments under capital lease obligations and bank loans and
the present value of the minimum lease payments are as follows:
Capital Bank
leases loans Total
$ $ $
2000 450,000 291,228 741,228
2001 374,323 88,355 462,678
2002 -- 25,000 25,000
-------------------------------
Total payments due 824,323 404,583 1,228,906
Less: Imputed interest 59,921 -- 59,921
-------------------------------
764,402 404,583 1,168,985
Less: Current portion 403,427 291,228 694,655
-------------------------------
February 28, 1999 360,975 113,355 474,330
===============================
February 28, 1998 764,401 321,824 1,086,225
===============================
a. Capital lease obligations bear interest at rates varying from 8% to 20%.
Security under capital lease obligations is provided by a first fixed
charge over the related capital asset. On September 18, 1997, $750,000 of
capital lease obligations were converted into 375,000 common shares of the
Company.
b. In addition to the non-revolving loans (note 6), included in bank loans is
$137,500 (1998 - $179,500), which bears interest at 7.25%. On September
18, 1997, $359,800 of bank loan obligations were converted into 179,900
common shares of the Company.
8. Capital stock
a. Authorized and issued share capital
Authorized
Unlimited number of common shares
Unlimited number of preference shares
Issued capital
1999 1998
$ $
20,005,296 (1998 - 15,610,324) common shares 28,131,818 19,467,159
4,000,000 (1998 - nil) special warrants 1,488,975 --
-----------------------
29,620,793 19,467,159
=======================
b. Special warrants
On December 2, 1998, the Company completed a private placement of
4,000,000 special warrants for gross proceeds of $2,000,000 before
deducting estimated fees and expenses of $305,000. Each special
warrant entitles the holder to acquire one unit consisting of one
common share and one-half of one purchase warrant upon exercise of
the special warrants in accordance with the terms of a special
warrant indenture made as of December 2, 1998 between the Company
and Montreal Trust Company of Canada,
F-14
<PAGE>
as trustee. The Company granted the agent non-assignable
compensation options entitling the agent to subscribe for up to
280,000 units which will result in the issuance of up to 420,000
common shares at an exercise price of $0.52 per share at any time up
to December 2, 2000. A receipt for a (final) prospectus of the
Company qualifying the distribution of the common shares and common
share purchase warrants was issued by the Ontario Securities
Commission on March 31, 1999.
c. Stock option plan
Pursuant to a plan authorized by the directors on April 1, 1996, as
amended, options were granted to directors, officers, employees and
other service providers, entitling the holders to purchase common
shares from treasury. These options vest over a three-year period,
commencing on the first anniversary of the date of grant and expire
on or before the tenth anniversary of the date of grant. Option
activity under the stock option plan is as follows:
Weighted
average
Options Options exercise
authorized outstanding price
$
Authorized 855,000 -- --
Granted at $6.50 (i) -- 569,500 6.50
Exercised -- -- --
Cancelled -- (17,500) 6.50
--------------------------
Balance - February 28, 1997 855,000 552,000 6.50
Authorized -- -- --
Granted -- 677,700 2.29
Exercised -- (100,424) 1.15
Cancelled -- (383,166) 1.69
--------------------------
Balance - February 28, 1998 855,000 746,110 2.65
Authorized 2,545,000 -- --
Granted -- 2,568,822 2.27
Exercised -- (509,164) 1.85
Cancelled -- (63,201) 2.77
--------------------------
Balance - February 28, 1999 3,400,000 2,742,567 1.89
==========================
(i) In August 1997, 222,500 of these options were repriced to $1.13,
representing current market value plus a 25% premium.
F-15
<PAGE>
The following options were outstanding at February 28, 1999:
Weighted Number
Number average vested and
outstanding at remaining exercisable at
Exercise February 28, contractual February 28,
price 1999 life (years) 1999
$
0.60 271,494 9.6 --
1.13 210,077 7.9 143,889
1.24 157,500 9.9 --
1.25 160,000 8.5 60,000
1.30 157,333 9.3 --
1.35 138,500 9.3 --
2.35 105,000 9.9 --
2.45 203,000 9.7 --
3.15 770,663 9.1 45,000
3.50 375,000 9.1 --
4.90 119,000 8.7 39,667
6.50 75,000 3.5 50,000
---------- --------
2,742,567 338,556
========== ========
SFAS 123
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option
plan, which are described below. Had compensation cost for the company's
stock option plans been determined based on the fair market value at the
grant dates for awards under the Plan consistent with the method provided
by SFAS No. 123, Accounting for Stock-based Compensation, the Company's
net loss would have been increased to the following pro forma amounts for
the years ended February 28, 1997 to 1999:
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
<S> <C> <C> <C>
Net loss - as reported (2,699,601) (8,152,307) (10,529,429)
Net loss - pro forma (3,587,359) (8,527,009) (10,615,838)
Basic and fully diluted loss per share - pro forma (0.21) (1.08) (2.32)
</TABLE>
The fair value of each option granted to employees is estimated on the
date of grant using the Black-Scholes option-pricing model based upon the
following weighted-average assumptions: dividend yield - nil, risk-free
interest rate - 4.34%, expected volatility - 75%, expected option term - 3
years. The fair value of options issued to non-employees (notes 8(d) and
8(e)) is estimated using the same assumptions adjusted to reflect a legal
life of two years.
F-16
<PAGE>
d. Underwriters' compensation options
Weighted
average
Number exercise
of options price
$
Granted in connection with special warrants
issued September 1997 800,000 1.05
Exercised (300,000) 1.05
---------
Balance - February 28, 1998 500,000 1.05
Granted in connection with special warrants
issued December 1998 420,000 0.52
Exercised (400,000) 1.05
---------
Balance - February 28, 1999 520,000 0.62
=========
The fair value of the 420,000 (1998 - 800,000) compensation options
granted is $206,025 (1998 - $1,725,846) which has been recorded as a
cost of issue.
e. Service provider's options
Weighted
average
Number exercise
of options price
$
Granted - September 1997 (i) 300,000 3.60
--------
Balance - February 28, 1998 300,000 3.60
Granted - November 1998 (ii) 200,000 0.85
Exercised (50,000) 0.85
--------
Balance - February 28, 1999 450,000 2.68
========
i. These options expire in September 1999 and were issued in connection
with investor relation services to be rendered from September 1997
to 1998. The fair value of these options is $338,460.
ii. These options expire in November 2000 and were issued in connection
with investor relation services from November 1998 to 1999. The fair
value of these options is $73,461.
iii. An expense of $215,800 (1998 - $141,025) has been recorded in
connection with the services noted above.
F-17
<PAGE>
f. Basic and diluted net earnings (loss) per share
The Company computes net loss per share in accordance with SFAS No.
128, "Earnings per Share". Under the provisions of SFAS No. 128,
basic net earnings (loss) per share is computed by dividing the net
earnings (loss) available to common stockholders for the period by
the weighted average number of common shares outstanding during the
period. Diluted net loss per share is computed by dividing the net
loss for the period by the weighted average number of common shares
and common equivalent shares outstanding during the period. Common
equivalent shares, composed of incremental common shares issuable
upon the exercise of stock options and warrants and upon conversion
of special warrants are included in the diluted net loss per share
computation to the extent such shares are dilutive.
Net earnings (loss) per share are calculated using a weighted
average number of outstanding common shares of 16,690,528 (1998 -
7,931,100; 1997 - 4,572,329).
9. Income taxes
The Company has approximately $22.7 million of non-capital losses
available to reduce future years' taxable income that expire as follows:
$
2003 300,000
2004 8,600,000
2005 9,300,000
2006 4,500,000
-----------
22,700,000
===========
Significant components of the Company's deferred taxes as of February 28,
1997 to 1999 are as follows:
1999 1998 1997
$ $ $
Deferred tax assets
Tax loss carry-forwards 10,129,000 8,121,000 3,971,000
Property and equipment 175,000 -- --
-----------------------------------------
10,304,000 8,121,000 3,971,000
Deferred tax liability
Property and equipment -- (35,000) (122,000)
-----------------------------------------
Net deferred tax assets 10,304,000 8,086,000 3,849,000
Valuation allowance (10,304,000) (8,086,000) (3,849,000)
-----------------------------------------
Net deferred taxes -- -- --
=========================================
The Company has established valuation allowances equal to the net deferred
tax assets due to uncertainties regarding the realization of deferred tax
assets based on the company's lack of earnings history and the risk that
taxable income may not be generated during the carry-forward period.
The Company's provisions for income taxes differ from the expected tax
benefit amounts computed by applying the statutory income tax rate of
44.62% to income before income taxes primarily as a result of the
valuation allowances.
F-18
<PAGE>
10. Operating lease commitments
The Company has entered into operating leases for premises and equipment
with annual rentals as follows:
$
2000 845,000
2001 653,000
2002 245,000
2003 130,000
2004 117,000
11. Segmented information
The Company has adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." The accounting policies of the
segments are the same as those described in note 1. For the years ended
February 28, 1998 and 1997, the Company's continuing operations were in
one segment being Internet and multimedia services. For the year ended
February 28, 1999, the Company's continuing operations are in three
distinct segments as reported below, which do not include any information
with respect to Software Guaranty Inc. (note 14(b)).
The Company is an e-commerce applications, content, technology service
corporation providing a broad range of e-commerce, creative and database
marketing services to a list of recognized North American based clients.
The Company has redirected its strategic focus to become a total response,
Internet based commerce and strategic marketing organization.
The Company operates in the following areas: e-commerce and related
software development, Web design, leading-edge animation, video and
digital design, strategic marketing, direct marketing, contest and
incentive programs, special event management, telemarketing, warehousing,
distribution and fulfillment services, advertising, public relations,
database development and management, lettershop and variable imaging,
CD-ROM and disc duplication.
<TABLE>
<CAPTION>
Marketing Advertising Internet
programs and and
and public multimedia Reconciling
distribution relations services items Total
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
Sales 15,641,192 8,470,673 5,380,551 (343,841) 29,148,575
Operating and other expenses 16,684,692 8,589,973 7,847,352 (343,841) 32,778,176
--------------------------------------------------------------------------
Loss from continuing operations (1,043,500) (119,300) (2,466,801) -- (3,629,601)
--------------------------------------------------------------------------
Identifiable assets from continuing
operations 6,965,628 2,387,267 4,270,615 4,742,646 18,366,156
==========================================================================
</TABLE>
The Company operates predominantly in Canada.
12. Concentration of credit risk
For the year ended February 28, 1999, the Company earned a significant
portion of its marketing, program and distribution revenue from two
customers. As at February 28, 1999, approximately 43% and 9% of the
accounts receivable balance and 34% and 21% of revenues for the year then
ended were derived from these two customers, respectively.
F-19
<PAGE>
13. Related party transactions
Amounts due from/to related parties are detailed as follows as at February
28, 1999:
$
Due from related parties
Due from Elliot & Andrews Studios Inc. (a) 370,000
Due from Tribco Communications Group Inc. (b) 149,124
---------
519,124
---------
Due to related party
Due to stockholder (c) 771,624
=========
The companies in (a) and (b) are ultimately controlled by a former
controlling stockholder of the PPL Group who is an officer, director and
stockholder of the Company. All amounts are non-interest bearing and due
on demand. The Company does not expect to demand payment within the next
twelve months.
Amounts due to the stockholder in (c) are non-interest bearing and due on
demand except for $252,500 (note 2). The stockholder has indicated that he
will not demand repayment of balances due on demand within the next twelve
months.
14. Subsequent events
a. On March 8, 1999, the Company completed a private placement of
2,891,739 special warrants for gross proceeds of $3,325,500 before
deducting estimated fees and expenses of $425,000. Each special
warrant entitles the holder to acquire one common share in
accordance with the terms of a special indenture made as of March 8,
1999 between the Company and Montreal Trust Company of Canada, as
trustee. The Company granted the agents non-assignable compensation
options entitling the agents to subscribe for in the aggregate up to
202,422 common shares at an exercise price of $1.38 per share at any
time on or before March 8, 2001. In the event that a receipt for a
final prospectus of the Company qualifying the issuance of the
common shares is not issued by the Ontario Securities Commission by
July 6, 1999, each special warrant shall entitle the holder thereof
to acquire 1.05 common shares (in lieu of one common share) for no
additional consideration.
b. On March 9, 1999, the Company acquired all the issued and
outstanding common shares of Software Guaranty Inc. The price of the
transaction, which will be accounted for using the purchase method,
was determined with reference to the balance sheet at November 30,
1998, and was $3,126,000, of which $2,250,000 was paid by way of
cash and $876,000 was paid by way of common shares of the Company.
$
Purchase price 3,126,000
Fees and expenses attributable to the acquisition 37,500
-----------
3,163,500
==========
Net assets acquired
Current assets 1,649,000
Capital assets 297,000
Goodwill and other intangible assets 2,164,500
-----------
4,110,500
Liabilities assumed (947,000)
-----------
3,163,500
==========
F-20
<PAGE>
The following table reflects the results of Software Guaranty Inc. for the
year ended February 28, 1999, which are not included in the results of the
Company for the year ended February 28, 1999:
<TABLE>
<CAPTION>
Three-month
Nine-month period period ended
ended November 30, February 28,
1998 1999 Total
$ $ $
<S> <C> <C> <C>
Revenue 1,460,007 909,913 2,369,920
================================================
Net income for the period 49,477 80,456 129,933
================================================
</TABLE>
c. On May 10, 1999, the Company completed a private placement of
3,100,000 special units for gross proceeds of $20,150,000. Each
special unit entitles the holder to acquire one common share and
one-half of one common share purchase warrant for no additional
consideration. Each whole common share purchase warrant shall
entitle the holder thereof to acquire one common share at an
exercise price of $10 per common share until September 10, 2000. The
Company granted the agent non-assignable compensation options
entitling the agent to subscribe for 310,000 special units at an
exercise price of $6.50 per unit at any time on or before November
10, 2000. In the event that a receipt for a final prospectus of the
Company qualifying the issuance of the common shares is not issued
by the Ontario Securities Commission by July 9, 1999, each special
unit shall entitle the holder thereof to acquire 1.10 special units
for no additional consideration.
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
MICROFORUM INC.
By: /s/ Howard A. Pearl
_____________________________________
Howard A. Pearl
President and Chief Executive
Officer
Date: August 13, 1999
S-1
<PAGE>
EXHIBIT INDEX
1.1 Articles of Incorporation of Microforum
1.2 By-Laws of Microforum
*3.1 Share Purchase Agreement dated April 3, 1998 between Microforum and the
selling shareholders relating to the sale of the issued and outstanding
shares of Tribco Group.
*3.2 Share Purchase Agreement dated April 3, 1998 between Microforum and
Howard Pearl relating to the sale of the issued and outstanding shares
of Clubhouse Communications Inc.
*3.3 Severance Agreement dated as of November 11, 1998 between Microforum and
Eric H. Winston.
*3.4 Secured Non-Recourse Promissory Note dated as of November 11, 1998
between Microforum and Eric H. Winston.
*3.5 Release of Howard Pearl dated December 2, 1998 and Extension Agreement
and Release dated February 4, 1999.
*3.6 Agency Agreement dated December 2, 1998 between Microforum and Taurus
Capital Markets Ltd.
*3.7 Special Warrant Indenture dated December 2, 1998 between Microforum and
Montreal Trust Company of Canada.
*3.8 Compensation Option Agreement between Microforum and Taurus Capital
Markets Ltd. dated December 2, 1998.
*3.9 Offer to Finance dated December 4, 1998 between Microforum and a
Canadian Schedule "A" Bank relating to a proposed credit facility.
*3.10 Agreement of Purchase and Sale dated January 5, 1999 between Microforum
and CryptoLogic Inc.
*3.11 Agency Agreement dated March 8, 1999 between Microforum, Taurus Capital
Markets Ltd. and Kearns Capital Limited.
*3.12 Special Warrant Indenture dated March 8, 1999 between Microforum and
Montreal Trust Company of Canada.
*3.13 Compensation Warrant Certificates and Related Compensation Option
Agreements between Microforum, Taurus Capital Markets Ltd. and Kearns
Capital Limited, dated March 8, 1999.
*3.14 Share Purchase Agreements dated March 9, 1999 between Microforum,
Software Guaranty Inc., Nelson Lin and certain minority shareholders.
*3.15 Consultant's Warrant Certificate dated May 28, 1999 and Consultant's
Option Agreement between Microforum and Investor Relations Group
(Ontario) Inc..
*3.16 Underwriting Agreement dated May 10, 1999 between Microforum, Yorkton
Securities Inc., Taurus Capital Markets Ltd. and Kearns Capital Limited
and Canaccord Capital Corporation.
E-1
<PAGE>
*3.17 Special Unit Indenture dated May 10, 1999 between Microforum and
Montreal Trust Company of Canada.
*3.18 Common Share Purchase Warrant Indenture dated May 10, 1999 between
Microforum and Montreal Trust Company of Canada.
*3.19 Compensation Warrant Certificates and Related Compensation Option
Agreements between Microforum, Yorkton Securities Inc., Taurus Capital
Markets Ltd., Kearns Capital Limited and Canaccord Capital Corporation
dated May 10, 1999.
*3.20 Memorandum of Agreement between Ford Canada and PPL dated May 1, 1997.
*3.21 Agency Agreement between CasinoRama and Marshall Fenn dated April 17,
1999.
*3.22 Warrant Certificate and Option Agreement between Microforum and Quartet.
*3.23 Share Purchase Agreement dated August 5, 1999 among Microforum and the
selling shareholders of Q-Inter.
* To be filed by amendment.
E-2
FEBRUARY 27, 1987
ARTICLES OF INCORPORATION
1. The name of the corporation is
MICROFORUM INC.
2. The address of the registered office is:
944/A St. Clair Avenue West
Toronto, Ontario M6C1C8
City of Toronto
Municipality of Metropolitan Toronto
3. Number (or minimum and maximum number) of directors is:
Minimum one (1); maximum ten (10)
4. The first director(s) is/are:
JOHN W. WRIGHT
Residence address, giving street & No. or R.R. No. or municipality and
postal code.
246 Glenview Avenue
Toronto, Ontario
M4R 1R3
Resident Canadian State. (Yes or No)
Yes
5. Restrictions, if any, on business the corporation may carry on or on powers
the corporation may exercise.
None
6. The classes and any maximum number of shares that the corporation is
authorized to issue.
The Corporation is authorized to issue an unlimited number of common
shares; an unlimited number of non-cumulative, redeemable, non-voting
Class A special shares; an unlimited number of non-cumulative, redeemable,
non-voting Class B special shares; an unlimited number of non-cumulative,
redeemable, non-voting
<PAGE>
Class C special shares; and an unlimited number of non-cumulative,
redeemable, non-voting Class D special shares.
7. Rights, privileges, restrictions and conditions (if any) attaching to each
class of shares and directors authority with respect to any class of shares
which may be issued in series:
(a) The holders of the non-cumulative, redeemable, non-voting Class A special
shares; the non-cumulative, redeemable, non-voting Class B special shares; the
non-cumulative, redeemable, non-voting Class C special shares; and the
non-cumulative, redeemable, non-voting Class D special shares (all of which
classes of special shares are hereinafter collectively called the "special
shares") shall be entitled to receive dividends in an amount to be determined
from time to time in the discretion of the board of directors of the Corporation
out of the monies of the Corporation properly applicable to payment of dividends
as and when such dividends are declared.
(b) The board of directors of the Corporation when declaring dividends in
respect of one class of special shares shall not be obliged to declare:
a dividend at such time on any other class of special shares;
dividends in the same aggregate amount in respect of other classes of special
shares; and
dividends at the same rate per share in respect of other classes of special
shares.
(c) No holder of any class of shares of the Corporation shall be entitled to any
preference to or priority over the assets and property of the Corporation in the
event of the liquidation, dissolution or winding-up of the Corporation or other
distribution of the assets of the Corporation among its shareholders for the
purpose of winding-up its affairs.
(d) The Corporation may at any time or times purchase (if obtainable) for
cancellation all or any part of any class of special shares outstanding from
time to time on the open market, or by invitation for tenders addressed to all
the holders of record of the outstanding shares of any class of special shares
of the Corporation, or by private contract at the lowest price or prices at
which, in the opinion of the directors, such shares are obtainable but not
exceeding the amount paid up thereon plus costs of purchase and an amount equal
to all dividends declared thereon and remaining unpaid. Where, in response to
any invitation for tenders, two or more shareholders submit tenders at the same
price and such tenders are accepted by the Corporation as to part only of the
shares offered, the Corporation shall accept part of the shares offered in each
such tender in proportion as nearly as may be to the total number of shares
offered in each such tender.
(e) The Corporation may, upon given notice as herein provided, redeem at any
time the whole or from time to time any part of the class of outstanding special
shares on payment for each share to be redeemed of the Redemption Amount (as
hereinafter defined) of each such class of special shares. The Redemption Amount
of each class of special shares shall mean the sum of one ($1.00) dollar per
share and each certificate for any class of
<PAGE>
special shares shall contain a statement setting forth the applicable Redemption
Amount per share.
In any case of redemption of shares pursuant to this section (3),
the Corporation shall, at least twenty (20) days before the date
specified for redemption, mail to each person who, at the date of
mailing, is a registered holder of the shares to be redeemed, a
notice in writing of the intention of the Corporation to redeem such
shares. Such notice shall be mailed in a prepaid letter addressed to
each such shareholder at his address as it appears on the books of
the Corporation or, in the event of the address of any such
shareholder not so appearing, then to the last known address of such
shareholder; provided, however, that accidental failure to give such
notice to one or more of such holders shall not affect the validity
of such redemption. Such notice shall set out the redemption amount
and the date on which redemption is to take place and, if part only
of the shares held by the person to whom such notice is addressed is
to be redeemed, the number thereof so to be redeemed. On or after
the date so specified for redemption, the Corporation shall pay or
cause to be paid to or to the order of the registered holders of the
shares to be redeemed the redemption amount on presentation and
surrender at the registered office of the Corporation, or any other
place designated in such notice, of the certificates representing
the shares called for redemption and such shares shall thereupon be
redeemed. If a part only of the shares represented by any
certificate be redeemed, a new certificate for the balance shall be
issued at the expense of the Corporation. From and after the date
specified in any such notice the shares called for redemption shall
cease to be entitled to dividends and the holders thereof shall not
be entitled to exercise any of the rights of shareholders in respect
hereof unless payment of the redemption amount shall not be made
upon presentation of certificates in accordance with the foregoing
provisions, in which case the rights of the holders shall remain
unaffected. The Corporation shall have the right, at any time after
the mailing of notice of its intention to redeem any shares as
aforesaid, to deposit the redemption amount of the shares as are
represented by certificates which have not at the date of such
deposit been surrendered by the holders thereof in connection with
such redemption, to a special account in any chartered bank or any
trust company in Canada named in such notice to be paid without
interest to or to the order of the respective holders of such shares
called for redemption upon presentation and surrender to such bank
or trust company of the certificates representing the same. Upon
such deposit being made or upon the date specified for redemption in
such notice, whichever is the later, the shares in respect whereof
such deposit shall have been made shall be redeemed and the rights
of the holders thereof after such deposit or such redemption date,
as the case may be, shall be limited to receiving without interest
the proportionate part of the total redemption price so deposited
<PAGE>
against presentation and surrender of the said certificates.
(f) The holders of shares of any class of special shares shall be entitled to
receive notice of all meetings of shareholders but shall not be entitled to vote
thereat, except with respect to any matter referred to in the following section
(g). Without limiting the generality of the foregoing, the holders of the
aforesaid shares shall be entitled to notice of meetings of the shareholders
called for the purpose of authorizing the dissolution of the Corporation or the
sale of its undertaking or a substantial part thereof.
(g) The confirmation required by the Business Corporations Act, 1982 of any
resolution to delete or vary any preference, right, condition, restriction,
limitation or prohibition attaching to any class or classes of special shares of
the Corporation or creating special shares ranking in priority to or on a parity
with any class or classes of special shares of the Corporation may be given by
at least two-thirds (2/3) of the votes cast at a meeting of holders of such
class or classes of shares duly called for that purpose and held upon at least
ten (10) days' notice and at which the holders of at least a majority of such
class or classes of shares are present or represented by proxy. If at any such
meeting the holders of a majority of such class or classes of shares are not
present or represented by proxy within half an hour after the time appointed for
the meeting, then the meeting shall be adjourned to such date not being less
than ten (10) days later and to such time and place as may be appointed by the
Chairman, and at least five (5) days' notice shall be given of such adjourned
meeting but it shall not be necessary in such notice to specify the purpose for
which the meeting was originally called. At such adjourned meeting, the holders
of such class or classes of shares present or represented by proxy may transact
the business for which the meeting was originally called, and a resolution
passed thereat by the affirmative votes of the holders of not less than
two-thirds (2/3) of such class or classes of shares represented and voted at
such adjourned meeting cast on a poll shall constitute the confirmation by the
holders of such class or classes of shares referred to above. The formalities to
be observed with respect to the giving of notice of any such meeting and the
conduct thereof shall be those from time to time prescribed in the by-laws of
the Corporation with respect to meetings of shareholders. On every poll taken at
every such meeting, every holder of such class or classes of shares shall be
entitled to one (1) vote in respect of each share held.
8. The issue, transfer or ownership of shares is/is not restricted and the
restrictions (if any) are as follows:
The right to transfer shares of the Corporation shall be restricted in
that no shareholder shall be entitled to transfer any share or shares of
the Corporation without either:
(a) The express sanction of the holders of at least sixty-six and two-thirds
(66-2/3%) percent of the common shares of the Corporation for the time being
outstanding expressed by a resolution passed at a meeting of such shareholders
or by an instrument or instruments in writing signed by the holders of at least
sixty-six and two-thirds (66-2/3%) percent of the
<PAGE>
common shares of the Corporation for the time being outstanding, or
(b) The express sanction of the directors of the Corporation expressed by a
resolution passed at a meeting of the board of directors or by an instrument or
instruments in writing signed by a majority of the directors.
9. Other Provisions, if any, are
1. The number of shareholders of the Corporation, exclusive of
persons who are in its employment and exclusive of persons who,
having been formerly in the employment of the Corporation, were,
while in that employment and have continued after the termination of
that employment to be shareholders of the Corporation, is limited to
not more than fifty (50); two (2) or more persons who are the joint
registered owners of one (1) or more shares being counted as one (1)
shareholder.
2. Any invitation to the public to subscribe for any shares or
securities of the Corporation is prohibited.
3. The Corporation may purchase any of its common shares.
4. The board of directors may from time to time, in such amounts
and on such terms as it deems expedient:
(a) borrow money on the credit of the Corporation;
(b) issue, sell or pledge debt obligations (including bonds,
debentures, notes or other similar obligations secured or
unsecured) of the Corporation;
(c) charge, mortgage, hypothecate or pledge all or any of
the currently owned or subsequently acquired real or personal,
moveable or immovable, property of the Corporation, including
book debts, rights, powers, franchises and undertaking, to
secure any debt obligations or any money borrowed, or other
debt or liability of the Corporation.
5. The board of directors may from time to time delegate to such
one or more of the directors and officers of the Corporation as may
be designated by the board all or any of the powers conferred on the
board above to such extent and in such extent and in such manner as
the board shall determine at the time of each such delegation.
10. The names and addresses of the incorporators are
First name, initials and surname or corporate name
<PAGE>
JOHN W. WRIGHT
Full residence address or address of registered office or of principal
place of business giving street & No. or R.R. No. municipality and postal
code.
246 Glenview Avenue
Toronto, Ontario
M4R IR3
These articles are signed in duplicate
Signatures of Incorporators
/John W. Wright
- ---------------------------------------
<PAGE>
MARCH 19, 1987
ARTICLES OF AMENDMENT
1. The present name of the corporation is:
MICROFORUM INC.
2. The name of the corporation is changed to (if applicable):
MICROFORUM MANUFACTURING INC.
3. Date of incorporation/amalgamation:
27 February 1987
4. The articles of the corporation are amended as follows:
The articles of the Corporation be amended to change the name of the
Corporation to "MICROFORUM MANUFACTURING INC."
5. The amendment has been duly authorized as required by Sections 167 and 169
(as applicable) of the Business Corporations Act.
6. The resolution authorizing the amendment was approved by the
shareholders/directors (as applicable) of the corporation on
17 March 1987
<PAGE>
These articles are signed in duplicate.
MICROFORUM INC.
---------------
(Name of Corporation)
By: /Anna Maria Capurso
-------------------
Secretary
<PAGE>
AUGUST 7, 1992
ARTICLES OF AMENDMENT
1. The present name of the corporation is:
MICROFORUM MANUFACTURING INC.
2. The name of the corporation is changed to (if applicable):
3. Date of incorporation/amalgamation:
27 February 1987
4. The articles of the corporation are amended as follows:
WHEREAS the authorized capital of the Corporation consists of an unlimited
number of common shares; an unlimited number of non-cumulative,
redeemable, non-voting, Class A special shares; an unlimited number of
non-cumulative, redeemable, non-voting, Class B special shares; an
unlimited number of non-cumulative, redeemable, non-voting Class C special
shares and an unlimited number of non-cumulative, redeemable, non-voting
Class D special shares;
NOW THEREFORE BE IT RESOLVED that the Articles of the Corporation are
hereby amended as follows:
1. Firstly, to reorganize the capital stock of the corporation as follows:
(a) To create a class of shares of an unlimited number to be designated as
Class "E" Preferred shares so that the Corporation is authorized to issue
an unlimited number of shares of one class designated as non-cumulative,
redeemable, non-voting, Class A special shares; an unlimited number shares
of a second class designated as non-cumulative, redeemable, non-voting,
Class B special shares; an unlimited number of shares of a third class
designated as non-cumulative, redeemable, non-voting Class C special
shares; an unlimited number of shares of a fourth class designated as
non-cumulative, redeemable, non-voting Class D special shares; an
unlimited number of shares of a fifth class designated as common shares
and an unlimited number of shares of a sixth class designated
<PAGE>
as Class "E" Preferred shares of which 1 common share is issued and
outstanding as a fully paid and non-assessable share in the capital stock
of the Corporation.
2. Secondly, to provide that the rights, privileges, restrictions and
conditions attached to the Class "E" Preferred shares are as follows:
Except as required under the Business Corporations Act, the holders of the
Class "E" Preferred shares shall not have any voting rights for any
purposes; the holders of the Class "E" Preferred shares shall, however, be
entitled to notice of meetings of shareholders called for the purpose of
authorizing the dissolution of the Corporation or the sale, lease or
exchange of its undertaking or a substantial part thereof, except a sale,
lease or exchange in the ordinary course of business of the Corporation.
The holders of the Class "E" Preferred shares shall be entitled to receive
such non-cumulative dividends as are declared payable on the Class "E"
Preferred shares as a separate class by the Board of Directors in its
discretion from time to time.
In the event of the liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, the holders of the Class
"E" Preferred Shares shall be entitled to receive, in priority to any
distribution to the holders of the Class A special, Class B special, Class
C special, Class D special and the common shares, an amount equal to the
stated capital attributable to the Class "E" Preferred shares held by such
shareholders together with all dividends thereon theretofore declared
payable and remaining unpaid; provided that the holders of the Class "E"
Preferred shares shall not be entitled to participate further in the
assets of the Corporation.
Subject to the provisions of the Business Corporation Act, the Corporation
upon giving notice as hereinafter provided, may redeem the whole or any
part of the Class "E" Preferred shares on payment for each Class "E"
Preferred shares to be redeemed of the Redemption Amount (as hereinafter
defined) together with all dividends thereon theretofore declared payable
and remaining unpaid. The Redemption Amount of the Class "E" Preferred
shares shall mean the sum of one ($1.00) dollar per Class "E" Preferred
share. If part only of the outstanding Class "E" Preferred shares is to be
redeemed, the Class "E" Preferred shares to be redeemed shall be selected
in such manner as the Board of Directors determine; provided that notice
in writing of such redemption specifying the date and place or places of
redemption is given to or waived by all holders of the Class "E" Preferred
shares and an amount sufficient to redeem such shares is deposited in any
Canadian chartered bank as specified in such notice on or before the date
fixed for redemption, such shareholders shall have no rights thereafter in
respect of such Class "E" Preferred shares except to receive payment
therefor out of the
<PAGE>
monies so deposited upon due presentation and surrender of certificates
therefor.
3. Thirdly, Page 3 of the Certificate of Incorporation issued February 27,
1987, is amended by the deletion of all of paragraph 7(c) and the
substitution therefor of the following:
"(c) Subject to the prior rights attaching to the Class "E" Preferred
shares, the holders of the Class A special shares, Class B special shares,
Class C special shares, Class D special shares and the common shares shall
share equally, share for share, in any and all further distributions of
the property and assets of the Corporation available for distribution.
5. The amendment has been duly authorized as required by Sections 167 and 169
(as applicable) of the Business Corporations Act.
6. The resolution authorizing the amendment was approved by the shareholders/
directors (as applicable) of the corporation on:
4 August, 1992
-------------------------
(Day, Month, Year)
These articles are signed in duplicate
MICROFORUM MANUFACTURING INC.
-----------------------------
(Name of Corporation)
By: /Anna Maria Capurso
-------------------
President
<PAGE>
DECEMBER 23, 1993
ARTICLES OF AMENDMENT
1. The present name of the corporation is:
MICROFORUM MANUFACTURING INC.
2. The name of the corporation is changed to (if applicable):
Not applicable
3. Date of incorporation/amalgamation:
27 February 1987
4. The articles of the corporation are amended as follows:
A. The Articles of Incorporation of the Corporation, the Articles of Amendment
dated March 9, 1987 and the Articles of Amendment dated August 7, 1992 be and
are hereby amended to:
1. To divide the one (1) issued and outstanding common share in the
capital stock of the Corporation into two hundred (200) issued and
outstanding common shares.
2. To increase the authorized capital of the Corporation by creating a
class of shares of an unlimited number to be designated as Class A common
shares and by creating a class of shares of an unlimited number to be
designated as Class F special shares, so that the authorized capital of
the Corporation shall consist of an unlimited number of Class A special
shares, an unlimited number of Class B special shares, an unlimited number
of Class C special shares, an unlimited number of Class D special shares,
an unlimited number of Class "E" preferred shares, an unlimited number of
common shares and an unlimited number of Class A common shares.
3. To provide that the rights, privileges, restrictions and conditions
attached to the Class A common shares shall be as follows:
<PAGE>
(a) The holders of the Class A common shares shall be entitled to
one (1) vote for each share held by them at all meetings of
shareholders of the Corporation, other than meetings of the holders
of another class of shares.
(b) The holders of the Class A common shares shall have the right to
receive such dividends as are declared payable thereon by the board
of directors in its discretion and shall have no preference or
priority in the payment of dividends other than in the event of the
distribution of assets upon the liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary.
(c) In the event of the liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary, the holders of
the Class A common shares shall be entitled to receive payment of
the amount of the stated capital of such shares together with all
dividends thereon theretofore declared payable and remaining unpaid
before the holders of any of the common shares, the Class A special
shares, the Class B special shares, the Class C special shares, the
Class D special shares, the Class "E" preferred shares and the Class
F special shares shall be entitled to distribution of any part of
the assets of the Corporation and the holders of the Class A common
shares shall have a right to further participation in the remaining
assets of the Corporation.
(d) Subject to the provisions of the Business Corporations Act, the
Corporation, upon giving notice as hereinafter provided, may redeem
the whole or any part of the Class A common shares on payment for
each share to be redeemed of the stated capital thereof together
with all dividends thereon theretofore declared payable and
remaining unpaid. If part only of the Class A common shares is to be
redeemed, the shares to be redeemed shall be selected in such manner
as the board of directors determines with the consent of all the
holders of the Class A common shares.
In any case of redemption of shares, the Corporation shall, at least
thirty (30) days before the date specified for redemption, mail to
each person, who, at the date of mailing, is the registered holder
of the shares to be redeemed, a notice in writing of the intention
of the Corporation to redeem such shares. Such notice shall be
mailed in a prepaid letter addressed to each such shareholder at his
address as it appears on the books of the Corporation or, in the
event of the address of any such shareholder not so appearing, then
to the last known address of such shareholder; provided, however,
that accidental failure to give such notice to one or more of such
holders shall not affect the validity of such redemption. Such
notice shall set out the stated capital of the shares and the date
on which redemption is to take place and, if part only of the shares
held by the person to whom such notice is addressed is to be
redeemed, the number thereof so to be redeemed. On or after the date
so specified for redemption, the Corporation shall pay or cause to
be paid to or to the order of the
<PAGE>
registered holders of the shares to be redeemed the stated capital
thereon on presentation and surrender at the registered office of
the Corporation, or any other place designated in such notice, of
the certificate representing the shares called for redemption and
such shares shall thereupon be redeemed. If part only of the shares
represented by any certificate be redeemed, a new certificate for
the balance shall be issued at the expense of the Corporation. From
and after the date specified in such notice, the shares called for
redemption shall cease to be entitled to dividends and the holders
thereof shall not be entitled to exercise any of the rights of
shareholders in respect thereof unless payment of the stated capital
shall not be made upon presentation of certificates in accordance
with the foregoing provisions, in which case the rights of the
holders shall remain unaffected. The Corporation shall have the
right, at any time after the mailing of notice of its intention to
redeem any shares as aforesaid, to deposit the stated capital of the
shares as are represented by certificates which have not at the date
of such deposit been surrendered by the holders thereof in
connection with such redemption, to a special account in any
chartered bank or any trust company in Canada named in such notice
to be paid without interest to or to the order of the respective
holders of such shares called for redemption upon presentation and
surrender to such bank or trust company of the certificates
representing the same. Upon such deposit being made or upon the date
specified for redemption in such notice, whichever is the later, the
shares in respect whereof such deposit shall have been made shall be
redeemed and the rights of the holders thereof after such deposit or
such redemption date, as the case may be, shall be limited to
receiving without interest the proportionate part of the total
redemption price so deposited against presentation and surrender of
the said certificates.
(e) Subject to the provisions of the Business Corporation Act, a
holder of Class A common shares may require the Corporation to
redeem the whole or any part of the Class A common shares held by
such holder as provided herein by giving thirty (30) days prior
written notice to the Corporation specifying the number of shares to
be redeemed (the "Retracted Shares") and the time for such
redemption (the "Retraction Date"). The Corporation shall redeem on
the Retraction Date and from time to time thereafter the maximum
number of Retracted Shares permitted to be redeemed pursuant to the
provisions of the Business Corporations Act until all of the
Retracted Shares have been redeemed by payment of the stated capital
thereof to the holder of the Retracted Shares for each Retracted
Share together with all dividends thereon theretofore declared
payable and remaining unpaid against due presentation and surrender
of certificates therefor at the registered office of the
Corporation. The Corporation shall notify the holder of the shares
of the number of shares to be redeemed on the Retraction Date and
each date of retraction thereafter not later than the business day
prior to such date and, from and after such date, the holder shall
have no rights in respect of the shares to be redeemed on that date
except to receive payment there for by the
<PAGE>
delivery to such holder of a certified cheque drawn on a Canadian
chartered bank in the amount of the redemption price required
hereunder at the registered office of the Corporation at the time
specified for such redemption, unless payment shall not be made as
so provided, in which case the right rights of the holder shall
remain unaffected.
4. To provide that the rights, privileges, restrictions and conditions
attached to the Class F special shares shall be as follows:
(a) Except as required under the Business Corporation Act, the
holders of the Class F special shares shall not be entitled to
receive notice of or to attend meetings of the shareholders of the
Corporation or to vote at any such meeting, but shall only be
entitled to receive notice of a meeting of shareholders called for
the purpose of authorizing the dissolution of the Corporation or the
sale of its undertaking or a substantial part thereof pursuant to
the Business Corporations Act.
(b) The holders of the Class F special shares have the right to
receive such dividends as are declared payable thereon by the board
of directors in its discretion and shall have no preference or
priority in the payment of dividends other than in the event of the
distribution of assets upon the liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary.
(c) In the event of the liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary, the holders of
the Class F special shares shall be entitled to receive payment of
the amount of the stated capital of such shares together with all
dividends thereon theretofore declared payable and remaining unpaid
before the holders of any of the common shares, the Class A special
shares, the Class B special shares, the Class C special shares, the
Class D special shares and the Class "E" preferred shares shall be
entitled to distribution of any part of the assets of the
Corporation, but the holders of the Class F special shares shall
have no right to further participation in the remaining assets of
the Corporation.
(d) Subject to the provisions of the Business Corporations Act, the
Corporation, upon giving notice as hereinafter provided, may redeem
the whole or any part of the Class F special shares on payment for
each share to be redeemed of the amount of five thousand ($5,000.00)
dollars together with all dividends thereon theretofore declared
payable and remaining unpaid (the "Redemption Amount"). If part only
of the Class F special shares is to be redeemed, the shares to be
redeemed shall be selected in such manner as the board of directors
determines with the consent of all the holders of the Class F
special shares.
<PAGE>
In any case of redemption of shares, the Corporation shall, at least
thirty (30) days before the date specified for redemption, mail to
each person, who, at the date of mailing, is the registered holder
of the shares to be redeemed, a notice in writing of the intention
of the Corporation to redeem such shares. Such notice shall be
mailed in a prepaid letter addressed to each such shareholder at his
address as it appears on the books of the Corporation or, in the
event of the address of any such shareholder not so appearing, then
to the last known address of such shareholder; provided, however,
that accidental failure to give such notice to one or more of such
holders shall not affect the validity of such redemption. Such
notice shall set out the Redemption Amount of the shares and the
date on which redemption is to take place and, if part only of the
shares held by the person to whom such notice is addressed is to be
redeemed, the number thereof so to be redeemed. On or after the date
so specified for redemption, the Corporation shall pay or cause to
be paid to or to the order of the registered holders of the shares
to be redeemed the Redemption Amount thereon on presentation and
surrender at the registered office of the Corporation, or any other
place designated in such notice, of the certificates representing
the shares called for redemption and such shares shall thereupon be
redeemed. If part only of the shares represented by any certificate
be redeemed, a new certificate for the balance shall be issued at
the expense of the Corporation. From and after the date specified in
such notice, the shares called for redemption shall cease to be
entitled to dividends and the holders thereof shall not be entitled
to exercise any of the rights of shareholders in respect thereof
unless payment of the Redemption Amount shall not be made upon
presentation of certificates in accordance with the foregoing
provisions, in which case the rights of the holders shall remain
unaffected. The Corporation shall have the right, at any time after
the mailing of notice of its intention to redeem any shares as
aforesaid, to deposit the Redemption Amount of the shares as are
represented by certificates which have not at the date of such
deposit been surrendered by the holders thereof in connection with
such redemption, to a special account in any chartered bank or any
trust company in Canada named in such notice to be paid without
interest to or to the order of the respective holders of such shares
called for redemption upon presentation and surrender to such bank
or trust company of the certificates representing the same. Upon
such deposit being made or upon the date specified for redemption in
such notice, whichever is the later, the shares in respect whereof
such deposit shall have been made shall be redeemed and the rights
of the holders thereof after such deposit or such redemption date,
as the case may be, shall be limited to receiving without interest
the proportionate part of the total redemption price so deposited
against presentation and surrender of the said certificates.
(e) Subject to the provisions of the Business Corporations Act, a
holder of Class F special shares may require the Corporation to
redeem the whole or any part of the Class F special shares held by
such holder as provided herein by giving
<PAGE>
thirty (30) days prior written notice to the Corporation specifying
the number of shares to be redeemed (the "Retracted Shares") and the
time for such redemption (the "Retraction Date"). The Corporation
shall redeem on the Retraction Date and from time to time thereafter
the maximum number of Retracted Shares permitted to be redeemed
pursuant to the provisions of the Business Corporations Act until
all of the Retracted Shares have been redeemed by payment of the
Redemption Amount thereof to the holder of the Retracted Shares for
each Retracted Share together with all dividends thereon theretofore
declared payable and remaining unpaid against due presentation and
surrender of certificates therefor at the registered office of the
Corporation. The Corporation shall notify the holder of the shares
of the number of shares to be redeemed on the Retraction Date and
each date of retraction thereafter not later than the business day
prior to such date and, from and after such date, the holder shall
have no rights in respect of the shares to be redeemed on that date
except to receive payment therefor by the delivery to such holder of
a certified cheque drawn on a Canadian chartered bank in the amount
of the redemption price required hereunder at the registered office
of the Corporation at the time specified for such redemption, unless
payment shall not be made as so provided, in which case the right
rights of the holder shall remain unaffected.
5. To delete Article 4(3) of the Articles of Amendment dated August 7,
1992.
B. Any director or officer of the Corporation be and is hereby authorized and
directed to execute and deliver to the Minister of Consumer and Commercial
Relations articles of amendment and to do, sign and execute all things, deeds
and documents necessary or desirable for the due carrying out of the foregoing.
<PAGE>
5. The amendment has been duly authorized as required by Sections 167 and 169
(as applicable) of the Business Corporations Act:
6. The resolution authorizing the amendment was approved by the
shareholders/directors (as applicable) of the corporation on
22 December 1993
------------------------
(Day, Month, Year)
These articles are signed in duplicate.
MICROFORUM MANUFACTURING INC.
-----------------------------
(Name of Corporation)
By: /Anna Maria Capurso
-------------------
President
<PAGE>
JULY 14, 1994
ARTICLES OF AMENDMENT
1. The present name of the corporation is:
MICROFORUM MANUFACTURING INC.
2. The name of the corporation is changed to (if applicable):
MICROFORUM INC.
3. Date of incorporation/amalgamation:
27 February 1987
4. The articles of the corporation are amended as follows:
1. The name of the Corporation be and is hereby changed to "MICROFORUM
INC.".
5. The amendment has been duly authorized as required by Sections 167 and 169
(as applicable) of the Business Corporations Act.
6. The resolution authorizing the amendment was approved by the
shareholders/directors (as applicable) of the corporation on
10 July, 1994
-------------
(Day, Month, Year)
These articles are signed in duplicate.
MICROFORUM MANUFACTURING INC.
-----------------------------
(Name of Corporation)
By: /Mario Baiocchi
-----------------------------------
President
<PAGE>
NOVEMBER 9 1995
ARTICLES OF AMENDMENT
1. The present name of the corporation is:
MICROFORUM INC.
2. The name of the corporation is changed to (if applicable):
Not applicable
3. Date of incorporation/amalgamation:
27 February 1987
4. The articles of the corporation are amended as follows:
A. The articles of Incorporation of the Corporation, the Articles of Amendment
dated March 9, 1987, the Articles of Amendment dated August 7, 1996, the
Articles of Amendment dated December 23, 1993 and the Articles of Amendment
dated July 14, 1994 be and are hereby amended to:
1. Divide the eighteen thousand (18,000) issued and outstanding common
shares in the capital stock of the Corporation into three million,
six hundred thousand (3,600,000) issued and outstanding common
shares.
B. Any director or officer of the Corporation be and is hereby authorized and
directed to execute and deliver to the Minister of Consumer and Commercial
Relations articles of amendment and to do, sign and execute all things, deeds
and documents necessary or desirable for the due carrying out of the foregoing.
5. The amendment has been duly authorized as required by Sections 167 and 169
(as applicable) of the Business Corporations Act.
6. The resolution authorizing the amendment was approved by the
<PAGE>
shareholders/directors (as applicable) of the corporation on
6 November, 1995
----------------
(Day, Month, Year)
These articles are signed in duplicate.
MICROFORUM INC.
---------------
(Name of Corporation)
By: /Mario Baiocchi
---------------
President
<PAGE>
NOVEMBER 20, 1995
ARTICLES OF AMENDMENT
1. The present name of the corporation is:
MICROFORUM INC.
2. The name of the corporation is changed to (if applicable):
Not applicable.
3. Date of incorporation/amalgamation:
27 February 1987
4. The articles of the corporation are amended as follows:
A. The Articles of Incorporation of the Corporation are hereby amended
to:
1. Delete the following restrictions on the issue, transfer or
ownership of shares of the Corporation:
"The right to transfer shares of the Corporation shall be restricted
in that no shareholder shall be entitled to transfer any share or
shares of the Corporation without either:
(a) The express sanction of the holders of at least sixty-six
and two-thirds (66-2/3%) percent of the common shares of the
Corporation for the time being outstanding expressed by a
resolution passed at a meeting of such shareholders or by an
instrument or instruments in writing signed by the holders of
at least sixty-six and two-thirds (66-2/3%) percent of the
common shares of the Corporation for the time being
outstanding, or
(b) The express sanction of the directors of the Corporation
expressed by a resolution passed at a meeting of the board of
directors or by an instrument or instruments in writing signed
by a majority of the directors."
<PAGE>
2. To delete the following special provisions:
(a) The number of shareholders of the Corporation, exclusive
of persons who are in the employment of the Corporation and
exclusive of the persons who, having been formerly in the
employment of the Corporation were, while in that employment,
and have continued after the termination of that employment to
be shareholders of the Corporation, is limited to not more
than fifty (50); two (2) or more persons who are joint
registered holders of one (1) or more shares being counted as
one (1) shareholder.
(b) Any invitation to the public to subscribe for any shares
or securities of the Corporation is hereby prohibited."
B. Any director or officer of the Corporation be and is hereby authorized
and directed to execute and deliver to the Minister of Consumer and
Commercial Relations articles of amendment and to do, sign and execute all
things, deeds and documents necessary or desirable for the due carrying
out of the foregoing.
5. The amendment has been duly authorized as required by Sections 167 and 169
(as applicable) of the Business Corporations Act.
6. The resolution authorizing the amendment was approved by the
shareholders/directors (as applicable) of the corporation on
17 November, 1995
-----------------
(Day, Month, Year)
These articles are signed in duplicate.
MICROFORUM INC.
---------------
(Name of Corporation)
By: /Mario Baiocchi
---------------
President
<PAGE>
SEPTEMBER 11, 1996
ARTICLES OF AMENDMENT
1. The present name of the corporation is:
MICROFORUM INC.
2. The name of the corporation is changed to (if applicable):
3. Date of incorporation/amalgamation:
27 February 1987
4. The articles of the corporation are amended as follows:
(a) Reduce the authorized capital of the Corporation by canceling
the Class A common shares which are authorized and unissued and
deleting the share provisions attached thereto;
(b) Reduce the authorized capital of the Corporation by canceling
the Class A special shares which are authorized and unissued and
deleting the share provisions attached thereto;
(c) Reduce the authorize capital of the Corporation by canceling the
Class B special shares which are authorized and unissued and
deleting the share provisions attached thereto;
(d) Reduce the authorized capital of the Corporation by canceling
the Class C special shares which are authorized and unissued and
deleting the share provisions attached thereto;
(e) Reduce the authorized capital of the Corporation by canceling
the Class D special shares which are authorized and unissued and
deleting the shares provisions attached thereto;
<PAGE>
(f) Reduce the authorized capital of the Corporation by canceling
the Class "E" preferred shares which are authorized and unissued and
deleting the share provisions attached thereto;
(g) Reduce the authorized capital of the Corporation by canceling
the Class F special shares which are authorized and unissued and
deleting the share provisions attached thereto;
(h) Increase the authorized capital of the Corporation by creating
an unlimited number of Preference Shares;
(i) Declare that the authorized capital of the Corporation after
giving effect to the foregoing, shall consist of an unlimited number
of Preference Shares and an unlimited number of Common Shares;
(j) Provide that the rights, conditions, restrictions, limitations
and prohibitions attaching to each class of shares as follows:
1.00 The Preference Shares
1.01 The Preference Shares may at any time or from time to time be issued
in one or more series, each series to consist of such number of shares as
may, before the issue thereof, be determined by the board of directors of
the Corporation. The directors shall by resolution fix, from time to time,
before the issue of any series of Preference Shares, the designation,
preferences, rights, restrictions, conditions, limitations, priorities as
to payment of dividends and/or distribution on liquidation, dissolution or
winding up, or prohibitions attaching thereto including, without limiting
the generality of the foregoing, the provisions of a purchase fund, the
right of the Corporation to purchase such shares for cancellation, the
rate of preferential dividends, the dates of payment thereof, the date or
dates from which any such preferential dividends shall accrue, redemption
rights including purchase or redemption price, terms and conditions of
redemption, conversion rights and any sinking fund or other provisions,
and authorize the issuance thereof.
1.02 The directors before the issue of any Preference Shares of a series
shall file with the Director (the "Director") appointed under the Business
Corporations Act (Ontario) or any successor statue of the Province of
Ontario which is from time to time in force (the "Act"), Articles of
Amendment designating such series and specifying the number, designation,
preferences, rights, restrictions, conditions, limitations, priorities as
to payment of dividends and/or distribution on liquidation, dissolution or
winding up, and prohibitions attached thereto, and shall obtain a
certificate from the Director with respect thereto.
1.03 Notwithstanding the foregoing, the board of directors shall be
authorized
<PAGE>
to change the rights, privileges, restrictions and conditions attached to
any unissued or (if otherwise permitted by law) any issued series of
Preference Shares. In such case, the directors shall file with the
Director, Articles of Amendment giving effect to such change and shall
obtain a certificate from the Director with respect thereto.
1.04 The Preference Shares of each series shall be entitled to preference
over the Common Shares and any other shares ranking junior to the
preference Shares with respect to priority in payment of dividends and in
the distribution of assets in the event of liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, or any
other distribution of the assets of the Corporation among its shareholders
for the purpose of winding up its affairs, and may also be given such
other preference over the Common Shares and shares ranking junior to the
Preference Shares as may be determined with respect to the respective
series authorized to be issued.
1.05 The holders of the preference Shares shall not be entitled as such,
except as required by law, to receive notice of or to attend any meeting
of the shareholders of the Corporation or to vote at any such meeting, but
shall be entitled to receive notice of meetings of shareholders of the
Corporation called for the purpose of authorizing the dissolution of the
Corporation or the sale of its undertaking or a substantial part thereof.
2.00 The Common Shares
2.01 Subject to the prior rights of the holders of the Preference Shares,
the holders of the Common Shares shall be entitled to receive such
dividends (if any) as the board of directors may in their discretion
declare.
2.02 In the event of the liquidation, dissolution or winding-up of the
Corporation or other distribution of assets or property of the Corporation
among its shareholders for the purpose of winding-up its affairs, the
holders of the Common Shares shall, subject to the prior rights of the
holders of the Preference Shares and any other class of shares of the
Corporation entitled to receive the assets and property of the Corporation
upon such a distribution in priority to the common shares, be entitled to
participate rateably in any distribution of the assets and property of the
Corporation.
2.03 The holders of the Common Shares shall be entitled to receive notice
of and to attend all meetings of the shareholders of the Corporation and
to one vote in respect of each Common Share held at all such meetings.
5. The amendment has been duly authorized as required by Sections 168 and 170
(as applicable) of the Business Corporations Act.
<PAGE>
6. The resolution authorizing the amendment was approved by the
shareholders/directors (as applicable) of the corporation on
12 September 1966
-----------------
(Day, Month, Year)
These articles are signed in duplicate.
MICROFORUM INC.
---------------
(Name of Corporation)
By: /Claudio Baiocchi
-----------------
President
BY-LAW NO. 1A
A by-law relating generally to
the conduct of the affairs of
MICROFORUM INC.
CONTENTS
1. Interpretation
2. Business of the Corporation
3. Directors
4. Committees
5. Officers
6. Protection of Directors, Officers and Others
7. Shares
8. Dividends and Rights
9. Meetings of Shareholders
10. Information Available to Shareholders
11. Divisions and Departments
12. Notices
13. Effective Date
BE IT ENACTED AND IT IS HEREBY ENACTED as a by-law of MICROFORUM INC.
(hereinafter called the "Corporation") as follows:
<PAGE>
SECTION 1
INTERPRETATION
1.1 Definitions
In the by-laws of the Corporation, unless the context otherwise requires:
(1) "Act" means the Business Corporations Act, R.S.0. 1990 c. B.16 and
the regulations made pursuant thereto, as from time to time amended,
and every statute that may be substituted therefor and, in the case
of such substitution, any reference in the by-laws of the
Corporation to provisions of the Act shall be read as references to
the substituted provisions therefor in the new statute or statutes;
(2) "appoint" includes "elect" and vice versa;
(3) "board" means the board of directors of the Corporation;
(4) "by-laws" means this by-law and all other by-laws of the Corporation
from time to time in force and effect;
(5) "meeting of shareholders" includes an annual meeting of shareholders
and a special meeting of shareholders; "special meeting of
shareholders" includes a meeting of any class or classes of
shareholders and a special meeting of all shareholders entitled to
vote at an annual meeting of shareholders;
(6) "non-business" day means Saturday , Sunday and any other day that is
a holiday as defined in the Interpretation Act (Ontario);
(7) "recorded address "means in the case of a shareholder his address as
recorded in the securities register; and in the case of joint
shareholders the address appearing in the securities register in
respect of such joint holding or the first address so appearing if
there is more than one; and in the case of a director, officer,
auditor or member of a committee of the board his latest address as
recorded in the records of the Corporation;
(8) "signing officer" means, in relation to any instrument, any person
authorized to sign the same on behalf of the Corporation by
paragraph 2.03 or by a resolution passed pursuant thereto;
(9) all terms contained in the by-laws and which are defined in the Act
shall have the meanings given to such terms in the Act; and
(10) the singular shall include the plural and the plural shall include
the singular; the
<PAGE>
masculine shall include the feminine and neuter genders; and the
word "person" shall include individuals, bodies corporate,
corporations, companies, partnerships, syndicates, trusts,
unincorporated organizations and any number or aggregate of persons.
SECTION 2
BUSINESS OF THE CORPORATION
2.1 Corporate Seal
The Corporation may have a corporate seal which shall be adopted and may
be changed by resolution of the board.
2.2 Financial Year
The financial year of the Corporation shall be as determined by the board
from time to time.
2.3 Execution of Instruments
Contracts, documents or instruments in writing requiring the signature of
the Corporation may be signed on behalf of the Corporation by any two officers
or directors and instruments in writing so signed shall be binding upon the
Corporation without any further authorization or formality. The board shall have
power from time to time by resolution to appoint any officer or officers or any
person or persons on behalf of the Corporation either to sign contracts,
documents and instruments in writing generally or to sign specific contracts,
documents or instruments in writing.
The seal of the Corporation may when required be affixed to contracts,
documents and instruments in writing signed as aforesaid or by any officer or
officers, person or persons, appointed as aforesaid by resolution of the board.
The term "contracts, documents or instruments in writing" as used in this
by-law shall include deeds, mortgages, hypothecs, charges, conveyances,
transfers and assignments of property, real or personal, movable or immovable,
agreements, releases, receipts and discharges for the payment of money or other
obligations, conveyances, transfers and assignments of shares, share warrants,
stocks, bonds, debentures, notes or other securities and all paper writings.
The signature or signatures of the Chairman of the Board (if any), the
Vice-Chairman of the Board, the President, any Executive Vice-President, or any
Vice-President together with any one of the Secretary, the Treasurer , an
Assistant Secretary, an Assistant Treasurer or any one of the foregoing officers
together with any one director of the Corporation and/or any other officer or
officers, person or persons, appointed as aforesaid by resolution may, if
specifically authorized by resolution of the directors, be printed, engraved,
lithographed or otherwise mechanically
<PAGE>
reproduced upon any contracts, documents or instruments in writing or bonds,
debentures, notes or other securities of the Corporation executed or issued by
or on behalf of the Corporation and all contracts, documents or instruments in
writing or bonds, debentures, notes or other securities of the Corporation on
which the signature or signatures of any of the foregoing officers or directors
or persons authorized as aforesaid shall be so reproduced pursuant to special
authorization by resolution of the board, shall be deemed to have been manually
signed by such officers or directors or persons whose signature or signatures is
or are so reproduced and shall be as valid to all intents and purposes as if
they had manually been signed and (in the case of share certificates only)
notwithstanding that the officers or directors or persons whose signature or
signatures is or are so reproduced may have ceased to hold office at the date of
the delivery or issue of such contracts, documents or instruments in writing or
bonds, debentures, notes or other securities of the Corporation.
2.4 Banking Arrangements
The banking business of the Corporation, or any part thereof, including,
without limitation, the borrowing of money and the giving of security therefor,
shall be transacted with such banks, trust companies or other bodies corporate
or organizations as may from time to time be designated by or under the
authority of the board. Such banking business or any part thereof shall be
transacted under such agreements, instructions and delegations of power as the
board may from time to time by resolution prescribe or authorize.
2.5 Custody of Securities
All shares and securities owned by the Corporation shall be lodged (in the
name of the Corporation) with a chartered bank or a trust company or in a safety
deposit box or, if so authorized by resolution of the board, such other
depositaries or in such other manner as may be determined from time to time by
resolution of the board.
All share certificates, bonds, debentures, notes or other obligations or
securities belonging to the Corporation may be issued or held in the name of a
nominee or nominees of the Corporation (and if issued or held in the names of
more than one nominee shall be held in the names of the nominees jointly with
the right of survivorship) and shall be endorsed in blank with endorsement
guaranteed in order to enable transfer to be completed and registration to be
effected.
2.6 Voting Shares and Securities in other Companies
All of the shares or other securities carrying voting rights of any other
body corporate held from time to time by the Corporation may be voted at any and
all meetings of shareholders, bondholders, debenture holders or holders of other
securities (as the case may be) of such other body corporate and in such manner
and by such person or persons as the board shall from time to time by resolution
determine. The proper signing officers of the Corporation may also from time to
time execute and deliver for and on behalf of the Corporation proxies and/or
arrange for the issuance of voting certificates and/or other evidence of the
right to vote in such names as they may determine without the necessity of a
resolution or other action by the board.
<PAGE>
SECTION 3
DIRECTORS
3.1 Number of Directors and Quorum
The number of directors of the Corporation shall be the number of
directors as specified in the articles or, where a minimum and maximum number of
directors is provided for in the articles, the number of directors of the
Corporation shall be the number of directors determined from time to time by
special resolution or, if a special resolution empowers the directors to
determine the number, the number of directors determined by resolution of the
board. Subject to paragraph 3.08, the quorum for the transaction of business at
any meeting of the board shall be a majority of the number of directors then in
office and or such greater number of directors as the board may from time to
time by resolution determine, provided that if the Corporation has fewer than
three directors, all directors must be present at any meeting of the board to
constitute a quorum.
3.2 Qualification
No person shall be qualified for election as a director if he is less than
18 years of age; if he is of unsound mind and has been so found by a court in
Canada or elsewhere; if he is not an individual; or if he has the status of a
bankrupt. A director need not be a shareholder. A majority of the directors
shall be resident Canadians, provided that if the Corporation has only one or
two directors, that director or one of the two directors, as the case may be,
shall be a resident Canadian. If the Corporation is or becomes an offering
corporation within the meaning of the Act, at least one-third of the directors
of the Corporation shall not be officers or employees of the Corporation or any
of its affiliates.
3.3 Election and Term
The election of directors shall take place at the first meeting of
shareholders and at each succeeding annual meeting of shareholders and all the
directors then in office shall retire but, if qualified, shall be eligible for
reselection. The number of directors to be elected at any such meeting shall be
the number of directors as specified in the articles or, if a minimum and
maximum number of directors is provided for in the articles, the number of
directors determined by special resolution or, if the special resolution
empowers the directors to determine the number, the number of directors
determined by resolution of the board. The voting on the election shall be by
show of hands unless a ballot is demanded by any shareholder. If an election of
directors is not held at the proper time, the incumbent directors shall continue
in office until their successors are elected.
3.4 Removal of Directors
Subject to the provisions of the Act, the shareholders may by ordinary
resolution passed at a meeting specially called for such purpose remove any
director from office and the vacancy
<PAGE>
created by such removal may be filled at the same meeting failing which it may
be filled by a quorum of the directors.
3.5 Vacation of Office
A director ceases to hold office when he dies or, subject to the Act,
resigns; he is removed from office by the shareholders in accordance with the
Act; he becomes of unsound mind and is so found by a court in Canada or
elsewhere or if he acquires the status of a bankrupt.
3.6 Vacancies
Subject to the Act, a quorum of the board may fill a vacancy in the board,
except a vacancy resulting from an increase in the number or maximum number of
directors or from a failure of the shareholders to elect the number of directors
required to be elected at any meeting of shareholders. In the absence of a
quorum of the board, or if the vacancy has arisen from a failure of the
shareholders to elect the number of directors required to be elected at any
meeting of shareholders, the directors then in office shall forthwith call a
special meeting of shareholders to fill the vacancy. If the directors then in
office fail to call such meeting or if there are no directors then in office,
any shareholder may call the meeting.
3.7 Action by the Board
The board shall manage or supervise the management of the business and
affairs of the Corporation. Subject to paragraphs 3.08 and 3.09, the powers of
the board may be exercised at a meeting at which a quorum is present or by
resolution in writing signed by all the directors entitled to vote on that
resolution at a meeting of the board. Where there is a vacancy in the board, the
remaining directors may exercise all the powers of the board so long as a quorum
of the board remains in office.
3.8 Canadian Majority
The board shall not transact business at a meeting other than to fill a
vacancy in the board, unless a majority of the directors present are resident
Canadians, except where
(a) a resident Canadian director who is unable to be present approves in
writing or by telephone or other communications facilities the business
transacted at the meeting; and
(b) a majority of resident Canadians would have been present had that
director been present at the meeting.
3.9 Meeting by Telephone
If all the directors of the Corporation present or participating in the
meeting consent, a director may participate in a meeting of the board or of a
committee of the board by means of such telephone, electronic or other
communications facilities as permit all persons participating in the meeting to
communicate with each other simultaneously and instantaneously, and a director
participating in such a meeting by such means is deemed to be present at the
meeting.
<PAGE>
Any such consent shall be effective whether given before or after the meeting to
which it relates and may be given with respect to all meetings of the board and
of committees of the board held while a director holds office.
3.10 Place of Meetings
Meetings of the board may be held at any place within or outside Ontario.
In any financial year of the Corporation a majority of the meetings of the board
need not be held within Canada.
3.11 Calling of Meetings
Subject to the Act, meetings of the board shall be held from time to time
on such day and at such time and at such place as the board, the Chairman of the
Board (if any), the President, a Vice-President who is a director or any two
directors may determine and the Secretary, when directed by the board, the
Chairman of the Board (if any), the President, a Vice-President who is a
director or any two directors shall convene a meeting of the board.
3.12 Notice of Meeting
Notice of the date, time and place of each meeting of the board shall be
given in the manner provided in paragraph 12.01 to each director not less than
48 hours (exclusive of any part of a non-business day) before the time when the
meeting is to be held. A notice of a meeting of directors need not specify the
purpose of or the business to be transacted at the meeting except where the Act
requires such purpose or business to be specified.
A director may in any manner waive notice of or otherwise consent to a
meeting of the board.
3.13 First Meeting of New Board
Provided a quorum of directors is present, each newly elected board may
without notice hold its first meeting immediately following the meeting of
shareholders at which such board is elected.
3.14 Adjourned Meeting
Notice of an adjourned meeting of the board is not required if the time
and place of the adjourned meeting is announced at the original meeting.
3.15 Regular Meetings
The board may appoint a day or days in any month or months for regular
meetings of the board at a place and hour to be named. A copy of any resolution
of the board fixing the place and time of such regular meetings shall be sent to
each director forthwith after being passed, but no other notice shall be
required for any such regular meeting except where the Act requires the purpose
thereof or the business to be transacted thereat to be specified.
<PAGE>
3.16 Chairman
The chairman of any meeting of the board shall be the first mentioned of
such of the following officers as have been appointed and who is a director and
is present at the meeting: the Chairman of the Board, the President or a
Vice-President. If no such officer is present, the directors present shall
choose one of their number to be chairman.
3.17 Votes to Govern
At all meetings of the board every question shall be decided by a majority
of the votes cast on the question. In case of an equality of votes the chairman
of the meeting shall not be entitled to a second or casting vote.
3.18 Conflict of Interest
A director or officer who is a party to, or who is a director or officer
of or has a material interest in any person who is a party to, a material
contract or transaction or proposed material contract or transaction with the
Corporation shall disclose in writing to the Corporation or request to have
entered in the minutes of the meetings of the directors the nature and extent of
his interest at the time and in the manner provided by the Act. Any such
contract or transaction or proposed contract or transaction shall be referred to
the board or shareholders for approval even if such contract is one that in the
ordinary course of the Corporation's business would not require approval by the
board or shareholders, and a director interested in a contract so referred to
the board shall not vote on any resolution to approve the same except as
permitted by the Act.
3.19 Remuneration and Expenses
The directors shall be paid such remuneration for their services as the
board may from time to time determine. The directors shall also be entitled to
be reimbursed for travelling and other expenses properly incurred by them in
attending meetings of the shareholders or of the board or any committee thereof
or otherwise in the performance of their duties. Nothing herein contained shall
preclude any director from serving the Corporation in any other capacity and
receiving remuneration therefor.
SECTION 4
COMMITTEES
4.1 Committee of Directors
The board may appoint a committee of directors, however designated, and
delegate to such committee any of the powers of the board except those which
pertain to items which, under the Act, a committee of directors has no authority
to exercise. A majority of the members of such committee shall be resident
Canadians.
4.2 Transaction of Business
<PAGE>
The powers of a committee of directors may be exercised by a meeting at
which a quorum is present or by resolution in writing signed by all members of
such committee who would have been entitled to vote on that resolution at a
meeting of the committee. Meetings of such committee may be held at any place
within or outside Ontario.
4.3 Audit Committee
The board may, and shall if the Corporation becomes an offering
corporation within the meaning of the Act, elect annually from among its number
an audit committee to be composed of not fewer than three directors of whom a
majority shall not be officers or employees of the Corporation or its
affiliates. The audit committee shall have the powers and duties provided in the
Act.
4.4 Advisory Committees
The board may from time to time appoint such other committees as it may
deem advisable, but the functions of any such other committees shall be advisory
only.
4.5 Procedure
Unless otherwise determined by the board, each committee shall have power
to fix its quorum at not less than a majority of its members, to elect its
chairman and to regulate its procedure.
SECTION 5
OFFICERS
5.1 Appointment
The board may from time to time appoint a Chairman of the Board, a
President, one or more Vice-Presidents (to which title may be added words
indicating seniority or function), a Secretary, a Treasurer and such other
officers as the board may determine, including one or more assistants to any of
the officers so appointed. The board may specify the duties of and, in
accordance with this by-law and subject to the provisions of the Act, delegate
to such officers powers to manage the business and affairs of the Corporation.
Subject to paragraph 5.02, an officer may but need not be a director and one
person may hold more than one office. In case and whenever the same person holds
the offices of Secretary and Treasurer, he may but need not be known as the
Secretary-Treasurer. All officers shall sign such contracts, documents, or
instruments in writing as require their respective signatures. In the case of
the absence or inability to act of any officer or for any other reason that the
board may deem sufficient, the board may delegate all or any of the powers of
such officer to any other officer or to any director for the time being.
5.2 Chairman of the Board
<PAGE>
The Chairman of the Board, if appointed, shall be a director and shall,
when present, preside at all meetings of the board and committees of the board.
The Chairman of the Board shall be vested with and may exercise such powers and
shall perform such other duties as may from time to time be assigned to him by
the board. During the absence or disability of the Chairman of the Board, his
duties shall be performed and his powers exercised by the President.
5.3 President
The President shall, and unless and until the board designates any other
officer of the Corporation to be the Chief Executive Officer of the Corporation,
be the Chief Executive Officer and, subject to the authority of the board, shall
have general supervision of the business and affairs of the Corporation and such
other powers and duties as the board may specify. The President shall be vested
with and may exercise all the powers and shall perform all the duties of the
Chairman of the Board if none be appointed or if the Chairman of the Board is
absent or unable or refuses to act.
5.4 Vice-President
Each Vice-President shall have such powers and duties as the board or the
President may specify. The Vice-President or, if more than one, the Vice
President designated from time to time by the board or by the President, shall
be vested with all the powers and shall perform all the duties of the President
in the absence or inability or refusal to act of the President, provided,
however, that a Vice-President who is not a director shall not preside as
chairman at any meeting of the board and that a Vice-President who is not a
director and shareholder shall not preside as chairman at any meeting of
shareholders.
5.5 Secretary
The Secretary shall give or cause to be given as and when instructed, all
notices to shareholders, directors, officers, auditors and members of committees
of the board; he shall be the custodian of the stamp or mechanical device
generally used for affixing the corporate seal of the Corporation and all books,
papers, records, documents and instruments belonging to the Corporation, except
when some other officer or agent has been appointed for that purpose; and he
shall have such other powers and duties as the board may specify.
5.6 Treasurer
The Treasurer shall keep proper accounting records in compliance with the
Act and shall be responsible for the deposit of money, the safekeeping of
securities and the disbursement of the funds of the Corporation; he shall render
to the board whenever required an account of all his transactions as Treasurer
and of the financial position of the Corporation; and he shall have such other
powers and duties as the board may specify. Unless and until the board
designates any other officer of the Corporation to be the Chief Financial
Officer of the Corporation, the Treasurer shall be the Chief Financial Officer
of the Corporation.
5.7 Powers and Duties of Other Officers
<PAGE>
The powers and duties of all other officers shall be such as the terms of
their engagement call for or as the board may specify. Any of the powers and
duties of an officer to whom an assistant has been appointed may be exercised
and performed by such assistant, unless the board otherwise directs.
5.8 Variation of Powers and Duties
The board may from time to time and subject to the provisions of the Act,
vary, add to or limit the powers and duties of any officer.
5.9 Term of Office
The board, in its discretion, may remove any officer of the Corporation,
with or without cause, without prejudice to such officer's rights under any
employment contract. Otherwise each officer appointed by the board shall hold
office until his successor is appointed or until the earlier of his resignation
or death.
5.10 Terms of Employment and Remuneration
The terms of employment and the remuneration of an officer appointed by
the board shall be settled by it from time to time. The fact that any officer or
employee is a director or shareholder of the Corporation shall not disqualify
him from receiving such remuneration as may be so determined.
5.11 Conflict of Interest
An officer shall disclose his interest in any material contract or
transaction or proposed material contract or transaction with the Corporation in
accordance with paragraph 3.18.
5.12 Agents and Attorneys
The board shall have power from time to time to appoint agents or
attorneys for the Corporation in or outside Canada with such powers of
management or otherwise (including the powers to subdelegate) as may be thought
fit.
5.13 Fidelity Bonds
The board may require such officers, employees and agents of the
Corporation as the board deems advisable to furnish bonds for the faithful
discharge of their powers and duties, in such form and with such surety as the
board may from time to time determine but no director shall be liable for
failure to require any such bond or for the insufficiency of any such bond or
for any loss by reason of the failure of the Corporation to receive any
indemnity thereby provided.
SECTION 6
PROTECTION OF
<PAGE>
DIRECTORS, OFFICERS AND OTHERS
6.1 Submission of Contracts or Transactions to Shareholders for Approval
The board in its discretion may submit any contract, act or transaction
for approval, ratification or confirmation at any meeting of the shareholders
called for the purpose of considering the same and any contract, act or
transaction that shall be approved, ratified or confirmed by a resolution passed
by a majority of the votes cast at any such meeting (unless any different or
additional requirement is imposed by the Act or by the Corporation's articles or
any other by-law) shall be as valid and as binding upon the Corporation and upon
all the shareholders as though it had been approved, ratified or confirmed by
every shareholder of the Corporation.
6.2 For the Protection of Directors and Officers
In supplement of and not by way of limitation upon any rights conferred
upon directors by the provisions of the Act, it is declared that no director
shall be disqualified by his office from, or vacate his office by reason of
holding any office or place of profit under the Corporation or under any body
corporate in which the Corporation shall be a shareholder or by reason of being
otherwise in any way directly or indirectly interested or contracting with the
Corporation either as vendor, purchaser or otherwise or being concerned in any
contract or arrangement made or proposed to be entered into with the Corporation
in which he is in any way directly or indirectly interested either as vendor,
purchaser or otherwise nor shall any director be liable to account to the
Corporation or any of its shareholders or creditors for any profit arising from
such office or place of profit; and, subject to the provisions of the Act, no
contract or arrangement entered into by or on behalf of the Corporation in which
any director shall be in any way directly or indirectly interested shall be
avoided or voidable and no director shall be liable to account to the
Corporation or shareholders or creditors for any profit realized by or from any
such arrangement by reason of the fiduciary relationship existing or established
thereby. Subject to the provisions of the Act and to paragraph 3.18, no director
shall be obliged to make any declaration of interest or refrain from voting in
respect of a contract or proposed contract with the Corporation in which such
director is in any way directly or indirectly interested.
6.3 Limitation of Liability
Except as otherwise provided in the Act, no director or officer for the
time being of the Corporation shall be liable for the acts, receipts, neglects
or defaults of any other director or officer or employee or for joining in any
receipt or act for conformity or for any loss, damage or expense happening to
the Corporation through the insufficiency or deficiency of title to any property
acquired by the Corporation or for or on behalf of the Corporation or for the
insufficiency or deficiency of any security in or upon which any of the moneys
of or belonging to the Corporation shall be placed out or invested or for any
loss or damage arising from the bankruptcy, insolvency or tortious act of any
persons, firm or corporation including any person, firm or corporation with whom
or which any moneys, securities or effects shall be lodged or deposited for any
loss, conversion, misapplication or misappropriation of or any damage resulting
from any dealings with any moneys, securities or other assets belonging to the
<PAGE>
Corporation or for any other loss, damage or misfortune whatever which may
happen in the execution of the duties of his respective office or trust or in
relation thereto unless the same shall happen by or through his failure to
exercise the powers and to discharge the duties of his office honestly, in good
faith and in the best interests of the Corporation and in connection therewith
to exercise the degree of care, diligence and skill that a reasonably prudent
person would exercise in comparable circumstances. The directors for the time
being of the Corporation shall not be under any duty or responsibility in
respect of any contract, act or transaction whether or not made, done or entered
into in the name or on behalf of the Corporation, except such as shall have been
submitted to and authorized or approved by the board. If any director or officer
of the Corporation shall be employed by or shall perform services for the
Corporation otherwise than as a director or officer or shall be a member of a
firm or a shareholder, director or officer of a company which is employed by or
performs services for the Corporation, the fact of his being a director or
officer of the Corporation shall not disentitle such director or officer or such
firm or company, as the case may be, from receiving proper remuneration for such
services.
6.4 Indemnity
Subject to the limitations contained in the Act, the Corporation shall
indemnify a director or officer, a former director or officer, or a person who
acts or acted at the Corporation `s request as a director or officer of a body
corporate of which the Corporation is or was a shareholder 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 or such body corporate, if
(a) he acted honestly and in good faith with a view to the best interest
of the Corporation; and
(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. The Corporation shall also indemnify such person in such
other circumstances as the Act permits or requires.
6.5 Insurance
The Corporation may purchase and maintain insurance for the benefit of any
person referred to in paragraph 6.04 against such liabilities and in such
amounts as the board may from time to time determine and are permitted by the
Act.
SECTION 7
SHARES
7.1 Allotment
<PAGE>
The board may from time to time allot or grant options to purchase the
whole or any part of the authorized and unissued shares of the Corporation at
such times and to such persons and for such consideration as the board shall
determine, provided that no share shall be issued until it is fully paid as
provided by the Act.
7.2 Commissions
The Board may from time to time authorize the Corporation to pay a
reasonable commission to any person in consideration of this purchasing or
agreeing to purchase shares of the Corporation, whether from the Corporation or
from any other person, or procuring or agreeing to procure purchasers for any
such shares.
7.3 Registration of Transfers
Subject to the provision of the Act, no transfer of shares shall be
registered in a securities register except upon presentation of the certificate
representing such shares with an endorsement which complies with the Act made
thereon or duly delivered therewith duly executed by an appropriate person as
provided by the Act, together with such reasonable assurance that the
endorsement is genuine and effective as the board may from time to time
prescribe, upon payment of all applicable taxes and any fees prescribed by the
board, upon compliance with such restrictions on transfer as are authorized by
the articles and upon satisfaction of any lien referred to in paragraph 7.05.
7.4 Transfer Agent and Registrars
The board may from time to time appoint one or more agents to maintain, in
respect of each class of securities of the Corporation issued by it in
registered form, a securities register and one or more branch securities
registers. Such a person may be designated as transfer agent and registrar
according to his functions an done person may be designated both registrar and
transfer agent. The board may at any time terminate such appointment.
7.5 Lien for Indebtedness
The Corporation shall have a lien on any share registered on the name of a
shareholder or his legal representative for a debt of that shareholder to the
Corporation, provided that if the shares of the Corporation are listed on a
stock exchange recognized by the Ontario Securities Commission, the Corporation
shall not have such lien. The Corporation may enforce ant lien that it has on
shares registered in the name of a shareholder indebted to the Corporation by
the sale of the shares thereby affected or by any other action, suit, remedy or
proceeding authorized or permitted by law and, pending such enforcement, the
Corporation may refuse to register a transfer of the whole or any part of such
shares.
7.6 Non-recognition of Trusts
Subject to the provision of the Act, the Corporation may treat as absolute
owner of any share the person in whose name the share is registered in the
securities register as if that person
<PAGE>
had full legal capacity and authority to exercise all rights of ownership,
irrespective of any indication to the contrary through knowledge or notice or
description in the Corporation's records or on the share certificate.
7.7 Share Certificates
Every holder of one or more shares of the Corporation, shall be entitled,
at his option, to a share certificate, or to a non-transferable written
acknowledgement of his right to obtain a share certificate, stating the number
of class or series of shares held by him as shown on the securities register.
Share certificates and acknowledgements of a shareholder's right to a share
certificate, respectively, shall be in such form as the board shall from time to
time approve. Any share certificate shall be signed in accordance with paragraph
2.03 and need not be under the corporate seal; provided that, unless the board
otherwise determines, certificates representing shares in respect of which a
transfer agent and/or registrar has been appointed shall not be valid unless
countersigned by or on behalf of such transfer agent and/or registrar. The
signature of one of the signing officers or, in the case of share certificates
which are not valid unless countersigned by or on behalf of a transfer agent
and/or registrar, the signatures of both signing officers, may be printed or
mechanically reproduced in facsimile upon share certificates and every such
facsimile signature shall for all purposes be deemed to be the signature of the
officer whose signature it reproduces and shall be binding upon the Corporation.
A share certificate executed as aforesaid shall be valid notwithstanding that
one or both of the officers whose facsimile signature appears thereon no longer
holds office at the date of issue of the certificate.
7.8 Replacement of Share Certificates
The board or any officer or agent designated by the board may in its or
his discretion direct the issue of a new share certificate in lieu of and upon
cancellation of a share certificate that has been mutilated or in substitution
for a share certificate claimed to have been lost, destroyed or wrongfully taken
on payment of such fee, not exceeding $3.00, and on such terms as to indemnity,
reimbursement of expenses and evidence of loss and of title as the board may
from time to time prescribe, whether generally or in any particular case.
7.9 Joint Shareholders
If two or more persons are registered as joint holders of any share, the
Corporation shall not be bound to issue more than one certificate in respect
thereof, and delivery of such certificate to one of such persons shall be
sufficient delivery to all of them. Any one of such persons may give effectual
receipts for the certificate issued in respect thereof or for any dividend,
bonus, return of capital or other money payable or warrant issuable in respect
of such shares.
7.10 Deceased Shareholders
In the event of the death of a holder, or of one of the joint holders, of
any share, the Corporation shall not be required to make any entry in the
securities register in respect thereof or to make payment of any dividends
thereon except upon production of all such documents as may be required by law
and upon compliance with the reasonable requirements of the Corporation
<PAGE>
and its transfer agents.
SECTION 8
DIVIDENDS AND RIGHTS
8.1 Dividends
Subject to the provisions of the Act, the board may from time to time
declared dividends payable to the shareholders according to their respective
rights and interest in the Corporation. Dividends may be paid in money or
property or by issuing fully paid shares of the Corporation.
8.2 Dividend Cheques
A dividend payable in cash shall be paid by cheque drawn on the
Corporation's bankers or one of them to the order of each registered holder of
shares of the class or series in respect of which it has been declared and
mailed by prepaid ordinary mail to such registered holder at his recorded
address, unless such holder otherwise directs. In the case of joint holders the
cheque shall, unless such joint holders otherwise direct, be made payable to the
order of all of such joint holders and mailed to them at their recorded address.
The mailing of such cheque as aforesaid, unless the same is not paid on due
presentation, shall satisfy and discharge the liability for the dividend to the
extent of the sum represented thereby plus the amount of any tax which the
Corporation is required to and does withhold.
8.3 Non-receipt of Cheques
In the event of non-receipt of any dividend cheque by the person to whom
it is sent as aforesaid, the Corporation shall issue to such person a
replacement cheque for a like amount on such terms as to indemnity,
reimbursement of expenses and evidence of non-receipt and of title as the board
may from time to time prescribe, whether generally or in any particular case.
8.4 Record Date for Dividends and Rights
The board may fix in advance a date, preceding by not more than 50 days
the date for the payment of any dividend or the date for the issue of any
warrant or other evidence of the right to subscribe for securities of the
Corporation, as a record date for the determination of the persons entitled to
receive payment of such dividend or to exercise the right to subscribe for such
securities, and notice of any such record date shall be given not less than
seven days before such record date in the manner provided by the Act. If no
record date is so fixed, the record date for the determination of the persons
entitled to receive payment of any dividend or to exercise the right to
subscribe for securities of the Corporation shall be at the close of business on
the day on which the resolution relating to such dividend or right to subscribe
is passed by the board.
8.5 Unclaimed Dividends
Any dividend unclaimed after a period of six years from the date on which
the same has
<PAGE>
been declared to be payable shall be forfeited and shall revert to the
Corporation.
SECTION 9
MEETING OF SHAREHOLDERS
9.1 Annual Meetings
The annual meeting of shareholders shall be held at such time in each year
as the board, the Chairman of the Board (if any) or the President may from time
to time determine, for the purpose of considering the financial statements and
reports required by the Act to be placed before the annual meeting, electing
directors, appointing an auditor and for the transaction of such other business
as may properly be brought before the meeting.
9.2 Special Meetings
The board, the Chairman of the Board (if any) or the President shall have
power to call a special meeting of shareholders at any time.
9.3 Place of Meetings
Meetings of shareholders shall be held at the registered office of the
Corporation or elsewhere in the municipality in which the registered office is
situate or, if the board shall so determine, at some other place in Canada or,
if all the shareholders entitled to vote at the meeting so agree, at some place
outside Canada.
9.4 Notice of Meetings
Notice of the time and place of each meeting of shareholders shall be
given in the manner provided in paragraph 12.01 not less than 10 days nor more
than 50 days before the date of the meeting of each director, to the auditor and
to each shareholder who at the close of business on the record date for notice
is entered in the securities register as the holder of one or more shares
carrying the right to vote at the meeting. Notice of a meeting of shareholders
called for any purpose other than consideration of the financial statements and
auditor's report, election of directors and reappointment of the incumbent
auditor shall state or be accompanied by a statement of the nature of such
business in sufficient detail to permit the shareholder to form a reasoned
judgment thereon and the text of any special resolution or by-law to be
submitted to the meeting. A shareholder and any other person entitled to attend
a meeting of shareholders may in any manner waive notice of or otherwise consent
to a meeting of shareholders.
9.5 List of Shareholders Entitled to Notice
For every meeting of shareholders, the Corporation shall prepare a list of
shareholders entitled to receive notice of the meeting, arranged in alphabetical
order and showing the number of shares held by each shareholder entitled to vote
at the meeting. If a record date for the meeting is fixed pursuant to paragraph
9.06, the shareholders listed shall be those registered at
<PAGE>
the close of business on such record date. If no record date is fixed, the
shareholders listed shall be those registered at the close of business on the
day immediately preceding the day on which notice of the meeting is given, or
where no such notice is given, the day on which the meeting is held. The list
shall be available for examination by any shareholder during usual business
hours at the registered office of the Corporation or at the place where the
central securities register is maintained and at the meeting for which the list
was prepared.
9.6 Record Date for Notice
The board may fix in advance a date, preceding the date of any meeting of
shareholders by not more than 50 days and not less than 21 days, as a record
date for the determination of the shareholders entitled to notice of the
meeting, provided that notice of any such record date shall be given not less
than seven days before such record date by newspaper advertisement in the manner
provided in the Act and, if any shares of the Corporation are listed for trading
on a stock exchange in Canada, by written notice to each such stock exchange. If
no record date is so fixed, the record date for the determination of the
shareholders entitled to notice of the meeting shall be at the close of business
on the day immediately preceding the day on which the notice is given or, if no
notice is given, the day on which the meeting is held.
9.7 Meetings without Notice
A meeting of shareholders may be held without notice at any time and place
permitted by the Act
(a) if all the shareholders entitled to vote thereat are present in person
or represented by proxy waive notice of or otherwise consent to such meeting
being held, and
(b) if the auditor and the directors are present or waive notice of or
otherwise consent to such meeting being held, so long as such shareholders,
auditor and directors present are not attending for the express purpose of
objecting to the transaction of any business on the grounds that the meeting is
not lawfully called. At such a meeting any business may be transacted which the
Corporation at a meeting of shareholders may transact. If the meeting is held at
a place outside Canada, shareholders not present or represented by proxy, but
who have waived notice of or otherwise consented to such meeting, shall also be
deemed to have consented to the meeting being held at such place.
9.8 Chairman, Secretary and Scrutineers
The chairman of any meeting of shareholders shall be the first mentioned
of such of the following officers as have been appointed and who is present at
the meeting: the President or a Vice-President who is a director and a
shareholder. If no such officer is present within 15 minutes from the time fixed
for holding the meeting, the persons and entitled to vote shall choose one of
their number to be chairman. If the Secretary of the Corporation is absent, the
chairman shall appoint some person, who need not be a shareholder, to act as
secretary of the meeting. If desired, one or more scrutineers, who need not be
shareholders, may be appointed by a resolution or by the chairman with the
consent of the meeting.
<PAGE>
9.9 Persons Entitled to be Present
The only persons entitled to be present at a meeting of shareholders shall
be those entitled to vote thereat, the directors and the auditor of the
Corporation and others who, although not entitled to vote are entitled or
required under any provision of the Act or the articles or the by-laws to be
present at the meeting. Any other person may be admitted only on the invitation
of the chairman of the meeting or with the consent of the meeting.
9.10 Quorum
Subject to section 9.20 of this by-law, a quorum for the transaction of
business at any meeting of shareholders shall be 2 persons present in person,
each being a shareholder entitled to vote thereat or a duly appointed proxy or
proxyholder for an absent shareholder so entitled.
9.11 Right to Vote
Subject to the provisions of the Act as to authorized representatives of
any other body corporate or association, at any meeting of shareholders for
which the Corporation has prepared the list referred to in paragraph 9.05, every
person who is named in such list shall be entitled to vote the shares shown
opposite his name except to the extent that such person has transferred any of
his shares after the record date determined in accordance with paragraph 9.06
and the transferee, having produced properly endorsed certificates evidencing
such shares or having otherwise established that he owns such shares, has
demanded not later than 10 days before the meeting that his name be included in
such list. In any such case the transferee shall be entitled to vote the
transferred shares at the meeting. At any meeting of shareholders for which the
Corporation has not prepared the list referred to in paragraph 9.05, every
person shall be entitled to vote at the meeting who at the time is entered in
the securities register as the holder of one or more shares carrying the right
to vote at such meeting.
9.12 Proxies
Every shareholder entitled to vote at a meeting of shareholders may
appoint a proxyholder, or one or more alternate proxyholders, who need not be
shareholders, to attend and act at the meeting in the manner and to the extent
authorized and with the authority conferred by the proxy. A proxy shall be in
writing executed by the shareholder or his attorney authorized in writing and
shall conform with the requirements of the Act.
9.13 Time for Deposit of Proxies
The board may by resolution specify in a notice calling a meeting of
shareholders a time, preceding the time of such meeting or an adjournment
thereof by not more than 48 hours exclusive of any part of a non-business day,
before which time proxies to be used at such meeting must be deposited. A proxy
shall be acted upon only if, prior to the time so specified, it shall have been
deposited with the Corporation or an agent thereof specified in such notice or,
if no such time is specified in such notice, only if it has been received by the
Secretary of the Corporation or by the chairman of the meeting or any
adjournment thereof prior to the time of
<PAGE>
voting.
9.14 Joint Shareholders
If two or more persons hold shares jointly, any one of them present in
person or represented by proxy at a meeting of shareholders may, in the absence
of the other or others, vote the shares; but if two or more of those persons are
present in person or represented by proxy and vote, they shall vote as one the
shares jointly held by them.
9.15 Votes to Govern
At any meeting of shareholders every question shall, unless otherwise
required by the articles or by-laws or by law, be determined by a majority of
the votes cast on the question. In the case of an equality of votes either upon
a show of hands or upon a poll, the chairman of the meeting shall not be
entitled to a second or casting vote.
9.16 Show of Hands
Subject to the provisions of the Act, any question at a meeting of
shareholders shall be decided by a show of hands unless a ballot thereon is
required or demanded as hereinafter provided. Upon a show of hands every person
who is present and entitled to vote shall have one vote. Whenever a vote by show
of hands shall have been taken upon a question, unless a ballot thereon is so
required or demanded, a declaration by the chairman of the meeting that the vote
upon the question has been carried or carried by a particular majority or not
carried and an entry to that effect in the minutes of the meeting shall be prima
facie evidence of the fact without proof of the number or proportion of the
votes recorded in favour of or against any resolution or other proceeding in
respect of the said question, and the result of the vote so taken shall be the
decision of the shareholders upon the said question.
9.17 Ballots
On any question proposed for consideration at a meeting of shareholders,
and whether or not a vote by show of hands has been taken thereon, any
shareholder or proxyholder entitled to vote at the meeting may require or demand
a ballot. A ballot so required or demanded shall be taken in such manner as the
chairman shall direct. A requirement or demand for a ballot may be withdrawn at
any time prior to the taking of the ballot. If a ballot is taken each person
present shall be entitled, in respect of the shares which he is entitled to vote
at the meeting upon the question, to that number of votes provided by the Act or
the articles, and the result of the ballot so taken shall be the decision of the
shareholders upon the said question.
9.18 Adjournment
The chairman at the meeting of shareholders may with the consent of the
meeting and subject to such conditions as the meeting may decide, or where
otherwise permitted under the provisions of the Act, adjourn the meeting from
time to time and from place to place. If a meeting of shareholders is adjourned
for less than 30 days, it shall not be necessary to give notice
<PAGE>
of the adjourned meeting, other than by announcement at the earliest meeting
that is adjourned. If a meeting of shareholders is adjourned by one or more
adjournments for an aggregate of 30 days or more, notice of the adjourned
meeting shall be given as for an original meeting.
9.19 Resolution in Writing
A resolution in writing signed by all the shareholders entitled to vote on
that resolution at a meeting of shareholders is as valid as if it has been
passed at a meeting of the shareholders unless a written statement with respect
to the subject matter of the resolution is submitted by a director or the
auditor in accordance with the Act.
9.20 Only One Shareholder
Where the Corporation has only one shareholder or only one holder of any
class or series of shares, all business which the Corporation may transact at an
annual or special meeting of shareholders shall be transacted in the manner
provided for in paragraph 9.19.
SECTION 10
INFORMATION AVAILABLE TO SHAREHOLDERS
10.1 Information Available to Shareholders
Except as provided by the Act, no shareholder shall be entitled to
discovery of any information respecting any details or conduct of the
Corporation's business which in the opinion of the directors it would be
inexpedient in the interests of the Corporation to communicate to the public.
10.2 Directors' Determination
The directors may from time to time, subject to the rights conferred by
the Act, determined whether and to what extent and at what time and place and
under what conditions or regulations the documents, books and registers and
accounting records of the Corporation or any of them shall be open to the
inspection of shareholders and no shareholder shall have any right to inspect
any document or book or register or accounting record of the Corporation except
as conferred by statute or authorized by the board or by a resolution of the
shareholders in general meetings.
SECTION 11
DIVISIONS AND DEPARTMENTS
11.1 Creation and Consolidation of Divisions
The board may cause the business and operations of the Corporation or any
part thereof
<PAGE>
to be divided or to be segregated into one or more divisions upon such basis,
including without limitation, character or type of operation, geographical
territory, product manufactured or service rendered, as the board may consider
appropriate in each case. The board may also cause the business and operations
of any such division to be further divided into sub-units and the business and
operations or any such divisions or sub-units to be consolidated upon such basis
as the board may consider appropriate in each case.
11.2 Name of Division
Any division or its sub-units may be designated by such name as the board
may from time to time determine and may transact business under such name,
provided that the Corporation shall set out its name in legible characters in
all contracts, invoices, negotiable instruments an orders for goods or services
issued or made by or on behalf of the Corporation.
11.3 Officers of Division
From time to time the board or, if authorized by the board, the Chief
Executive Officer, may appoint one or more officers for any division, prescribe
their powers and duties and settle their terms of employment and renumeration.
The board or, if authorized by the board, the Chief Executive Officer, may
remove at its or his pleasure any officer so appointed, without prejudice to
such officer's rights under any employment contract. Officers of divisions of
their sub-units shall not, as such, be officers of the Corporation.
SECTION 12
NOTICES
12.1 Method of Giving Notices
Any notice (which term includes any communication or document) to be given
(which term includes sent, delivered or served) pursuant to the Act, the
regulations thereunder, the articles, the by-laws or otherwise to a shareholder,
director, officer, auditor or member of a committee of the board shall be
sufficiently given if delivered personally to the person to whom it is to be
given of if delivered to his recorded address or if mailed to him at his
recorded address by prepaid mail or if sent to him at his recorded address by
any means of prepaid transmitted or recorded communication. A notice so
delivered shall be deemed to have been given when it is delivered personally or
to the recorded address as aforesaid; a notice so mailed shall be deemed to have
been given when deposited in a post office or public letter box and shall be
deemed to have been received on the fifth day after so depositing; and a notice
so sent by any means of transmitted or recorded communication shall be deemed to
have been given when dispatched or delivered to the appropriate communication
company or agency or its representative for dispatch. The Secretary may change
or cause to be changed the recorded address of any shareholder, director,
officer, auditor or member of a committee of the board in accordance with any
information believed by him to be reliable.
<PAGE>
12.2 Signature to Notices
The signature of any director or officer of the Corporation to any notice
or document to be given by the Corporation may be written, stamped, typewritten
or printed or partly written, stamped, typewritten or printed.
12.3 Proof of Service
A Certificate of the Chairman of the Board (if any), the President, a
Vice-President, the Secretary or the Treasurer or of any other officer of the
Corporation in office at the time of the making of the certificate or of a
transfer officer of any transfer agent or branch transfer agent of shares of any
class of the Corporation as to the facts in relation to the mailing or delivery
of any notice or other document to any shareholder, director, officer or auditor
or publication of any notice or other document shall be conclusive evidence
thereof and shall be binding on every shareholder, director, officer or auditor
of the Corporation as the case may be.
12.4 Notice of Joint Shareholders
All notices with respect to shares registered in more than one name shall,
if more than one address appears on the records of the Corporation in respect of
such joint holdings, be given to all of such joint shareholders at the first
address so appearing, and notice so given shall be sufficient notice to the
holders of such shares.
12.5 Computation of Time
In computing the date when notice must be given under any provisions
requiring a specified number of days notice of any meeting or other event both
the date of giving the notice and the date of the meeting or other event shall
be excluded.
12.6 Undelivered Notices
If any notice given to a shareholder pursuant to paragraph 12.01 is
returned on three consecutive occasions because he cannot be found, the
Corporation shall not be required to give any further notices to such
shareholder until he informs the Corporation in writing of his new address.
12.7 Omissions and Errors
The accidental omission to give any notice to any shareholder, director,
officer, auditor or member of a committee of the board or the non-receipt of any
notice by any such person or any error in any notice not affecting the substance
thereof shall not invalidate any action taken at any meeting held pursuant to
such notice or otherwise found thereon.
12.8 Deceased Shareholders
Any notice or other document delivered or sent by post or left at the
address of any shareholder as the same appears in the records of the Corporation
shall, notwithstanding that
<PAGE>
such shareholder be then deceased, and whether or not the Corporation has notice
of his decease, be deemed to have been duly served in respect of the shares held
by such shareholder (whether held solely or with any person or persons) until
some other person be entered in his stead in the records of the Corporation as
the holder or one of the holders thereof and such service shall for all purposes
be deemed a sufficient service of such notice or document on his heirs,
executors or administrators and on all persons, if any, interested with him in
such shares.
12.9 Persons Entitled by Death or Operation of Law
Every person who, by operation of law, transfer, death of a shareholder or
any other means whatsoever, shall become entitled to any share, shall be bound
by every notice in respect of such share which shall have been duly given to the
shareholder from whom he derives his title to such share prior to his name and
address being entered on the securities register (whether such notice was given
before or after the happening of the event upon which he became so entitled) and
prior to his furnishing to the Corporation the proof of authority or evidence of
his entitlement prescribed by the Act.
12.10 Waiver of Notice
Any shareholder (or his duly appointed proxyholder), director, officer,
auditor or member of a committee of the board may at any time waive any notice,
or waive or abridge the time for any notice, required to be given to him under
any provision of the Act, the regulations thereunder, the articles, the by-laws
or otherwise and such waiver or abridgement, whether given before or after the
meeting or other event of which notice is required to be given shall cure any
default in the giving or in the time of such notice, as the case may be. Any
such waiver or abridgement shall be in writing except a waiver of notice of a
meeting of shareholders or of the board or of a committee of the board which may
be given in any manner.
SECTION 13
EFFECTIVE DATE
13.1 Effective Date
This by-law shall come into force upon being passed by the board.
ENACTED this 27th day of August, 1996.
WITNESS the seal of the Corporation.
13.2 Repeal
<PAGE>
Upon this by-law coming into force, by-law number 1 of the Corporation
shall be repealed provided that such repeal shall not affect the previous
operation of such by-law number 1 so repealed or affect the validity of any act
done or right, privilege, obligation, acquired or incurred, or the validity of
any contract or agreement made pursuant to such by-law number 1 prior to its
repeal. All resolutions of the shareholders and of the board with continuing
effect passed under such repealed by-law number 1 shall continue to be good and
valid except to the extent that such resolutions are inconsistent with this
by-law.
BE IT RESOLVED THAT the foregoing By-Law No. 1 being a by-law relating
generally to the transaction of the business and affairs of the Corporation be
and the same is hereby made as a by-law of the Corporation and the President and
the Secretary be and they are hereby authorized to sign the by-law and to apply
the corporate seal thereto.
The undersigned, being all the directors of the Corporation by their
signature, hereby consent, pursuant to the provisions of the Business
Corporations Act, to the foregoing resolution.
DATED the 27th day of August, 1996.
Claudio Baiocchi Gideon Vardi
David Peterson Donald Paterson
John Albright
<PAGE>
BE RESOLVED THAT the foregoing By-Law No. 1A being a by-law relating
generally to the transaction of the business and affairs of the Corporation be
and the same is hereby confirmed without amendment as a by-law of the
Corporation.
The undersigned, being all the shareholders of the Corporation by their
signatures hereby consent, pursuant to the provisions of the Business
Corporations Act, to the foregoing resolution.
DATED as of the 11th day of September, 1996.
Claudio Baiocchi Aldo Baiocchi
Paul Weissman Barbara Stipo
Anna Maria Capurso Yeganesh Baiocchi
Marilyn Weissman Frank Stipo
Mario Baiocchi THE CLAUDIO BAIOCCHI FAMILY TRUST
Per:
Per:
<PAGE>
MICROFORUM MANUFACTURING INC.
SPECIAL BY-LAW NO. 2
BE IT AND IT IS HEREBY ENACTED as a special by-law of the Corporation that:-
1. The Directors of the Corporation may from time to time:
(a) borrow money upon the credit of the Corporation by obtaining loans
or advances or by way of overdraft or otherwise;
(b) issue, sell or pledge securities of the Corporation including bonds,
debentures, debenture stock, for such sums on such terms and at such
prices as they may deem expedient; and
(c) assign, transfer, convey, hypothecate, mortgage, pledge, charge,
give security or promise to agree to give security in any manner
upon all or any of the real or personal, moveable or immovable
property, rights, powers, choses in action, or other assets, present
or future, of the Corporation to secure any such securities or other
securities of the Corporation or any money borrowed or to be
borrowed or any other debts, obligations or liabilities of the
Corporation heretofore, now or hereafter made or incurred directly
or indirectly or otherwise.
2. Any or all of the foregoing powers may from time to time be delegated by the
directors to any one or more of the directors or officers of the Corporation.
3. This special by-law shall remain in force and be binding upon the Corporation
as regards any person acting on the faith thereof until such person has received
written notification from the Corporation that this by-law has been repealed or
replaced.
ENACTED the 16th day of June, 1987.
Anna Maria Capurso, President Anna Maria Capurso, Secretary
