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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 1997
REGISTRATION NO. 333-19933
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SANCTUARY WOODS MULTIMEDIA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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BRITISH COLUMBIA 7372 75-2444109
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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1825 SOUTH GRANT STREET
SAN MATEO, CALIFORNIA 94402
(415) 286-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CHARLOTTE J. WALKER
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
1825 SOUTH GRANT STREET
SAN MATEO, CALIFORNIA 94402
(415) 286-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
JUDITH M. O'BRIEN
BRUCE M. MCNAMARA
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(415) 493-9300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If the registrant elects to deliver its latest annual report to
security-holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(l) of this form, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED MAXIMUM
MAXIMUM OFFERING AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
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Rights to Purchase Common Stock and
Common Stock, no par value issuable
on exercise thereof.................. 67,424,497 $.17 $11,462,164 $3,438.64(2)
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(1) Registration fee is based on the average of the bid and ask price reported
by the Nasdaq Bulletin Board on February 26, 1997 prior to the initial
filing hereof pursuant to Rule 457(c).
(2) Of which $2,996.03 has been previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH THE PROVISIONS OF
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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SANCTUARY WOODS MULTIMEDIA CORPORATION
1825 SOUTH GRANT STREET
SAN MATEO, CALIFORNIA 94402
NOTICE OF EXTRAORDINARY GENERAL MEETING
NOTICE IS HEREBY GIVEN THAT an Extraordinary General Meeting of the
shareholders of Sanctuary Woods Multimedia Corporation (the "Company") will be
held at the South San Francisco Conference Center, 225 South Airport Boulevard,
South San Francisco, California, Tuesday, April 15, 1997 at the hour of 9:00
a.m., California time, for the following purposes:
1. To consider and, if deemed advisable, to pass a Special Resolution
authorizing the Company to change its jurisdiction of incorporation from
British Columbia, Canada to Delaware, U.S.A. by way of a domestication
under Section 388 of the Delaware General Corporation Law (the
"Domestication") and the adoption by the Company of a Certificate of
Incorporation and Bylaws under Delaware corporate legislation in
substitution of the Company's current Memorandum and Articles and
(without taking into account the one-for-twenty share consolidation set
forth in Proposal Number Two) to alter the Company's authorized capital
from 100,000,000 shares of Common Stock without par value and 5,000,000
shares of Preferred Stock without par value to 100,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock, each with a par
value of $.001 U.S. per share, both of these matters to be effective as
of the date of the Domestication.
2. To approve a one-for-twenty share consolidation of the Company's Common
Stock, and to increase the Company's authorized shares of Common Stock
after the share consolidation to 50,000,000.
3. To approve, subject to the Domestication, the Company's 1996 Stock Plan,
and reserve 8,000,000 shares of the Company's Common Stock for issuance
thereunder (prior to giving effect to the one-for-twenty share
consolidation).
4. To approve, subject to the Domestication, the adoption of
Indemnification Agreements for the Company's directors, executive
officers, employees, agents and fiduciaries.
Management of the Company is not aware of any other matter to come before
the Meeting other than as set forth in this Notice of Meeting and accompanying
Proxy Statement/Prospectus and Information Circular (the "Proxy Statement").
Only shareholders of record at the close of business March 7, 1997 shall be
entitled to notice of and to vote at the Meeting.
All shareholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to
complete, sign and date the enclosed form of proxy and return the same in the
enclosed return envelope provided for that purpose within the time and to the
location set out in the form of proxy accompanying this Notice.
Take notice that pursuant to the British Columbia Company Act shareholders
may, until 5:00 p.m. daylight savings time, at Vancouver, British Columbia, on
April 13, 1997, give the Company a Notice of Dissent by registered mail,
addressed to the Company at 1825 South Grant Street, San Mateo, California
94402, with respect to the Special Resolution to continue the Company out of the
Province of British Columbia and under the General Corporation Law of the State
of Delaware. As a result of giving a Notice of Dissent, a shareholder may, on
receiving a Notice of Intention to Act under Section 231 of the British Columbia
Company Act, require the Company to purchase all of such shareholder's shares in
respect of which the Notice of Dissent was given. See "Proposal Number
One -- Domestication to the State of Delaware" in the accompanying Proxy
Statement.
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The accompanying Proxy Statement provides additional information relating
to the matters to be dealt with at the Meeting and is deemed to form part of
this Notice.
BY ORDER OF THE BOARD OF DIRECTORS
--------------------------------------
CHARLOTTE J. WALKER
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
DATED as of the day of , 1997.
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YOUR VOTE IS IMPORTANT
IN ORDER TO ASSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE REQUESTED
TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE
AND RETURN IT IN THE ENCLOSED ENVELOPE.
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March , 1997
Dear Sanctuary Woods Shareholder and Holder of 8% Convertible Debentures:
I am pleased to inform you that Sanctuary Woods is granting
non-transferable rights (the "Rights") to the holders of its Common Stock
("Common Stock Holders") and holders of 8% Convertible Debentures due July 31,
1999 ("Debenture Holders") (who are not Canadian residents) to purchase up to
67,424,497 shares of Common Stock of the Company. All Common Stock Holders and
Debenture Holders (who are not Canadian residents) of record at the close of
business March 7, 1997 (the "Rights Offering Record Date") will receive Rights
("Rights Holders"). If a holder's shares are not held in the holder's own name
but in the name of a broker, bank, trust company or other entity as record or
nominee holder, the holder will need to contact the record or nominee holder as
soon as possible to communicate the holder's desire to exercise his Rights. NO
RIGHTS WILL BE ISSUED TO THE COMPANY'S CANADIAN COMMON STOCK HOLDERS OR
DEBENTURE HOLDERS DUE TO THE SUBSTANTIAL BURDEN AND COST TO COMPLY WITH CANADIAN
REGULATORY REQUIREMENTS.
The Rights Holders will receive one Right for every share of Common Stock
and 441.8 Rights for every share of Series A Preferred Stock into which such
Rights Holder's Debentures are exchangeable, (prior to giving effect to the
one-for-twenty share consolidation). Each Right will entitle the holder to buy
one share of the Company's stock for U.S.$0.12 per share. The Rights will be
exercisable at any time after issuance until 5:00 p.m., California time, April
4, 1997 (the "Expiration Date"). After the Expiration Date, the Rights will
expire and become void.
The Rights are not transferable. No certificates for Rights will be issued.
No fractional Rights will be issued and no cash will be paid in lieu of
fractional Rights.
Rights Holders may exercise any or all Rights received. No delivery of
shares of Common Stock of the Company issuable upon the exercise of Rights will
be made prior to the Rights Offering Record Date. Certificates for shares
purchased upon exercise of Rights will be delivered as soon as practicable after
exercise.
Any Rights Holder who fully exercises all Rights initially issued to him is
entitled to subscribe for shares of Common Stock which were not otherwise
subscribed for by other Rights Holders in the primary subscription (the
"Over-Subscription Privilege"). Record Date Shareholders such as broker-dealers,
banks, and other professional intermediaries who hold shares on behalf of
clients, may participate in the Over-Subscription Privilege for a client if the
client fully exercises all Rights attributable to him. For purposes of
determining the maximum number of shares of Common Stock a Rights Holder may
acquire pursuant to the Rights Offering, broker-dealers whose shares of Common
Stock are held of record by Cede & Co. ("Cede") or by any other depository or
nominee will be deemed to be the holders of the Rights that are issued to Cede
or such other depository or nominee on their behalf. Shares of Common Stock
acquired pursuant to the Over-Subscription Privilege may be subject to
allotment, which is more fully discussed in the Prospectus accompanying this
letter.
TO EXERCISE RIGHTS:
Complete the Subscription Certificate: To exercise Rights, the Rights
Holder must complete and sign the enclosed Subscription Certificate.
Method of Payment: Payment must be made in United States dollars by check,
bank draft or money order, payable to the order of First National Bank of Boston
as Rights Agents for the Company or by wire transfer to the Rights Agent
pursuant to the instructions set forth in the Subscription Certificate. Payments
received prior to the Rights Offering Record Date for the exercise of Rights
will be held in an escrow account maintained by the Rights Agent until after the
Rights Offering Record Date.
Delivery: The completed Subscription Certificate, with payment, must be
delivered to the Rights Agent on or before the Expiration Date at the address
set forth in the Prospectus:
IF DELIVERY IS MADE BY MAIL, THE HOLDER OF THE RIGHTS BEARS THE RISK OF
LATE DELIVERY. PAYMENT MAY NOT BE MADE IN CASH AND MAY ONLY BE MADE ON
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BUSINESS DAYS. COMPLETED SUBSCRIPTION CERTIFICATES AND PAYMENT FOR SHARES SHOULD
NOT BE SENT TO THE COMPANY.
If Your Shares Are Held By Your Broker, Etc.: If Debentures or shares of
the Company's Common Stock are not held in a Rights Holder's own name but in the
name of a broker, bank, trust company or other entity as record or nominee
holder, the Rights Holder will need to contact the record or nominee holder as
soon as possible to communicate the Rights Holder's desire to exercise Rights.
Exercise is Irrevocable: Once a Rights Holder has delivered or mailed a
completed Subscription Certificate, together with payment, the exercise of the
Rights represented thereby is not revocable for any reason.
Use of Proceeds: The net proceeds received by the Company from the sale of
67,424,497 Shares of Common Stock is estimated to be approximately $8 million,
assuming a Subscription Price of U.S. $0.12 per share and assuming that all of
the Rights are exercised (which cannot be assured), and after deducting expenses
of the Rights Offering of approximately $150,000. The Company intends to use the
proceeds of this Rights Offering for the repayment of debt, research and
development and sales and marketing activities, and for other general corporate
purposes.
AMENDMENT, EXTENSION OR TERMINATION
The Company reserves the right, in its sole discretion, to: (a) terminate
the Rights Offering prior to delivery of the Common Stock for which Rights
Holders have subscribed pursuant to the exercise of Rights in the primary
subscription or the Over-Subscription Privilege; (b) extend the Expiration Date
to a later date; (c) change the Rights Offering Record Date to a later date
prior to the distribution of Rights to shareholders; or (d) amend or modify the
terms of the Rights Offering.
The Rights Offering is described in more detail under the heading "Rights
Offering" in the enclosed Proxy Statement/Prospectus. If you have any questions
relating to the exercise of Rights, please telephone the Rights Agent (800)
733-8481, Ext. 352 or (212) 305-7000.
Very truly yours,
CHARLOTTE J. WALKER
Chairman, President and Chief
Executive Officer
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SANCTUARY WOODS MULTIMEDIA CORPORATION
1825 SOUTH GRANT STREET
SAN MATEO, CALIFORNIA 94402
PROXY STATEMENT/PROSPECTUS
INFORMATION CIRCULAR
EXTRAORDINARY GENERAL MEETING OF SHAREHOLDERS OF
SANCTUARY WOODS MULTIMEDIA CORPORATION
TO BE HELD APRIL 15, 1997
A. PROXY STATEMENT/PROSPECTUS RELATING TO DOMESTICATION
This Proxy Statement/Prospectus constitutes a prospectus of the Company
with respect to (i) 90,665,661 shares of Common Stock, $.001 par value
(including 67,424,497 shares issuable upon exercise of Rights pursuant to the
Rights Offering), (ii) up to 100,000 shares of Series A Preferred Stock, $.001
par value issued in exchange for 8% Convertible Debentures, (iii) 44,183,333
shares of Common Stock issuable upon conversion of the Series A Preferred Stock,
(iv) Warrants to purchase 14,848,716 shares of Common Stock, and (v) 14,700,416
shares of Common Stock issuable upon exercise of Common Stock Warrants, to be
issued in connection with the Domestication in exchange for the Company's
existing share capital.
GENERAL INFORMATION
This Proxy Statement/Prospectus and Information Circular ("Proxy
Statement") is being furnished to the shareholders of Sanctuary Woods Multimedia
Corporation (the "Company"), a British Columbia corporation, in connection with
the solicitation of proxies by the Board of Directors of the Company for use at
an Extraordinary General Meeting of Shareholders of the Company to be held
Friday, April 15, 1997, at the South San Francisco Conference Center, 225 South
Airport Boulevard, South San Francisco, California, commencing at 9:00 a.m.
California time, and at any adjournment or postponement thereof (the "Meeting").
These proxy solicitation materials were mailed on or about March 11, 1997 to all
shareholders entitled to vote at the Meeting.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation at any time up to and including the last
business day preceding the day of the Meeting or, if adjourned, any reconvening
thereof, or to the Chairman of the Meeting on the day of the Meeting prior to
its commencement or, if adjourned, any reconvening thereof, or in any other
manner provided by law. A revocation of a proxy does not affect any matter on
which a vote has been taken before revocation.
VOTING; QUORUM; AND SOLICITATION
Shareholders of record at the close of business March 7, 1997 (the "Record
Date") are entitled to notice of and to vote at the Meeting and at any
adjournment(s) thereof. At the Record Date, 23,241,164 shares of the Company's
Common Stock were issued and outstanding.
The presence of two shareholders or proxy holders representing
shareholder(s) holding in the aggregate not less than 10% of the issued and
outstanding shares entitled to vote, is necessary to constitute a quorum at the
Meeting. As of the Record Date, the Company had one class of shares outstanding.
On all matters which may come before the Meeting, shareholders of the Company on
the Record Date are entitled to one vote for each share of Common Stock held of
record. Approval of Proposals One and Two require the affirmative votes of not
less than 75% of the shares of Common Stock represented and voting at the
Meeting. Approval of Proposal Three requires the affirmative vote of a majority
of the shares of Common Stock represented and
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voting at the Meeting. Proposal Number Four requires the affirmative vote of a
majority of the outstanding shares of voting stock.
The Company has retained the services of Skinner & Co., (the "Agent") to
perform a search of brokers, bank nominees and other institutional owners. The
Company estimates that it will pay the Agent a fee of $3,500 for its services
and will reimburse it for reasonable out-of-pocket expenses, if necessary. In
addition, the Company may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation material to such beneficial owners. Proxies may also be solicited
by certain of the Company's directors, officers and regular employees, without
additional compensation, personally or by telephone or telegram.
OTHER MATTERS
Shareholders unable to attend the Meeting in person should read the notes
accompanying the enclosed Proxy and complete and return the Proxy to the
Company's Registrar and Transfer Agent within the time required by, and to the
location set out in, the notes to the Proxy.
The persons named in the enclosed form of Proxy are directors or officers
of the Company and will, if authorized by proxy, vote the shares represented
thereby on any poll, and where a choice with respect to any matter to be acted
upon has been specified in the form of Proxy, the shares will be voted in
accordance with the specification so made. If no such specification is made, the
shares will be voted in favor of the Proposals.
The enclosed form of Proxy confers discretionary authority upon the person
appointed thereunder with respect to amendments or variations of matters
identified in the Notice of Meeting and with respect to other matters which may
properly come before the Meeting. At the time of printing this Proxy Statement,
Management of the Company knows of no such amendment, variation or other matter
which is expected to come before the Meeting.
B. PROSPECTUS RELATING TO RIGHTS OFFERING
This Proxy Statement/Prospectus also constitutes a prospectus of the
Company with respect to the issuance and delivery of up to 67,424,497 shares of
the Company's Common Stock issuable upon exercise of Rights pursuant to the
Rights Offering.
The Company is granting to its holders of record of Common Stock ("Common
Stock Holders")and 8% Convertible Debentures due July 31, 1999 ("Debenture
Holders") (who are not Canadian residents) at the close of business March 7,
1997 (the "Rights Offering Record Date") Rights to purchase up to 67,424,497
shares of Common Stock of the Company ("Rights Holders"). NO RIGHTS WILL BE
ISSUED TO THE COMPANY'S CANADIAN COMMON STOCK HOLDERS DUE TO THE SUBSTANTIAL
BURDEN OF COMPLYING WITH CANADIAN REGULATORY REQUIREMENTS. Each Rights Holder
will receive one Right for each share of Common Stock owned on the Rights
Offering Record Date and 441.8 Rights for each share of Series A Preferred Stock
for which such Rights Holder's Debentures are exchangeable. Each Rights Holder
will be entitled to subscribe for and purchase from the Company one new share of
Common Stock for every Right held.
In addition, any Rights Holder who fully exercises all Rights initially
issued to him is entitled to subscribe for shares of Common Stock which were not
otherwise subscribed for by other Rights Holders in the primary subscription.
The subscription price for the Common Shares to be issued pursuant to the
Rights is U.S. $0.12 per share.
The Rights expire at 5:00 p.m. California time, on April 4, 1997 (the
"Expiration Date"). The Company's Canadian Common Stock and Debenture Holders,
and Rights Holders who do not fully exercise their Rights should expect, upon
completion of the Rights Offering, to own a smaller proportional interest in the
Company than before the Rights Offering.
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The net proceeds received by the Company from the sale of 67,424,497 shares
of Common Stock in the Rights Offering is estimated to be approximately $8
million, assuming a subscription price of U.S. $0.12 and assuming that all of
the Rights are exercised (which cannot be assured) and after deducting expenses
of the Rights Offering of approximately $150,000.
All proceeds from the sale of the Common Stock of the Company pursuant to
the exercise of Rights will be used for the repayment of debt, research and
development and sales and marketing activities and other general corporate
purposes. The Rights are not transferable and may be exercised only by the
Rights Holders. No fractional Rights will be issued; no cash will be paid in
lieu of fractional Rights. No certificates for Rights will be issued.
The Company's Common Stock trades on the Nasdaq Bulletin Board. The Company
announced the Rights Offering on February 26, 1997. The last reported sale price
of a share of Common Stock on the Nasdaq Bulletin Board on February 26, 1997 was
U.S.$0.17.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 15 HEREIN FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE
CONSIDERED BY POTENTIAL INVESTORS.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/ PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE OR OTHER SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE
OR OTHER SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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TABLE OF CONTENTS
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SUMMARY............................................................................... 10
RISK FACTORS.......................................................................... 15
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON.............................. 21
AVAILABLE INFORMATION................................................................. 21
INFORMATION INCORPORATED BY REFERENCE................................................. 22
RECENT DEVELOPMENTS................................................................... 23
RIGHTS OFFERING....................................................................... 25
Purpose of the Rights Offering...................................................... 25
Eligible Participants............................................................... 25
The Rights.......................................................................... 25
Transferability of Rights........................................................... 25
Over-Subscription Privilege......................................................... 25
Exercise of Rights.................................................................. 26
Rights Agent........................................................................ 27
Information Agent................................................................... 27
The Subscription Price.............................................................. 28
Expiration of Rights Offering....................................................... 28
Amendment, Extension or Termination of Rights Offering.............................. 28
Delivery of Shares Upon Exercise.................................................... 28
Plan of Distribution................................................................ 29
Dilution of Canadian Common Stock Holders........................................... 29
USE OF PROCEEDS....................................................................... 30
PARTICULARS OF MATTERS TO BE ACTED UPON............................................... 31
Proposal Number One -- Domestication to the State of Delaware....................... 31
Proposal Number Two -- One-for-Twenty Share Consolidation........................... 44
Proposal Number Three -- Approval of the Company's 1996 Stock Plan.................. 47
Proposal Number Four -- Adoption of Indemnification Agreements...................... 52
OTHER MATTERS......................................................................... 55
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 55
EXECUTIVE OFFICERS.................................................................... 56
EXECUTIVE COMPENSATION................................................................ 57
Summary Compensation................................................................ 57
Stock Option Grants and Exercises................................................... 58
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements..................................................................... 59
Compensation Committee Interlocks and Insider Participation......................... 60
Indebtedness of Directors, Executive and Senior Officers............................ 60
DESCRIPTION OF CAPITAL STOCK.......................................................... 60
LEGAL MATTERS......................................................................... 61
SHAREHOLDER PROPOSALS................................................................. 62
APPENDIX 1 -- Section 231 of the Company Act (British Columbia)
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APPENDIX 2 -- Certificate of Incorporation of Sanctuary Woods (Delaware)
APPENDIX 3 -- Bylaws of Sanctuary Woods (Delaware)
APPENDIX 4 -- 1996 Stock Plan
APPENDIX 5 -- Form of Indemnification Agreement
APPENDIX 6 -- Subscription Certificate
APPENDIX A: Report of the Company on Form 10K/A-3 for the year ended December 31, 1995
APPENDIX B: Report of the Company on Form 10-Q for the quarter ended December 31, 1996
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SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. Reference is made to, and this summary is qualified in
its entirety by, the more detailed information contained or incorporated by
reference in this Proxy Statement and the exhibits hereto. Unless otherwise
defined herein, capitalized terms used in this summary have the respective
meanings ascribed to them elsewhere in this Proxy Statement. Unless otherwise
indicated, all dollar amounts are stated in U.S. dollars.
RIGHTS OFFERING:
Securities Offered......... The Company is issuing to its holders of Common
Stock, including beneficial owners of shares held
in the name of Cede & Co. as nominee for The
Depository Trust Company or in the name of any
other depositary or nominee, and 8% Convertible
Debentures due July 31, 1999, of record March 7,
1997 (the "Rights Offering Record Date") (who are
not Canadian residents) rights ("Rights") entitling
the holders thereof to subscribe for and purchase
up to an aggregate of 67,424,497 shares of Common
Stock of the Company ("Rights Holders"). Each
Rights Holder will receive one Right for every
share of Common Stock and 441.8 Right(s) for every
share of Series A Preferred Stock for which a
Rights Holder's Debentures are exchangeable. Each
Right will entitle the holder to purchase one share
of the Company's Common Stock. The Rights will be
exercisable at any time after issuance until 5:00
p.m. California time, April 4, 1997.
Over-Subscription
Privilege.................. Any Rights Holder who fully exercises all Rights
initially issued to him is entitled to subscribe
for shares of Common Stock which were not otherwise
subscribed for by other Rights Holders in the
primary subscription (the "Over-Subscription
Privilege").
Subscription Price......... The subscription price per share of Common Stock
(the "Subscription Price") will be U.S.$0.12.
How to Exercise Rights..... To exercise Rights, the Rights Holder must complete
and sign the Subscription Certificate enclosed with
this Prospectus. Payment of the Exercise Price must
be made in United States dollars by check, bank
draft or money order, payable to the order of the
Rights Agent for the Company or by wire transfer to
the Rights Agent pursuant to the instructions set
forth in the Subscription Certificate. Payment may
not be made in cash and may only be made on
business days. The completed Subscription
Certificate, accompanied by payment of the Exercise
Price, must be delivered to the Rights Agent on or
before the Expiration Date. The addresses of the
Rights Agent to which delivery may be made, by mail
or by hand, are set forth in this Prospectus. Once
the Subscription Certificate together with payment,
has been delivered or mailed, the exercise of the
Rights represented thereby is not revocable for any
reason.
Sale of Rights............. The Rights are not transferable. No certificates
for Rights will be issued. No fractional Rights
will be issued and no cash will be paid in lieu of
fractional Rights.
Foreign Restrictions....... Rights will not be issued to Common Stockholders of
Record whose addresses of record are in Canada.
Important Dates to
Remember................... Rights Offering Record Date: March 7, 1997
Expiration Date: April 4, 1997
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Amendment, Extension or
Termination of Rights
Offering................. The Company reserves the right, in its sole
discretion, to:(a) terminate the Rights Offering
prior to delivery of the shares of Common Stock for
which Rights Holders have subscribed pursuant to
the exercise of Rights in the primary subscription
or the Over-Subscription Privilege; (b) extend the
Termination Date to a later date prior to the
distribution of Rights to Rights Holders; (c)
change the Rights Offering Record Date prior to the
distribution of the Rights to Rights Holders; or
(d) amend or modify the terms of the Rights
Offering.
Risk Factors............... An investment in the Common Stock involves a high
degree of risk. See "Risk Factors."
Use of Proceeds............ The proceeds received from the Rights Offering will
be used to fund the Company's operations and for
other general corporate purposes. See "Use Of
Proceeds."
EXTRAORDINARY GENERAL MEETING:
Time, Date and Place....... The Company's Extraordinary General Meeting of
Shareholders (the "Meeting") will be held Tuesday,
April 15, 1997, at 9:00 a.m., California time, at
the South San Francisco Conference Center, 225
South Airport Blvd., South San Francisco, CA.
Record Date, Shares
Entitled to Vote........... The Record Date for the Meeting is March 7, 1997.
Shareholders of record at the close of business on
the Record Date are entitled to notice of and to
vote at the Meeting. At such date, there were
outstanding 23,241,164 shares of Common Stock of
the Company, each of which will be entitled to one
vote on each matter to be acted upon or which may
properly come before the Meeting.
Purposes of the
Extraordinary Meeting...... The purposes of the Meeting are to (i) consider and
vote upon the
Domestication of the Company into the State of
Delaware, U.S.A., (ii) authorize the Board of
Directors to effect a one-for-twenty share
consolidation of the Company's Common Stock and to
increase the number of shares of Common Stock which
the Company is authorized to issue to 50,000,000,
(iii) approve the Company's 1996 Stock Plan, and
(iv) approve the form of indemnification
agreements.
THE DOMESTICATION:
Sanctuary Woods Multimedia
Corporation.............. The Company, incorporated under the laws of British
Columbia, Canada, is currently engaged in the
development and marketing of CD-ROM-based
interactive multimedia software products targeted
at the children's home and education markets. The
Company conducts its operations in the United
States through its wholly-owned subsidiary
Sanctuary Woods Multimedia, Inc., a Nevada
corporation. The principal executive offices of the
Company are located at 1825 South Grant Street, San
Mateo, California, 94402; its telephone number is
(415) 286-6000.
Effect of the
Domestication.............. The Company will change its jurisdiction of
incorporation from British Columbia, Canada to
Delaware, U.S.A. by means of a process called a
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"continuance" under Canadian law and a
"domestication" under Delaware law (herein referred
to as the "Domestication"). Upon the effectiveness
of the Domestication, the Company will become a
Delaware corporation as if it had originally been
incorporated in that jurisdiction and its
incorporation in British Columbia, Canada will be
discontinued.
Vote Required.............. The approval and adoption of the Domestication by
shareholders of the Company will require the
affirmative vote of the holders of seventy-five
percent (75%) of the votes represented and voting
at the Meeting. The presence of at least two
shareholders (or proxy holders representing
shareholder(s)) holding in the aggregate not less
than 10% of the issued and outstanding shares
entitled to vote constitutes a quorum at the
Meeting.
Background of and Reasons
for the Domestication...... For many years, Delaware has followed a policy of
encouraging incorporation in that State and has
adopted comprehensive, modern and flexible
corporate laws to meet the changing needs of
today's corporations. In addition, the Delaware
courts have developed considerable expertise in
dealing with corporate issues and a substantial
body of law has developed construing Delaware law
and establishing public policies with respect to
Delaware corporations. In addition, the Company's
Canadian operations have been sold or discontinued
and its current operations are conducted only in
the United States. The Company has registered
shares of its Common Stock under the U.S.
Securities Act of 1933, as amended (the "Securities
Act") and the U.S. Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and a large
majority of the Company's shareholders reside in
the U.S. Consequently, the Company is required to
comply with both Canadian and U.S. tax and
securities laws, which is both expensive and time-
consuming. Becoming a Delaware corporation is
expected to simplify the Company's tax and
securities filings, accounting and operations and
substantially reduce both the cost and the burden
of these reporting obligations.
Board Has Discretion to
Effect the Domestication... Notwithstanding the fact that the Domestication is
approved and adopted by the requisite vote of the
shareholders of the Company, the Board of Directors
of the Company may, at its option, elect not to
effect the Domestication. Reasons that may cause
the Board of Directors of the Company not to effect
the Domestication include (i) if the Company were
to incur significant tax liabilities; (ii) if a
significant number of the Company's shareholders
elect dissenters' rights; or (iii) if there arises
any other circumstance which, in the discretion of
the Board of Directors, would cause the
Domestication not to be in the best interests of
the Company and its shareholders.
Recommendation of the Board
of Directors of the
Company.................. The Board of Directors of the Company has
unanimously approved the Domestication, believes it
to be in the best interests of the Company and its
shareholders and unanimously recommends approval of
the Domestication to the shareholders.
Effective Time of the
Domestication............ It is anticipated that the Domestication will
become effective as promptly as practicable after
shareholder approval of the Domestication
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<PAGE> 14
has been obtained. Subject to Canadian regulatory
approval, the Domestication will become effective
upon the filing of a Certificate of Domestication
and the Company's Delaware Certificate of
Incorporation with the Secretary of State of the
State of Delaware.
Regulatory Approval........ The Company will apply to the Registrar of
Companies for the Province of British Columbia for
permission to domesticate the Company in the State
of Delaware. Such approval must be obtained for the
Domestication to take place. There are no other
regulatory approvals necessary for consummation of
the Domestication.
Dissenters' Appraisal
Rights With Respect to the
Domestication............ Under Canadian law, the Company's shareholders who
do not vote for the Domestication may elect to have
the fair value of their shares determined in
accordance with Section 231 of the Company Act
(British Columbia) and paid to them in cash if the
Domestication is consummated and if they comply
with the provisions of said Section 231. See
"Particulars of Matters to be Acted Upon, Proposal
Number One -- Domestication to the State of
Delaware -- Right of Dissent."
Certain Canadian Income Tax
Consequences of the
Domestication............ A Canadian shareholder will not incur any income
tax liability solely by reason of the Domestication
unless such shareholder exercises dissenters'
rights, in which case dividend and capital gain
taxes will apply. See "Particulars of Matters to be
Acted Upon, Proposal Number One -- Domestication to
the State of Delaware -- Tax Consequences."
Certain United States
Federal Income Tax
Consequences of the
Domestication............ The Domestication, if approved, has been structured
as a tax-free reorganization under the Internal
Revenue Code of 1986, as amended (the "Code").
Consequently, the U.S. shareholders generally will
not incur any income tax liability solely by reason
of the Domestication unless a shareholder exercises
dissenters' rights in which case capital gain taxes
will apply. See "Particulars of Matters to be Acted
Upon, Proposal Number One -- Domestication to the
State of Delaware -- Tax Consequences."
Comparison of Shareholder
Rights................... See "Particulars of Matters to be Acted
Upon -- Proposal Number One -- Domestication to the
State of Delaware -- Corporate Governance
Differences."
ONE-FOR-TWENTY SHARE
CONSOLIDATION: On November 12, 1996, the Company's shareholders
authorized the Board to effect a one-for-three
share consolidation of the Company's Common Stock
and thereafter to increase the Company's authorized
Common Shares to 50,000,000. The purpose of the
share consolidation was to increase the per share
price of the Company's Common Stock in order to
requalify the Company's Common Stock for listing on
the Nasdaq SmallCap Market ("Nasdaq"). Among other
requirements, in order to qualify for listing on
Nasdaq, the Company's Common Stock must have a
minimum bid price of U.S.$3.00 per share. Since the
shareholder approval, however, the market price of
the Company's
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<PAGE> 15
Common Stock has declined to the extent that the
Board of Directors believes that the one-for-three
share consolidation previously approved by the
Company's shareholders will not increase the market
price of the Company's Common Stock sufficiently to
allow the Company to attempt to list its Common
Stock on Nasdaq. Therefore, the Board of Directors
of the Company believes that it is in the best
interests of the Company and its shareholders to
effect a one-for-twenty share consolidation of the
Company's Common Stock in place of the
one-for-three share consolidation already approved
by the Company's shareholders and thereafter to
increase the Company's authorized Common Stock to
50,000,000 shares. No fractional shares will be
issued. After the aggregation of all fractional
shares held by a shareholder, any remaining
fractional share will be rounded up to the next
whole share. See "Particulars of Matters to be
Acted Upon -- Proposal Number Two -- One-for-Twenty
Share Consolidation."
APPROVAL OF 1996 STOCK
PLAN: The Company's existing 1995 Stock Plan (the "Old
Plan") was drafted to comply with Canadian tax and
securities laws. If the shareholders approve the
Domestication and the Company becomes a Delaware
corporation, the Old Plan will not comply with U.S.
tax and securities laws. Therefore, the Board of
Directors has determined that, subject to the
Domestication of the Company, it is in the best
interests of the Company and its shareholders to
discontinue the granting of options under the Old
Plan and to adopt a new 1996 Stock Plan (the "New
Plan") that complies with U.S. tax and securities
laws. The shareholders are being asked to approve
the adoption of the New Plan and to reserve
8,000,000 shares of Common Stock for issuance
thereunder (prior to giving effect to the
one-for-twenty share consolidation). See
"Particulars of Matters to be Acted
Upon -- Proposal Number Three -- Approval of the
1996 Stock Plan."
ADOPTION OF INDEMNIFICATION
AGREEMENTS: The Company intends to enter into indemnification
agreements with its directors, officers, agents and
fiduciaries upon the effectiveness of the
Domestication, which, among other things, would
incorporate future changes in Delaware law which
expand the permissible scope of indemnification of
directors and officers of Delaware corporations.
See "Particulars of Matters to be Acted
Upon -- Proposal Number Four -- Adoption of
Indemnification Agreements."
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<PAGE> 16
RISK FACTORS
An investment in the Common Stock issuable upon exercise of Rights issued
in the Right's Offering involves a high degree of risk. Before deciding to
purchase any of the Common Stock offered hereby, prospective investors should
consider the following factors, among others set forth herein. The following
risk factors and other information in this Prospectus contains forward looking
statements within the meaning of section 27A of the Securities Act of 1933, as
amended, and section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those projected, as a result of risk
factors discussed in this section and elsewhere in this Prospectus.
Additional Financing Required; No Assurance of Exercise of Rights. At
February 12, 1997, the Company had cash of $925,000 and available credit under
its line of credit with Imperial Bank of $576,000. The Company's line of credit
matures on April 3, 1997 and Imperial Bank has notified the Company that the
line of credit will not be renewed. The Company believes that its existing cash
resources (not including its line of credit) and cash flows from operations will
fund continuing operations only through April 15, 1997. In order to raise
additional capital to fund the Company's continued operations, the Company is
issuing Rights to its shareholders to purchase shares of the Company's Common
Stock. The number of Rights that will be exercised by Rights Holders in the
Rights Offering cannot be presently determined. Accordingly, the amount of
proceeds to the Company from the Rights Offering is uncertain. Certain
shareholders of the Company have informed the Company that they intend to
exercise the Rights issued to them, however, they are not legally bound to do
so. The Company believes that, if all of the Rights are exercised (which cannot
be assured), the proceeds from the Rights Offering, together with the Company's
existing cash resources and cash flows from operations will be sufficient to
permit the Company to continue its operations through December 31, 1997.
Thereafter, unless the Company returns to profitability, additional financing
may be required to fund the Company's continued operations. In the event the
Rights Offering is delayed, the Company believes it has the ability to raise
additional capital on a near term basis from both existing shareholders and
other sources. If the Company is unable to raise additional capital through the
Rights Offering or from other sources, the Company's ability to continue its
operations will be seriously impaired. There can be no assurance, however, that
the Company will be able to raise additional funds on favorable terms or at all,
or that such funds, if raised, will be sufficient to permit the Company to
continue operations long enough to return to profitability.
Continued Losses; Liquidity. The Company had operating losses and net
losses in each fiscal year since its inception in 1991 and has suffered
operating losses in each of its last five quarters. In the three years ended
December 31, 1995, 1994 and 1993, the Company reported operating losses of $18.7
million, $8.0 million and $4.4 million, respectively, and net losses in each of
these years of $18.7 million, $7.4 million and $4.2 million, respectively. These
losses were due to low sales volumes and expenditures incurred by the Company in
the development of its CD-ROM publishing business, including significant
expenses related to internally and externally developed products, formation of
its own direct sales force, and the write-off of certain significant assets as a
result of the Company's lack of capital resources and its reassessment of the
future salability of certain products. There is no assurance that the Company
will become profitable in the near future or at all. "See -- Recent
Developments."
Fluctuations in Operating Results; Seasonality. The Company has
experienced, and expects to continue to experience, significant fluctuations in
operating results due to a variety of factors, including the size and rate of
growth of the consumer software market, market acceptance of the Company's
products and those of its competitors, development and promotional expenses
relating to the introduction of new products or new versions of existing
products, projected and actual changes in computing platforms, the timing and
success of product introductions, product returns, changes in pricing policies
by the Company and its competitors, difficulty in securing retail shelf space
for the Company's products, the accuracy of retailers' forecasts of consumer
demand, the timing of orders from major customers, order cancellations and
delays in shipment. In addition, the Company's business has been in the past
(due to the seasonal nature of consumer purchases of entertainment products) and
is expected to continue to be subject to seasonal fluctuations as a result of
the purchasing cycle of consumers, school districts and dealers in educational
products. In response to competitive pressures, the Company may take certain
pricing or marketing actions that could materially adversely affect the
Company's business, operating results and financial condition. The Company may
be required to pay fees
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<PAGE> 17
in advance or to guarantee royalties, which may be substantial, or to obtain
licenses to intellectual properties from third parties before such properties
have been introduced or achieved market acceptance. A significant portion of the
Company's operating expenses are relatively fixed, and planned expenditures are
based in part on sales forecasts. If net sales do not meet the Company's
expectations, the Company's business, operating results and financial condition
could be materially adversely affected.
Possible Write-Offs from Product Returns, Price Protection; Bad Debts;
Collections. The Company recognizes revenue in accordance with industry
practice (net of an allowance for product returns and price protection) from the
sale of its products upon shipment to its distributors and retailers. The
Company had a reserve balance for price protection and returns as of December
31, 1996, of $1,049,688. Product returns or price protection concessions that
exceed the Company's reserves could materially adversely affect the Company's
business, operating results and financial condition and could increase the
magnitude of quarterly fluctuations in the Company's operating and financial
results. In addition, the Company has experienced in the past, and continues to
experience, significant delays in the collection of certain of its accounts
receivable. Further, if the Company's assessment of the creditworthiness of its
customers receiving products on credit proves incorrect, the Company could be
required to significantly increase the reserves previously established.
Recent Changes in Management Team. The Company recently experienced a
period of reorganization that has placed, and could continue to place, a
significant strain on the Company's financial, management, personnel and other
resources. The Company is operating under the direction of a new President and
Chief Executive Officer, and a new management team. If the Company's executives
are unable to effectively manage the Company's business, the Company's operating
results and financial condition could be materially adversely affected.
Impact of Reorganization of Operations. The Company may take additional
steps to reorganize or consolidate its operations. As discussed above, in an
effort to reduce its expense structure, the Company reorganized its operations
in 1996, in addition to revising its product development plans for the year.
These changes or other future steps to reorganize and reduce expenses could
result in the delayed introduction of new products which could have a material
adverse effect on the Company's financial condition and results of operations.
Dependence on Key Personnel; Retention of Employees. The Company's success
depends in large part on the continued service of its key creative, technical,
marketing, sales and management personnel and its ability to continue to
attract, motivate and retain highly qualified employees. Because of the
multifaceted nature of interactive media, key personnel often require a unique
combination of creative and technical talents. Such personnel are in short
supply, and the competition for their services is intense. The process of
recruiting key creative, technical and management personnel with the requisite
combination of skills and other attributes necessary to execute the Company's
strategy is often lengthy. The Company has entered into at-will employment
agreements with its management and other personnel, who may generally terminate
their employment at any time. The loss of the services of key personnel or the
Company's failure to attract additional qualified employees could have a
material adverse effect on the Company's results of operations and research and
development efforts. In particular, the Company has recently reorganized its
operations and has undergone a reduction in force among its employees. Such
reduction in force, combined with the Company's disappointing operating
performance, the price of the Company's stock, and the availability of
substantial alternative employment for talented employees of the Company, may
result in key employees and managers leaving the Company, which could materially
adversely impact the Company's ability to develop and sell its products. The
Company does not have key person insurance covering any of its personnel.
Dependence on New Product Development; Product Delays. The success of the
Company depends on the continuous and timely introduction of successful new
products. In general, consumer preferences for software products are difficult
to predict and are often short-lived. The retail life of software programs has
become shorter, and may now last only 9 to 12 months (or even less for
unsuccessful products), while the Company typically requires 6 to 9 months or
longer for the development of a new educational CD-ROM title. The short life
span of a product combined with a lengthy development cycle makes it especially
difficult to predict whether a product will be a success by the time it comes to
market. There can be no assurance that
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<PAGE> 18
new products introduced by the Company will achieve any significant market
acceptance or that, if such acceptance occurs, it will be sustained for any
significant period. If the Company does not correctly anticipate and respond to
demand for its products in a timely manner, the Company's business, operating
results and financial condition will be materially adversely affected.
A significant delay in the introduction of, or the presence of a defect in,
one or more products could have a material adverse affect on the Company's
business, operating results and financial condition, particularly in view of the
seasonality of the Company's business. Further, delays in a product introduction
near the end of a fiscal quarter may materially adversely affect operating
results for that quarter, as initial shipments of a product may move from one
quarter to the next and may represent a substantial percentage of annual
shipments of a product. The timing and success of software development is
unpredictable due to the technological complexity of software products, inherent
uncertainty in anticipating technological developments, the need for coordinated
efforts of numerous creative and technical personnel and difficulties in
identifying and eliminating errors prior to product release. In the past, the
Company has experienced delays in the introduction of certain new products.
There can be no assurance that new products will be introduced on schedule or at
all or that they will achieve market acceptance or generate significant
revenues.
Competition. The home entertainment and education software industry is
intensely competitive, and market acceptance for any of the Company's products
may be adversely affected by competitors introducing similar products with
greater consumer demand. The Company competes against a large number of other
companies of varying sizes and resources. Most of the Company's competitors have
substantially greater financial, technical and marketing resources, as well as
greater name recognition and better access to consumers. Existing competitors
may continue to broaden their product lines and potential competitors, including
large computer or software manufacturers, entertainment companies, diversified
media companies, and book publishers, may enter or increase their focus on the
CD-ROM school and home education markets, resulting in increased competition for
the Company. Retailers of the Company's products typically have a limited amount
of shelf space and promotional resources, and there is intense competition among
consumer software producers for high quality and adequate levels of shelf space
and promotional support from retailers. To the extent that the number of
consumer software products and computer platforms increases, this competition
for shelf space may intensify. Due to increased competition for limited shelf
space, retailers and distributors are increasingly in a better position to
negotiate favorable terms of sale, including price discounts and product return
policies. Retailers often require software publishers to pay fees in exchange
for preferred shelf space. There can be no assurance that retailers will
continue to purchase the Company's products or provide the Company's products
with adequate levels of shelf space. Increased competition could result in loss
of shelf space for, and reduction in sell-through of, the Company's products at
retail stores and significant price competition, any of which could adversely
affect the Company's business, operating results and financial condition. In
addition, other types of retail outlets and methods of product distribution,
such as on-line services, may become important in the future, and it may be
important for the Company to gain access to these channels of distribution.
There can be no assurance that the Company will gain such access or that the
Company's access will be on terms favorable to the Company.
Changing Product Platforms and Formats. The Company's software products
are intended to be played on machines built by other manufacturers. The
operating systems of machines currently being manufactured are characterized by
several competing and incompatible formats or "platforms," and new platforms
will probably be introduced in the future. The Company must continually
anticipate the emergence of, and adapt its products to, popular platforms for
consumer software. When the Company chooses a platform for its products, it must
commit a substantial development time and investment in advance of shipments of
products on that platform. If the Company invests in a platform that does not
achieve significant market penetration, the Company's planned revenues from
those products will be adversely affected and it may not recover its development
investment. If the Company does not choose to develop for a platform that
achieves significant market success, the Company's revenues may also be
adversely affected. The Company is currently developing products only for DOS
and Windows PC, and Macintosh computers. The Company has terminated virtually
all current development for other platforms such as the Sony PlayStation and
Sega Saturn. There can be no assurance that the Company has chosen to support
the platforms that ultimately will be successful.
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<PAGE> 19
Changes in Technology and Industry Standards. The consumer software
industry is undergoing rapid changes, including evolving industry standards,
frequent new product introductions and changes in consumer requirements and
preferences. The introduction of new technologies, including operating systems
and media formats, can render the Company's existing products obsolete or
unmarketable. Operating setbacks at Apple Computer may adversely affect future
sales of Macintosh computers. The development cycle for products utilizing new
operating systems, microprocessors or formats may be significantly longer than
the Company's current development cycle for products on existing operating
systems, microprocessors and formats and may require the Company to invest
resources in products that may not become profitable. There can be no assurance
that the current demand for the Company's products will continue or that the mix
of the Company's future product offerings will keep pace with technological
changes or satisfy evolving consumer preferences or that the Company will be
successful in developing and marketing products for any future operating system
or format.
Limited Protection of Intellectual Property and Proprietary Rights; Risk of
Litigation. The Company regards its software as proprietary and relies
primarily on a combination of trademark, copyright and trade secret laws, and
employee and third-party nondisclosure agreements and other methods to protect
its proprietary rights. However, the Company does not have signed license
agreements with its end-users and does not include in its products any mechanism
to prevent or inhibit unauthorized copying. Unauthorized parties may copy the
Company's products or reverse engineer or otherwise obtain and use information
that the Company regards as proprietary. If a significant amount of unauthorized
copying of the Company's products were to occur, the Company's business,
operating results and financial condition could be materially adversely
affected. Further, the laws of certain countries in which the Company's products
are or may be distributed do not protect applicable intellectual property rights
to the same extent as the laws of the United States. In addition, the Company
holds no patents, and, although the Company has developed and continues to
develop certain proprietary software tools, the copyrights to which are owned by
the Company, most of the technology used to develop the Company's products is
not proprietary. There can be no assurance that the Company's competitors will
not independently utilize existing technologies to develop products that are
substantially equivalent or superior to the Company's. Also, as the number of
software products in the industry increases and the functionality of these
products further overlaps, software developers and publishers may increasingly
become subject to infringement claims. There can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products.
As is common in the industry, from time to time the Company receives
notices from third parties claiming infringement of intellectual property or
other rights of such parties. The Company investigates these claims and responds
as it deems appropriate. There has been substantial litigation regarding
copyright, trademark and other intellectual property rights involving computer
software companies in general. The Company may also face suits as a result of
employment matters, publicity rights, governmental or regulatory investigations,
or due to claims of breach of the Company's obligations under various agreements
to publish or develop products, or for goods or services provided to the
Company. Adverse determinations in such claims or litigation could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company may find it necessary or desirable in the
future to obtain licenses relating to one or more of its products or relating to
current or future technologies. There can be no assurance that the Company will
be able to obtain these licenses or other rights on commercially reasonable
terms or at all.
Relationship with Vendors. Failure to pay vendors on a timely basis may
result in loss of the availability of the services of such vendors, which could
hamper the Company's ability to manufacture and ship products, and may
ultimately result in the Company being sued for collection of such amounts as
may be owed to such vendors. If the Company is unable to produce its products to
fill orders, the Company's operating results and financial condition could be
materially adversely affected. In the event that suits by vendors are filed
against the Company, the Company may be required to incur unanticipated legal
expenses.
Market for Common Stock; Stock Price Volatility. The Company's Common
Stock was quoted on the Vancouver Stock Exchange until March 12, 1997 when the
Company's shares were delisted at the Company's request. The Company's Common
Stock was quoted on the Nasdaq National Market or Small Cap Market from
September 8, 1993 until July 2, 1996 when it began trading on the Nasdaq
Bulletin Board for failing to
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<PAGE> 20
meet NASDAQ requirements for trading. Based upon historical trends in the market
for other software company stocks, the Company anticipates that the trading
price of its Common Stock may be subject to wide fluctuations in response to
quarterly variations in operating results, changes in actual earnings or in
earnings estimates by analysts, announcements of technological developments by
the Company or its competitors, general market conditions or other events
largely outside the Company's control. In addition, the stock market has
experienced, from time to time, extreme price and volume fluctuations which have
particularly affected the market prices of high technology stocks. These
fluctuations have often been disproportionate or unrelated to the operating
performance of these companies. These broad market fluctuations, general
economic conditions or other factors outside the Company's control may adversely
affect the market price for the Company's stock. The Company is asking its
shareholders to approve a one-for-twenty share consolidation in order to help
the Company requalify its Common Stock for listing on the Nasdaq SmallCap
Market. There is no assurance, however, that the one-for-twenty share
consolidation will increase the price of the Company's Common Stock sufficiently
to qualify for relisting on the Nasdaq SmallCap Market or that the Company will
be able to meet the other requirements necessary to qualify its Common Stock for
listing on such exchange. In addition, the NASD has proposed new entry and
maintenance standards that, if adopted, would require a company to (i) have net
tangible assets of at least $4,000,000, a market capitalization of at least
$50,000,000 or net income in two of the last three years of $750,000 in order to
be listed for trading on the Nasdaq SmallCap Market and (ii) net tangible assets
of at least $2,000,000, a market capitalization of at least $35,000,000 or net
income of at least $500,000 during two of the last three years in order to
maintain its listing on the Nasdaq SmallCap Market. Under the proposed new
rules, a company would also have to have a public float of at least 1,000,000
shares with a market value of at least $5,000,000, and a minimum bid price of
$4.00 per share for initial listing and a public float of 500,000 shares with a
market value of at least $1,000,000 and a minimum bid price of $1.00 per share,
to maintain such listing. There is no assurance that the Company will be able to
meet these new listing requirements, or, that if the Company does meet the
initial listing requirement, that it will be able to continue to meet the
maintenance requirements. If the Company were unable to list its shares on the
Nasdaq SmallCap Market, trading in the Common Stock would thereafter be
conducted in the over-the-counter market on an electronic bulletin board
established for securities that do not meet the Nasdaq SmallCap Market listing
requirements. As a result, an investor could continue to find it difficult to
dispose of, or to obtain accurate quotations as to the price of, the Company's
Common Stock.
Performance Shares and Related Compensation Expense. In October 1991, in
connection with the sale of 1,800,000 common shares to the Company's founders
and principal stockholders, the Company issued 4,000,000 common "performance"
shares (the "Performance Shares") at CDN $0.01 per share to certain of these
individuals. These Performance Shares were issued pursuant to Local Policy #3-07
of the British Columbia Securities Commission ("BCSC") and Policy 19 of the
Vancouver Stock Exchange, which provide the guidelines for the issuance of
performance shares. In July 1996, a total of 1,200,000 of these shares were sold
and transferred to certain members of management at their then estimated fair
market value of $.03 per share.
The Performance Shares are held in escrow to be released as the Company
achieves positive operating cash flow on a cumulative basis as defined by the
BCSC ("BCSC Operating Cash Flow"). The holders of Performance Shares will be
entitled to a pro rata release from escrow on the basis of one share for every
CDN $0.653 of cumulative positive BCSC Operating Cash Flow, subject to approval
by the BCSC and the Vancouver Stock Exchange. Performance Shares are permitted
to be released from escrow on an annual basis, and all of the Performance Shares
will be released once CDN $2,612,000 of cumulative positive BCSC Operating Cash
Flow has been generated by the Company.
At the time when BCSC Operating Cash Flow justifying release of the
Performance Shares, or a pro rata portion thereof, is probable, the Company will
record as compensation expense an amount equal to the difference between the CDN
$0.01 per share originally paid for the Performance Shares then issuable and the
market price of its common stock at that time. Such a pro rata or full expense
recognition will occur prior to the pro rata or full release from escrow of the
Performance Shares. If and when such expense recognition criteria are achieved,
based on the closing price of the Company's Common Stock on the Nasdaq Bulletin
Board at February 26, 1997, of US$.17 per share (for example purposes only), the
aggregate compensation
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<PAGE> 21
expense that would be recognized as a result of earning of all the Performance
Shares would be approximately $640,000. Any compensation expense recognized
related to the Performance Shares will be a noncash charge against income and
will have no net impact on total stockholders' equity (deficit).
If and when the Performance Shares are earned, the number of shares used to
calculate primary net income (loss) per share will increase by the number of
Performance Shares earned. Through December 31, 1996, no Performance Shares have
been earned or released.
The Company has agreed in principle (subject to required regulatory
approvals) with holders of 2,172,500 of these shares and it is negotiating with
holders of the remaining 1,827,500 shares to cancel their Performance Shares in
consideration for Cdn $.01 per Performance Share, which the Company will pay by
the issuance of Common Shares at a price of Cdn $0.21 per share plus warrants to
purchase one share of Common Stock for every 6.67 Performance Shares at an
exercise price of Cdn $0.21 per share in year one and Cdn $0.23 per share in
year two. For example, if a shareholder held 1,000,000 Performance Shares, in
consideration for the cancellation of such Performance Shares, he would receive
approximately 47,619 shares of Common Stock and warrants to purchase
approximately 149,403 shares of Common Stock.
Shares Eligible for Future Sale; Possible Adverse Effect on Future Market
Price. The sale of substantial amounts of shares in the public market or the
prospect of such sales or the sales or issuance of convertible securities or
warrants could adversely affect the market price of the Company's Common Stock.
Substantially all of the Company's issued and outstanding shares are freely
tradable. In addition, as of December 31, 1996, the Company had outstanding
options to purchase 3,104,500 shares of Common Stock, warrants to purchase
5,131,000 shares of Common Stock and 8% Convertible Debentures convertible into
9,640,000 shares of Common Stock. Furthermore, as of the Record Date the Company
had reserved approximately 8,000,000 additional shares of Common Stock for
future issuance pursuant to the Company's Stock Plans. In addition, in February
1997 the Company agreed with certain holders of the 8% Convertible Debentures to
exchange the Debentures for shares of Series A Preferred Stock. Assuming the
exchange of all of the outstanding Convertible Debentures upon the consummation
of the exchange, the Company will have outstanding approximately 100,000 shares
of Series A Preferred Stock, which will be convertible at any time at the option
of the holder into 44,183,333 shares of Common Stock. In connection with the
exchange, the Company will issue an additional 9,499,416 warrants to purchase
shares of the Company's Common Stock.
No Dividends. The Company has not paid any cash dividends since inception
and does not anticipate paying cash dividends in the foreseeable future. The
Company's bank credit agreement prohibits the payment of cash dividends without
the prior written consent of the lender. The Company's bank credit agreement
matures on April 3, 1997, at that time assuming repayment of all amounts owed
thereunder, the dividends restrictions will be lifted.
Broad Discretion on Use of Proceeds. Management of the Company will have
broad discretion in determining the use to which the net proceeds of the Rights
Offering will be put.
Potential Dilution in Net Tangible Book Value (Deficit). The net tangible
book value (deficit) of the Company at December 31, 1996 was approximately
$(3,500,000) or $(0.15) per share of common stock "Net tangible book value
(deficit)" per share is equal to the Company's total tangible assets less its
total liabilities, divided by the total number of shares of common stock
outstanding (excluding the 4,000,000 performance shares). Investors purchasing
shares of common stock in the Rights Offering will incur immediate and
substantial net tangible book value (deficit) dilution.
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<PAGE> 22
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
INDEMNIFICATION
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that indemnification of directors, officers, employees and other agents of the
corporation, and persons who serve at its request as directors, officers,
employees or other agents of another organization, may be provided by it to
whatever extent specified in or authorized by (i) the articles of organization,
(ii) a by-law adopted by the shareholders or (iii) a vote adopted by the holders
of a majority of the shares of stock entitled to vote on the election of
directors.
The Company's Delaware Certificate of Incorporation includes provisions
eliminating the personal liability of the Company's directors for monetary
damages resulting from breaches of their fiduciary duty except (i) for any
breach of the directors' duty of loyalty to the Company or its shareholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) from an unlawful payment of a
dividend, stock repurchase or redemption, or (iv) with respect to any
transaction from which the director derived an improper personal benefit. The
Company's Delaware Bylaws provide indemnification to directors and officers
against claims to the full extent allowable under Delaware law. The Company also
intends to enter into indemnification agreements with its directors and
executive officers providing, among other things, that the Company provide
defense costs against any such claim, subject to reimbursement in certain
events. The Company also maintains a directors and officers liability insurance
policy.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("the 1934 Act"), and in accordance therewith
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: in Chicago, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and in New York, 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such materials can be obtained at prescribed
rates by written request addressed to the Commission, Public Reference Section,
450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web
site that contains reports, proxy and information statements and information
regarding the Company. The address of such Web site is (http://www.sec.gov).
The Company has filed with the Commission in Washington, D.C. Registration
Statements on Forms S-2 and S-4 (collectively, and together with all amendments,
supplements, and exhibits thereto, referred to as the "Registration Statements")
under the Securities Act of 1933, as amended, with respect to the Common Stock,
Series A Preferred Stock and Warrants to be issued in connection with the
Domestication (the "Securities"), and the Common Stock to be issued by the
Company in connection with the Rights Offering. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statements and the exhibits thereto.
For further information with respect to the Company and the Securities offered
hereby, reference is made to the Registration Statements, including the exhibits
filed or incorporated as a part thereof, copies of which can be inspected at, or
obtained at prescribed rates from, the Public Reference Section of the
Commission at the address set forth above. While statements contained in this
Proxy Statement fully and accurately describe the material aspects of the
transactions being contemplated, statements as to the contents of any contract
or other document referred to herein or therein are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statements or such other
document.
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<PAGE> 23
INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the Commission (File No. 0-21510)
pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K/A-3 for the fiscal year ended
December 31, 1995 filed pursuant to Section 13 of the Exchange Act.
2 The Company's quarterly report on Form 10-Q for the quarter ended March
31, 1996 filed pursuant to Section 13 of the Exchange Act.
3 The Company's quarterly report on Form 10-Q for the quarter ended June
30, 1996 filed pursuant to Section 13 of the Exchange Act.
4 The Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1996 filed pursuant to Section 13 of the Exchange Act.
5 The Company's quarterly report on Form 10-Q for the quarter ended
December 31, 1996 filed pursuant to Section 13 of the Exchange Act.
6 The Company's report dated October 30, 1996 on Form 8-K filed pursuant to
Section 13 of the Exchange Act.
This prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents are available without charge upon
request from Sanctuary Woods Multimedia Corporation, c/o Peter Nichter, 1825
South Grant Street, San Mateo, California 94402. In order to ensure timely
delivery of the documents, any request should be made by March 15, 1997.
A COPY OF THE COMPANY'S REPORT ON FORM 10-K/A-3 FOR THE YEAR ENDED DECEMBER
31, 1995, AND A COPY OF THE COMPANY'S REPORT ON FORM 10-Q FOR THE QUARTER ENDED
DECEMBER 31, 1996 ARE BEING INCLUDED WITH THIS PROSPECTUS AS APPENDICES A AND B,
RESPECTIVELY.
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<PAGE> 24
RECENT DEVELOPMENTS
BANK LINE OF CREDIT
The Company is a party to a revolving credit agreement with Imperial Bank,
through which the Company can borrow up to $750,000. Borrowings under the credit
agreement are limited to 65% of eligible trade accounts receivable. Interest is
payable at the rate of the bank's prime rate plus 2.50% (4% if the Company is
out of compliance with certain covenants under the credit agreement). At
February 3, 1997 the interest rate was 10.75%
On April 2, 1996, the bank agreed to waive certain debt covenant violations
and to extend the credit agreement to May 15, 1996 in consideration for warrants
to purchase 200,000 shares of the Company's Common Stock at an exercise price of
$.5625 per share. On May 29, 1996, the bank again agreed to waive certain debt
covenant violations and to extend the credit agreement to December 31, 1996 in
consideration for warrants to purchase an additional 200,000 shares of the
Company's Common Stock at an exercise price of $.50 per share. On August 15,
1996, the bank agreed to extend the credit agreement to April 3, 1997.
As of February 12, 1997, the Company had outstanding bank borrowings of
$174,000. The Company did not comply with the earnings covenant under the credit
agreement for the quarter ended December 31, 1996. The bank has advised the
Company that it will not enforce its default rights under the agreement at this
time but that it does not intend to renew the line of credit when it matures
April 3, 1997. The Company does not presently anticipate obtaining another bank
line of credit. Because the Company's borrowings under its line of credit have
been minimal and because the bank has not enforced its default rights, the
Company believes the default under its bank credit agreement did not or will not
have a material adverse effect on the Company.
The Company's bank credit agreement prohibits the payment of cash dividends
without the prior written consent of the bank. The credit agreement expires on
April 3, 1997. Assuming repayment of all amounts owing thereunder, the dividend
restrictions will be lifted.
8% CONVERTIBLE DEBENTURES
In September 1996, the Company privately placed 8% Convertible Debentures
due July 31, 1999 ("Debentures") in the principal amount of $5,302,000. In
addition, the Company issued to each purchaser of the Debentures a warrant to
purchase one share of Common Stock for each $2.00 invested (2,651,000 total
shares). Each warrant is exercisable at $.6875 per share. The warrants expire in
September 1999. The Debentures are convertible into shares of the Company's
Common Stock at the rate of one share for each $.55 of principal plus accrued
interest. The Debentures are automatically convertible on July 31, 1999 or upon
occurrence of either of the following events: (a) the Company's obtaining any
equity financing in an amount not less than $2,000,000 at prices not less than
$1.00 per share or (b) the Common Stock of the Company having closed trading at
a price of $1.375 or more per share for any 21 trading days in any consecutive
40 day trading period. From April 1, 1997 to July 31, 1999 the Debentures are
convertible at the option of the holder. The Debentures are subordinate to
senior debt and to the security interest of the Company's bank. The Company may
prepay the Debentures at any time without penalty.
In order to improve the Company's financial condition, in February 1997 the
Company agreed with holders of outstanding Debentures in the principal amount of
$4,550,000 and is negotiating agreements with the remaining holders that,
subject to regulatory approval, the holders of the Debentures will exchange the
outstanding Debentures for an aggregate of 100,000 shares of the Company's
Series A Preferred Stock. The Series A Preferred Stock will have an aggregate
liquidation preference of $5,302,000, and shall be convertible into Common Stock
at the rate of $0.12 per share (44,183,333 total shares) (as adjusted for stock
splits, stock dividends and the like). The Series A Preferred Stock shall
automatically convert into Common Stock on July 31, 1999 or upon the occurrence
of either (i) the Company obtaining equity financing of not less than $2,000,000
at a price not less than $0.22 or (ii) the closing price of the Company's Common
Stock shall have been 250% of the conversion price of the Series A Preferred
Stock for any 21 trading days in any consecutive 40 day trading period. In
addition, the Company will issue to the Debenture Holders warrants to purchase
9,499,416 additional shares of the Company's Common Stock at an exercise price
of U.S.$0.15 per share and
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<PAGE> 25
will decrease the exercise price of existing warrants issued to the Debenture
holders to $0.15 per share. The warrants must be exercised if the Company's
Common Stock trades at 300% of the exercise price or $0.45 per share for any 21
trading days in any consecutive 40 day trading period. In consideration for the
exchange, the Debenture Holders will retroactively forego interest on the
Convertible Debentures.
RIGHTS OFFERING
In addition, the Company seeks to raise approximately $8 million (assuming
all of the Rights are exercised, which cannot be assured) in the Rights
Offering, which it plans to use to fund the Company's operations and for
necessary working capital and other general corporate purposes. In the event the
Rights Offering is delayed, the Company believes it has the ability to raise
additional capital on a near term basis from both existing shareholders and
other sources.
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<PAGE> 26
RIGHTS OFFERING
The Company is granting rights ("Rights") to the holders of the Company's
Common Stock ("Common Stock Holders") and holders of the Company's 8%
Convertible Debentures due July 31, 1999 ("Debenture Holders")(who are not
Canadian residents) to purchase up to 67,424,497 shares of Common Stock of the
Company ("Rights Holders"). The purpose of the Rights Offering is to raise
necessary capital for the Company. See "Use of Proceeds."
PURPOSE OF THE RIGHTS OFFERING
The Board of Directors of the Company has determined that it is necessary
for the Company to raise additional capital at this time to finance its
operations. The Rights Offering provides the Company with the opportunity to
raise additional capital without diluting the ownership interests of existing
non-Canadian shareholders who exercise their Rights, and without paying
underwriting commissions and expenses. Rights Holders who exercise their Rights
in the Rights Offering will be able to purchase shares of the Company's Common
Stock at a price below market, without incurring brokers' commissions, and will
be able to maintain their prorata share of the Company's equity.
ELIGIBLE PARTICIPANTS
All Common Stock and Debenture Holders (who are not Canadian residents) of
record on the Rights Offering Record Date will receive Rights. If a Common Stock
Holder's or a Debenture Holder's shares are not held in such holder's own name
but in the name of a broker, bank, trust company or other entity as record or
nominee holder (the "Record Holder"), the Common Stock Holder or Debenture
Holder will need to contact the Record Holder as soon as possible to exercise
Rights.
THE RIGHTS
Rights Holders will receive one Right for every share of Common Stock and
441.8 Rights for every share of Series A Preferred Stock for which the Rights
Holder's Debentures are exchangeable. Each Right will entitle the holder to buy
one share of Common Stock of the Company.
TRANSFERABILITY OF RIGHTS
The Rights are not transferable. No certificates for Rights will be issued.
No fractional Rights will be issued and no cash will be paid in lieu of
fractional Rights.
OVER-SUBSCRIPTION PRIVILEGE
Any Rights Holder who fully exercises all Rights initially issued to him is
entitled to subscribe for shares of Common Stock which were not otherwise
subscribed for by other Rights Holders in the primary subscription (the
"Over-Subscription Privilege"). Record Date Shareholders such as broker-dealers,
banks, and other professional intermediaries who hold shares on behalf of
clients may participate in the Over-Subscription Privilege for a client if the
client fully exercises all Rights attributable to him. For purposes of
determining the maximum number of shares of Common Stock a Rights Holder may
acquire pursuant to the Rights Offering, broker-dealers whose shares of Common
Stock are held of record by Cede & Co. ("Cede") or by any other depository or
nominee will be deemed to be the holders of the Rights that are issued to Cede
or such other depository or nominee on their behalf. Shares of Common Stock
acquired pursuant to the Over-Subscription Privilege may be subject to
allotment. Rights Holders should indicate, on the Subscription Certificate how
many shares of Common Stock they are willing to acquire pursuant to the
Over-Subscription Privilege. If sufficient shares of Common Stock remain after
the primary subscription, all over-subscriptions will be honored in full. If
subscriptions for Common Stock through the Over-Subscription Privilege exceed
the Common Stock available for sale after the primary subscription, the
available Common Stock will be allocated among those who over-subscribe based on
the number of shares of Common Stock a Rights Holder subscribes for pursuant to
the Over-Subscription Privilege. The percentage of remaining Common Stock each
over-subscribing Rights Holder may acquire may be rounded up or down to result
in delivery of whole shares.
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A Rights Holder who is not allocated the full amount of shares that such holder
subscribes for pursuant to the Over-Subscription Privilege will receive a refund
of the Subscription Price paid by such holder for shares that are not allocated
to and purchased by such holder. Such refund will be made by a check mailed by
the Rights Agent.
If a Rights Holder does not deliver full payment of the Subscription Price
for the number of shares indicated as being subscribed through the exercise of
the Over-Subscription Privilege, then such Rights Holder will be deemed to have
exercised the Over-Subscription Privilege to purchase the maximum number of
shares of Common Stock determined by dividing the total Subscription Price paid
(in excess of the Subscription Price for the number of shares of Common Stock
such holder purchased through the exercise of Rights in the primary
subscription) by the Subscription Price per share.
EXERCISE OF RIGHTS
To exercise Rights, the Rights Holder must complete and sign the
Subscription Certificate enclosed with this Proxy Statement. Payment of the
Subscription Price must be made in United States dollars by check, bank draft or
money order, payable to the order of the Rights Agent for the Company or by wire
transfer to the Rights Agent pursuant to the instructions set forth in the
Subscription Certificate. Payment may not be made in cash and may only be made
on business days. The completed Subscription Certificate, accompanied by payment
of the Subscription Price, must be delivered to the Rights Agent on or before
the Expiration Date. The addresses of the Rights Agent to which delivery may be
made, by mail or by hand, are set forth in this Prospectus.
If delivery is made by mail, the holder of Rights bears the risk of late
delivery. Completed Subscription Certificates should not be sent to the Company.
If a Common Stock Holder's shares or a Debenture Holder's Debentures are
not held in the holder's own name but in the name of a broker, bank, trust
company or other entity as Record Holder, the holder will need to contact the
Record Holder as soon as possible to exercise Rights, and any Subscription
Certificate must be signed by such Record Holder.
Once a completed Subscription Certificate, together with payment, has been
delivered or mailed, the exercise of the Rights represented thereby is not
revocable for any reason.
All questions as to the validity, form and eligibility (including times of
receipt and matters pertaining to beneficial ownership) pertaining to the
exercise of Rights will be determined by the Company, which determinations shall
be final and binding. No alternative, conditional or contingent exercises will
be accepted. The Company reserves the absolute right to reject any or all
Subscription Certificates not properly submitted or the acceptance of which
would, in the opinion of the Company's counsel, be unlawful. The Company also
reserves the right to waive any irregularities or conditions, and the Company's
interpretations of the terms and conditions of the Rights Offering shall be
final and binding. Any irregularities in connection with the execution of a
Subscription Certificate must be cured within such time as the Company shall
determine, unless waived. Neither the Company nor the Rights Agent, however,
shall be under any duty to give notification of defects in Subscription
Certificates, nor shall either incur any liability for failure to give
notification. Subscription Certificates received by the Rights Agent that are
not properly submitted and as to which the irregularities have not been cured or
waived will be returned by the Rights Agent to the appropriate holder of the
Rights before the Expiration Date, but only if time permits.
Travelers Indemnity Corporation which owns 3,350,000 shares of the
Company's Common Stock and an 8% Convertible Debenture in the principal amount
of $550,000, and Pequot Partners Fund, L.P. and Pequot International Fund, Inc.
who own 8% Convertible Debentures in the aggregate principal amount of
$4,000,000 have informed the Company that they intend to purchase up to
16,666,666 shares of Common Stock through the exercise of Rights distributed to
them in the Rights Offering, although they are not legally bound to do so. Any
shares of Common Stock so acquired by these holders and other persons who are
"affiliates" of the Company, as that term is defined under the Securities Act of
1933, as amended (the "Securities Act"), may only be sold in accordance with
Rule 144 under the Securities Act or pursuant to an effective registration
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<PAGE> 28
statement under the Securities Act. In general, under Rule 144, as currently in
effect, an "affiliate" of the Company is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then-outstanding shares of Common Stock or the average weekly reported
trading volume of the shares of Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
restrictions on the manner of sale, to notice requirements and to the
availability of current public information about the Company.
RIGHTS AGENT
The Rights Agent is The First National Bank of Boston through its
subsidiary State Street Bank and Trust Company, 225 Franklin Street, Concourse
Level, Boston, MA 02110, which will receive, for the administrative, processing,
invoicing and other services as Rights Agent, a fee estimated to be $5,000 plus
reimbursement for all out-of-pocket expenses related to the Rights Offering.
Shareholder questions or inquiries should be directed to State Street Bank and
Trust Company, P.O. Box 8200, Boston, MA 02266-8200, telephone (800) 426-5523.
SIGNED SUBSCRIPTION CERTIFICATES SHOULD BE SENT TO STATE STREET BANK AND TRUST
COMPANY, by one of the methods described below:
<TABLE>
<CAPTION>
EXERCISE FORM
DELIVERY METHOD ADDRESS/NUMBER
- --------------------------------------------- ---------------------------------------------
<S> <C>
By Mail State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, MA 02205-8686
By Hand State Street Bank and Trust Company
225 Franklin Street, Concourse Level
Boston, MA 02110
or
Securities Transfer and Reporting Services
55 Broadway, Concourse Level
New York, NY 10006
By Overnight Courier State Street Bank and Trust Company
or Express Mail 2 Heritage Drive
North Quincy, MA 02171
Attn: Corp. Reorg.
By Broker-Dealer or other Nominee Shareholders whose Shares are held in a
(Notice of Guaranteed Delivery) brokerage, bank, or trust account may contact
their broker or other nominee and instruct
them to submit a Notice of Guaranteed
Delivery and Payment on their behalf.
</TABLE>
Delivery to an address other than as set forth above does not constitute a
valid delivery.
INFORMATION AGENT
Any questions or requests for assistance may be directed to the Information
Agent at its telephone number and address listed below:
SHAREHOLDER COMMUNICATIONS CORPORATION
17 State Street
New York, NY 10004
Call Toll Free: (800) 733-8481, Ext. 352
or
Call Collect: (212) 305-7000
THE SUBSCRIPTION PRICE
The Subscription Price for the Common Stock to be issued pursuant to the
Rights is U.S.$0.12 per share.
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<PAGE> 29
The Company announced the Rights Offering on February 26, 1997. The last
reported sale price of the Common Stock on the Nasdaq Bulletin Board on February
26, 1997 was U.S.$0.17.
EXPIRATION OF RIGHTS OFFERING
The Rights will be exercisable at any time after issuance until 5:00 p.m.,
California time, April 4, 1997 (the "Expiration Date"). After the Expiration
Date, the Rights will expire and become void.
AMENDMENT, EXTENSION OR TERMINATION OF RIGHTS OFFERING
The Company reserves the right, in its sole discretion, to: (a) terminate
the Rights Offering prior to delivery of the Common Stock for which Rights
Holders have subscribed pursuant to the exercise of Rights; (b) extend the
Expiration Date to a later date; (c) change the Rights Offering Record Date to a
later date; or (d) amend or modify the terms of the Rights Offering. If the
Company amends the terms of the Rights Offering, an amended Prospectus will be
distributed to holders of record of Rights and to holders of Rights who have
previously exercised Rights. All holders of Rights who exercised their Rights
prior to such amendment or within four business days after the mailing of the
amended Prospectus will be given the opportunity to confirm the exercise of
their Rights by executing and delivering a consent form.
Any Rights Holder who exercised Rights before or within four days after
mailing of an amended Prospectus relating to an amendment of the Rights Offering
and who fails to deliver, in a proper and timely manner, a properly executed
consent form will be deemed to have rejected the amended terms of the Rights
Offering and to have elected to revoke in full his exercise of the Rights. If a
Rights Holder's exercise of Rights is so revoked, the full amount of the
Subscription Price paid by such Rights Holder will be returned to the Rights
Holder.
A Rights Holder whose executed Subscription Certificate is received by the
Rights Agent more than four days after the mailing of an amended Prospectus will
be deemed to have accepted the amended terms of the Rights Offering in
connection with the exercise of their Rights.
If the Company elects to terminate the Rights Offering before delivering
the Common Stock for which Rights Holders have subscribed, the Subscription
Price paid will be returned by mail. Except for the obligation to return the
Subscription Price paid by Rights Holders who attempted to exercise their
Rights, neither the Company nor the Rights Agent will have any obligation or
liability to a Rights Holder in the event of an amendment or termination of the
Rights Offering.
DELIVERY OF SHARES UPON EXERCISE
No delivery of shares of Common Stock of the Company issuable upon exercise
of Rights will be made prior to the date of the Rights Offering Record Date.
Certificates for shares purchased upon exercise of Rights will be delivered as
soon as practicable after such purchase; provided, however, that the stock
certificates may be issued after the Company's Extraordinary General Meeting to
be held on April 15, 1997.
PLAN OF DISTRIBUTION
The Company is distributing the Rights directly to its Common Stock Holders
(there are no Canadian Debenture Holders) who are not Canadian residents, and
has made no arrangements with brokers or dealers to solicit purchases of shares
by holders of Rights.
The Company will not distribute any Rights or offer to sell any of the
underlying shares of Common Stock in states or other jurisdictions where it is
unlawful to do so or whose laws, rules, regulations or orders would require the
Company, in its sole determination, to incur costs, obligations or time delays
disproportionate to the net proceeds to be realized by the Company from such
offers, sales or issuance. If the Company were to issue rights to its Canadian
Common Stock Holders, the Company would be required to comply with the
regulatory requirements of each province of Canada in which Common Stock Holders
reside. This would cause the Company to incur significant costs and time delays
disproportionate to the net proceeds to be realized from the issuance of Rights
in Canada. Consequently, the Company will not issue Rights to any
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<PAGE> 30
Common Stock Holder who is a Canadian resident. The exclusion of the Company's
Canadian Common Stock Holders from the Rights Offering does not contravene the
B.C. Company Act and the rules and regulations of the B.C. Securities
Commission.
DILUTION OF CANADIAN COMMON STOCK HOLDERS
The Company will not distribute any Rights to its Common Stock Holders who
reside in Canada. As a result, these holders will not be able to maintain their
pro rata share of the Company's equity and (assuming the exercise of any Rights)
will have their ownership in the Company substantially diluted. This dilution
could be substantial if a large number of Rights are exercised.
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<PAGE> 31
USE OF PROCEEDS
The net proceeds received by the Company from the sale of the 67,424,497
shares of Common Stock in the Rights Offering are estimated to be $8.0 million,
assuming a subscription price of U.S.$0.12 per share and assuming that all of
the Rights are exercised (which cannot be assured), and after deducting expenses
of the Rights Offering of approximately $150,000.
The Company intends to use the net proceeds of the Rights Offering for the
repayment of short-term borrowings that as of February 14, 1997 consisted of
$174,000 under its revolving line of credit, which bears interest at the bank's
prime rate plus 2.5% and expires on April 3, 1997. The Company intends to use
the balance of the proceeds for research and development and marketing and sales
activities, including increasing the Company's sales and marketing and research
and development team, advertising and promotional activities and capital
expenditures. Pending the use of the net proceeds for the above purposes, the
Company intends to invest such funds in short-term, interest-bearing money
market funds.
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PARTICULARS OF MATTERS TO BE ACTED UPON
PROPOSAL NUMBER ONE
DOMESTICATION TO THE STATE OF DELAWARE
GENERAL
The Company is presently a corporation formed and operating under the laws
of British Columbia. The shareholders of the Company will be asked at the
Meeting to pass a Special Resolution authorizing the Company to domesticate in
the State of Delaware under the Delaware General Corporation Law (the "Delaware
GCL") pursuant to Section 388 thereof (the "Domestication") thereby continuing
the Company as if it had been originally incorporated under the Delaware GCL as
a Delaware corporation. The Special Resolution also alters the Company's
authorized capital (without taking into account the one-for-ten share
consolidation described in Proposal Two below) from 100,000,000 Common Stock
without par value and 5,000,000 shares of Preferred Stock without par value to
100,000,000 shares of Common Stock and 5,000,000 Preferred Stock, each with a
par value of $.001 U.S. per share, both of these matters to be effective as of
the date of the domestication.
Upon the Domestication, the Company Act of British Columbia (the "B.C.
Act") ceases to apply and the Delaware GCL becomes applicable to the Company as
if it had been originally incorporated in Delaware.
The Domestication will not result in any change in the business of the
Company or its assets, liabilities, net worth or management. However, the Board
of Directors may increase the size of the Company's Board of Directors after the
Domestication (see "Corporate Governance Differences -- Size of the Board of
Directors"). A shareholder's holdings will not change. The Domestication is not
a reorganization, amalgamation or merger.
Upon consummation of the Domestication, the Company will file a Current
Report on Form 8-K with the United States Securities and Exchange Commission
(the "Commission") to reflect the Domestication for the purposes of Section
15(d) of the Exchange Act.
The Domestication gives rise to a Right of Dissent (see "Right of Dissent"
hereunder). If the Right of Dissent is exercised by any of the Company's
shareholders entitled to do so, and the Company effects the Domestication, the
Company would be required to purchase for cash the dissenting shareholders'
shares in the Company at the fair value of the shares as at March 20, 1997. This
could have an adverse effect on the Company. The Special Resolution will,
therefore, provide authority to the Board of Directors of the Company not to
proceed with the Domestication if, in the Board's opinion, it is not in the best
interest of the Company to do so.
VOTE REQUIRED
To effect the Special Resolution authorizing the Domestication of the
Company, the Special Resolution must be passed by at least seventy-five percent
(75%) of the votes represented and voting at the Meeting in respect to this
Proposal Number One.
Under British Columbia law, abstentions and broker non-votes may be counted
as present or represented for purposes of determining the presence or absence of
a quorum for the transaction of business but may not be counted as votes cast.
Accordingly, abstentions and broker non-votes with respect to this proposal will
not be considered and will not be counted in determining whether this proposal
passes.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE
DOMESTICATION OF THE COMPANY UNDER THE PROVISIONS OF SECTION 388 OF THE DELAWARE
GCL AND RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE DOMESTICATION INTO THE STATE
OF DELAWARE.
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PRINCIPAL REASONS FOR THE DOMESTICATION
For many years, Delaware has followed a policy of encouraging incorporation
in that State and, in furtherance of that policy, has adopted comprehensive,
modern and flexible corporate laws, which are periodically updated and revised
to meet changing business needs. As a result, many major corporations have
initially chosen Delaware for their domicile or have subsequently reincorporated
in Delaware in a manner similar to that proposed by the Company. Because of
Delaware's long standing policy of encouraging incorporation in that State, and
consequently its preeminence as the State of incorporation for many major
corporations, the Delaware courts have developed considerable expertise in
dealing with corporate issues and a substantial body of case law has developed
construing Delaware law and establishing public policies with respect to
Delaware corporations.
Because the Company's business focus has shifted from Canada to the United
States, Management believes that it is preferable to be governed by the laws of
a State of the United States. For example, the British Columbia Companies Act
(the "B.C. Act"), requires that a certain numbers of the Directors of the
Company must be ordinarily resident in Canada and British Columbia. It is a
continuing problem for the Company to find qualified individuals in British
Columbia who are prepared to act as Directors and assume the responsibilities,
the expense and the risks that are inherent with acting as a Director of a
company whose headquarters is located in California. Management is, therefore,
of the opinion that it is preferable to eliminate this Canadian residency
requirement.
In addition, most of the Company's shareholders and customers are in the
United States. The Company's shares are registered under the United States
Securities Exchange Act of 1934 (the "Exchange Act") and the Company is subject
to the Exchange Act reporting requirements. However, as a British Columbia
company, the Company is also subject to the reporting requirements under British
Columbia law and to Canadian tax law and rules. The U.S. and Canadian tax and
securities reporting requirements often are in conflict. As a result, the
Company must retain both United States and British Columbia securities counsel
and tax accountants, which is very expensive for the Company and very
time-consuming for Management. By changing its jurisdiction of incorporation
from British Columbia to Delaware, the Company eliminates the need to comply
with British Columbia securities requirements thereby simplifying its securities
and tax reporting requirements and reducing the need for British Columbia
securities counsel and accountants. Consequently, the Company believes the
Domestication will result in substantial savings to the Company.
In connection with the proposed change in the Company's jurisdiction of
incorporation from British Columbia to the State of Delaware, the Board of
Directors has proposed that the par value of the shares of the Company's Common
Stock and Preferred Stock be changed from no par value to $.001 par value per
share because the Delaware franchise fees applicable to no par value shares are
significantly higher than those for $.001 par value shares. Par value represents
the minimum consideration which must be received by the Company for the issuance
of a share of stock. The change in par value will have no effect upon the rights
of existing security holders. By voting in favor of the Domestication, the
shareholders are voting in favor of the change in par value of the Company's
Common and Preferred Stock. If the Proposal is approved, the change will be
reflected in the new Delaware Certificate of Incorporation which will be filed
with the Delaware Secretary of State's Office.
BOARD OF DIRECTORS HAS DISCRETION TO EFFECT DOMESTICATION
Notwithstanding the fact that the Domestication is approved and adopted by
the requisite vote of the shareholders of the Company, the Board of Directors
may, in its discretion, elect not to effect the Domestication. Some of the
reasons that may cause the Board of Directors not to effect the Domestication
are if (i) the Domestication causes the Company to incur substantial tax
liability, (ii) a significant number of the Company's shareholders elect
dissenters' rights, or (iii) the Board of Directors determines that the
Domestication is not in the best interests of the Company and its shareholders.
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CORPORATE GOVERNANCE DIFFERENCES
In approving the Domestication, shareholders of the Company will be
approving the form of Certificate of Incorporation and Bylaws, copies of which
are attached as Appendices 2 and 3, respectively and will be agreeing to hold
securities in a corporation governed by Delaware law. In exercising their vote,
shareholders should consider the distinctions between Delaware and British
Columbia law, some of which are outlined below.
Delaware and British Columbia Law Comparisons
The Delaware Corporation Law and the Company's Delaware Certificate of
Incorporation and Bylaws differ in many respects from the B.C. Act and the
Company's British Columbia charter documents. This Proxy Statement summarizes
the principal differences that could materially affect the rights of
shareholders of the Company. The following summaries of certain provisions of
the Company's Certificate of Incorporation and Bylaws do not purport to be
complete and are subject to, and are qualified in their entirety by, reference
to all of the provisions of the Company's Delaware Certificate of Incorporation
and Bylaws attached as Appendices 2 and 3, respectively.
Shareholder Quorum. Under the Company's British Columbia Articles, two
shareholders (or proxy holders representing shareholder(s)) holding shares
representing in the aggregate at least 10% of the issued and outstanding shares
of the Company that are entitled to attend and vote at such meeting constitutes
a quorum at any meeting of shareholders. Under Delaware law a corporation's
Certificate of Incorporation and Bylaws may specify the number of shares
necessary to constitute a quorum at any meeting of shareholders; provided,
however, that a quorum may not consist of less than one-third of the shares
entitled to vote at the meeting. The Company's Delaware Bylaws provide that, in
general, a majority of the shares entitled to vote, present in person or
represented by proxy, is required for a quorum at a meeting of shareholders.
Supermajority. Both jurisdictions permit the adoption of a higher
requisite vote for certain types of corporate action, subject to certain
limitations. Notwithstanding any provision contained in a corporation's
memorandum and articles, the B.C. Act provides that 75% of the votes present and
voting at a general meeting of shareholders on a special resolution is required
to amend the Company's charter documents, including changing the corporation's
name or altering its share capital, or any of the rights attached thereto, to
remove a Director and for certain extraordinary corporate transactions. The
Delaware GCL generally has no limit on how high a percentage the vote must be,
provided such supermajority requirements are set forth in a corporation's
Certificate of Incorporation. The Company's Delaware Certificate of
Incorporation provides for a supermajority vote to amend certain sections of its
Certificate of Incorporation (see "Corporate Governance
Differences -- Amendments to Certificate of Incorporation and Bylaws").
Required Approvals of Shareholders. The B.C. Act requires that various
extraordinary corporate transactions, such as a merger, the sale of
substantially all of a corporation's assets or the change of jurisdiction, must
be approved by 75% of the votes represented and voting at the meeting called for
such purpose. Under Delaware law, such extraordinary transactions must generally
be approved by shareholders holding a majority of the outstanding shares
entitled to vote thereon. Since a quorum under the Company's British Columbia
Articles is two persons holding shares representing in the aggregate at least
10% of the issued and outstanding shares, as compared to the quorum requirement
under the Company's Delaware Bylaws, which is a majority of the outstanding
shares entitled to vote (see "Corporate Governance Differences -- Shareholder
Quorum"), shareholder action can be taken under the B.C. Act with a smaller
percentage of the shareholder vote than is required under Delaware law.
Examination of Corporate Records. Under the B.C. Act, any person is
entitled to examine a corporation's registers of transfers, allotments,
directors, debenture holders, debentures and indebtedness, and a corporation's
Certificate of Incorporation, Articles, Memorandum and all amendments thereto,
minutes of all shareholders' meetings, copies of all contracts pursuant to which
the corporation issued shares for a consideration other than cash, copies of all
documents filed by the Registrar and all certificates or orders issued by the
Registrar, and every audited financial statement, prospectus and takeover bid
circular upon payment of $.50 Cdn. for each document examined. In addition, any
person is entitled to a copy of the register
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of shareholders on filing an affidavit with the corporation stating that the
list is required for corporate purposes. "Corporate purposes" is defined to mean
any effort to influence the voting of shareholders at any meeting, any effort to
purchase or sell shares of the corporation, or to effect an amalgamation or
reorganization of the corporation.
Under Delaware law, shareholders have the right for any proper purpose to
inspect, upon written demand under oath stating the purpose for such inspection,
the corporation's stock ledger, list of shareholders, and its other books and
records, and to make copies or extracts of the same. A proper purpose means a
purpose reasonably related to a person's interest as a shareholder.
Minority (Dissenters) Rights. Under the B.C. Act, all of the shareholders
of the Company have the right to dissent from certain corporate acts involving
(i) certain amendments to the Company's Memorandum or Articles, (ii) a
continuation of the corporation into another jurisdiction, (iii) various forms
of corporate reorganizations/amalgamations, or (iv) a sale, lease or exchange of
all or substantially all of its assets, and to exercise their statutory
appraisal rights after such dissent, receiving a cash payment for the repurchase
of their shares. Under Delaware law, shareholders have the right to dissent and
exercise appraisal rights only with respect to certain forms of corporate
mergers and consolidations. In addition, under Delaware law, appraisal rights
are not available with respect to any shares of stock if, at the record dated
fixed to determine the shareholders entitled to vote on such merger or
consolidation, (i) such shares were listed on a national security exchange or
(ii) held of record by more than 2,000 holders, unless, under the terms of an
agreement of merger or consolidation, the shareholders are required to accept
for their stock something other than: (i) shares of stock of the surviving
corporation; (ii) shares of stock of any other corporation which is listed on a
national securities exchange or designated as a national market system security
or an interdealer quotation system by the National Association of Securities
Dealers, Inc. ("NASD") or which has more than 2,000 shareholders of record;
(iii) cash in lieu of fractional shares; and/or (iv) any combination thereof.
THEREFORE, IN APPROVING THE ARRANGEMENT, SHAREHOLDERS WILL BE AGREEING TO FOREGO
THE MORE EXTENSIVE DISSENTERS' RIGHTS UNDER THE B.C. ACT WITH RESPECT TO FUTURE
ACTIONS.
Disqualification of Directors. The B.C. Act prohibits the following
persons from serving as a Director: (i) persons under age 18, (ii) persons who
are mentally infirm, (iii) corporations, (iv) undischarged bankrupts, (v)
"persons" who have been convicted of offenses in connection with the promotion,
formation or management of a corporation or involving fraud within certain
specified time periods, or (vi) in the case of a reporting corporation,
"persons" who have had their registration under certain British Columbia
statutes canceled within certain specified time periods. Delaware law contains
no comparable direct prohibitions.
Personal Liability of Directors. The B.C. Act provides that every
Director, in exercising his powers and performing his functions, shall act
honestly and in good faith and in the best interests of the Company and exercise
the care, diligence and skill of a reasonably prudent person. The B.C. Act also
specifically imposes joint and several personal liability upon Directors who
vote for or consent to a resolution which is in violation of applicable
provisions of the B.C. Act relating to the acquisition of a corporation's own
shares, the payment of commissions or discounts in excess of 25% on a sale of a
corporation's shares, the payment of dividends, financial assistance, payment of
an indemnity, or payment to a shareholder, subject to certain limited defenses.
The B.C. Act provides that such liability is in addition to and not in
derogation of any liability imposed on a Director by any other legislation,
regulation or rule of law.
In addition, under a number of British Columbia and Canadian federal
statutes, Directors are personally liable for certain of the corporation's debts
such as those under the British Columbia Employment Standards Act which imposes
liability for the unpaid wages of employees in an amount not exceeding two
months wages for each employee in the event that the corporation failed to pay
the wages. Other statutes impose personal liability on Directors for corporate
acts which have caused damage to third parties.
The B.C. Act entitles a shareholder or a Director of the corporation, with
the approval of the Supreme Court of British Columbia, and in the name of the
corporation, to commence legal proceedings to enforce a duty or right owed to
the corporation or to obtain monetary damages for breach of such right or duty
whether the right or duty arises under the B.C. Act or otherwise. Derivative
actions therefor may be brought by
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shareholders on behalf of the corporation against the corporation's Directors
for cash damages or to enforce rights or duties owed by the Director to the
corporation. Under the B.C. Act, there is no statutory limitation in respect to
the monetary liability which may be imposed on Directors and the Company's
British Columbia Articles and Memorandum contain no such limitations.
Under Delaware law, the directors of a corporation act in a fiduciary
capacity and owe the duties of loyalty and due care to the corporation and its
shareholders.
Under Delaware law, shareholders may bring derivative actions against
officers and directors of the corporation for breach of their fiduciary duty to
the corporation and its shareholders or for other fraudulent misconduct, so long
as the shareholder was a shareholder of the corporation at the time of the
transaction in question or that he/or she obtained the stock thereafter solely
by operation of law.
Delaware law permits a corporation to adopt a provision in its Certificate
of Incorporation eliminating the liability of a director to the corporation or
its shareholders for monetary damages for breach of the director's fiduciary
duty of care, except where the liability arises (i) from a breach of the
Director's duty of loyalty to the corporation or its shareholders; (ii) from
acts or omissions not in good faith, involving intentional misconduct or a
knowing violation of law; (iii) from unlawfully paying a dividend, approving
Delaware stock repurchases or redemptions; or (iv) from a transaction where the
Director derived an improper personal benefit. The Company's Delaware
Certificate of Incorporation eliminates the liability of its directors to the
fullest extent permissible under applicable law. The foregoing limitations on
monetary damages, however, have no effect on the standard of care to which
directors must conform or the availability of monetary damages.
Indemnification. The Delaware General Corporation Law generally provides
that a corporation shall indemnify a Director against all costs, charges and
expenses actually and reasonably incurred by the Director, including an amount
paid to settle an action or satisfy a judgment in a civil, criminal or
administrative action to which the Director is a party by reason of his having
been a Director, provided that the Director was acting in good faith. The
indemnification permitted under Delaware law is not substantially different in
nature or extent from that permitted under British Columbia law and currently
provided for in the constituent documents of the Company. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to Directors, officers or controlling persons, it is the opinion of
the Commission that such indemnification is against public policy as expressed
in the Securities Act.
After the Domestication, the Company intends to enter into indemnification
agreements with its officers and directors. See "Proposal Number
Four -- Approval of Indemnification Agreements."
Cumulative Voting. Cumulative voting entitles each shareholder to cast a
number of votes that is equal to the number of voting shares held by such
shareholder multiplied by the total number of directors to be elected, and to
cast all such votes for one nominee or distribute the votes among up to as many
candidates as there are positions to be filled. Without cumulative voting, a
shareholder or group of shareholders must hold a majority of the voting shares
to cause the election of one or more nominees. Cumulative voting enables a
minority shareholder or group of shareholders holding a relatively small number
of shares to elect a representative or representatives to the Board.
Under the B.C. Act and Delaware law, cumulative voting is permitted only if
provided for in a corporation's Articles or Certificate of Incorporation,
respectively. Neither the Company's British Columbia Articles nor the Company's
Delaware Certificate of Incorporation provide for cumulative voting.
Loans to Officers and Employees. Under B.C. law, a company may give
financial assistance by way of loan guarantee, the provision of security or
otherwise, to any person provided that: (a) the company is not insolvent at the
time the financial assistance is given, or in the case of a loan, would not be
rendered insolvent by the giving of the loan; (b) there are reasonable grounds
for believing that, and the directors are of the opinion that, the giving of the
financial assistance is in the best interests of the company; and (c) the
financial assistance is not for the purpose of a purchase of shares or debt
obligations convertible into shares of the company or made wholly or partially
on the security of a pledge or charge of shares of the company. However, if
previously authorized by a special resolution of shareholders and there are
reasonable grounds for believing it to be in the best interests of the company,
a company may provide money in accordance with a scheme for
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the purchase of shares or debt obligations to be held by trustees by and for the
benefit of bona fide employees of the company or of its affiliates and may
provide financial assistance to bona fide employees of the company or of its
affiliates to enable them to purchase shares or debt obligations of the company
to be beneficially owned by them. Under Delaware law, a corporation may make
loan subsidies (including directors who are also officers or employees) when
such action, in the judgment of the directors, may reasonably be expected to
benefit the corporation.
Dividends and Repurchases of Shares. B.C. law prohibits a company from
redeeming, purchasing or otherwise acquiring any of its shares if the company is
insolvent or would be rendered insolvent by such action. However, under B.C.
law, the declaration and payment of dividends is regulated entirely by the
company's articles which typically give the directors authority to declare
dividends. Directors who vote for or consent to a resolution authorizing payment
of a dividend or a purchase, redemption or other acquisition of shares which
would render the company insolvent are jointly and severally liable to the
company to make good any loss or damage suffered by the company as a result.
Delaware law permits a corporation to declare and pay dividends out of surplus
or, if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or for the preceding fiscal year as long as the amount
of capital of the corporation following the declaration and payment of the
dividend is not less than the aggregate amount of the capital represented by the
issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, Delaware law generally provides that a
corporation may redeem or repurchase its shares only if such redemption or
repurchase would not impair the capital of the corporation.
Interested Director Transactions. Under B.C. law, contracts or
transactions in which a director of the company has an interest are not invalid
because of such interest provided that certain conditions such as obtaining the
required approval and fulfilling the requirements of full disclosure and
reasonableness, are met. Under B.C. law, after full disclosure by the interested
director or directors, either (a) a majority of the directors at a meeting at
which a quorum is present must approve the proposed contract or transaction with
the interested director abstaining from voting but counted in the quorum if so
permitted by the company's articles; or (b) the shareholders must approve the
contract or transaction, which must be fair and reasonable at the time it was
entered into. Otherwise, (a) a court may, on application of the company or any
interested person, set aside the contract or transaction or enjoin the company
from entering into a proposed contract or transaction or make any other order it
sees fit, and (b) the interested director or directors shall account to the
company for any profit made as a consequence of the company entering into or
performing the proposed contract or transaction. Under Delaware law, if board
approval is sought, the contract or transaction must be approved by a majority
of the disinterested directors (even though less than a majority of a quorum).
Therefore, certain transactions that the Board of the B.C. Company would lack
the authority to approve, because of the number of interested directors, could
be approved by a majority of the disinterested directors of the Delaware Company
representing less than a majority of a quorum. The Company is not aware of any
plans to propose any transactions involving interested directors of the Company
which the Board would lack the authority under B.C. law but could approve under
Delaware law.
Anti-Takeover Effect. Certain provisions of the Delaware GCL and of the
Company's Delaware Certificate of Incorporation and Bylaws, summarized in the
following paragraphs, may be deemed to have an anti-takeover effect and may
delay, defer or prevent a hostile tender offer or takeover attempt that a
shareholder might consider in his or her best interest, including those attempts
that might result in the payment of a premium over the market price for the
shares held by shareholders. Despite such anti-takeover implications, this
Proposal Number One is not intended to prevent an acquisition of the Company and
Management is not aware of any effort to accumulate the Company's securities or
to obtain control of the Company by means of a merger, tender offer or
solicitation in opposition to management or otherwise.
Delaware Anti-Takeover Law. Section 203 of the Delaware GCL (the
"Delaware Takeover Statute") applies to a Delaware corporation with a class
of voting stock listed on a national securities exchange, authorized for
quotation on an interdealer quotation system or held of record by 2,000 or
more persons. In general, Section 203 prevents an "interested shareholder"
(defined generally as any person owning, or who is an affiliate or
associate of the corporation and has owned in the preceding three years,
15% or more of a corporation's outstanding voting stock and affiliates and
associates of such person) from
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engaging in a "business combination" (as defined) with a Delaware
corporation for three years following the date such person became an
interested shareholder unless (i) before such person became an interested
shareholder, the Board of Directors of the corporation approved either the
business combination or the transaction that resulted in the shareholder
becoming an interested shareholder; (ii) the interested shareholder owned
at least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced (excluding stock held by Directors who are also
officers of the corporation and by employee stock plans that do not provide
employees with the rights to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer); or
(iii) on or subsequent to the date such person became an interested
shareholder, the business combination is approved by the Board of Directors
of the corporation and authorized at a meeting of shareholders by the
affirmative vote of the holders of two-thirds of the outstanding voting
stock of the corporation not owned by the interested shareholder. Under
Section 203, the restrictions described above do not apply to certain
business combinations proposed by an interested shareholder following the
announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who had not been an interested
shareholder during the previous three years or who became an interested
shareholder with the approval of a majority of the corporation's Directors.
Size of the Board of Directors. The B.C. Act provides that although
changes in the number of directors must in general be approved by the holders of
a majority of the outstanding shares, the Board of Directors may fix the exact
number of directors within a stated range set forth in the corporation's charter
documents, if that stated range has been approved by the shareholders. Delaware
law permits the corporation to adopt a provision in its certificate of
incorporation or bylaws authorizing the board of directors alone to change the
authorized number or the range of directors by amendment to the bylaws. The
Company's Delaware Certificate of Incorporation provides that the number of
directors of the Company will be as specified in its Bylaws and authorizes the
Board of Directors to make, alter, amend or repeal the Bylaws. The ability of
the Board of Directors to alter the size of the Board without shareholder
approval enables the Company to respond quickly to a potential opportunity to
attract the services of a qualified director or to eliminate a vacancy for which
a suitable candidate is not available. If the Domestication is approved, the
Company presently intends to increase the size of the Board from three members
to between seven and nine members, although the Company has not identified any
candidates who might become the new Board members.
Special Meeting of Shareholders. The B.C. Act provides that the Board of
Directors or the holders of five percent (5%) of the issued shares with a right
to vote can call a special meeting. Under Delaware law, a special meeting may be
called by the Board of Directors or by any other person authorized to do so in
the corporation's Certificate of Incorporation or Bylaws. The Delaware Bylaws of
the Company authorize (i) the Board of Directors, (ii) the Chairman of the
Board, or (iii) the Chief Executive Officer to call a special meeting.
Shareholder Action by Written Consent. Under the Company's British
Columbia Articles, since the Company is a reporting corporation as defined in
the B.C. Act, all matters to be approved at an annual general meeting must be
approved at a meeting and may not be approved by written consent. Under Delaware
law, shareholders may execute an action by written consent in lieu of a
shareholder meeting, unless such right is eliminated in the corporation's
Certificate of Incorporation or Bylaws. Elimination of written consents of
shareholders could lengthen the amount of time required to take shareholder
actions since certain actions by written consent are not subject to the minimum
notice requirement of a shareholders' meeting. The elimination of shareholders'
written consents, however, may deter hostile takeover attempts by preventing a
holder or group of holders controlling a majority in interest of a corporation's
capital stock from amending the corporation's Bylaws or removing directors by
means of a shareholder's written consent. The Company's Delaware Certificate of
Incorporation eliminates the ability of shareholders to take actions by written
consent.
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. The Company's Delaware Bylaws provide that shareholders seeking to
bring business before an annual meeting of shareholders, or to nominate
candidates for election as Directors at an annual or a special meeting of
shareholders, must provide timely notice thereof in writing. To be timely, a
shareholder's notice must be delivered to, or mailed and received at, the
principal executive offices of the Company (i) in the case of an annual meeting
no later
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than the close of business 120 days before the anniversary date of the
immediately preceding annual meeting of shareholders, and (ii) in the case of a
special meeting of shareholders, not later than the close of business 60 days
before the date of the meeting. The Company's Delaware Bylaws specify certain
requirements for a shareholder's notice to be in proper written form. These
provisions may preclude some shareholders from bringing matters before the
shareholders at an annual or special meeting or from making nominations for
Directors at an annual or special meeting.
Under the B.C. Act, the Company must, not less than 56 days before it holds
a general meeting at which a Director is to be elected, publish in a Vancouver
newspaper an advance notice of the meeting giving the date of the meeting,
inviting written nominations for Directors signed by shareholders holding in the
aggregate not less than 10% of the issued voting shares and stating that if the
nominations are received at the registered office of the Company not less than
thirty-five (35) days before the date of the meeting, the Company will include
the nominee in its information circular with respect to the meeting.
Amendments to the Certificate of Incorporation and Bylaws. Delaware law
provides that the vote of holders of a majority of the outstanding shares
entitled to vote is required to alter, amend, change or repeal a corporation's
Certificate of Incorporation, unless otherwise specified in a corporation's
Certificate of Incorporation or Bylaws. The provisions of the Company's Delaware
Certificate of Incorporation and Bylaws governing (i) the size of the Board of
Directors, (ii) the elimination of actions by written consent of shareholders,
(iii) the removal of directors, and (iv) the filling of vacancies on the Board
of Directors may only be amended by the affirmative vote of the holders of at
least sixty-six and two-thirds percent (66-2/3%) of the outstanding shares
entitled to vote. This limitation on the ability of shareholders to amend the
Company's charter documents may make a potential change in control of the
Company a lengthier and more difficult process.
Under the B.C. Act, the Company's Memorandum and Articles may be altered if
approved by 75% of the votes cast and such alteration takes effect upon the
later of the date a certified copy of the special resolution is accepted for
filing by the Registrar of Companies for the Province of British Columbia and
the date specified in the special resolution.
REGULATORY APPROVAL
The Company will apply to the Registrar of Companies for the Province of
British Columbia for permission to continue the Company to the State of
Delaware. Such approval must be obtained for the Domestication to take place.
There are no other regulatory approvals necessary for consummation of the
Domestication.
TAX CONSIDERATIONS
The following sections summarize certain provisions of United States and
Canadian federal income tax laws that may affect the Company and its
shareholders. This summary is applicable to shareholders who are corporations or
individuals resident in Canada or the United States who hold their shares as
capital property, and does not generally apply to shareholders who are trusts,
deferred income plans or similar entities, nor does it apply to any shareholder
resident outside Canada and the United States. All shareholders are urged to
seek specific tax advice. Although this summary discusses the principal tax
considerations deemed by the Company to be material to a shareholder's decision
regarding Proposal Number One, it does not purport to discuss all of the United
States and Canadian federal tax consequences that may be relevant to its
shareholders, nor will it apply to the same extent or in the same way to all
shareholders. No information is provided herein with respect to the effect of
any state, local or provincial tax law, rule or regulation nor is any
information provided as to the effect of any foreign tax law, other than the
federal law of Canada and the United States to the extent specifically set forth
herein. EACH SHAREHOLDER IS URGED TO CONSULT WITH HIS OR HER OWN INDIVIDUAL TAX
ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO SUCH SHAREHOLDER OF THE
DOMESTICATION.
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NO ADVANCE TAX RULING OR INTERPRETATION HAS BEEN OR WILL BE SOUGHT FROM ANY
TAX AUTHORITY WITH RESPECT TO ANY OF THE TRANSACTIONS DISCUSSED HEREIN.
CANADIAN TAX IMPLICATIONS TO CANADIAN SHAREHOLDERS
The following is confined to provisions of the Income Tax Act (Canada) (the
"Tax Act") enacted, and Regulations thereunder proclaimed, or amendments thereto
proposed at this date and, where applicable, is based on the Company's tax
advisor's understanding of current administrative practices of Revenue Canada,
Taxation. No assurance can be given that the consequences will not be altered by
future changes to administrative practices, judicial decisions or amendments to
the law. This discussion addresses in a general manner the more pertinent
Canadian Federal income tax consequences to shareholders of the Company, both
resident and non-resident, to whom shares of the Company constitute "capital
property" for purposes of the Tax Act, who deal at arms' length with the Company
and who hold less than a 10% interest in the Company. Generally speaking, shares
of the Company will be considered capital property unless the holder is a trader
or dealer in securities, has acquired the shares as part of an adventure in the
nature of trade, or holds the shares otherwise than for investment purposes.
Consequences of Domestication. The Domestication of the Company is not
considered to be a disposition of the shares of the Company by its shareholders
and is not considered to be a taxable event to the shareholders, unless the
shareholder dissents to the Domestication (see below). Shareholders of the
Company will continue to hold their shares of the Company following the
Domestication at their adjusted cost basis of the shares immediately before the
Domestication. On Domestication, shares of the Company will constitute "foreign
property" for purposes of deferred income plans such as RRSP's. As such, any
deferred income plans holding such shares are advised to carefully review their
foreign property limits. Depending on the extent of the interest held, a
Canadian resident shareholder may be required to report his holdings pursuant to
new foreign property reporting rules first advanced in the 1995 Canadian Federal
Budget, and pursuant to draft foreign reporting requirements released on March
5, 1996 as subsequently revised.
Consequences of Dissent to the Domestication. A shareholder who dissents
to the Domestication is entitled to require the Company to purchase for cash all
of his shares in the Company at their fair market value if the Company proceeds
with the Domestication. The dissenting Canadian shareholder (and non-resident
shareholder prior to Domestication) will generally be deemed for Canadian tax
purposes to have received a dividend equal to the excess of the purchase price
over the paid up capital of the purchased shares. The balance of the purchase
price, i.e., the amount equal to the aggregate paid up capital of each of the
shares constitutes proceeds of disposition which, when measured against the
shareholder's adjusted cost base for the shares, would result in capital gain or
capital loss. Three quarters of any capital gain must be included in the
shareholder's income, while three quarters of any capital loss will constitute
an allowable capital loss which may be deducted against taxable capital gains of
the shareholders for the year, any of the prior three years or any future year.
Relief from tax on a capital gain may be available to non-residents of Canada
pursuant to the terms of one of Canada's tax treaties.
Where a dissenting shareholder is a corporation resident in Canada, an
anti-avoidance provision in the Tax Act may apply to treat the entire purchase
price as proceeds of disposition of the shares for purposes of calculating any
capital gain or capital loss in respect of such disposition with the result that
no portion of the proceeds would be treated as a dividend.
Consequences of Dividends. A Canadian individual shareholder who receives
a deemed dividend from the Company, including a dividend received pursuant to a
shareholder's dissent, would include the dividend in income, grossed up to 125%
of the actual amount, and would claim a dividend tax credit equal to 13.33% of
the grossed up amount in calculating tax payable. A dividend received by a
corporation resident in Canada in these circumstances would not be subject to
tax (unless as discussed above, the dividend is recharacterized to be proceeds
of disposition) under Part I of the Income Tax Act but may be subject to a
refundable tax of 33 1/3% under Part IV of the Income Tax Act.
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A dividend paid prior to Domestication to a non-resident shareholder,
individual or corporate, would be subject to Canadian withholding tax of 25% or
such lower rate as provided by treaty. Pursuant to the Canada/U.S. treaty, this
withholding rate would be 15% when paid to individuals, or corporate
shareholders owning less than 10% of the Company's outstanding securities and,
in the case of corporate shareholders, 5% if owning 10% or more of the Company's
outstanding securities.
Canadian shareholders who receive dividends after the Domestication
(including a dividend received pursuant to a shareholder's dissent) would be
subject to U.S. withholding tax at rates corresponding to the treaty rates
discussed above which, depending upon particular circumstances, may or may not
qualify for a credit against Canadian tax or a deduction against taxable income.
No dividend tax credit would be available to shareholders who are non-residents
of Canada after Domestication in the State of Delaware.
CANADIAN TAX IMPLICATIONS TO THE COMPANY
Upon the Domestication, the Company will be deemed to have had a year end
immediately before the Domestication and the Company will be deemed to have
disposed of each of its properties and to have immediately reacquired them at
their then fair market values. Any resulting gains or losses from such deemed
dispositions will be taken into account in calculating the Company's taxable
income for the fiscal period then ended. However, any gains may be offset by any
net operating loss carry forwards. The Company has significant amounts of net
operating loss carry forwards which can be claimed as a deductions in
calculating taxable income for this fiscal period in accordance with the
provisions of the Tax Act. Consequently, the Company does not believe that it
will incur substantial tax obligations as a result of the Domestication. After
the Domestication, for Canadian tax purposes, the Canadian tax losses will only
be available to offset Canadian source income.
The Tax Act additionally imposes a special branch tax in these
circumstances calculated on the amount by which the aggregate fair market value
of the Company's property immediately before Domestication exceeds the aggregate
of its liabilities (including liability for income tax for the final taxation
year) and the paid up capital of all of its issued and outstanding shares. The
general rate of tax is 25% of such amount but pursuant to the Canada/U.S. treaty
this would be reduced to 5%.
Upon the Domestication, the Company is deemed to have been incorporated in
Delaware and not to have been incorporated elsewhere. The Company will,
therefore, cease to be resident in Canada for purposes of the Tax Act, provided
that its "mind and management" is not exercised from Canada. In any event, for
most purposes the Canada/U.S. tax treaty would deem the Company to be resident
in the U.S. after Domestication. As such it would subsequently generally only be
subject to Canadian tax in respect of business income attributable to a
permanent establishment in Canada, gains realized on disposition of taxable
Canadian property and withholding tax in respect of Canadian source passive
income.
A branch tax will be imposed upon business profits realized by a branch
operation if the Company retains business operations in Canada. This tax imposed
at the reduced treaty rate of 5%, is payable upon business profits earned in
Canada minus a deduction for corporate income taxes payable upon those profits
and after the deduction of a special reserve allowed for net assets, computed by
prescribed rules, invested in Canada.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
This discussion does not address tax considerations applicable to U.S.
holders of 10% or more (by voting power or value) of the stock of the Company
who may be required to include amounts in income as a consequence of the
Domestication.
The Domestication will constitute a reorganization within the meaning of
Section 368(a) of the Code. As a consequence, no U.S. gain or loss will be
recognized by the Company and no U.S. gain or loss will generally be recognized
by the U.S. shareholders of the Company. The basis and holding period for the
shares of the Company after the Domestication will be the same as the basis and
holding period for the shares of the Company prior to the Domestication provided
that the shares of the Company's stock were held as a capital asset at the
effective time of the Domestication. Non-U.S. shareholders of the Company
generally will not be
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subject to U.S. Federal income tax on any gain realized as a result of the
Domestication, including those non-U.S. shareholders who exercise dissenters'
rights, provided such gain is not connected with a trade or business in the
United States and provided that such shareholder has not been present in the
United States for a significant amount of time.
Cash received as a result of the exercise of dissenters' rights by a
shareholder who dissents from the Domestication ("Dissenting Holder") and who is
subject to U.S. Federal income tax will be treated as cash received in
redemption of the Dissenting Holder's shares of the Company's stock. A
dissenting shareholder who, after the Domestication does not own (actually or
constructively) any capital stock of the Company will generally recognize gain
or loss, measured by the difference between the cash received and the Dissenting
Holder's basis in his Company stock. The gain or loss should be a capital gain
or loss if the Dissenting Holder holds his stock as a capital asset.
THE COMPANY WILL NOT OBTAIN A RULING FROM THE U.S. INTERNAL REVENUE SERVICE
WITH RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE DOMESTICATION.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. IT
DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE DOMESTICATION.
THE DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED, EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER
AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING IS
SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF
THE DISCUSSION. EACH COMPANY SHAREHOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS
TO THE SPECIFIC TAX CONSEQUENCES OF THE DOMESTICATION TO HIM, INCLUDING THE
APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
RIGHT OF DISSENT
A DISSENTING SHAREHOLDER'S RIGHTS TO PAYMENT FOR THE COMPANY'S SHARES UNDER
THE B.C. ACT ARE AVAILABLE ONLY IF ALL APPLICABLE PROCEDURAL STEPS ARE PROPERLY
FOLLOWED. SUCH RIGHTS ARE NOT AVAILABLE IF, SUBSEQUENT TO A NOTICE OF DISSENT,
THE SHAREHOLDER ACTS IN A MANNER WHICH IS INCONSISTENT WITH A DISSENT. FOR
EXAMPLE, A NOTICE OF DISSENT WOULD CEASE TO BE EFFECTIVE IF THE SHAREHOLDER
VOTED IN FAVOR OF THE DOMESTICATION RESOLUTION. IF THE NUMBER OF SHAREHOLDERS
EXERCISING DISSENTERS' RIGHTS COULD ADVERSELY AFFECT THE COMPANY, THE BOARD OF
DIRECTORS OR OFFICERS MAY ABANDON THE DOMESTICATION.
Shareholders may, until 5:00 p.m., local time, at Vancouver, British
Columbia, on April 13, 1997, give the Company a Notice of Dissent by registered
mail, addressed to the Company at 1825 South Grant Street, San Mateo, California
94402, with respect to the Domestication. As a result of giving a Notice of
Dissent, shareholders may, on receiving a Notice of Intention to Act, require
the Company to purchase for cash all the shares in respect of which the Notice
of Dissent was given.
If the Domestication Resolution is passed and the Company intends to act on
such Resolution, the Company shall first give to the dissenting shareholder a
Notice of Intention to Act. On receiving a Notice of Intention to Act, a
dissenting shareholder is entitled to require the Company to purchase for cash
all of his shares in respect of which the Notice of Dissent was given. The
dissenting shareholder, after receipt of the Notice of Intention to Act, must,
within fourteen days, notify the Company in writing that he requires the Company
to purchase all of his shares referred to in the Notice of Dissent, and
concurrently the shareholder shall deliver to the Company the certificates
representing all of the shares referred to in the Notice of Dissent. A
dissenting shareholder who has complied with these provisions may no longer vote
or exercise any rights as a shareholder of the Company.
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The filing of a Notice of Dissent does not deprive a shareholder of his
right to vote on the Domestication Resolution. A Notice of Dissent ceases to be
effective if the dissenting shareholder consents or votes in favor of the
Domestication Resolution, except where the consent or vote is given solely as a
proxy holder for a person whose proxy required an affirmative vote. If a
shareholder fails to vote against the Domestication Resolution, it does not
constitute a waiver of his right to dissent, and a vote against the
Domestication Resolution does not perfect his right of dissent and does not
constitute notice of dissent. THE RETURN OF AN UNMARKED PROXY THAT IS NOT
REVOKED PRIOR TO THE MEETING WILL PRECLUDE A SHAREHOLDER FROM EXERCISING
DISSENTERS' RIGHTS, AS UNMARKED PROXIES WILL BE VOTED IN FAVOR OF THE PROPOSAL,
AT THE ELECTION OF THE PROXY HOLDERS.
The price to be paid to a dissenting shareholder for his shares shall be
the fair value as of the day before the date on which the Domestication
Resolution was passed. All dissenting shareholders shall be paid the same price.
The method of determining "fair value" will vary according to the circumstances
of the case. In reported decisions, the choice of method of valuation has
generally been left to the party appointed by the court or the court itself. It
has been held in previously reported decisions that no discount is to be made to
the price of the shares merely because a minority interest is being purchased.
What is to be paid is the fair value and not the market value. The courts have
endeavored to determine what is most equitable in the circumstances, including
the tax consequences of the purchase.
In the event a shareholder elects to dissent and the Domestication
Resolution is passed, and the Company acts on the Resolution, the procedure
which the Company would propose to follow in order to determine the price to be
paid to the dissenting shareholders with respect to their shares of the Company
is as follows: the Company would attempt to reach a mutually agreed fair value
in direct negotiations with the dissenting shareholders; if such negotiations
were unsuccessful, the Company would propose to appoint a single arbitrator,
mutually agreeable to all of the dissenting shareholders, whose decision would
be final and binding on all parties; in the event that the parties cannot agree
upon an acceptable arbitrator, the matter would be referred to the Supreme Court
of British Columbia. In the event of an arbitration or a court application, all
parties will have the opportunity to present evidence to the arbitrator or court
in order to establish the "fair value". The Company is not required to notify
shareholders of the amount it believes is the "fair value".
The cost of any arbitration or application to the Supreme Court of British
Columbia will be under the discretion of the arbitrator or court. In exercising
such discretion, the Company may be ordered to pay all of the costs incurred by
both the Company and the dissenting shareholders, or the dissenting shareholders
may be ordered to pay all of the costs incurred by the Company and the
dissenting shareholders, or the costs may be divided on some other basis between
the parties. The final decision with respect to the same would be made by the
arbitrator or the court, as the case may be.
The foregoing is a summary only of the Right of Dissent with respect to the
Domestication Resolution. It is suggested that any holder of shares wishing to
avail himself of the Right of Dissent under the B.C. Act obtain his own legal
advice. The full text of Section 231 of the B.C. Act is set out in Appendix 1 to
this Proxy Statement.
SECURITIES LAW CONSEQUENCES
United States Securities Law Consequences
All of the Warrants and the shares of capital stock received by the
Company's shareholders in the Domestication will be freely transferable, except
as set forth under "Canadian Securities Law Consequences" below, and except that
shares received by persons who are deemed to be "affiliates" (as such term is
defined under the Securities Act ) of the Company prior to the Domestication may
be resold by them only in transactions permitted by the resale provisions of
Rule 145 promulgated, or as otherwise permitted, under the Securities Act.
Persons who may be deemed to be affiliates of the Company generally include
individuals or entities that control, are controlled by, or are under common
control with, such party and may include certain officers and directors of such
party as well as principal shareholders of such party or persons who hold
restricted shares.
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Canadian Securities Law Consequences
The Company's capital stock received by Canadian residents in the
Domestication will continue to be subject to any applicable resale restrictions
imposed by the securities laws of the province of Canada in which the
shareholder is resident.
THE DOMESTICATION RESOLUTION
Based on the foregoing discussion, the Company's Board of Directors and
Management have approved and believe that it is in the best interests of the
Company and its shareholders to domesticate the Company into the State of
Delaware. To reduce the franchise fees payable to the Delaware corporate
authorities by the Company following the Domestication, the Company's Board of
Directors and Management believe that it is in the best interests of the Company
and its shareholders to alter the Company's authorized capital (before taking
into effect the one-for-ten share consolidation) from 100,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock without par value to
100,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, each
with a par value of $.001 U.S. per share.
Accordingly, shareholders will be asked at the meeting to consider and if
thought fit, approve a Special Resolution (the "Domestication Resolution")
transferring the Company's jurisdiction of incorporation from British Columbia
to Delaware and altering its authorized share capital in substantially the
following terms:
"Resolved as a special resolution that:
1. the continuance of the Company's jurisdiction of incorporation from
the Province of British Columbia to the State of Delaware pursuant to
Section 388 of the Delaware General Corporation Law be and is hereby
approved;
2. the Company obtain the approval of the Registrar of Companies for
British Columbia that the Company be permitted to be continued into and be
registered as a "Corporation" in the State of Delaware pursuant to the
Delaware General Corporation Law;
3. the Company make application to the appropriate authorities in the
State of Delaware for consent to be domesticated into and registered as a
"Corporation" pursuant to the Delaware General Corporation Law;
4. effective on the date of such domestication under the Delaware
General Corporation Law and prior to giving effect to the one-for-ten share
consolidation (if such share consolidation is approved by the Company's
shareholders), the authorized share capital of the Company be altered from
100,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock
each without par value to 100,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock each with a par value of $.001 U.S. per share;
5. effective on the date of such domestication as a Corporation under
the Delaware General Corporation Law, the Company adopt a Certificate of
Incorporation and Bylaws in substantially the form submitted to the
shareholders, in substitution for the existing Memorandum and Articles of
the Company;
6. the Board of Directors or officers of the Company be authorized to
perform such further acts and execute such further documents as may be
required to give effect to the foregoing; and
7. the Directors or officers may, in their sole discretion, elect not
to act on or carry out this Special Resolution."
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE
DOMESTICATION OF THE COMPANY UNDER THE PROVISIONS OF SECTION 388 OF THE DELAWARE
GCL AND RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE DOMESTICATION INTO THE STATE
OF DELAWARE.
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PROPOSAL NUMBER TWO
ONE-FOR-TWENTY SHARE CONSOLIDATION
On November 12, 1996, the Company's shareholders authorized the Board to
effect a one-for-three share consolidation of the Company's Common Stock and
thereafter to increase the number of the Company's authorized Common Stock to
50,000,000. The purpose of the share consolidation was to increase the per share
price of the Company's Common Stock in order to requalify the Company's Common
Stock for listing on the Nasdaq SmallCap Market ("Nasdaq"). Among other
requirements, in order to qualify for listing on Nasdaq, the Company's Common
Stock must have a minimum bid price of U.S.$3.00 per share. Since the
shareholder approval, however, the market price of the Company's Common Stock
has declined to the extent that the Board of Directors believes that the
one-for-three share consolidation previously approved by the Company's
shareholders will not increase the market price of the Company's Common Stock
sufficiently to allow the Company to attempt to meet Nasdaq requirements.
Therefore, the Board of Directors of the Company believes that it is in the best
interests of the Company and its shareholders to effect a one-for-twenty share
consolidation of the Company's Common Stock in place of the one-for-three share
consolidation already approved by the Company's shareholders and thereafter to
increase the Company's authorized Common Stock to 50,000,000 shares.
If the shareholders approve the following special resolution, the Company's
Board of Directors may elect to effect the one-for-twenty share consolidation
either prior to, at the same time as, or after the Domestication (See Proposal
Number One). The shareholders are being asked to approve the following special
resolution:
"RESOLVED, as a Special Resolution, THAT:
1. all of the 100,000,000 common shares without par value, both
unissued and fully paid issued, be consolidated on the basis of one new
common share without par value for every twenty common shares without par
value before consolidation; provided, however, that if this share
consolidation is effected at the same time as or after the domestication of
the Company into the State of Delaware (the "Domestication") the common
shares will be consolidated on the basis of one new common share, $.001 par
value, for every twenty common shares without par value.
2. The authorized common shares after giving effect to the
one-for-twenty share consolidation be increased to 50,000,000 common shares
without par value; provided, however, that if this share consolidation is
effected at the same time as or after the Domestication, the authorized
common shares after giving effect to this share consolidation shall be
increased to 50,000,000 common shares, $.001 par value.
AND THAT paragraph 2 of the Memorandum of the Company be altered to read as
follows:
2. The authorized capital of the Company consists of 55,000,000 shares
divided into:
a. 50,000,000 Common shares without par value; and
b. 5,000,000 Preferred shares without par value having attached
thereto the special rights and restrictions set out in the
Articles of the Company;
a copy of the memorandum as altered being attached as Schedule "A"
hereto;
PURPOSES AND EFFECTS OF THE SHARE CONSOLIDATION
The Board of Directors has proposed the one-for-twenty share consolidation
because the Board believes that the share consolidation should result in an
increase in the market price of the Company's Common Stock. The Company's Common
Stock was recently delisted from Nasdaq in part because the market price of the
Company's Common Stock did not meet the minimum requirements for continued
listing on Nasdaq. The Company is asking its shareholders to approve a
one-for-twenty share consolidation in order to help the Company requalify its
Common Stock for listing on Nasdaq. Under the current rules of Nasdaq, the
minimum bid price of one share of stock is $3.00 and under the proposed rules of
Nasdaq, the minimum bid price of one share of stock is $4.00. The one-for-twenty
share consolidation will substantially reduce the number of
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outstanding shares of the Company's Common Stock. Assuming that the price of one
share of the Company's Common Stock is determined by dividing the value of the
Company by the number of shares outstanding, fewer outstanding shares should
result in proportionately higher per share price. Based on the foregoing, the
Company believes that the share consolidation should initially increase the per
share market price of each share of the Company's Common Stock. There can be no
assurance, however, that the per share market price of the Company's Common
Stock after the share consolidation will be proportionately greater than the per
share price prior to the share consolidation, or that the per share market price
of the Company's Common Stock after the share consolidation will not be less
than the per share market price prior to the share consolidation. The Company's
Common Stock trades on the Nasdaq Bulletin Board. On the Record Date, the
reported closing price of the Company's Common Stock was U.S. $ per
share. IF THIS PROPOSAL NUMBER TWO IS APPROVED BY THE COMPANY'S SHAREHOLDERS,
THE BOARD OF DIRECTORS WILL NOT EFFECT THE ONE-FOR-THREE SHARE CONSOLIDATION
PREVIOUSLY APPROVED BY THE SHAREHOLDERS.
Proportionate voting rights and other rights of shareholders would not be
altered by the share consolidation. The number of shares of Common Stock subject
to outstanding options granted pursuant to the Company's stock option plans
(collectively, the Plans), and the exercise price thereof, and the number of
shares of Common Stock reserved for issuance under the Plans, would be adjusted
to take into account the share consolidation.
In addition, if the share consolidation is effected prior to completion of
the Rights Offering, the number of shares of Common Stock that may be purchased
pursuant to the exercise of Rights issued pursuant to the Company's Rights
Offering will be adjusted to take into account the share consolidation.
The proposed share consolidation would not change the shareholders' equity
or interest in the Company, and the aggregate book value of the number of shares
outstanding immediately after the applicable share consolidation would be equal
to the aggregate book value of the number of shares outstanding immediately
prior to the share consolidation.
Following the effective date of the share consolidation, to be determined
in the discretion of the Board of Directors, the number of shares of Common
Stock outstanding immediately prior to the share consolidation would be
consolidated into one new share of Common Stock for each existing twenty shares
of Common Stock. In addition, the number of authorized shares of the Company's
Common Stock would be increased to 50,000,000.
The shareholders will receive instructions to return their stock
certificates to the Company's transfer agent which will return a new stock
certificate representing one share of Common Stock for each twenty shares
surrendered; provided, however, that the Company may elect to conduct the stock
certificate exchange after the Domestication (see Proposal Number One).
FRACTIONAL SHARES
No fractional shares will be issued. Any fractional shares remaining after
aggregating all fractional shares held by a shareholder, will be rounded up to
the nearest whole share.
TAX CONSEQUENCES
U.S. Tax Consequences. The Company has been advised by tax counsel that,
under existing U.S. Federal income tax laws and regulations, the receipt of
fewer shares of Common Stock of the Company in the share consolidation will not
constitute taxable income or gain, or loss to shareholders; the cost or other
tax basis of each share of Common Stock held by a shareholder immediately prior
to the share consolidation will be allocated equally among the corresponding
number of shares held immediately after the consolidation and the holding period
for each of the post-consolidated shares will be equal to the most recently
acquired of the twenty shares which were consolidated.
Canadian Tax Consequences. The Company has been advised by tax counsel
that the share consolidation will have no consequence for holders of the Common
Shares for Canadian income tax purposes; there will
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be no inclusion into income and no capital gain arising from the receipt by a
shareholder of fewer Common Shares of the Company in the share consolidation;
the Common Shares held by a shareholder will be deemed not to have been disposed
of. The cost of the post-consolidated shares will be a proportion of the cost of
the shares of Common Stock calculated in accordance with the ratio of the
consolidation; that is, twenty times the cost of the pre-consolidation shares of
Common Stock to a holder.
VOTE REQUIRED
To effect the Special Resolution authorizing the one-for-twenty share
consolidation, the Special Resolution must be passed by a majority of the votes
represented and voting at the Meeting in respect of this Proposal.
Under British Columbia law, abstentions and broker non-votes may be counted
as present or represented for purposes of determining the presence or absence of
a quorum for the transaction of business but may not be counted as votes cast.
Accordingly, abstentions and broker non-votes with respect to this proposal will
not be considered and will not be counted in determining whether this proposal
passes.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS THE
SHAREHOLDERS APPROVE A ONE-FOR-TWENTY SHARE CONSOLIDATION AND THE INCREASE IN
THE COMPANY'S AUTHORIZED COMMON STOCK.
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PROPOSAL NUMBER THREE
APPROVAL OF THE COMPANY'S 1996 STOCK PLAN
GENERAL
If the shareholders approve the Domestication and the Company becomes a
Delaware corporation, the Company's existing 1995 Stock Option Plan (the "Old
Plan") will not comply with U.S. federal and state tax and securities laws.
Therefore, the Board of Directors has determined that, subject to the
Domestication of the Company, it is in the best interests of the Company and its
shareholders to discontinue the granting of options under the Old Plan and to
adopt a new 1996 Stock Plan (the "New Plan") that complies with U.S. federal and
state tax and securities laws. The New Plan was adopted by the Board of
Directors in December 1996 in the form attached hereto as Appendix 4. A total of
8,000,000 shares of the Company's Common Stock (without giving effect to the
one-for-twenty share consolidation) have been reserved for issuance thereunder.
The shareholders are being asked to approve the adoption of the New Plan and the
reservation of 8,000,000 shares of the Company's Common Stock for issuance
thereunder (prior to giving effect to the one-for-twenty share consolidation).
Assuming all of the Rights offered by the Company in the Rights Offering
are subscribed for and assuming the exchange of all of the Convertible
Debentures (see -- "Recent Developments"), the 8,000,000 shares reserved for
issuance under the 1996 Stock Plan will represent approximately 6% of the
Company's outstanding stock on an as-converted basis.
PURPOSE
The purposes of the New Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentive to employees, directors and other persons providing services to the
Company and its subsidiaries and to promote the success of the Company's
business.
ADMINISTRATION
The New Plan provides for administration by the Board of Directors of the
Company or by a committee of the Board. The New Plan is currently being
administered by the Compensation Committee (the "Committee") of the Board of
Directors. No member of the Committee who is either presently eligible or who
has been eligible at any time within the preceding year to participate in the
New Plan may vote on any option to be granted to himself or herself or take part
in any consideration of the New Plan as it applies to himself or herself;
however such members of the Committee may vote on any other matters affecting
the administration of the New Plan. Members of the Committee receive no
compensation for their services in connection with the administration of the New
Plan.
If the New Plan is approved, it will be administered by the Board of
Directors if it may administer the New Plan in compliance with Rule 16b-3 of the
Exchange Act ("Rule 16b-3"), or alternatively by a committee designated by the
Board of Directors to administer the New Plan, which committee will be
constituted to permit the New Plan to comply with Rule 16b-3. The Board of
Directors or the committee designated by the Board of Directors will have full
power to implement and carry out the New Plan, including the power to determine
to what extent options and stock purchase rights are granted under the New Plan
and the terms and conditions of such options and stock purchase rights. The
interpretation and construction of any provision of the New Plan by the Board of
Directors or any committee designated by the Board of Directors to administer
the New Plan shall be final and conclusive. From time to time, the Board may
increase the size of the committee and appoint additional members, remove
members (with or without cause) and substitute new members, fill vacancies
(however caused) and remove all members of the committee and thereafter directly
administer the New Plan, all to the extent permitted by the rules under Rule
16b-3.
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<PAGE> 49
ELIGIBILITY
The New Plan provides that options and stock purchase rights may be granted
to employees, including officers, directors, and other persons who provide
services to the Company or any of its designated subsidiaries ("Service
Provider"). Incentive Stock Options may be granted only to employees, including
officers and employee directors. The Board of Directors or a committee of the
Board selects the optionees and determines the number of shares to be subject to
each option or stock purchase right. The New Plan does not provide for a maximum
or a minimum number of option shares or stock purchase rights which may be
granted to any one employee; provided, however, that there is a limit on the
aggregate fair market value of shares subject to all Incentive Stock Options
which are exercisable for the first time in any one calendar year.
TERMS OF OPTIONS
Each option is evidenced by a stock option agreement between the Company
and the employee or other person to whom such option is granted and is subject
to the following additional terms and conditions:
(A) EXERCISE OF THE OPTION: The Board of Directors or its committee
determines when options granted under the New Plan may be exercised. An option
is exercised by giving written notice of exercise to the Company, specifying the
number of shares of Common Stock to be purchased and tendering payment to the
Company of the purchase price and any applicable withholding taxes. Payment for
shares issued upon exercise of an option may consist of (i) cash, (ii) check,
(iii) promissory note, (iv) with certain exceptions, exchange of already owned
shares of the Company's Common Stock, (v) a reduction in the amount of any
Company liability to the optionee, (vi) any combination of the foregoing methods
of payment or (vii) such other consideration as determined by the Board of
Directors or its committee and as permitted by applicable laws.
Options may be exercised at any time prior to their termination, on or
following the date such options are first exercisable. An option may not be
exercised for a fraction of a share.
(B) OPTION PRICE: The option price under the New Plan is determined by the
Board of Directors or its committee, but, in the case of Incentive Stock Options
granted to (i) Service Providers who, at the time of the grant of such Incentive
Stock Option, own stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any parent or
subsidiary, the exercise price shall be no less than 110% of the fair market
value per share of the Company's Common Stock on the date the option is granted
and (ii) any other Service Provider, in no event shall it be less than 100% of
the fair market value of the Company's Common Stock on the date the option is
granted. The Board of Directors of the Company or its committee may determine
the fair market value in its discretion; provided, however, that since there is
a public market for the Common Stock, such fair market value shall be based upon
the closing price of the Company's Common Stock as quoted on any established
stock exchange or market on which the stock is traded on the date the option is
granted.
(C) TERMINATION OF EMPLOYMENT: The New Plan provides that unless otherwise
determined by the Board if the optionee's status as a Service Provider is
terminated for any reason, other than death or disability, options may be
exercised not later than one (1) month (or such other period of time, not
exceeding three (3) months in the case of Incentive Stock Options, as is
determined by the Board of Directors) after such termination and that, unless
otherwise determined by the Board, may be exercised only to the extent the
options were exercisable on the date of termination.
(D) DEATH OR DISABILITY: If an optionee should die or become disabled
while an optionee of the Company, or die while disabled, unless otherwise
determined by the Board, options may be exercised at any time within twelve (12)
months after the earlier of the date of death or disability and only to the
extent that the options were exercisable on the date of death or disability.
(E) TERMINATION OF OPTIONS: Options granted under the New Plan have a term
as determined by the Board of Directors or its committee upon the grant of the
option; provided that the term shall be no more than ten (10) years from the
date of grant. However, Incentive Stock Options granted to an optionee who,
immediately before the grant of such option, owns stock representing more than
ten percent (10%) of the total
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<PAGE> 50
combined voting power of all classes of stock of the Company or a parent or
subsidiary corporation, may not have a term of more than five (5) years. No
option may be exercised by any person after such expiration.
(F) NONTRANSFERABILITY OF OPTIONS: An option is nontransferable by the
optionee, other than by will or the laws of descent or distribution, and is
exercisable only by the optionee during his or her lifetime or, in the event of
death, by a person who acquires the right to exercise the option by bequest or
inheritance or by reason of the death of the optionee.
(G) RIGHTS UPON EXERCISE: Until an option has been properly exercised,
that is, proper written notice and full payment have been received by the
Company, and a stock certificate evidencing the option shares has been issued,
no rights to vote or receive dividends or any other rights as a shareholder
shall exist with respect to the optioned stock, notwithstanding the exercise of
the option.
(H) OTHER PROVISIONS: The option agreement may contain such other terms,
provisions and conditions not inconsistent with the New Plan as may be
determined by the Board of Directors or its committee.
TERMS OF STOCK PURCHASE RIGHTS
Each stock purchase right is evidenced by a Restricted Stock Purchase
Agreement between the Company and the employee or other person to whom such
stock purchase right is granted and is subject to the following additional terms
and conditions:
(A) RIGHTS TO PURCHASE. Stock purchase rights may be issued either alone,
in addition to, or in tandem with other awards granted under the New Plan and/or
cash awards made outside the New Plan. The Board of Directors or its committee
shall determine the terms, conditions and restrictions related to the offer of
stock purchase rights, including (i) the number of shares that may be purchased,
(ii) the price per share to be paid for such shares (which price shall not be
less than eighty-five percent (85%) of the fair market value per share of the
Company's Common Stock as of the date of the offer) and (iii) the time within
which the offer of stock purchase rights must be accepted. Such offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Board of Directors or its committee.
(B) REPURCHASE OPTION. Unless otherwise determined by the Board of
Directors or its committee, the Company shall be granted a repurchase option
exercisable on the voluntary or involuntary termination of the purchaser's
employment with the Company for any reason (including death or disability). The
purchase price for shares repurchased pursuant to such repurchase option shall
be the original price paid by the purchaser and may be paid by cancellation of
any indebtedness of such purchaser to the Company. The repurchase option shall
lapse at such rate as the Board of Directors or its committee may determine in
which event will be not less than the rate of 20% per year over 5 years from the
date the stock was purchased.
(C) RIGHTS AS SHAREHOLDER. Once the stock purchase right has been
exercised and the purchase is entered upon the records of the Company, the
purchaser shall have the rights equivalent to those of a shareholder. With
certain exceptions, no adjustment will be made for a dividend or other right for
which the record date is prior to the date the stock purchase right is
exercised.
(D) OTHER PROVISIONS. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
New Plan as may be determined by the Board of Directors or its committee. In
addition, Restricted Stock Purchase Agreements need not be the same with respect
to each purchaser.
ADJUSTMENT UPON CHANGES IN CAPITALIZATION
In the event any change, such as a stock split or dividend, is made in the
Company's capitalization which results in an increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, an appropriate adjustment shall be made in the option and stock
purchase price and in the number of shares subject to each option and stock
purchase right. In the event of the proposed dissolution or liquidation of the
Company, upon written notice to the holders of options and stock purchase rights
given within a reasonable time prior to such dissolution or liquidation, all
outstanding options and stock
49
<PAGE> 51
purchase rights, to the extent not previously exercised, automatically terminate
immediately prior to the consummation of such proposed action. The Board may, in
its sole discretion, fix a date for termination of the option or stock purchase
right and give each optionee the right to exercise his or her option or stock
purchase right as to all or any part of the optioned stock, including shares as
to which the option or stock purchase right would not otherwise be exercisable.
In the event of a merger of the Company with or into another corporation, or the
sale of substantially all of the assets of the Company, all outstanding options
and stock purchase rights shall be assumed or an equivalent option or stock
purchase right substituted by the successor corporation. If the option or stock
purchase right is not assumed or substituted, or if the Board otherwise so
determines, an optionee shall have the right to exercise his or her option or
stock purchase right as to all or any part of the optioned stock, including
shares as to which it would not otherwise be exercisable. In such event, the
Board shall notify the optionee that the option or stock purchase right shall be
fully exercisable for 30 days from the date of such notice, and the option or
stock purchase right shall terminate upon the expiration of such period.
AMENDMENT AND TERMINATION
The Board of Directors may amend the New Plan at any time or from time to
time or may terminate it without approval of the shareholders, provided,
however, that shareholder approval is required to the extent necessary and
desirable to comply with Rule 16b-3 of the Exchange Act or with Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"). However, no action
by the Board of Directors or shareholders may alter or impair any option
previously granted under the New Plan without the consent of the optionee. In
any event, the New Plan will terminate in 2006.
TAX INFORMATION
Options granted under the New Plan may be either "incentive stock options,"
as defined in Section 422 of the Code or nonstatutory options.
An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
although the exercise may subject the optionee to the alternative minimum tax.
Upon the sale or exchange of the shares more than two years after grant of the
option and one year after exercising the option, any gain or loss will be
treated as long-term capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time of sale or
exchange equal to the difference between the exercise price and the lower of (i)
the fair market value of the shares at the date of the option exercise or (ii)
the sale price of the shares. A different rule for measuring ordinary income
upon such a premature disposition may apply if the optionee is also an officer,
director, or 10% shareholder of the Company. The Company will be entitled to a
deduction in the same amount as the ordinary income recognized by the optionee.
Any gain or loss recognized on such a premature disposition of the shares in
excess of the amount treated as ordinary income will be characterized as
long-term or short-term capital gain or loss, depending on the holding period.
All other options which do not qualify as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any taxable
income at the time he is granted a nonstatutory option. However, upon its
exercise, the optionee will recognize ordinary income generally measured by the
excess of the then fair market value of the shares purchased over the purchase
price. Any taxable income recognized in connection with an option exercise by an
optionee who is also an employee of the Company will be subject to tax
withholding by the Company. Upon resale of such shares by the optionee, any
difference between the sales price and the optionee's purchase price, to the
extent not recognized as taxable income as described above, will be treated as
long-term or short-term capital gain or loss, depending on the holding period.
The Company will be entitled to a tax deduction in the same amount as the
ordinary income recognized by the optionee with respect to shares acquired upon
exercise of a nonstatutory option.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and the Company with respect to the grant and exercise of
options under the New Plan, does not purport to be complete, and does not
discuss the tax consequences of the optionee's death or the income tax laws of
any municipality, state, province or foreign country in which an optionee may
reside.
50
<PAGE> 52
Outstanding Options
On November 12, 1996 the shareholders approved an increase in the number of
shares of Common Stock reserved under the Old Plan to 4,000,000 shares (prior to
giving effect to the one-for-twenty share consolidation). As of the Record Date
options to purchase 1,208,000 shares of Common Stock were outstanding under the
Old Plan. If the New Plan is approved, no further options will be granted under
the Old Plan, and the remaining shares of Common Stock reserved for issuance
thereunder will be returned to the status of authorized but unissued Common
Stock.
VOTE REQUIRED
The affirmative vote of a majority of the shares represented and voting at
the Meeting will be required to approve Proposal Number Three.
Under British Columbia law, abstentions and broker non-votes may be counted
as present or represented for purposes of determining the presence or absence of
a quorum for the transaction of business but may not be counted as votes cast.
Accordingly, abstentions and broker non-votes with respect to this proposal will
not be considered and will not be counted in determining whether this proposal
passes.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS THAT THE
SHAREHOLDERS VOTE "FOR" THE ADOPTION OF THE 1996 STOCK PLAN AND THE RESERVATION
OF 8,000,000 SHARES OF COMMON STOCK (PRIOR TO GIVING EFFECT TO THE
ONE-FOR-TWENTY SHARE CONSOLIDATION) FOR ISSUANCE THEREUNDER.
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<PAGE> 53
PROPOSAL NUMBER FOUR
ADOPTION OF INDEMNIFICATION AGREEMENTS
GENERAL
The Company intends to enter into indemnification agreements with its
directors and officers upon the effectiveness of the Domestication (see Proposal
Number One), which, among other things, would incorporate future changes in
Delaware law which expand the permissible scope of indemnification of directors
and officers of Delaware corporations.
REASON FOR SHAREHOLDER APPROVAL
Section 144 of the Delaware GCL provides that no contract or transaction
between a corporation and one or more of its directors or officers, or between a
corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present or
participates in the meeting of the board or committee thereof which authorizes
the contract or transaction, or solely because his or their votes are counted
for such purpose, if: (1) the material facts as to his relationship or interest
and as to the contract or transaction are disclosed or are known to the board of
directors or the committee, and the board or committee in good faith authorizes
the contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (2) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the shareholders, and
the contract or transaction is specifically approved in good faith by vote of
the shareholders entitled to vote thereon; or (3) the contract or transaction is
fair as to the corporation as of the time it is authorized, approved or
ratified, by the board, a committee thereof, or the shareholders.
If the shareholders approve the Domestication, the Company intends to enter
into Indemnification Agreements with its directors and executive officers.
Although the Company believes that such agreements are just and reasonable to
it, and that shareholder approval may not therefore be required to validate the
Indemnification Agreements, the Company believes that it is appropriate to
submit the Indemnification Agreements to the shareholders for their
consideration. If the Indemnification Agreements are approved by the
shareholders, they are not void or voidable and shareholders may not later
assert a claim that the Indemnification Agreements are invalid due to improper
authorization. If the Indemnification Agreements are not approved, the
invalidity of such agreements could hereafter be asserted. In such an instance,
the person asserting the validity of the contracts may bear the burden of
proving that they were just and reasonable to the Company at the time they were
authorized.
The shareholders are requested to review and approve the proposed form of
indemnification agreement in substantially the form attached hereto as Appendix
5 (the "Indemnification Agreement"). The following discussion is qualified by
reference to such form, which you are urged to read and consider carefully.
REASONS FOR THE INDEMNIFICATION AGREEMENTS
The Indemnification Agreements are a response to: (i) the increasing hazard
and related expense of unfounded litigation directed against directors and
executive officers; (ii) the general unavailability of directors' and officers'
liability insurance or significant limitations in amounts and breadth of
coverage; (iii) dramatic increases in premiums for such coverage; and (iv) the
potential inability of the Company to continue to attract and retain qualified
directors and executive officers in light of these circumstances.
Although the Company has not experienced any difficulties in attracting and
retaining qualified directors and executive officers as a result of the
foregoing concerns, the Board of Directors believes that the Indemnification
Agreements will serve the best interests of the Company and its shareholders by
strengthening the Company's ability to attract and retain the services of
knowledgeable and experienced persons as directors and officers who, through
their efforts and expertise, can make a significant contribution to the
52
<PAGE> 54
success of the Company. The Indemnification Agreements are intended to
complement the indemnity and protection available under Delaware law, the
Company's Delaware Certificate of Incorporation and Bylaws and any policies of
insurance which may hereafter be maintained by the Company, and to provide for
indemnification of certain of its agents to the fullest extent permitted by
applicable law.
Insurance has traditionally provided additional protection to directors and
officers by covering expenses of litigation and judgments in a wide range of
cases, even if a corporation would be prohibited from directly indemnifying its
directors and officers. In recent years, however, insurance for directors' and
officers' liability has become either unavailable or available only in reduced
amounts and at substantially increased prices. In view of the current
environment in the insurance industry, the Board has determined that the
Company's interests are best served by supplementing any coverage which the
Company may maintain by agreeing by contract to indemnify directors and officers
to the fullest extent permitted under applicable law.
TERMS OF THE INDEMNIFICATION AGREEMENTS
The Indemnification Agreements attempt to provide the maximum
indemnification allowed under applicable law. Since the Delaware statute is
nonexclusive, it is possible that certain claims beyond the scope of the
statutes may be indemnifiable. It is intended that the Indemnification
Agreements provide a scheme of indemnification that may be broader than that
specifically provided by Delaware law. The degree to which the indemnification
expressly permitted by the statutes may be expanded has not yet been determined.
The Indemnification Agreements cover any and all expenses (including
attorneys' fees and all other costs, expenses and obligations), judgments,
fines, penalties and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld) of
any claim, whether civil, criminal, administrative, investigative or other,
relating to the fact that the indemnified party is or was an agent of the
Company or any of its subsidiaries, or is or was serving at the request of the
Company as a director, officer, employee, agent or fiduciary of another entity,
or by reason of any action or inaction on the part of the indemnitee while
serving in such capacity. Indemnification would not, however, be available if it
shall ultimately be determined by a final judicial determination that such
indemnification is not permitted under applicable law. In the event that the
person or body appointed by the Board determines that the indemnitee would not
be permitted to be indemnified, the indemnitee may seek a judicial determination
of the indemnitee's right to indemnification.
The Indemnification Agreements also provide for the prompt advancement of
all expenses incurred in connection with any claim and obligate the indemnitee
to reimburse the Company for all amounts so advanced if it is subsequently
determined that the indemnitee is not entitled to indemnification.
The Company is not obligated to indemnify the indemnitee with respect to
(a) acts, omissions or transactions from which the indemnitee may not be
relieved of liability under applicable law, (b) claims initiated or brought
voluntarily by the indemnitee and not by way of defense, except in certain
situations, (c) proceedings instituted by the indemnitee to enforce the
Indemnification Agreements which are not made in good faith or are frivolous, or
(d) violations of Section 16(b) of the Exchange Act, or any similar successor
statute.
The Indemnification Agreements also provide that they are not exclusive,
although they do prohibit double payment. While not requiring the maintenance of
directors' and officers' liability insurance, if there is such a policy, the
Indemnification Agreements require that indemnity be provided in addition to the
maximum coverage afforded to directors, officers, key employees, agents or
fiduciaries if the indemnitee is a director, officer, key employee, agent or
fiduciary, respectively, under such liability insurance. Any award of
indemnification to an agent would come directly from the assets of the Company,
thereby affecting a shareholder's investment. The Indemnification Agreements,
together with the limitation of liability provided by the Company's Delaware
Certificate of Incorporation, reduce significantly the number of instances in
which directors might be held liable to the Company or its shareholders for
monetary damages for breach of their fiduciary duty of care. Therefore, it
should be noted that the directors have a direct personal interest in the
approval of the Indemnification Agreements.
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<PAGE> 55
At present, there is no pending litigation or proceeding involving an agent
of the Company where indemnification would be required or permitted under the
Indemnification Agreements. The Company is not aware of any threatened
litigation or proceeding which will result in a claim for indemnification by any
agent under the Indemnification Agreements.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock will be required to approve Proposal Number Four.
Under British Columbia law, abstentions and broker non-votes may be counted
as present or represented for purposes of determining the presence or absence of
a quorum for the transaction of business but may not be counted as votes cast.
Accordingly, abstentions and broker non-votes with respect to this proposal will
not be considered and will not be counted in determining whether this proposal
passes.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS THAT THE
SHAREHOLDERS APPROVE THE INDEMNIFICATION AGREEMENTS.
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<PAGE> 56
OTHER MATTERS
Management of the Company is not aware of any matter to come before the
Meeting other than as set forth in the notice of Meeting. If any other matter
properly comes before the Meeting, it is the intention of the persons named in
the enclosed form of proxy to vote the shares represented thereby in accordance
with their best judgment on such matter.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 7, 1997 certain information
regarding the beneficial ownership of the Company's Common Stock by (i) each
person (including any group as that term is used in Section 13(d)(3) of the
Exchange Act) known by the Company to be the beneficial owner of more than 5% of
the Company's voting securities, (ii) each director, (iii) each of the Company's
executive officers named in the Summary Compensation Table appearing herein, and
(iv) all of the Company's directors and executive officers as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
------------------------
NUMBER PERCENT OF
NAME AND ADDRESS OF SHARES TOTAL
--------------------------------------------------------------- --------- ----------
<S> <C> <C>
The Travelers Indemnity Company(2)............................. 3,350,000 14.3%
388 Greenwich Street, 36th Floor
New York, NY 10013
State of Wisconsin Investment Board(3)......................... 2,145,000 9.2%
Lake Terrace
121 East Wilson Street
P.O. Box 7842
Madison, WI 53707
Charlotte J. Walker(4)(5)...................................... 738,804 3.1%
N. John Campbell(6)............................................ 90,000 *
Grant N. Russell(7)............................................ 90,000 *
Suzie O'Hair(8)................................................ 128,441 *
All directors and executive officers as a group (4
persons)(9).................................................. 1,047,245 4.3%
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules and
regulation of the U.S. Securities and Exchange Commission (the "SEC") and
generally includes voting or investment power with respect to securities.
Options to purchase shares of Common Stock which are currently exercisable
or will become exercisable within 60 days of March 7, 1997 (the Record
Date), are deemed to be outstanding for purposes of computing the percentage
of the shares held by an individual but are not outstanding for purposes of
computing the percentage of any other person. Except as indicated otherwise
in the footnotes below, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) As reported on Schedule 13G filed with the SEC in February 1997. Excludes
approximately 4,583,333 shares of Common Stock and warrants to purchase
985,417 issuable upon exchange of Convertible Debentures in the principal
amount of $550,000.
(3) As reported by the holder in February 1997.
(4) Performance Shares are shares of Common Stock which are held in escrow
pending release upon the attainment by the Company of certain performance
criteria (see discussion in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Report on
Form 10-K/A-3 for the fiscal year ended December 31, 1995). On or before
March 7, 1997, the Company plans to cancel some of the outstanding
Performance Shares in consideration of the Company's Common Stock at the
approximate rate of one share of Common Stock for each 21 Performance Shares
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<PAGE> 57
and warrants to purchase shares of the Company's Common Stock at the rate of
one share of Common Stock for each 6.67 Performance Shares.
(5) Includes 534,955 shares subject to outstanding options and warrants held by
Ms. Walker which are exercisable within 60 days of the Record Date and
28,571 shares of Common Stock to be issued in exchange for 600,000
Performance Shares.
(6) Includes 90,000 shares subject to outstanding options held by Mr. Campbell
which are exercisable within 60 days of the Record Date.
(7) Includes 90,000 shares subject to outstanding options held by Mr. Russell
which are exercisable within 60 days of the Record Date.
(8) Includes 117,608 shares subject to outstanding options and warrants
exercisable within 60 days of the Record Date and 10,833 shares of Common
Stock to be issued in exchange for 227,500 Performance Shares.
(9) Includes an aggregate of 832,563 shares subject to outstanding options and
warrants which are exercisable within 60 days of the Record Date (see
footnotes 5 through 8 above), and 39,404 shares of Common Stock to be issued
in exchange for 827,500 Performance Shares.
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME OF EXECUTIVE OFFICER AGE PRINCIPAL OCCUPATION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Charlotte J. Walker....................... 41 Chairman, President, Chief Executive
Officer and Director
Suzie O'Hair.............................. 37 Vice President, Marketing
</TABLE>
Charlotte J. Walker has served as the Company's President and Chief
Executive Officer since January 1996. From September 1993 to January 1996, Ms.
Walker served as Managing Director of Bear Stearns & Co., Inc., an investment
bank. From March 1990 to September 1993, Ms. Walker was employed by Martin
Simpson & Company, Inc., an investment banking firm, serving in various
capacities including Managing Director, Chief Executive Officer, Senior Managing
Director and General Manager.
Suzie O'Hair joined the Company in September 1994 as Director of Marketing
for the Education Division. Ms. O'Hair was promoted to Vice President, Marketing
in April 1996. Prior to joining the Company, Ms. O'Hair was President of the
marketing firm Hi-Lo Communications, Inc. and was formerly Partner, then
President, of HL&S Partners, -- an independent marketing firm serving primarily
high technology companies.
The Company knows of no arrangement or understanding between any executive
officer and any other person(s) pursuant to which she was selected as an
officer.
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<PAGE> 58
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table shows, as to the Chief Executive Officer and each of
the other four most highly compensated executive officers, information
concerning compensation awarded to, earned by or paid for services to the
Company in all capacities during the fiscal years ended December 31, 1995, 1994
and 1993. On May 6, 1996 the Company changed its fiscal year end to March 31,
beginning April 1, 1996. The table below also shows such compensation
information calculated based upon the twelve-month period ended March 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------ LONG-TERM
TWELVE MONTHS COMPENSATION
NAME AND PRINCIPAL POSITION ENDED SALARY BONUS AWARDS OPTIONS(#)
- ---------------------------------- ------------------ ------- -------- -----------------
<S> <C> <C> <C> <C>
Charlotte J. Walker(1)............ March 31, 1996 $27,000 $ -- 420,000(2)
President, Chairman and Chief
Executive Officer
FORMER OFFICERS
A. Renee Courington(3)............ March 31, 1996 111,530 -- 62,500
Senior Vice President December 31, 1995 116,430 -- 62,500
December 31, 1994 99,000 -- --
December 31, 1993 58,000 -- --
Jeremy R. Salesin(4).............. March 31, 1996 102,000 -- 90,000
Senior Vice President December 31, 1995 100,580 -- 90,000
December 31, 1994 -- -- --
December 31, 1993 -- -- --
Scott A. Walchek(5)............... March 31, 1996 170,160 -- 350,000
President, Chief Executive December 31, 1995 164,000 -- 350,000
Officer
and Director December 31, 1994 140,200 6,300 --
December 31, 1993 85,000 6,800 250,000
Paul Salzinger(6)................. March 31, 1996 137,700 -- 130,000
Vice President, Sales December 31, 1995 132,900 -- 30,000
December 31, 1994 75,000 -- --
December 31, 1993 -- -- --
Allen M. Barr(7).................. March 31, 1996 112,200 -- 100,000
Chief Financial Officer December 31, 1995 116,000 -- 100,000
December 31, 1994 71,020 -- --
December 31, 1993 -- -- --
</TABLE>
- ---------------
(2) Excludes 600,000 Performance Shares.
(3) Ms. Courington resigned effective January 2, 1997.
(4) Mr. Salesin resigned effective October 18, 1996.
(5) Mr. Walchek resigned effective January 19, 1996. Ms. Charlotte Walker
accepted the position of President and Chief Executive Officer of the
Company effective January 19, 1996.
(6) Mr. Salzinger resigned effective July 15, 1996.
(7) Mr. Barr resigned effective May 15, 1996.
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STOCK OPTION GRANTS AND EXERCISES
The following table shows, as to the individuals named in the Summary
Compensation Table above, information concerning stock options granted during
the twelve months ended March 31, 1996.
OPTION GRANTS IN THE TWELVE MONTHS ENDED MARCH 31, 1996(1)
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
----------------------------------------------------------- STOCK PRICE
NUMBER OF % OF TOTAL APPRECIATION
SECURITIES OPTIONS FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(5)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------
NAME GRANTED(#)(2) PERIOD(3) SHARE(4) DATE 5% 10%
- ---------------------------- ------------- --------------- ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Charlotte J. Walker(4)...... 20,000 1.5% $5.75 08/11/00 $31,772 $70,209
100,000 7.4% 2.50 12/15/00 69,070 152,628
300,000 22.1% 0.875 02/20/01 72,524 166,259
FORMER OFFICERS
A. Renee Courington(6)...... 12,500 1.0% 5.75 08/11/00 19,858 43,880
50,000 3.7% 6.125 08/18/00 84,611 186,969
Jeremy R. Salesin(6)........ 75,000 5.5% 5.75 08/11/00 119,146 263,282
15,000 1.1% 6.125 08/18/00 25,383 56,091
Scott A. Walchek(6)......... 100,000 7.4% 5.75 08/11/00 158,862 351,041
250,000 18.4% 6.125 08/18/00 423,056 934,843
Paul Salzinger(6)........... 30,000 2.2% 4.06 11/22/00 33,650 75,350
100,000 7.4% 1.375 01/16/01 37,990 83,445
Allen M. Barr(6)............ 50,000 3.7% 5.75 08/11/00 79,430 175,522
50,000 3.7% 6.125 08/18/00 84,611 186,989
</TABLE>
- ---------------
(1) On May 6, 1996, the Company changed its fiscal year from December 31 to
March 31, beginning with the year ending March 31, 1997.
(2) These options generally vest over a three-year period from the date of grant
as follows: 25% six months from the date of grant, 25% one year after the
date of grant, 25% two years from the date of grant and 25% three years from
the date of grant.
(3) The Company granted options to purchase an aggregate of 420,500 shares of
Common Stock to all employees other than executive officers and granted
options to purchase an aggregate of 940,000 shares of Common Stock to all
executive officers as a group (6 persons), during the twelve months ended
March 31, 1996.
(4) All outstanding options held by employees at May 31, 1996 were repriced to
$0.875.
(5) This column sets forth hypothetical gains or option spreads for the options
at the end of their respective five-year terms, as calculated in accordance
with the rules of the SEC. Each gain is based on an arbitrarily assumed
annualized rate of compound appreciation of the market price at the date of
grant of 5% and 10% from the date the option was granted to the end of the
option term. The 5% and 10% rates of appreciation are specified by the rules
of the SEC and do not represent the Company's estimate or projection of
future Common Stock prices. The Company does not necessarily agree that this
method properly values an option. Actual gains, if any, on option exercises
are dependent on the future performance of the Company's Common Stock and
overall market conditions and the timing of option exercises, if any. All
option grants shown in this table are presently at exercise prices in excess
of the current market price of the Company's Common Stock.
(6) All of these options have expired.
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<PAGE> 60
The following table shows, as to the individuals named in the Summary
Compensation Table above, information concerning stock options exercised during
the twelve months ended March 31, 1996 and unexercised options at March 31,
1996. None of such unexercised options were in-the-money at such date.
Accordingly, the exercise value of such options was zero:
AGGREGATED OPTION EXERCISES IN THE TWELVE MONTHS ENDED MARCH 31, 1996
AND MARCH 31, 1996 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS/
SARS AT MARCH 31,
SHARES VALUE 1996(2)(3)
ACQUIRED ON REALIZED -----------------------------
NAME EXERCISE (1) EXERCISABLE UNEXERCISABLE
- ---------------------------------------------- ----------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Charlotte J. Walker........................... -- $ -- 245,000 200,000
FORMER OFFICERS
A. Renee Courington........................... -- -- 75,625 86,875
Jeremy R. Salesin............................. 15,000 66,143 27,700 97,300
Scott A. Walchek.............................. 25,000 89,911 100,000 --
Paul Salzinger................................ -- -- 15,000 145,000
Allen M. Barr................................. -- -- 75,000 125,000
</TABLE>
- ---------------
(1) Calculated by determining the difference between the closing price of the
Company's Common Stock on Nasdaq on the date of exercise and the exercise
price of the options.
(2) The Company has not granted any stock appreciation rights and its stock
plans do not provide for the granting of such rights.
(3) None of these options were in the money at March 31, 1996.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company entered into a year-to-year Management Services Agreement with
Brian J. Beninger which commenced July 1, 1991, pursuant to which Mr. Beninger
received a salary of CDN $5,000 per month for his services to the Company. Mr.
Beninger resigned as Chairman effective May 15, 1996.
The Company entered into a letter Agreement with Scott A. Walchek in April
1993. Pursuant to this Agreement, as amended, Mr. Walchek received a salary of
$13,333 per month for his services with the Company. Mr. Walchek resigned
effective January 19, 1996. The Company entered into a severance agreement with
Mr. Walchek pursuant to which the Company agreed to continue paying Mr. Walchek
his salary for six months following his resignation, less payments to repay the
Company for the full amount then owned by Mr. Walchek to the Company. The
Company subsequently amended this agreement to reduce the amount payable by the
Company.
The Company entered into at will employment contracts with Ms. Walker, Mr.
Salzinger, Mr. Barr, Ms. Courington and Mr. Salesin pursuant to which the salary
levels of these executives were initially set. Subsequent salary increases have
resulted in these executives being paid the amounts shown in the summary
compensation table above. Ms. Walker, Ms. Courington and Mr. Salesin agreed to
accept a 10% reduction in their compensation effective January 1996 while the
Company reorganized its operations. Ms. Courington and Mr. Salesin entered into
amendments to their employment agreements with the Company which call for
severance payments in the event of a termination without cause pursuant to an
acquisition of the Company. The amount of such severance payments (if payable)
would be equal to two months' of the individual's salary plus one month's salary
for each full year the individual was employed by the Company prior to
termination. Mr. Salesin resigned effective October 18, 1996 and Ms. Courington
resigned effective January 2, 1997. No severance payments have been or will be
made to Mr. Salesin or Ms. Courington.
59
<PAGE> 61
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board currently consists of Messrs.
Campbell and Russell, neither of whom is an officer or employee of the Company.
No interlocking relationship exists between the Company's Board of Directors or
Compensation Committee and the Board of Directors or Compensation Committee of
any other company, nor has any such interlocking relationship existed during the
past fiscal year.
In March 1996, the Company completed a private placement of approximately
$1.5 million aggregate principal amount of secured debentures, all of which were
converted to equity as of June 7, 1996 at a conversion price of $.50 per share.
In connection with the issuance of these debentures, each purchaser of
debentures received a warrant to purchase 1.25 shares of the Company's Common
Stock for each $1.00 principal amount of debentures purchased. Each warrant is
exercisable for two years from the date of issuance at an exercise price of $.50
per share. Ms. Charlotte Walker and Ms. Renee Courington each purchased $50,000
principal amount of convertible debentures and each received the associated
warrant to purchase 62,500 shares of the Company's Common Stock. Ms. Walker
subsequently exercised such warrant in its entirety.
Except as disclosed herein, since the commencement of the last completed
fiscal year, no insider of the Company had any material interest, direct or
indirect, in any transaction or any proposed transaction which has materially
affected or would materially affect the Company or any of its subsidiaries.
INDEBTEDNESS OF DIRECTORS, EXECUTIVE AND SENIOR OFFICERS
As of December 31, 1995, Mr. Scott Walchek, the Company's former President
and Chief Executive Officer owed the Company $24,500 under a loan made pursuant
to the terms of his employment agreement. This loan was unsecured, did not bear
interest and was due upon demand. In connection with Mr. Walchek's severance
agreement, Mr. Walchek agreed to have the remaining balance of the loan repaid
by deductions from the amount payable to him under his severance agreement. The
Company subsequently renegotiated its severance agreement with Mr. Walchek to
reduce the amount payable to Mr. Walchek, and in connection with this
renegotiation wrote off a portion of this remaining balance.
DESCRIPTION OF CAPITAL STOCK
COMMON AND PREFERRED STOCK
Following completion of the Domestication, if approved, and after giving
effect to the one-for-twenty share consolidation discussed in Proposal Number
Two, the authorized capital of the Company will consist of 50,000,000 shares of
Common Stock of which approximately 4,533,283 will be issued and outstanding
(assuming the exercise of all Rights offered pursuant to the Rights Offering),
and 5,000,000 shares of Preferred Stock, of which 100,000 shares will be
designated Series A Preferred Stock, 99,993 shares of which will be issued and
outstanding (assuming exchange of all of the outstanding Convertible Debentures)
and 4,900,000 shares of Preferred Stock will be undesignated and unissued.
Holders of Common Stock and Series A Preferred Stock are entitled to receive
dividends as may from time to time be declared by the Board of Directors of the
Company out of funds legally available therefor. Holders of Common Stock are
entitled to one vote per share on all matters on which the holders of Common
Stock are entitled to vote. Holders of Series A Preferred Stock are entitled to
vote on all matters on which the holders of Common Stock are entitled to vote
and have the number of votes equal to the number of shares of Common Stock into
which their shares of Series A Preferred are convertible. Holders of Common
Stock and Series A Preferred Stock have no cumulative voting, preemptive,
redemption or sinking fund rights. In the event of a liquidation, dissolution or
winding up of the Company, holders of Series A Preferred Stock are entitled to
receive approximately $53.02 or an aggregate of $5,302,000 (assuming conversion
of all of the Convertible Debentures into Series A Preferred Stock) per share
prior to and in preference of the holders of Common Stock. After the Series A
Preferred Stock liquidation preference is paid, the holders of Common Stock are
entitled to share equally and ratably in the remaining assets of the Company, if
any. The outstanding shares of Common Stock and Preferred Stock are fully paid
and nonassessable. The Series A Preferred is convertible at the option of the
60
<PAGE> 62
holder at the conversion price of $0.12 per share or 441.8 shares of Common
Stock for each share of Series A Preferred Stock. In addition, the Series A
Preferred Stock converts automatically on July 31, 1999 or upon either (i) the
Company obtaining equity financing in an amount not less than $2 million and at
a price of not less than $0.22 per share, or (ii) the stock trading at 250% or
more of the conversion price for any 21 trading days in any consecutive 40 day
trading period.
WARRANTS
As of the Record Date there were outstanding warrants to purchase an
aggregate of 14,858,716 shares of Common Stock at exercise prices from
U.S.$.5625 to U.S.$.15 per share. These Warrants expire on various dates between
March 1997 and November 2001.
REGISTRATION RIGHTS
The holders of the 8% Convertible Debentures and Warrants issued with
respect thereto (the "Holders") are entitled to certain rights with respect to
the registration of the resale of shares issued on conversion or exercise
thereof under the Securities Act. Under the terms of an agreement between the
Company and the Holders, the Company has an obligation to register these shares
as soon as reasonably practical after written demand of purchasers holding a
majority of the debentures and warrants.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is the
Montreal Trust Company of Canada. After the Domestication, the Company's
transfer agent and registrar in the United States will be The First National
Bank of Boston.
LEGAL MATTERS
Certain matters with respect to the legality of the issuance of the Common
Stock, Preferred Stock and Warrants to be issued in connection with the
Domestication and with respect to United States tax matters will be passed upon
by Wilson Sonsini Goodrich & Rosati, professional corporation, Palo Alto,
California. Certain matters with respect to Canadian tax matters and with
respect to the legality of the issuance of the Rights to purchase Common Stock
and the Common Stock issuable upon exercise of the Rights in connection with the
Rights Offering will be passed upon by Campney & Murphy, Barristers and
Solicitors, Vancouver, British Columbia.
61
<PAGE> 63
SHAREHOLDER PROPOSALS
Any shareholder proposing to have any appropriate matter brought before the
1997 Annual General Meeting of Shareholders is required to submit such proposal
in accordance with the proxy rules of the Securities and Exchange Commission to
the Secretary of the Company not later than June 2, 1997 to be considered for
inclusion in the 1997 Proxy Statement.
BY ORDER OF THE BOARD
--------------------------------------
CHARLOTTE J. WALKER
Chairman of the Board
DATED this day of February, 1997.
62
<PAGE> 64
APPENDIX 1
SECTION 231 OF
THE COMPANY ACT (BRITISH COLUMBIA)
DISSENT PROCEDURE.
231. (1) Where,
(a) being entitled to give notice of dissent to a resolution as
provided in section 37, 127, 150, 246, 268, 273 or 313, a member of a
company (in this Act called a "dissenting member") gives notice of dissent;
(b) the resolution referred to in paragraph (a) is passed; and
(c) the company or its liquidator proposes to act on the authority of
the resolution referred to in paragraph (a) the company or the liquidator
shall first give to the dissenting member notice of the intention to act
and advise the dissenting member of his rights under this section.
(2) On receiving a notice of intention to act in accordance with subsection
(1), a dissenting member is entitled to require the company to purchase all his
shares in respect of which the notice of dissent was given.
(3) The dissenting member shall exercise his right under subsection (2) by
delivering to the registered office of the company, within 14 days after the
company, or the liquidator, gives the notice of intention to act,
(a) a notice that he requires the company to purchase all his shares
referred to in subsection (2); and
(b) the share certificates representing all his shares referred to in
subsection (2); and thereupon he is bound to sell those shares to the
company and the company is bound to purchase them.
(4) A dissenting member who has complied with subsection (3), the company,
or, if there has been an amalgamation, the amalgamated company, may apply to the
court, which may
(a) require the dissenting member to sell, and the company or the
amalgamated company to purchase, the shares in respect of which the notice
of dissent has been given;
(b) fix the price and terms of the purchase and sale, or order that
the price and terms be established by arbitration, in either case having
due regard for the rights of creditors;
(c) join in the application any other dissenting member who has
complied with subsection (3); and
(d) make consequential orders and give directions it considers
appropriate.
(5) The price to be paid to a dissenting member for his shares shall be
their fair value as of the day before the date on which the resolution referred
to in subsection (1) was passed, including any appreciation or depreciation in
anticipation of the vote on the resolution, and every dissenting member who has
complied with subsection (3) shall be paid the same price.
(6) The amalgamation or winding up of the company, or any change in its
capital assets or liabilities resulting from the company acting on the authority
of the resolution referred to in subsection (1), shall not affect the right of
the dissenting member and the company under this section or the price to be paid
for the shares.
(7) Every dissenting member who has complied with subsection (3) may
(a) not vote, or exercise or assert any rights of a member, in respect
of the shares for which notice of dissent has been given, other than under
this section;
(b) not withdraw the requirement to purchase his shares, unless the
company consents; and
(c) until he is paid in full, exercise and assert all the rights of a
creditor of the company.
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<PAGE> 65
(8) Where the court determines that a person is not a dissenting member, or
is not otherwise entitled to the right provided by subsection (2), the court may
make the order, without prejudice to any acts or proceedings which the company,
its members or any class of members may have taken during the intervening
period, it considers appropriate to remove the limitations imposed on him by
subsection (7).
(9) The relief provided by this section is not available if, subsequent to
giving his notice of dissent, the dissenting member acts inconsistently with his
dissent; but a request to withdraw the requirement to purchase his shares is not
an act inconsistent with his dissent.
(10) A notice of dissent ceases to be effective if the member giving it
consents to or votes in favor of the resolution of the company to which he is
dissenting, except where the consent or vote is given solely as a proxy holder
for a person whose proxy required an affirmative vote.
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<PAGE> 66
APPENDIX 2
CERTIFICATE OF INCORPORATION
OF
SANCTUARY WOODS MULTIMEDIA CORPORATION
FIRST: The name of this Corporation is Sanctuary Woods Multimedia
Corporation
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, County of New Castle, Delaware
19801. The name of its registered agent at such address is The Corporation Trust
Company.
THIRD: The purpose of this Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: This Corporation is authorized to issue two classes of shares to
be designated, respectively, Common Stock and Preferred Stock. The total number
of shares of Common Stock which this Corporation is authorized to issue is
50,000,000, with a par value of $.001, and the total number of shares of
Preferred Stock which this Corporation is authorized to issue is 5,000,000, with
a par value of $.001, of which 100,000 shares are designated Series A Preferred
Stock (the "Series A"),
The Preferred Stock may be issued from time to time in one or more series
pursuant to a resolution or resolutions providing for such issue duly adopted by
the Board of Directors (authority to do so being hereby expressly vested in the
Board). The Board of Directors is further authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and, to fix the number of shares of
any such series of Preferred Stock and the designation of any such series of
Preferred Stock. The Board of Directors is authorized, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares thereof then outstanding) the
number of shares of any such series subsequent to the issue of shares of that
series, to determine the designation of any series, and to fix the number of
shares of any series.
1. Dividends. The holders of the Common Stock and Series A shall be
entitled, when, as and if declared by the board of directors of the Corporation,
to noncumulative dividends out of funds legally available therefor.
2. Liquidation Preference. In the event of any liquidation, dissolution,
or winding up of the Corporation, either voluntary or involuntary, distributions
to the stockholders of the Corporation shall be made in the following manner:
(a) The holders of the Series A shall be entitled to receive, prior
and in preference to any distribution of any of the assets or surplus funds
of the Corporation to the holders of the Common Stock by reason of their
ownership of such shares, an amount equal to $53.02 per share for each
share of Series A then held by them, adjusted for any stock splits,
combinations, consolidations, or stock distributions or dividends with
respect to such shares, plus declared but unpaid dividends. If the assets
and funds thus distributed among the holders of the Series A shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amount, then the entire assets and funds of the Corporation
legally available for distribution shall be distributed among the holders
of the Series A in proportion to the shares of Series A then held by them.
(b) After payment has been made to the holders of Series A of the
preferential amounts set forth in Sections 2(a) above, any remaining assets
of the Corporation shall be distributed ratably among the holders of the
Common Stock based upon the number of shares of Common Stock held.
(c) For purposes of this Section 2, a merger or consolidation of the
Corporation with or into any other corporation or corporations, or the
merger of any other corporation or corporations into the Corporation, in
which consolidation or merger the stockholders of the Corporation receive
distributions in cash or securities of another corporation or corporations
as a result of such consolidation or merger, or a
1
<PAGE> 67
sale of all or substantially all of the assets of the Corporation, shall
not be treated as a liquidation, dissolution or winding up of the
Corporation and the holders of Preferred Stock shall share ratably with the
holders of Common Stock based on the number of shares of Common Stock into
which their shares of Series A are convertible.
3. Voting Rights. Except as otherwise required by law, the holder of each
share of Common Stock issued and outstanding shall have one vote and the holder
of each share of Series A shall be entitled to the number of votes equal to the
number of shares of Common Stock into which such share of Series A could be
converted at the record date for determination of the stockholders entitled to
vote on such matters, or, if no such record date is established, at the date
such vote is taken, such votes to be counted together with all other shares of
the Corporation having general voting power and not separately as a class.
Fractional votes by the holders of Series A shall not, however, be permitted.
4. Conversion. The holders of Series A shall have conversion rights as
follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A shall be convertible,
without the payment of any additional consideration by the holder thereof
and at the option of the holder thereof, at any time after the date of
issuance of such share at the office of the Corporation or any transfer
agent for the Series A. Each share of Series A shall be convertible into
the number of fully paid and nonassessable shares of Common Stock which
results from dividing $53.02 by the Conversion Price per share determined
as hereinafter provided, in effect at the time of conversion (the
"Conversion Rate"). The Series A Conversion Price shall initially be $0.12.
Such initial Series A Conversion Price shall be subject to adjustment from
time to time as provided below.
(b) Automatic Conversion. Each share of Preferred Stock shall
automatically be converted into shares of Common Stock at the then
effective Series A Conversion Rate on July 31, 1999 or upon either (i) the
closing of an equity financing for the account of the Corporation at a
price per share of at least $0.22 (as adjusted for stock splits, reverse
stock splits and the like) and an aggregate offering price of not less than
$2,000,000, (ii) such time as the closing price of the Corporation's Common
Stock shall have been at least 250% of the Series A Conversion Price for
any 21 trading days in any consecutive 40 day period after the date of the
issuance of the first share of Series A or (iii) at the election of the
holders of at least seventy-five percent (75%) of the outstanding shares of
Series A Preferred Stock.
(c) Mechanics of Conversion. Before any holder of Series A shall be
entitled to convert the same into full shares of Common Stock and receive
Common Stock certificates therefor, he shall surrender the Series A
certificate or certificates, duly endorsed, at the office of the
Corporation or of any transfer agent for the Series A, and shall give
written notice to the Corporation at such office that such holder elects to
convert the same; provided, however, that the Corporation shall not be
obligated to issue certificates evidencing the shares of Common Stock
issuable upon such conversion unless the certificates evidencing such
shares of Series A are either delivered to the Corporation or its transfer
agent as provided above, or the holder notifies the Corporation or its
transfer agent that such certificates have been lost, stolen or destroyed
and executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such
certificates. The Corporation shall, as soon as practicable after such
delivery, or such agreement regarding indemnification in the case of a
lost, stolen or destroyed certificate, issue and deliver at such office to
such holder of Series A, a certificate or certificates (as requested by
such holder) representing the aggregate the number of shares of Common
Stock to which the holder shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable in lieu of
fractional shares of Common Stock. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of such
surrender of the shares of Series A to be converted and the person or
persons entitled to receive the shares of Common Stock issuable
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<PAGE> 68
upon such conversion shall be treated for all purposes as the record holder
or holders of such shares of Common Stock on such date.
(d) Fractional Shares. In lieu of any fractional shares to which the
holder of Series A would otherwise be entitled, the Corporation shall pay
cash equal to such fraction multiplied by the fair market value of one
share of Common Stock, as determined by the board of directors of the
Corporation. Whether or not fractional shares are issuable upon such
conversion shall be determined on the basis of the total number of shares
of Series A of each holder at the time converting into Common Stock and the
number of shares of Common Stock issuable upon such aggregate conversion.
(d) Adjustment of Conversion Price. The applicable Conversion Price
of the Series A shall be subject to adjustment from time to time as
follows:
(i) If the number of shares of Common Stock outstanding at any time
after the date hereof is increased by a stock dividend payable in shares
of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, on the date such payment is made or such change is
effective, the Conversion Price of the Series A shall be appropriately
decreased so that the number of shares of Common Stock issuable on
conversion of any shares of Series A shall be increased in proportion to
such increase of outstanding shares.
(ii) If the number of shares of Common Stock outstanding at any
time after the date hereof is decreased by a combination of the
outstanding shares of Common Stock, then, on the effective date of such
combination, the Conversion Price of the Series A shall be appropriately
increased so that the number of shares of Common Stock issuable on
conversion of any shares of the Series A shall be decreased in
proportion to such decrease in outstanding shares.
(iii) In case, at any time after the date hereof, of any capital
reorganization, or any reclassification of the stock of the Corporation
(other than as a result of a stock dividend or subdivision, split-up or
combination of shares), or the consolidation or merger of the
Corporation with or into another person (other than a consolidation or
merger in which the Corporation is the continuing entity and which does
not result in any change in the Common Stock), or the sale or other
disposition of all or substantially all the properties and assets of the
Corporation, the shares of Series A shall, after such reorganization,
reclassification, consolidation, merger, sale or other disposition, be
convertible into the kind and number of shares of stock or other
securities or property of the Corporation or otherwise to which such
holder would have been entitled if immediately prior to such
reorganization, reclassification, consolidation, merger, sale or other
disposition he had converted his shares of Series A into Common Stock.
The provisions of this clause (iii) shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, sales or
other dispositions.
(e) Minimal Adjustments. No adjustment in the Conversion Price of the
Series A need be made if such adjustment would result in a change in the
Conversion Price of less than $0.01.
(f) No Impairment. The Corporation will not through any
reorganization, recapitalization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of
this Section 4 and in the taking of all such action as may be necessary or
appropriate to protect the Conversion Rights of the holders of Series A
against impairment. This provision shall not restrict the Corporation's
right to amend its Certificate of Incorporation with the requisite
stockholder consent.
(g) Certificate as to Adjustments. Upon the occurrence of any event
requiring any adjustment or readjustment of the Conversion Price pursuant
to this Section 4, the Corporation at its expense shall promptly compute
such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Series A a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, upon
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written request at any time of any holder of Series A, furnish or cause to
be furnished to such holder a like certificate setting forth (i) all such
adjustments and readjustments, (ii) the Conversion Price of the Series A at
the time in effect, and (iii) the number of shares of Common Stock and the
amount, if any, of other property which at the time would be received upon
the conversion of such holder's shares of Series A.
(h) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of Series A such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of
all outstanding shares of Series A; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of Series A, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such
purpose.
(i) Reissuance of Converted Shares. No shares of Series A which have
been converted into Common Stock after the original issuance thereof shall
ever again be reissued and all such shares so converted or redeemed shall
upon such conversion cease to be a part of the authorized shares of the
Corporation.
FIFTH: The Corporation is to have perpetual existence.
SIXTH:
1. The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed exclusively
by one or more resolutions adopted from time to time by the Board of Directors.
Each director shall serve until his or her successor is duly elected and
qualified or until his or her death, resignation, or removal. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
Any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal, or other causes shall be filled by either (i) the
affirmative vote of the holders of a majority of the voting power of the
then-outstanding shares of voting stock of the Corporation entitled to vote
generally in the election of directors voting together as a single class (the
"Voting Stock"); or (ii) by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors. Newly created directorships resulting from any increase in the number
of directors shall, unless the Board of Directors determines by resolution that
any such newly created directorship shall be filled by the stockholders, be
filled only by the affirmative vote of the directors then in office, even though
less than a quorum of the Board of Directors.
2. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend,
or repeal the Bylaws of the Corporation.
3. The directors of the Corporation need not be elected by written ballot
unless a stockholder demands election by written ballot at the meeting and
before voting begins, or unless the Bylaws so provide.
4. The affirmative vote of sixty-six and two-thirds percent (66 2/3%) of
the voting power of the then outstanding shares of Voting Stock, voting together
as a single class, shall be required for the adoption, amendment or repeal of
the following sections of the Corporation's Bylaws by the stockholders of this
Corporation: 2.2 (Annual Meeting) and 2.3 (Special Meeting).
5. No action shall be taken by the stockholders of the Corporation except
at an annual or special meeting of the stockholders called in accordance with
the Bylaws.
6. Advance notice of stockholder nomination for the election of directors
and of business to be brought by stockholders before any meeting of the
stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
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7. Any director, or the entire Board of Directors, may be removed from
office at any time (i) with cause by the affirmative vote of the holders of at
least a majority of the voting power of all of the then-outstanding shares of
the Voting Stock, voting together as a single class; or (ii) without cause by
the affirmative vote of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the voting power of all of the then-outstanding shares of the
Voting Stock.
SEVENTH: Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Article SIXTH or
this Article SEVENTH.
EIGHTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, except as provided in Article
SEVENTH of this Certificate, and all rights conferred upon the stockholders
herein are granted subject to this right.
NINTH:
1. To the fullest extent permitted by the Delaware General Corporation Law
as the same exists or as may hereafter be amended, a director of the Corporation
shall not be personally liable to the Corporation or its stockholders for
monetary damages for breach fiduciary duty as a director.
2. The Corporation may indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer or employee of
the Corporation or any predecessor of the Corporation or serves or served at any
other enterprise as a director, officer or employee at the request of the
Corporation or any predecessor to the Corporation.
3. Neither any amendment nor repeal of this Article NINTH, nor the
adoption of any provision of the Corporation's Certificate of Incorporation
inconsistent with this Article NINTH, shall eliminate or reduce the effect of
this Article NINTH, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article NINTH, would accrue
or arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.
TENTH: Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
The Certificate of Incorporation has been duly adopted by the stockholders
of the Corporation in accordance with the provisions of Sections 242 and 245 of
the General Corporation Law of the State of Delaware, as amended.
IN WITNESS WHEREOF, Sanctuary Woods Multimedia Corporation. has caused this
Certificate of Incorporation to be signed by Charlotte J. Walker, its President,
and attested by , its Secretary, this day of , 1997.
SANCTUARY WOODS MULTIMEDIA
CORPORATION
--------------------------------------
Charlotte J. Walker
President and Chief Executive Officer
Attest:
- --------------------------------------
Bruce M. McNamara
Secretary
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APPENDIX 3
BYLAWS
OF
SANCTUARY WOODS MULTIMEDIA CORPORATION
(A DELAWARE CORPORATION)
<PAGE> 72
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C> <C>
ARTICLE I -- CORPORATE OFFICES......................................................... 1
1.1 Registered Office......................................................... 1
1.2 Other Offices............................................................. 1
ARTICLE II -- MEETINGS OF STOCKHOLDERS................................................. 1
2.1 Place of Meetings......................................................... 1
2.2 Annual Meeting............................................................ 1
2.3 Special Meeting........................................................... 2
2.4 Notice of Stockholders' Meetings.......................................... 3
2.5 Manner of Giving Notice; Affidavit of Notice.............................. 3
2.6 Quorum.................................................................... 3
2.7 Adjourned Meeting; Notice................................................. 3
2.8 Voting.................................................................... 4
2.9 Validation of Meetings; Waiver of Notice; Consent......................... 4
2.10 Stockholder Action by Written Consent Without a Meeting................... 4
2.11 Record Date for Stockholder Notice; Voting; Giving Consents............... 5
2.12 Proxies................................................................... 5
2.13 Inspectors of Election.................................................... 5
ARTICLE III -- DIRECTORS............................................................... 6
3.1 Powers.................................................................... 6
3.2 Number and Term of Office................................................. 6
3.3 Resignation and Vacancies................................................. 6
3.4 Removal................................................................... 7
3.5 Place of Meetings; Meetings by Telephone.................................. 7
3.6 First Meetings............................................................ 7
3.7 Regular Meetings.......................................................... 7
3.8 Special Meetings; Notice.................................................. 8
3.9 Quorum.................................................................... 8
3.10 Waiver of Notice.......................................................... 8
3.11 Adjournment............................................................... 8
3.12 Notice of Adjournment..................................................... 8
3.13 Board Action by Written Consent Without a Meeting......................... 8
3.14 Fees and Compensation of Directors........................................ 9
3.15 Approval of Loans to Officers............................................. 9
ARTICLE IV -- COMMITTEES............................................................... 9
4.1 Committees of Directors................................................... 9
4.2 Meetings and Action of Committees......................................... 9
ARTICLE V -- OFFICERS.................................................................. 10
5.1 Officers.................................................................. 10
5.2 Election of Officers...................................................... 10
5.3 Subordinate Officers...................................................... 10
5.4 Removal and Resignation of Officers....................................... 10
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
5.5 Vacancies in Offices...................................................... 10
5.6 Chairman of the Board..................................................... 10
5.7 President/Chief Executive Officer......................................... 11
5.8 Vice Presidents........................................................... 11
5.9 Secretary................................................................. 11
5.10 Chief Financial Officer................................................... 11
ARTICLE VI -- INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS.......
12
6.1 Indemnification of Directors and Officers................................. 12
6.2 Indemnification of Others................................................. 12
6.3 Insurance................................................................. 12
ARTICLE VII -- RECORDS AND REPORTS..................................................... 12
7.1 Maintenance and Inspection of Records..................................... 12
7.2 Inspection by Directors................................................... 13
7.3 Annual Statement to Stockholders.......................................... 13
7.4 Representation of Shares of Other Corporations............................ 13
ARTICLE VIII -- GENERAL MATTERS........................................................ 13
8.1 Record Date for Purposes Other Than Notice and Voting..................... 13
8.2 Checks; Drafts; Evidences of Indebtedness................................. 14
8.3 Corporate Contracts and Instruments: How Executed......................... 14
8.4 Stock Certificates; Partly Paid Shares.................................... 14
8.5 Special Designation on Certificates....................................... 14
8.6 Lost Certificates......................................................... 15
8.7 Construction; Definitions................................................. 15
ARTICLE IX -- AMENDMENTS............................................................... 15
ARTICLE X -- DISSOLUTION............................................................... 15
ARTICLE XI -- CUSTODIAN................................................................ 16
11.1 Appointment of a Custodian in Certain Cases............................... 16
11.2 Duties of Custodian....................................................... 16
</TABLE>
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BYLAWS
OF
SANCTUARY WOODS MULTIMEDIA CORPORATION
(A DELAWARE CORPORATION)
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be fixed in the Certificate
of Incorporation of the corporation.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such designation,
the annual meeting of stockholders shall be held on the fourth Tuesday of July
in each year at 9:00 a.m. However, if such day falls on a legal holiday, then
the meeting shall be held at the same time and place on the next succeeding full
business day. At the meeting, directors shall be elected, and any other proper
business may be transacted.
(b) At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be: (A) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (B) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (C) otherwise properly brought before
the meeting by a stockholder. For business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not less than one hundred twenty
(120) calendar days in advance of the date specified in the corporation's proxy
statement released to stockholders in connection with the previous year's annual
meeting of stockholders; provided, however, that in the event that no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the date contemplated at the time of
the previous year's proxy statement, notice by the stockholder to be timely must
be so received a reasonable time before the solicitation is made. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting: (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and address,
as they appear on the corporation's books, of the stockholder proposing such
business, (iii) the class and number of shares of the corporation which are
beneficially owned by the stockholder, (iv) any material interest of the
stockholder in such business and (v) any other information that is required to
be provided by the stockholder pursuant to
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Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934
Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding
the foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholder's meeting,
stockholders must provide notice as required by the regulations promulgated
under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any annual meeting except in accordance with the
procedures set forth in this paragraph (b). The chairman of the annual meeting
shall, if the facts warrant, determine and declare at the meeting that business
was not properly brought before the meeting and in accordance with the
provisions of this paragraph (b), and, if he should so determine, he shall so
declare at the meeting that any such business not properly brought before the
meeting shall not be transacted.
(c) Only persons who are nominated in accordance with the procedures set
forth in this paragraph (c) shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the corporation entitled to vote in the
election of Directors at the meeting who complies with the notice procedures set
forth in this paragraph (c). Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the corporation in accordance with the provisions
of paragraph (b) of this Section 2.2. Such stockholder's notice shall set forth
(i) as to each person, if any, whom the stockholder proposes to nominate for
election or re-election as a Director: (A) the name, age, business address and
residence address of such person, (B) the principal occupation or employment of
such person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder, and (E) any other information relating to such
person that is required to be disclosed in solicitations of proxies for
elections of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the 1934 Act (including without limitation such person's
written consent to being named in the proxy statement, if any, as a nominee and
to serving as a Director if elected); and (ii) as to such stockholder giving
notice, the information required to be provided pursuant to paragraph (b) of
this Section 2.2. At the request of the Board of Directors, any person nominated
by a stockholder for election as a Director shall furnish to the Secretary of
the corporation that information required to be set forth in the stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a Director of the corporation unless nominated in accordance
with the procedures set forth in this paragraph (c). The chairman of the meeting
shall, if the facts warrants, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if he should so determine, he shall so declare at the meeting, and
the defective nomination shall be disregarded.
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
Board of Directors, or by the chairman of the board, or in the absence of the
chairman of the board by the chief executive officer, or by one or more
stockholders holding shares in the aggregate entitled to cast not less than ten
percent (10%) of the votes at that meeting, but such special meetings may not be
called by any other person or persons.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president, chief
executive officer, or the secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
officer receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5, that a meeting will be held at the time requested by the person or
persons who called the meeting, not less than thirty-five (35) nor more than
sixty (60) days after the receipt of the request. If the notice is not given
within twenty (20) days after the receipt of the request, the person or persons
requesting the meeting may give the notice. Nothing contained in this paragraph
of this
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Section 2.3 shall be construed as limiting, fixing, or affecting the time when a
meeting of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
Except as set forth in Section 2.3, all notices of meetings of stockholders
shall be sent or otherwise given in accordance with Section 2.5 of these bylaws
not less than ten (10) nor more than sixty (60) days before the date of the
meeting. The notice shall specify the place, date, and hour of the meeting and
(i) in the case of a special meeting, the general nature of the business to be
transacted (no business other than that specified in the notice may be
transacted) or (ii) in the case of the annual meeting, those matters which the
board of directors, at the time of giving the notice, intends to present for
action by the stockholders (but any proper matter may be presented at the
meeting for such action). The notice of any meeting at which directors are to be
elected shall include the name of any nominee or nominees who, at the time of
the notice, the board intends to present for election.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that stockholder by mail or telegraphic or other written communication
to the corporation's principal executive office, or if published at least once
in a newspaper of general circulation in the county where that office is
located. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication.
If any notice addressed to a stockholder at the address of that stockholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the stockholder at that address, then
all future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available to the stockholder on written
demand of the stockholder at the principal executive office of the corporation
for a period of one (1) year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.6 QUORUM
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of stockholders. The stockholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough stockholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
2.7 ADJOURNED MEETING; NOTICE
Any stockholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy. In the absence
of a quorum, no other business may be transacted at that meeting except as
provided in Section 2.6 of these bylaws.
When any meeting of stockholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at the meeting at which the adjournment is taken.
However, if a new record date for the adjourned meeting is fixed or if the
adjournment
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is for more than thirty (30) days from the date set for the original meeting,
then notice of the adjourned meeting shall be given. Notice of any such
adjourned meeting shall be given to each stockholder of record entitled to vote
at the adjourned meeting in accordance with the provisions of Sections 2.4 and
2.5 of these bylaws. At any adjourned meeting the corporation may transact any
business which might have been transacted at the original meeting.
2.8 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the Certificate of Incorporation,
each outstanding share, regardless of class, shall be entitled to one vote on
each matter submitted to a vote of the stockholders. Any stockholder entitled to
vote on any matter may vote part of the shares in favor of the proposal and
refrain from voting the remaining shares or, except when the matter is the
election of directors, may vote them against the proposal; but, if the
stockholder fails to specify the number of shares which the stockholder is
voting affirmatively, it will be conclusively presumed that the stockholder's
approving vote is with respect to all shares which the stockholder is entitled
to vote.
If a quorum is present, the affirmative vote of the majority of the shares
represented and voting at a duly held meeting (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the stockholders, unless the vote of a greater number or a vote by classes is
required by law or by the Certificate of Incorporation.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of stockholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though they
had been taken at a meeting duly held after regular call and notice, if a quorum
be present either in person or by proxy, and if, either before or after the
meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of stockholders. All such waivers, consents,
and approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by law to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the Certificate of Incorporation, any action
which may be taken at any annual or special meeting of stockholders may be taken
without a meeting and without prior notice, if a consent in writing, setting
forth the action so taken, is signed by the holders of outstanding shares having
not less than the minimum number of votes that would be necessary to authorize
or take that action at a meeting at which all shares entitled to vote on that
action were present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any
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vote of stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of any such meeting nor more than sixty (60) days before any such
action without a meeting, and in such event only stockholders of record on the
date so fixed are entitled to notice and to vote or to give consents, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date.
If the board of directors does not so fix a record date:
(a) the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business
on the business day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held; and
(b) the record date for determining stockholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first
written consent is given, or (ii) when prior action by the board has been
taken, shall be at the close of business on the day on which the board
adopts the resolution relating to that action.
The record date for any other purpose shall be as provided in Article VIII
of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telefax, facsimile or other electronic
transmission or otherwise) by the stockholder or the stockholder's
attorney-in-fact. The revocability of a proxy that states on its face that it is
irrevocable shall be governed by the provisions of Section 212(c) of the General
Corporation Law of Delaware.
2.13 INSPECTORS OF ELECTION
Before any meeting of stockholders, the board of directors may appoint an
inspector or inspectors of election to act at the meeting or its adjournment. If
no inspector of election is so appointed, then the chairman of the meeting may,
and on the request of any stockholder or a stockholder's proxy shall, appoint an
inspector or inspectors of election to act at the meeting. The number of
inspectors shall be either one (1) or three (3). If inspectors are appointed at
a meeting pursuant to the request of one (1) or more stockholders or proxies,
then the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
then the chairman of the meeting may, and upon the request of any stockholder or
a stockholder's proxy shall, appoint a person to fill that vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way arising
in connection with the right to vote;
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(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election or
vote with fairness to all stockholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and to
any limitations in the Certificate of Incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER AND TERM OF OFFICE
The authorized number of directors shall be not less than seven (7) nor
more than nine (9). The exact number of directors shall be seven (7) until
changed, within the limits specified above, by a bylaw amending this Section
3.2, duly adopted by the board of directors or by the stockholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number, by a duly adopted amendment to the
Certificate of Incorporation or by an amendment to this bylaw adopted by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote or by resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires. If for any
cause, the directors shall not have been elected at an annual meeting, they may
be elected as soon thereafter as convenient at a special meeting of the
stockholders called for that purpose in the manner provided in these Bylaws.
3.3 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the chairman
of the board, the president/chief executive officer, the secretary or the board
of directors, unless the notice specifies a later time for that resignation to
become effective. If the resignation of a director is effective at a future
time, the board of directors may elect a successor to take office when the
resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the stockholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute a majority of the required quorum), or by the unanimous written
consent of all shares entitled to vote thereon. Each director so elected shall
hold office until the next annual meeting of the stockholders and until a
successor has been elected and qualified.
Unless otherwise provided in the Certificate of Incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or
by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created
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directorships of such class or classes or series may be filled by a
majority of the directors elected by such class or classes or series
thereof then in office, or by a sole remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.4 REMOVAL
Subject to any limitations imposed by law, and unless otherwise provided in
the Certificate of Incorporation, the Board of Directors, or any individual
Director, may be removed from office at any time by the affirmative vote of the
holders of at least a majority of the then outstanding shares of the capital
stock of the corporation entitled to vote at an election of Directors.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
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3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, or in the absence of the
chairman of the board by the chief executive officer or any three directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least seven (7) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least seventy-two (72) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.9 QUORUM
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.11
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
Certificate of Incorporation and applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.10 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.11 ADJOURNMENT
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.12 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.8 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board.
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3.14 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.14 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.15 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, but no such committee shall have the power or authority to (i) amend
the Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the board of directors as provided in Section 151(a) of the
General Corporation Law of Delaware, fix any of the preferences or rights of
such shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution, or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the Certificate of
Incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.7 (regular meetings), Section 3.8 (special
meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice),
Section 3.11 (adjournment), Section 3.12 (notice of adjournment), and Section
3.13 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
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meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a chairman of the board, a
president, a secretary and a chief financial officer. The corporation may also
have, at the discretion of the board of directors, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of Section
5.3 of these bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president/chief
executive officer to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in these bylaws or as
the board of directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall serve as
the corporation's general manager, and shall have general supervision, direction
and control of the corporation's business and its officers, and, if present,
preside at meetings of the stockholders and the board of directors and exercise
and perform such other powers and duties as may from time to time be assigned to
him by the board of directors or as may be prescribed by these bylaws. If there
is no president/chief executive officer, then the chairman of the board shall
also be the president/chief executive officer of the corporation and shall have
the powers and duties prescribed in Section 5.7 of these bylaws. The chairman of
the board shall report to the board of directors.
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5.7 PRESIDENT
Subject to such powers, if any, as may be given by the board of directors
to the chairman of the board, if there be such an officer, the president shall,
subject to the control of the chairman of the board, or the board of directors
if there is no chairman of the board, have general supervision, direction, and
control of the business and the officers of the corporation. He or she shall
preside at all meetings of the stockholders and the board of directors, in the
absence or nonexistence of a chairman of the board. He or she shall have the
general powers and duties of management usually vested in the office of
president of a corporation, and shall have such other powers and duties as may
be prescribed by the board of directors or these bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and stockholders. The minutes shall show the time and place of each
meeting, whether regular or special (and, if special, how authorized and the
notice given), the names of those present at directors' meetings or committee
meetings, the number of shares present or represented at stockholders' meetings,
and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable times
be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He or she shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.
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ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware, to indemnify each
of its employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the
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attorney or other agent to so act on behalf of the stockholder. The demand under
oath shall be directed to the corporation at its registered office in Delaware
or at its principal place of business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his or her position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any other lawful
action (other than action by stockholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) days before any such action. In that case, only
stockholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided by law.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
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8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by the chief
financial officer, the secretary or an assistant secretary representing the
number of shares registered in certificate form. Any or all of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if he or she were such officer, transfer agent or registrar at the
date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
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8.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its Certificate of Incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall have
attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
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ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the stockholders
are so divided that they have failed to elect successors to directors whose
terms have expired or would have expired upon qualification of their
successors; or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for
action by the board of directors cannot be obtained and the stockholders
are unable to terminate this division; or
(iii) the corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or distribute its
assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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APPENDIX 4
SANCTUARY WOODS MULTIMEDIA CORPORATION
1996 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants to promote the success of the Company's business. Options granted
under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as
determined by the Administrator at the time of grant. Stock Purchase Rights may
also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as shall
be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the Board
in accordance with Section 4 hereof.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Sanctuary Woods Multimedia Corporation, a
corporation organized under the laws of Delaware.
(h) "Consultant" means any person who is engaged by the Company or any
Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board of Directors of the
Company.
(j) "Employee" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider (defined below) shall not cease to be an Employee in the
case of (i) any leave of absence approved by the Company or (ii) transfers
between locations of the Company or between the Company, its Parent, any
Subsidiary, or any successor. For purposes of Incentive Stock Options, no
such leave may exceed ninety days, unless reemployment upon expiration of
such leave is guaranteed by statute or contract. If reemployment upon
expiration of a leave of absence approved by the Company is not so
guaranteed, on the 181st day of such leave any Incentive Stock Option held
by the Optionee shall cease to be treated as an Incentive Stock Option and
shall be treated for tax purposes as a Nonstatutory Stock Option. Neither
service as a Director nor payment of a director's fee by the Company shall
be sufficient to constitute "employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(l) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock
Market, or the Nasdaq Bulletin Board, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such exchange or system for the last market
trading day prior to the time of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable;
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(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean between the high bid and low asked prices for
the Common Stock on the last market trading day prior to the day of
determination; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(n) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(o) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" means a stock option granted pursuant to the Plan.
(q) "Option Agreement" means a written or electronic agreement between
the Company and an Optionee evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.
(r) "Option Exchange Program" means a program whereby outstanding
Options are exchanged for Options with a lower exercise price.
(s) "Optioned Stock" means the Common Stock subject to an Option or a
Stock Purchase Right.
(t) "Optionee" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(u) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1996 Stock Option Plan.
(w) "Restricted Stock" means shares of Common Stock acquired pursuant
to a grant of a Stock Purchase Right under Section 11 below.
(x) "Section 16(b)" means Section 16(b) of the Securities Exchange Act
of 1934, as amended.
(y) "Service Provider" means an Employee, Director or Consultant.
(z) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 below.
(aa) "Stock Purchase Right" means a right to purchase Common Stock
pursuant to Section 11 below.
(bb) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 8,000,000 Shares. The Shares may be authorized but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan, upon
exercise of either an Option or Stock Purchase Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
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4. Administration of the Plan.
(a) The Plan shall be administered by the Board or a Committee appointed by
the Board, which Committee shall be constituted to comply with Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan
and, in the case of a Committee, the specific duties delegated by the Board to
such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each such
award granted hereunder;
(iv) to approve forms of agreements for use under the Plan;
(v) to determine the terms and conditions of any Option or Stock
Purchase Right granted hereunder. Such terms and conditions include, but
are not limited to, the exercise price, the time or times when Options or
Stock Purchase Rights may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions,
and any restriction or limitation regarding any Option or Stock Purchase
Right or the Common Stock relating thereto, based in each case on such
factors as the Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an Option may
be settled in cash under subsection 9(e) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Common Stock covered by
such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations relating to
the Plan, including rules and regulations relating to sub-plans established
for the purpose of qualifying for preferred tax treatment under foreign tax
laws;
(x) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having
a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined. All elections by
Optionees to have Shares withheld for this purpose shall be made in such
form and under such conditions as the Administrator may deem necessary or
advisable; and
(xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all
Optionees.
5. Eligibility.
(a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to
Service Providers. Incentive Stock Options may be granted only to Employees.
(b) Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 5(b),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair
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Market Value of the Shares shall be determined as of the time the Option with
respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall confer
upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by the
Board. It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be stated in the Option
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option granted
to an Optionee who, at the time the Option is granted, owns stock representing
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant or such shorter term as may be provided in the
Option Agreement.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued upon exercise
of an Option shall be such price as is determined by the Administrator, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of grant of such
Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or
Subsidiary, the exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the
date of grant.
(ii) In the case of a Nonstatutory Stock Option:
(A) granted to a Service Provider who, at the time of grant of such
Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or
Subsidiary, the exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of the grant.
(B) granted to any other Service Provider, the per Share exercise
price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a per
Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon exercise
of an Option, including the method of payment, shall be determined by the
Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
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9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable according to the terms hereof at such times and
under such conditions as determined by the Administrator and set forth in the
Option Agreement, but in no case at a rate of less than 20% per year over five
(5) years from the date the Option is granted. Unless the Administrator provides
otherwise, vesting of Options granted hereunder shall be suspended during any
unpaid leave of absence. An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed exercised when the Company receives: (i) written
or electronic notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised plus any amount required to be
withheld by the Company for income and employment tax purposes in connection
with such option exercise. Full payment may consist of any consideration and
method of payment authorized by the Administrator and permitted by the Option
Agreement and the Plan. Shares issued upon exercise of an Option shall be issued
in the name of the Optionee or, if requested by the Optionee, in the name of the
Optionee and his or her spouse or a trust for his, her or their benefit. Until
the Shares are issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the Shares, notwithstanding the exercise of the Option. The Company
shall issue (or cause to be issued) such Shares promptly after the Option is
exercised. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the Shares are issued, except as provided
in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares thereafter available, both for purposes of the Plan and for
issuance under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. Unless otherwise
determined by the Administrator, if an Optionee ceases to be a Service Provider,
such Optionee may exercise his or her Option within thirty (30) days after the
date of such termination or such longer period of time as is specified in the
Option Agreement to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). Unless otherwise determined by the
Administrator, in the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for one (1) month following the Optionee's
termination. Unless otherwise determined by the Administrator, if, on the date
of termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Death or Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Death or Disability, the Optionee may
exercise his or her Option within such period of time as is specified in the
Option Agreement to the extent the Option is vested on the date of termination
(but in no event later than the expiration of the term of such Option as set
forth in the Option Agreement). Unless otherwise determined by the
Administrator, in the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If such disability is not a "disability" as such term is defined in
Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such
Incentive Stock Option shall automatically cease to be treated as an Incentive
Stock Option and shall be treated for tax purposes as a Nonstatutory Stock
Option on the day three months and one day following such termination. Unless
otherwise determined by the Administrator, if, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after termination,
the Option is not exercised within the time specified herein or determined by
the Administrator, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan. In the event of an Optionee's death while a
Service Provider or during the exercise period provided in the event of an
Optionee's Disability or Retirement, the Option may be exercised by the
Optionee's estate or by a person who acquires the right to exercise the Option
by bequest or inheritance;
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the Option may be exercised by the executor or administrator of the Optionee's
estate or, if none, by the person(s) entitled to exercise the Option under the
Optionee's will or the laws of descent or distribution.
(d) Buyout Provisions. The Administrator may at any time offer to buy out
for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
(e) Retirement. Upon the retirement of a service provider who is not less
than 60 years of age, the administrator may, in its sole discretion, accelerate
the vesting of any options held by such person and/or permit the person to
exercise such options over their remaining term, provided that should any such
action disqualify such remaining options as incentive stock options, the
remaining portion thereof shall become nonstatutory options.
10. Non-Transferability of Options and Stock Purchase Rights. Options and
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee, or in the event of the incapacity of the
Optionee, by his representative.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either alone,
in addition to, or in tandem with other awards granted under the Plan and/or
cash awards made outside of the Plan. After the Administrator determines that it
will offer Stock Purchase Rights under the Plan, it shall advise the offeree in
writing or electronically of the terms, conditions and restrictions related to
the offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid, and the time within which such person must
accept such offer. The terms of the offer shall comply in all respects with
Section 260.140.42 of Title 10 of the California Code of Regulations. The offer
shall be accepted by execution of a Restricted Stock purchase agreement in the
form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise, the
Restricted Stock purchase agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service with the Company for any reason (including death or disability). The
purchase price for Shares repurchased pursuant to the Restricted Stock purchase
agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The repurchase
option shall lapse at such rate as the Administrator may determine, but in no
case at a rate of less than 20% per year over five years from the date of
purchase.
(c) Other Provisions. The Restricted Stock purchase agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is exercised,
the purchaser shall have rights equivalent to those of a shareholder and shall
be a shareholder when his or her purchase is entered upon the records of the
duly authorized transfer agent of the Company. No adjustment shall be made for a
dividend or other right for which the record date is prior to the date the Stock
Purchase Right is exercised, except as provided in Section 12 of the Plan.
12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the
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Company. The conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Administrator, whose determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance for adequate consideration by the Company of shares of stock
of any class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an Option or Stock Purchase
Right.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, the Administrator shall notify each Optionee as
soon as practicable prior to the effective date of such proposed transaction.
The Administrator in its discretion may provide for an Optionee to have the
right to exercise his or her Option until fifteen (15) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets of the
Company, each outstanding Option and Stock Purchase Right shall be assumed or an
equivalent option or right substituted by the successor corporation or a Parent
or Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the Option or Stock Purchase
Right, the Optionee shall fully vest in and have the right to exercise the
Option or Stock Purchase Right as to all of the Optioned Stock, including Shares
as to which it would not otherwise be vested or exercisable. If an Option or
Stock Purchase Right becomes fully vested and exercisable in lieu of assumption
or substitution in the event of a merger or sale of assets, the Administrator
shall notify the Optionee in writing or electronically that the Option or Stock
Purchase Right shall be fully exercisable for a period ending five (5) days
prior to the closing of such transaction, but in no event less than thirty (30)
days from the date of such notice, and the Option or Stock Purchase Right shall
terminate upon the expiration of such period. For the purposes of this
paragraph, the Option or Stock Purchase Right shall be considered assumed if,
following the merger or sale of assets, the option or right confers the right to
purchase or receive, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
13. Time of Granting Options and Stock Purchase Rights. The date of grant
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator. Notice
of the determination shall be given to each Service Provider to whom an Option
or Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
Unless otherwise terminated pursuant to Section 14(a) below, the term
during which options may be granted under this plan shall expire December 31,
2006.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
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<PAGE> 97
(b) Shareholder Approval. The Board shall obtain shareholder approval of
any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the exercise
of an Option or Stock Purchase Right unless the exercise of such Option or Stock
Purchase Right and the issuance and delivery of such Shares shall comply with
Applicable Laws and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
Option or Stock Purchase Right, the Administrator may require the person
exercising such Option or Stock Purchase Right to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation is
required.
16. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Shareholder Approval. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under Applicable Laws.
19. Information to Optionees and Purchasers. The Company shall provide to
each Optionee or holder of Stock Purchase Rights and to each individual who
acquires Shares pursuant to the Plan, not less frequently than annually during
the period such Optionee or purchaser or holder of Stock Purchase Rights has one
or more Options or Stock Purchase Rights outstanding, and, in the case of an
individual who acquires Shares pursuant to the Plan, during the period such
individual owns such Shares, copies of annual financial statements. The Company
shall not be required to provide such statements to key employees whose duties
in connection with the Company assure their access to equivalent information.
20. Indemnification of Administrator. In addition to such other rights of
indemnification as they may have as directors, the Administrator shall be
indemnified by the Company against the reasonable expenses, including attorneys'
fees, actually and necessarily incurred in connection with the defense of any
actual or threatened action, investigation, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan or
any option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgement
in any such action, suit or proceeding except in relation to matters as of which
it shall be adjudged in such action, suit or proceeding that such Administrator
is liable for negligence or misconduct in the performance of his duties;
provided that within sixty days after institution of any such action, suit or
proceeding an Administrator member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
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<PAGE> 98
1996 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows:
<TABLE>
<S> <C>
Grant Number
Date of Grant
Vesting Commencement Date
Exercise Price per Share $
Total Number of Shares Granted
Total Exercise Price $
Type of Option: Incentive Stock Option
Nonstatutory Stock Option
Term/Expiration Date:
</TABLE>
Vesting Schedule:
This Option shall be exercisable on a cumulative basis, in whole or in
part, according to the following vesting schedule:
Termination Period:
This Option shall be exercisable for 30 days after Optionee ceases to be a
Service Provider. Upon Optionee's death or disability, this Option may be
exercised for such longer period as provided in the Plan. In no event may
Optionee exercise this Option after the Term/Expiration Date as provided above.
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option as defined in
Section 422 of the Code. Nevertheless, to the extent that it exceeds the
$100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
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<PAGE> 99
2. Exercise of Option.
a. Right to Exercise. This Option shall be exercisable during its term in
accordance with the Vesting Schedule set out in the Notice of Grant and with the
applicable provisions of the Plan and this Option Agreement.
b. Method of Exercise. This Option shall be exercisable by delivery of an
exercise notice in the form attached as Exhibit A (the "Exercise Notice") which
shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares and the amount required to be withheld by the Company for income and
employment tax purposes. This Option shall be deemed to be exercised upon
receipt by the Company of such fully executed Exercise Notice accompanied by the
aggregate Exercise Price and the amount of any required withholding.
No Shares shall be issued pursuant to the exercise of an Option unless such
issuance and such exercise complies with Applicable laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.
3. Optionee's Representations. In the event the Shares have not been
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement.
4. Method of Payment. Payment of the aggregate Exercise Price shall be by
any of the following, or a combination thereof, at the election of the Optionee:
a. cash or check;
b. consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or
c. surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (ii) have a Fair
Market Value on the date of surrender equal to the aggregate Exercise Price
of the Exercised Shares.
5. Restrictions on Exercise. This Option may not be exercised until such
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.
6. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee except in the
case of Optionee incapacity. The terms of the Plan and this Option Agreement
shall be binding upon the executors, administrators, heirs, successors and
assigns of the Optionee.
7. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
8. Tax Consequences. Set forth below is a brief summary as of the date of
this Option of some of the United States federal tax consequences of exercise of
this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE
SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE
SHARES.
a. Exercise of ISO. If this Option qualifies as an ISO, there will be no
ordinary federal income tax liability upon the exercise of the Option, although
the excess, if any, of the Fair Market Value of the Shares on the date of
exercise over the Exercise Price will be considered in determining the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
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<PAGE> 100
b. Exercise of ISO Following Disability. If the Optionee ceases to be an
Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to remain qualified as an ISO.
c. Exercise of Nonstatutory Stock Option. There may be ordinary federal
income tax and employment tax liabilities upon the exercise of a Nonstatutory
Stock Option. The Optionee will be treated as having received compensation
income (taxable at ordinary income tax rates) equal to the excess, if any, of
the Fair Market Value of the Shares on the date of exercise over the Exercise
Price. If Optionee is an Employee or a former Employee, the Company will be
required to withhold from Optionee's compensation or collect from Optionee and
pay to the applicable taxing authorities an amount in cash equal to a percentage
of this compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered by the Optionee at the time of exercise.
d. Disposition of Shares. In the case of an NSO, if Shares are held for
at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and at least two years after the Date of Grant, any gain
realized on disposition of the Shares will also be treated as long-term capital
gain for federal income tax purposes. If Shares purchased under an ISO are
disposed of within one year after exercise or two years after the Date of Grant,
any gain realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the difference between the
Exercise Price and the lesser of (1) the Fair Market Value of the Shares on the
date of exercise, or (2) the sale price of the Shares. Any additional gain will
be taxed as capital gain, short-term or long-term depending on the period that
the ISO Shares were held.
e. Notice of Disqualifying Disposition of ISO Shares. If the Option
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee and agrees to pay the Company (as a condition to its
permitting the transfer of Optionee's shares) the amount of income and
employment tax required to be withheld by the Company immediately upon such
disqualifying disposition.
9. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of California.
10. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
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<PAGE> 101
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions hereof and thereof.
Optionee has reviewed the Plan and this Option in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option and
fully understands all provisions of the Option Agreement and the 1996 Stock
Plan. Optionee hereby agrees to accept as binding, conclusive and final all
decisions or interpretations of the Administrator upon any questions arising
under the Plan or this Option. Optionee further agrees to notify the Company
upon any change in the residence address indicated below.
<TABLE>
<S> <C>
OPTIONEE: SANCTUARY WOODS MULTIMEDIA
CORPORATION
Signature By
Print Name Title
Residence Address
</TABLE>
4
<PAGE> 102
EXHIBIT A
1996 STOCK PLAN
EXERCISE NOTICE
Sanctuary Woods Multimedia Corporation
1825 South Grant Street
San Mateo, CA 94402
Attention: Chief Executive Officer
1. Exercise of Option. Effective as of today, , 19 , the
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
shares of the Common Stock (the "Shares") of Sanctuary Woods
Multimedia Corporation (the "Company") under and pursuant to the 1996 Stock
Option Plan (the "Plan") and the Stock Option Agreement dated , 19
(the "Option Agreement").
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price of the Shares, as set forth in the Option Agreement, and the
amount of any income and employment taxes required to be withheld by the Company
with respect to such exercise.
3. Representations of Optionee. Optionee acknowledges that Optionee has
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance of the Shares (as evidenced
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 11 of the Plan.
5. Tax Consultation. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
6. Successors and Assigns. The Company may assign any of its rights under
this Agreement to single or multiple assignees, and this Agreement shall inure
to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.
7. Interpretation. Any dispute regarding the interpretation of this
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.
8. Governing Law; Severability. This Agreement is governed by the
internal substantive laws, but not the choice of law rules, of California.
9. Entire Agreement. The Plan and Option Agreement are incorporated
herein by reference. This Agreement, the Plan and the Option Agreement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee.
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<PAGE> 103
<TABLE>
<S> <C>
Submitted by: Accepted by:
OPTIONEE: SANCTUARY WOODS MULTIMEDIA CORPORATION
Signature By
Print Name Its
Address: Address:
Date Received
</TABLE>
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<PAGE> 104
APPENDIX 5
SANCTUARY WOODS MULTIMEDIA CORPORATION
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of , 1997 by
and between Sanctuary Woods Multimedia Corporation, a Delaware corporation (the
"Company"), and 1, ("Indemnitee").
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;
WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;
WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors, officers, employees,
agents and fiduciaries, the significant increases in the cost of such insurance
and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited; and
WHEREAS, the Company and Indemnitee desire to provide indemnification and
advancement of expenses to the Indemnitee to the maximum extent permitted by
Delaware law;
WHEREAS, in view of the considerations set forth above, the Company desires
that Indemnitee shall be indemnified and advanced expenses by the Company as set
forth herein;
NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below.
1. Certain Definitions.
(a) "Change in Control" shall mean, and shall be deemed to have occurred
if, on or after the date of this Agreement, (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended) or group acting in concert, other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company acting in such
capacity or a corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their ownership of stock of
the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing more
than 50% of the total voting power represented by the Company's then outstanding
Voting Securities, (ii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board of Directors of the
Company and any new director whose election by the Board of Directors or
nomination for election by the Company's stockholders was approved by a vote of
at least two thirds ( 2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority thereof, (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation other than a merger or
consolidation which would result in the Voting Securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (iv) the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
related transactions) all or substantially all of the Company's assets.
(b) "Claim" shall mean with respect to a Covered Event: any threatened,
pending or completed action, suit, proceeding or alternative dispute resolution
mechanism, or any hearing, inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other.
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<PAGE> 105
(c) References to the "Company" shall include, in addition to Sanctuary
Woods Multimedia Corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger to which
Sanctuary Woods Multimedia Corporation (or any of its wholly owned subsidiaries)
is a party which, if its separate existence had continued, would have had power
and authority to indemnify its directors, officers, employees, agents or
fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent or fiduciary of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(d) "Covered Event" shall mean any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or fiduciary of
the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other enterprise, or
by reason of any action or inaction on the part of Indemnitee while serving in
such capacity.
(e) "Expenses" shall mean any and all expenses (including attorneys' fees
and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) of any Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement.
(f) "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgement in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.
(g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other Indemnitees under similar
indemnity agreements).
(h) References to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on Indemnitee with
respect to an employee benefit plan; and references to "serving at the request
of the Company" shall include any service as a director, officer, employee,
agent or fiduciary of the Company which imposes duties on, or involves services
by, such director, officer, employee, agent or fiduciary with respect to an
employee benefit plan, its participants or its beneficiaries; and if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan,
Indemnitee shall be deemed to have acted in a manner "not opposed to the best
interests of the Company" as referred to in this Agreement.
(i) "Reviewing Party" shall mean, subject to the provisions of Section
2(d), any person or body appointed by the Board of Directors in accordance with
applicable law to review the Company's obligations hereunder and under
applicable law, which may include a member or members of the Company's Board of
Directors, Independent Legal Counsel or any other person or body not a party to
the particular Claim for which Indemnitee is seeking indemnification.
(j) "Section" refers to a section of this Agreement unless otherwise
indicated.
(k) "Voting Securities" shall mean any securities of the Company that vote
generally in the election of directors.
2. Indemnification.
(a) Indemnification of Expenses. Subject to the provisions of Section 2(b)
below, the Company shall indemnify Indemnitee for Expenses to the fullest extent
permitted by law if Indemnitee was or is or becomes a
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<PAGE> 106
party to or witness or other participant in, or is threatened to be made a party
to or witness or other participant in, any Claim (whether by reason of or
arising in part out of a Covered Event), including all interest, assessments and
other charges paid or payable in connection with or in respect of such Expenses.
(b) Review of Indemnification Obligations. Notwithstanding the foregoing,
in the event any Reviewing Party shall have determined (in a written opinion, in
any case in which Independent Legal Counsel is the Reviewing Party) that
Indemnitee is not entitled to be indemnified hereunder under applicable law, (i)
the Company shall have no further obligation under Section 2(a) to make any
payments to Indemnitee not made prior to such determination by such Reviewing
Party, and (ii) the Company shall be entitled to be reimbursed by Indemnitee
(who hereby agrees to reimburse the Company) for all Expenses theretofore paid
to Indemnitee to which Indemnitee is not entitled hereunder under applicable
law; provided, however, that if Indemnitee has commenced or thereafter commences
legal proceedings in a court of competent jurisdiction to secure a determination
that Indemnitee is entitled to be indemnified hereunder under applicable law,
any determination made by any Reviewing Party that Indemnitee is not entitled to
be indemnified hereunder under applicable law shall not be binding and
Indemnitee shall not be required to reimburse the Company for any Expenses
theretofore paid in indemnifying Indemnitee until a final judicial determination
is made with respect thereto (as to which all rights of appeal therefrom have
been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for
any Expenses shall be unsecured and no interest shall be charged thereon.
(c) Indemnitee Rights on Unfavorable Determination; Binding Effect. If any
Reviewing Party determines that Indemnitee substantively is not entitled to be
indemnified hereunder in whole or in part under applicable law, Indemnitee shall
have the right to commence litigation seeking an initial determination by the
court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 15, the Company hereby consents to service of process
and to appear in any such proceeding. Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.
(d) Selection of Reviewing Party; Change in Control. If there has not been
a Change in Control, any Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), any
Reviewing Party with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnification of Expenses under this Agreement or any
other agreement or under the Company's Certificate of Incorporation or Bylaws as
now or hereafter in effect, or under any other applicable law, if desired by
Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and
approved by the Company (which approval shall not be unreasonably withheld).
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent Indemnitee would be
entitled to be indemnified hereunder under applicable law and the Company agrees
to abide by such opinion. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to indemnify fully such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto. Notwithstanding any other provision of this Agreement, the
Company shall not be required to pay Expenses of more than one Independent Legal
Counsel in connection with all matters concerning a single Indemnitee, and such
Independent Legal Counsel shall be the Independent Legal Counsel for any or all
other Indemnitees unless (i) the employment of separate counsel by one or more
Indemnitees has been previously authorized by the Company in writing, or (ii) an
Indemnitee shall have provided to the Company a written statement that such
Indemnitee has reasonably concluded that there may be a conflict of interest
between such Indemnitee and the other Indemnitees with respect to the matters
arising under this Agreement.
(e) Mandatory Payment of Expenses. Notwithstanding any other provision of
this Agreement other than Section 10 hereof, to the extent that Indemnitee has
been successful on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, in defense of any Claim, Indemnitee
shall be indemnified against all Expenses incurred by Indemnitee in connection
therewith.
3
<PAGE> 107
3. Expense Advances.
(a) Obligation to Make Expense Advances. Upon receipt of a written
undertaking by or on behalf of the Indemnitee to repay such amounts if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
therefor by the Company hereunder under applicable law, the Company shall make
Expense Advances to Indemnitee.
(b) Form of Undertaking. Any obligation to repay any Expense Advances
hereunder pursuant to a written undertaking by the Indemnitee shall be unsecured
and no interest shall be charged thereon.
(c) Determination of Reasonable Expense Advances. The parties agree that
for the purposes of any Expense Advance for which Indemnitee has made written
demand to the Company in accordance with this Agreement, all Expenses included
in such Expense Advance that are certified by affidavit of Indemnitee's counsel
as being reasonable shall be presumed conclusively to be reasonable.
4. Procedures for Indemnification and Expense Advances.
(a) Timing of Payments. All payments of Expenses (including without
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made to the fullest extent permitted by law as soon as
practicable after written demand by Indemnitee therefor is presented to the
Company, but in no event later than thirty (30) business days after such written
demand by Indemnitee is presented to the Company, except in the case of Expense
Advances, which shall be made no later than ten (10) business days after such
written demand by Indemnitee is presented to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
precedent to Indemnitee's right to be indemnified or Indemnitee's right to
receive Expense Advances under this Agreement, give the Company notice in
writing as soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company at the
address shown on the signature page of this Agreement (or such other address as
the Company shall designate in writing to Indemnitee). In addition, Indemnitee
shall give the Company such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.
(c) No Presumptions; Burden of Proof. For purposes of this Agreement, the
termination of any Claim by judgment, order, settlement (whether with or without
court approval) or conviction, or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by this Agreement or applicable
law. In addition, neither the failure of any Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by any
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
this Agreement under applicable law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief. In connection with any
determination by any Reviewing Party or otherwise as to whether the Indemnitee
is entitled to be indemnified hereunder under applicable law, the burden of
proof shall be on the Company to establish that Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the Company of a
notice of a Claim pursuant to Section 4(b) hereof, the Company has liability
insurance in effect which may cover such Claim, the Company shall give prompt
notice of the commencement of such Claim to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such Claim in accordance
with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
hereunder to provide indemnification for or make any Expense Advances with
respect to the Expenses of any Claim, the Company, if
4
<PAGE> 108
appropriate, shall be entitled to assume the defense of such Claim with counsel
approved by Indemnitee (which approval shall not be unreasonably withheld) upon
the delivery to Indemnitee of written notice of the Company's election to do so.
After delivery of such notice, approval of such counsel by Indemnitee and the
retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees or expenses of separate counsel
subsequently retained by or on behalf of Indemnitee with respect to the same
Claim; provided that, (i) In the event of a conflict, Indemnitee shall have the
right to employ Indemnitee's separate counsel in any such Claim at the Company's
expense and (ii) if (A) the employment of separate counsel by Indemnitee has
been previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not
continue to retain such counsel to defend such Claim, then the fees and expenses
of Indemnitee's separate counsel shall be Expenses for which Indemnitee may
receive indemnification or Expense Advances hereunder.
5. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. The Company hereby agrees to indemnify the Indemnitee to the
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 10(a) hereof.
(b) Nonexclusivity. The indemnification and the payment of Expense
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's Certificate of Incorporation, its
Bylaws, any other agreement, any vote of stockholders or disinterested
directors, the General Corporation Law of the State of Delaware, or otherwise.
The indemnification and the payment of Expense Advances provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though subsequent thereto
Indemnitee may have ceased to serve in such capacity.
6. No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's Certificate of
Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder.
7. Partial Indemnification. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.
8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
9. Liability Insurance. To the extent the Company maintains liability
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director
5
<PAGE> 109
of the Company but is an officer; or of the Company's key employees, agents or
fiduciaries, if Indemnitee is not an officer or director but is a key employee,
agent or fiduciary.
10. Exceptions. Notwithstanding any other provision of this Agreement,
the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Action or Omissions. To indemnify or make Expense
Advances to Indemnitee with respect to Claims arising out of acts,
omissions or transactions for which Indemnitee is prohibited from receiving
indemnification under applicable law.
(b) Claims Initiated by Indemnitee. To indemnify or make Expense
Advances to Indemnitee with respect to Claims initiated or brought
voluntarily by Indemnitee and not by way of defense, counterclaim or
crossclaim, except (i) with respect to actions or proceedings brought to
establish or enforce a right to indemnification under this Agreement or any
other agreement or insurance policy or under the Company's Certificate of
Incorporation or Bylaws now or hereafter in effect relating to Claims for
Covered Events, (ii) in specific cases if the Board of Directors has
approved the initiation or bringing of such Claim, or (iii) as otherwise
required under Section 145 of the Delaware General Corporation Law,
regardless of whether Indemnitee ultimately is determined to be entitled to
such indemnification, Expense Advances, or insurance recovery, as the case
may be.
(c) Lack of Good Faith. To indemnify Indemnitee for any Expenses
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that
each of the material assertions made by the Indemnitee as a basis for such
action was not made in good faith or was frivolous, or (ii) by or in the
name of the Company to enforce or interpret this Agreement, if a court
having jurisdiction over such action determines as provided in Section 13
that each of the material defenses asserted by Indemnitee in such action
was made in bad faith or was frivolous.
(d) Claims Under Section 16(b). To indemnify Indemnitee for Expenses
and the payment of profits arising from the purchase and sale by Indemnitee
of securities in violation of Section 16(b) of the Securities Exchange Act
of 1934, as amended, or any similar successor statute.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. This Agreement
shall continue in effect regardless of whether Indemnitee continues to serve as
a director, officer, employee, agent or fiduciary (as applicable) of the Company
or of any other enterprise at the Company's request.
13. Expenses Incurred in Action Relating to Enforcement or
Interpretation. In the event that any action is instituted by Indemnitee under
this Agreement or under any liability insurance policies maintained by the
Company to enforce or interpret any of the terms hereof or thereof, Indemnitee
shall be entitled to be indemnified for all Expenses incurred by Indemnitee with
respect to such action (including without limitation attorneys' fees),
regardless of whether Indemnitee is ultimately successful in such action, unless
as a part of such action a court having jurisdiction over such action makes a
final judicial determination (as to which all rights of appeal therefrom have
been exhausted or lapsed) that each of the material assertions made by
Indemnitee as a basis for such action was not made in good faith or was
frivolous; provided, however, that until such final judicial determination is
made, Indemnitee shall be entitled under Section 3 to receive payment of Expense
Advances hereunder with respect to such action. In the event of an action
instituted by or in the
6
<PAGE> 110
name of the Company under this Agreement to enforce or interpret any of the
terms of this Agreement, Indemnitee shall be entitled to be indemnified for all
Expenses incurred by Indemnitee in defense of such action (including without
limitation costs and expenses incurred with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action a court having jurisdiction over such action makes a final judicial
determination (as to which all rights of appeal therefrom have been exhausted or
lapsed) that each of the material defenses asserted by Indemnitee in such action
was made in bad faith or was frivolous; provided, however, that until such final
judicial determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action.
14. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
15. Notice. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
16. Consent to Jurisdiction. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
17. Severability. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including without limitation each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
18. Choice of Law. This Agreement, and all rights, remedies, liabilities,
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of Delaware as applied to
contracts between Delaware residents entered into and to be performed entirely
in the State of Delaware without regard to principles of conflicts of laws.
19. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
20. Amendment and Termination. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed to be or shall constitute a waiver of any other provisions
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver.
21. Integration and Entire Agreement. This Agreement sets forth the
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
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<PAGE> 111
22. No Construction as Employment Agreement. Nothing contained in this
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.
IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.
SANCTUARY WOODS MULTIMEDIA
CORPORATION
By:
Print Name:
Title:
Address: 1825 South Grant Street
San Mateo, California 94402
AGREED TO AND ACCEPTED
INDEMNITEE:
(signature)
Print Name:
Address:
8
<PAGE> 112
THIS OFFER EXPIRES AT 5:00 P.M. CALIFORNIA TIME, ON APRIL 4, 1997
SANCTUARY WOODS MULTIMEDIA CORPORATION
SUBSCRIPTION RIGHTS FOR COMMON STOCK
THESE SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE
SUBSCRIPTION CERTIFICATE
Dear Shareholder and Debenture Holder
You are entitled to exercise the Rights issued to you as of March 7, 1997,
the Rights Offering Record Date for the Company's Rights Offering to subscribe
for the number of Shares of Common Stock of Sanctuary Woods Multimedia
Corporation ("Shares") shown on this Subscription Certificate pursuant to the
primary subscription upon the terms and conditions specified in the Company's
Prospectus dated March 11, 1997 (the "Prospectus"). The terms and conditions of
the Rights Offering set forth in the Prospectus are incorporated herein by
reference. Capitalized terms not defined herein have the meanings attributed to
them in the Prospectus. In accordance with the Over-Subscription Privilege, as a
Record Date Rights Holder, you are also entitled to subscribe for additional
Shares if Shares remaining after exercise of Rights pursuant to the primary
subscription are available and if you have fully exercised all Rights issued to
you. If sufficient Shares remain after completion of the primary subscription,
all over-subscriptions will be honored in full. If the aggregate number of
Shares requested pursuant to the Over-Subscription Privilege exceeds the number
of additional Shares, the available Shares will be allocated among those who
over-subscribe based on the number of Shares a Rights Holder subscribes for
pursuant to the Over-Subscription Privilege. The Company will not offer or sell
any Shares which are not subscribed for pursuant to the primary subscription or
the Over-Subscription Privilege.
- --------------------------------------------------------------------------------
SAMPLE CALCULATION
FULL PRIMARY SUBSCRIPTION ENTITLEMENT
(ONE SHARE FOR EACH RIGHT)
No. of shares of Common Stock owned on the Record Date
------------------ X 1 =
------------------ Rights
No. of shares of Series A Preferred Stock that a Debenture
Holder is entitled to on the Record Date
------------------ X 441.8 =
------------------ Rights
Total Rights:
------------------
------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY
- --------------------------------------------------------------------------------
SECTION 1: DETAILS OF SUBSCRIPTION
IF YOU WISH TO SUBSCRIBE FOR YOUR FULL ENTITLEMENT:
A: I apply for ALL of my entitlement of new Shares pursuant to the Primary
Subscription
-------------------- X $0.12 = $
--------------------
B: I apply for additional Shares pursuant to the Over-Subscription
Privilege*
-------------------- X $0.12 = $
--------------------
A+B =
------------------ X $0.12 = $
------------------
*You can only over-subscribe if you have fully exercised your primary
subscription rights.
- --------------------------------------------------------------------------------
<PAGE> 113
- --------------------------------------------------------------------------------
IF YOU DO NOT WISH TO APPLY FOR YOUR FULL ENTITLEMENT:
C: I apply for
------------------ x $0.12 = $
------------------
- --------------------------------------------------------------------------------
Control #
--------------------------------------------------------------
Number of Rights Issued:
--------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION 2: TO SUBSCRIBE
I acknowledge that I have received the Prospectus for this Rights Offering
and I hereby irrevocably subscribe for the number of Shares indicated
above either as a total of A and B or as indicated in C, on the terms and
conditions specified in the Prospectus relating to the primary
subscription and the Over-Subscription Privilege.
I hereby agree that if I fail to pay in full for the Shares for which I
have subscribed, the Company may exercise any of the remedies set forth in
the Prospectus.
Signature of subscriber:
Telephone number (including area code) ( )
If you wish to have your shares and refund check (if any) delivered in a
different name or to an address other than that listed on this
Subscription Certificate you must have your signature guaranteed by a
member of the New York Stock Exchange or a bank or trust company. Please
provide the delivery address below and note if it is a permanent change.
- --------------------------------------------------------------------------------
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.6 Letter Agreement between the Registrant and A. Renee Courington dated April 26,
1993, as amended by letter dated July 29, 1994(7)
10.7 Licensing Agreement between the Registrant and Journeyman 2, Inc., dated as of
August 3, 1994 (Portions omitted -- confidential treatment requested)(8)
10.8 Security and Loan Agreement (Portions omitted -- confidential treatment requested),
Addendum to Security and Loan Agreement (Portions omitted -- confidential treatment
requested), General Security Agreement, Continuing Guarantee, between Sanctuary
Woods Multimedia, Inc. and a bank, dated March 10, 1994; Stock Pledge Agreement
between the Registrant and a bank, dated March 10, 1994; Warrant to Purchase Stock
of the Registrant granted to a bank, dated March 10, 1995(9)
10.9 Sub-Lease dated November 23, 1994 between the Registrant and Heublein, Inc., for
premises located at 1825 South Grant Street, San Mateo, California 99402(10)
10.10 Lease Agreement dated April 29, 1993 between the Registrant and Crossroads
Associates, for premises located at 1825 South Grant Street, San Mateo, California
94402, as amended by First Amendment of Lease dated February 22, 1994(11)
10.11 Form of Director Indemnity Agreement(12)
10.12 Form of Purchase Agreement for subscribing to the July 1995 private placement(13)
10.13 Form of Warrant to Purchase Common Stock issued by the Company to the placement
agent for the July 1995 private placement(14)
10.14 Form of 10% Convertible Secured Debenture(15)
10.15 Form of 10% Secured Debenture(16)
10.16 Form of Warrant to Purchase Common Stock(17)
10.17 Security Agreement dated as of February 28, 1996, by and between the Registrant and
the Collateral Agent for Secured Debentures(18)
10.18 Amendment to Loan Agreement between Sanctuary Woods Multimedia, Inc. and a bank,
dated April 2, 1996 and related warrant(19)
10.19 Third Amendment to Loan Agreement between Registrant and a bank dated August 15,
1996 and related warrant(20)
13.1 Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, filed
pursuant to Section 13 of the Exchange Act.
23.1 * Consent of Campney & Murphy (contained in Exhibit 5.1)
23.2 Consent of Chambers, Phillips & Co., Chartered Accountants
23.3 Consent of Deloitte & Touche, Chartered Accountants
23.4 Consent of Deloitte & Touche LLP, Independent Auditors
24.1 * Power of Attorney (see page II-5)
27.1 * Financial Data Schedule
99.1 Sanctuary Woods Multimedia Corporation 1995 Stock Option Plan(21)
</TABLE>
- ---------------
* Previously filed.
(1) Incorporated by reference to Exhibit 4.1 to Registrant's Registration
Statement on Form F-1, filed on November 12, 1993.
(2) Incorporated by reference to Exhibit 2-B to Form 20 F/A.
II-3
<PAGE> 115
(3) Incorporated by reference to Exhibit 3-I to Form 20 F/A.
(4) Incorporated by reference to Exhibit 10.21 to Registrant's Registration
Statement on Form F-1, filed on November 12, 1993.
(5) Incorporated herein by reference to Exhibit 10.22 to Registrant's
Registration Statement on Form F-1, filed on November 12, 1993.
(6) Incorporated by reference to Exhibit 10.32 to Registrant's Report on Form
10-K filed March 31, 1995.
(7) Incorporated by reference to Exhibit 10.33 to Registrant's Report on Form
10-K filed on March 31, 1995.
(8) Incorporated by reference to Exhibit 10.34 to Registrant's Report on Form
10-K filed on March 31, 1995.
(9) Incorporated herein by reference to Exhibit 10.35 Registrant's Report on
Form 10-K filed on March 31, 1995.
(10) Incorporated by reference to Exhibit 10.36 to Registrant's Report on Form
10-K filed on March 31, 1995.
(11) Incorporated by reference to Exhibit 10.37 to Registrant's Report on Form
10-K filed on March 31, 1995
(12) Incorporated by reference to Exhibit 10.38 to Registrant's Report on Form
10-K/A filed October 26, 1995
(13) Incorporated by reference to Exhibit 7.2 to Registrant's Report on Form 8-K
dated February 14, 1995.
(14) Incorporated by reference to Exhibit 7.5 to Registrant's Report on Form 8-K
dated February 14, 1995.
(15) Incorporated by reference to Exhibit 99.2 to Registrant's Report on Form
8-K dated March 8, 1996.
(16) Incorporated by reference to Exhibit 99.3 to Registrant's Report on Form
8-K dated March 8, 1996.
(17) Incorporated by reference to Exhibit 99.4 to Registrant's Report on Form
8-K dated March 8, 1996.
(18) Incorporated by reference to Exhibit 99.5 to Registrant's Report on Form
8-K dated March 8, 1996.
(19) Incorporated by reference to Exhibit 10.18 to Registrant's Report on Form
10-K dated March 31, 1995.
(20) Incorporated by reference from Exhibit 10.20 to Registrant's Report on Form
10-K/A-3 filed January 16, 1997.
(21) Incorporated by reference from Exhibit 99.1 to Registrant's Registration
Statement on Form S-8 filed August 25, 1995.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by final adjudication of
such issue.
II-4
<PAGE> 116
The undersigned registrant hereby undertakes:
(1) To file during any period in which offers or sales are made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or event arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate represent a fundamental change in the information set forth in
the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the bona fide offering thereof.
II-5
<PAGE> 117
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement on Form S-2 to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of San Mateo, California on February 28, 1997.
SANCTUARY WOODS MULTIMEDIA CORPORATION,
By: /s/ CHARLOTTE J. WALKER
------------------------------------------
Charlotte J. Walker
Chairman, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement on Form S-2 has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ----------------------------- -----------------
<C> <S> <C>
/s/ CHARLOTTE J. WALKER Chairman, President and Chief February 28, 1997
- --------------------------------------------- Executive Officer and
Charlotte J. Walker Director (Principal
Executive Officer)
/s/ * PETER C. NICHTER (Principal Financial Officer February 28, 1997
- --------------------------------------------- and Principal Accounting
Peter C. Nichter Officer)
/s/ * N. JOHN CAMPBELL Director February 28, 1997
- ---------------------------------------------
N. John Campbell
/s/ * GRANT N. RUSSELL Director February 28, 1997
- ---------------------------------------------
Grant N. Russell
* By: /s/ CHARLOTTE J. WALKER
- ---------------------------------------------
Charlotte J. Walker
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 118
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ --------------------------------------------------------------------------------------
<C> <S> <C>
1.1 Subscription Rights Agency Agreement......................................
4.1 Specimen Stock Certificate for Registrant's Common Shares(1)..............
5.1 Opinion of Campney & Murphy, Barristers and Solicitors regarding the
legality of securities being registered...................................
10.1 Employee Incentive Share Purchase Option between the Registrant and
Brinton E. Coxe dated as of December 23, 1992(2)..........................
10.2 Offer to Sub-Lease dated as of January 15, 1993 between the Registrant and
T.M. Thomson and Associates, a division of Sandwell Inc., for premises
located at 1006 Government Street, Victoria, British Columbia,
Canada(3).................................................................
10.3 Stock Purchase Agreement between the Registrant, Mind F/X Inc. and the
sole stockholder of Mind F/X Inc. dated as of June 30, 1993(4)............
10.4 License Agreement between the Registrant and Ripley Entertainment, Inc.
dated as of September 7, 1993 (Portions omitted -- confidential treatment
granted)(5)...............................................................
10.5 Letter Agreement between the Registrant and Allen M. Barr dated March 22,
1994, as amended by letter dated July 1, 1994(6)..........................
10.6 Letter Agreement between the Registrant and A. Renee Courington dated
April 26, 1993, as amended by letter dated July 29, 1994(7)...............
10.7 Licensing Agreement between the Registrant and Journeyman 2, Inc., dated
as of August 3, 1994 (Portions omitted -- confidential treatment
requested)(8).............................................................
10.8 Security and Loan Agreement (Portions omitted -- confidential treatment
requested), Addendum to Security and Loan Agreement (Portions omitted --
confidential treatment requested), General Security Agreement, Continuing
Guarantee, between Sanctuary Woods Multimedia, Inc. and a bank, dated
March 10, 1994; Stock Pledge Agreement between the Registrant and a bank,
dated March 10, 1994; Warrant to Purchase Stock of the Registrant granted
to a bank, dated March 10, 1995(9)........................................
10.9 Sub-Lease dated November 23, 1994 between the Registrant and Heublein,
Inc., for premises located at 1825 South Grant Street, San Mateo,
California 99402(10)......................................................
10.10 Lease Agreement dated April 29, 1993 between the Registrant and Crossroads
Associates, for premises located at 1825 South Grant Street, San Mateo,
California 94402, as amended by First Amendment of Lease dated February
22, 1994(11)..............................................................
10.11 Form of Director Indemnity Agreement(12)..................................
10.12 Form of Purchase Agreement for subscribing to the July 1995 private
placement(13).............................................................
10.13 Form of Warrant to Purchase Common Stock issued by the Company to the
placement agent for the July 1995 private placement(14)...................
10.14 Form of 10% Convertible Secured Debenture(15).............................
10.15 Form of 10% Secured Debenture(16).........................................
10.16 Form of Warrant to Purchase Common Stock(17)..............................
10.17 Security Agreement dated as of February 28, 1996, by and between the
Registrant and the Collateral Agent for Secured Debentures(18)............
10.18 Amendment to Loan Agreement between Sanctuary Woods Multimedia, Inc. and a
bank, dated April 2, 1996 and related warrant(19).........................
10.19 Third Amendment to Loan Agreement between Registrant and a bank dated
August 15, 1996 and related warrant(20)...................................
</TABLE>
<PAGE> 119
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ --------------------------------------------------------------------------------------
<C> <S> <C>
13.1 Quarterly Report on Form 10-Q for the quarter ended September 30, 1996,
filed pursuant to Section 13 of the Exchange Act..........................
23.1 Consent of Campney & Murphy (contained in Exhibit 5.1)....................
23.2 Consent of Chambers, Phillips & Co., Chartered Accountants................
23.3 Consent of Deloitte & Touche, Chartered Accountants.......................
23.4 Consent of Deloitte & Touche LLP, Independent Auditors....................
24.1 Power of Attorney (see page II-5).........................................
27.1 Financial Data Schedule...................................................
99.1 Sanctuary Woods Multimedia Corporation 1995 Stock Option Plan(21).........
</TABLE>
- ---------------
(1) Incorporated by reference to Exhibit 4.1 to Registrant's Registration
Statement on Form F-1, filed on November 12, 1993.
(2) Incorporated by reference to Exhibit 2-B to Form 20 F/A.
(3) Incorporated by reference to Exhibit 3-I to Form 20 F/A.
(4) Incorporated by reference to Exhibit 10.21 to Registrant's Registration
Statement on Form F-1, filed on November 12, 1993.
(5) Incorporated herein by reference to Exhibit 10.22 to Registrant's
Registration Statement on Form F-1, filed on November 12, 1993.
(6) Incorporated by reference to Exhibit 10.32 to Registrant's Report on Form
10-K filed March 31, 1995.
(7) Incorporated by reference to Exhibit 10.33 to Registrant's Report on Form
10-K filed on March 31, 1995.
(8) Incorporated by reference to Exhibit 10.34 to Registrant's Report on Form
10-K filed on March 31, 1995.
(9) Incorporated herein by reference to Exhibit 10.35 Registrant's Report on
Form 10-K filed on March 31, 1995.
(10) Incorporated by reference to Exhibit 10.36 to Registrant's Report on Form
10-K filed on March 31, 1995.
(11) Incorporated by reference to Exhibit 10.37 to Registrant's Report on Form
10-K filed on March 31, 1995
(12) Incorporated by reference to Exhibit 10.38 to Registrant's Report on Form
10-K/A filed October 26, 1995
(13) Incorporated by reference to Exhibit 7.2 to Registrant's Report on Form 8-K
dated February 14, 1995.
(14) Incorporated by reference to Exhibit 7.5 to Registrant's Report on Form 8-K
dated February 14, 1995.
(15) Incorporated by reference to Exhibit 99.2 to Registrant's Report on Form
8-K dated March 8, 1996.
(16) Incorporated by reference to Exhibit 99.3 to Registrant's Report on Form
8-K dated March 8, 1996.
(17) Incorporated by reference to Exhibit 99.4 to Registrant's Report on Form
8-K dated March 8, 1996.
(18) Incorporated by reference to Exhibit 99.5 to Registrant's Report on Form
8-K dated March 8, 1996.
(19) Incorporated by reference to Exhibit 10.18 to Registrant's Report on Form
10-K dated March 31, 1995.
(20) Incorporated by reference from Exhibit 10.20 to Registrant's Report on Form
10-K/A-3 filed January 16, 1997.
(21) Incorporated by reference from Exhibit 99.1 to Registrant's Registration
Statement on Form S-8 filed August 25, 1995.
<PAGE> 1
EXHIBIT 1.1
SANCTUARY WOODS MULTIMEDIA CORPORATION, INC.
SUBSCRIPTION RIGHTS AGENCY AGREEMENT
This Subscription Rights Agency Agreement (the "Agreement") is made as of this
24th day of February, 1997, by and between SANCTUARY WOODS MULTIMEDIA
CORPORATION, INC., a British Columbia corporation (the "Company"); and Bank of
Boston, a national banking association, as subscription and distribution agent
("Agent").
WHEREAS, the Company proposes to make a subscription offer by issuing
certificates or other evidences of subscription rights, in the form designated
by the Company (the "Subscription Certificates") to shareholders of record (the
"Shareholders") of its Common Stock, as of a record date specified by the
Company (the "Record Date"), pursuant to which each Shareholder will have
certain rights (the "Rights") to subscribe for shares of Common Stock, as
described in and upon such terms as are set forth in the final prospectus (the
"Prospectus") included in the Form S- 2 Registration Statement originally filed
by the Company with the Securities and Exchange Commission on January 17, 1997,
as amended (as amended, the "Registration Statement"), in accordance with the
applicable requirements of the Securities Act of 1933, as amended (the "Act");
WHEREAS, the Company wishes the Agent to perform certain acts on its behalf and
the Agent is willing to so act, in connection with the distribution of the
Subscription Certificates and the issuance and exercise of the Rights to
subscribe therein set forth, all upon the terms and conditions set forth
herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements
set forth herein, the parties agree as follows:
1. Pursuant to resolution of its Board of Directors, the Company hereby
appoints and authorizes the Agent to act on its behalf in accordance
with the provisions hereof, and the Agent hereby accepts such
appointment and agrees to so act.
2. (a) Each Subscription Certificate shall evidence the Rights of the
Shareholder therein named to purchase Common Stock upon the
terms and conditions therein and herein set forth.
(b) Upon the written advice of the Company signed by its Chairman,
President, Secretary or Assistant Secretary, as to the Record
Date, the Agent shall, from a list of Shareholders as of the
Record Date to be prepared by the transfer agent of the
Company, prepare and record Subscription Certificates in the
names of the Shareholders, setting forth the number of Rights
to subscribe to Common Stock calculated on the basis of one
Right for each share of Common Stock recorded on the books of
the Company in the name of each such Shareholder as of the
Record Date.
<PAGE> 2
3. Rights and Issuance of Subscription Certificates.
(a) Each Subscription Certificate shall be non-transferable and
shall, unless exercised by the holder thereof in the manner
set forth in the Prospectus, expire upon the expiration of the
offer. The Agent shall maintain a register of Subscription
Certificates and the holders of record thereof (each of whom
shall be deemed a "Shareholder" hereunder for purposes of
determining the rights of holders of Subscription
Certificates). Each Subscription Certificate shall, subject
to the provisions thereof, entitle the Shareholder in whose
name it is recorded to the following:
(1) The right (the "Primary Subscription Right") to
purchase a number of shares of Common Stock equal to one share
of Common Stock for every one (1) Right(s); provided, however,
that no fractional shares of Common Stock shall be issued; and
(2) The right (the "Primary Over-Subscription Right") to
purchase additional shares of Common Stock, subject to the
availability of such shares and to allotment of such shares as
may be available among Shareholders who exercise Over-
Subscription Rights on the basis specified in the Prospectus;
provided, however, that a Shareholder who has not exercised
his Primary Subscription Right with respect to the full number
of shares that such Shareholder is entitled to purchase by
virtue of his Primary Subscription Right as of the Expiration
Date (as hereinafter defined), if any, shall not be entitled
to any Over-Subscription Right.
(b) A Shareholder may exercise his Primary Subscription Right and
Over-Subscription Right by delivery to the Agent at its
corporate office specified in the Prospectus of (i) the
Subscription Certificate with respect thereto, duly executed
by such Shareholder in accordance with and as provided by the
terms and conditions of the Subscription Certificate, together
with (ii) the estimated subscription price for each share of
Common Stock subscribed for by exercise of such Rights, in
United States dollars by money order or check drawn on a bank
located in the United States and in each case payable to the
order of Sanctuary Woods Mutlimedia Corporation, Inc.
(c) Rights may be exercised at any time after the date of issuance
of the Subscription Certificates with respect thereto but no
later than 5:00 P.M. New York City time on such date as the
Company shall designate to the Agent in writing (the
"Expiration Date"). For the purpose of determining the time
of the exercise of any Rights, delivery of any material to the
Agent shall be deemed to occur when such materials are
received at the corporate office of the Agent specified in the
Prospectus.
(d) Not withstanding the provisions of Section 3(b) and 3(c) above
regarding delivery of an executed Subscription Certificate to
the Agent prior to 5:00 P.M. New York
<PAGE> 3
City time on the Expiration Date, if prior to such time the
Agent receives a properly completed and executed Notice of
Guaranteed Delivery in the form accompanying the Prospectus by
facsimile or otherwise from a financial institution that is a
member of the Securities Transfer Agents Medallion Program,
the Stock Exchange Medallion Program or the New York Stock
Exchange Medallion Signature Program, guaranteeing delivery of
(i) payment of the full subscription price for shares
purchased and subscribed for by virtue of a Subscription
Certificate, and (ii) a properly completed and executed
Subscription Certificate, then such exercise of Primary
Subscription Rights and Over-Subscription Rights shall be
regarded as timely, subject, however, to receipt of the
duly-executed Subscription Certificate, together will full
payment, by the Agent within three business days after the
Expiration Date.
(e) On a date (the "Confirmation Date") that is no later than
eight business days after the Expiration Date (as defined in
the Prospectus), the Agent shall send a confirmation to each
Shareholder (or, for shares of Common Stock on the Record Date
held by Cede & Co. or any other depository or nominee, to Cede
& Co. or such other depository or nominee), showing (i) the
number of shares acquired pursuant to the Primary Subscription
Rights, (ii) the number of shares, if any, acquired pursuant
to the Over-Subscription Rights, (iii) the per share and total
purchase price for the shares, (iv) any amount payable to the
Shareholder pursuant to Section 8 below, and (v) any
additional amount payable by the Shareholder to the Company or
any excess to be refunded by the Company to the Shareholder,
in each case based on the Subscription Price as determined on
the Expiration Date. Any additional payment required from a
Shareholder must be received by the Agent within ten business
days after the Confirmation Date. Any excess payment to be
refunded by the Company to a Shareholder shall be mailed by
the Agent to the Shareholder as provided in Section 6 below.
4. Pursuant to the terms of the Prospectus, the Company reserves the
right to increase the number of shares of Common Stock subject to
subscription by up to ___% (any such, an Increased Allocation"). The
Agent shall confer with the Company concerning the Company's decision
as to whether or not to undertake an Increased Allocation. If, after
allocation of shares of Common Stock to persons exercising Primary
Subscription Rights, there remain unexercised Rights (taking into
account any Increased Allocation elected by the Company), then the
Agent shall allot the shares issuable upon exercise of such
unexercised Rights (the "Remaining Shares") to persons exercising
Over-Subscription Rights, in the amounts of such over-subscriptions.
If the number of shares for which Over-Subscription Rights have been
exercised is greater than the Remaining Shares, the Agent shall allot
the Remaining Shares to the persons exercising Over-Subscription
Rights pro rata based solely on the number of shares of Common Stock
held on the Record Date.
5. All proceeds from the exercise of Rights shall be held by the Agent in
a segregated, interest-bearing account in the name of the Company.
The Agent shall advise the
<PAGE> 4
Company immediately upon the completion of the allocation set forth
above as to the total number of shares subscribed and distributable.
6. (a) The Agent shall mail to the Shareholders as soon as
practicable after the Confirmation Date and after full payment
for the shares subscribed for has cleared: (i) certificates
representing those shares purchased pursuant to exercise of
Primary Subscription Rights and those shares purchased
pursuant to the exercise of Over-Subscription Rights; and (ii)
in the case of each Shareholder who subscribed and paid for
shares at an estimated subscription price greater than the
actual Subscription Price, a refund in the amount of the
difference between the estimated subscription price and the
actual Subscription Price.
(b) The Agent shall deliver the proceeds of the exercise of Rights
to the Company as promptly as practicable, but in no event
later than 20 business days after the Expiration Date.
7. The Agent shall account promptly to the Company with respect to Rights
exercised and concurrently account for all monies received and
returned by the Agent with respect to the purchase of shares of Common
Stock upon the exercise of Rights.
8. In the event the Agent does not receive, within ten business days
after the Confirmation Date, any amount due from a Shareholder as
specified in Section 3 (e), then it shall take such action with
respect to such Shareholder's Rights as may be instructed in writing
by the Company, including without limitation (i) applying any payment
actually received by it toward the purchase of the greatest whole
number of shares of Common Stock which could be acquired with such
payment, (ii) allocating the shares subject to such Subscription
Rights to one or more other Shareholders, and (iii) selling all or a
portion of the shares of Common Stock deliverable upon exercise of
such Rights on the open market, and applying the proceeds thereof to
the amount owed.
9. No Subscription Certificate shall entitle a Shareholder to vote or
receive dividends or be deemed the holder of shares of Common Stock
for any purpose, nor shall anything contained in any Subscription
Certificate be construed to confer upon any Shareholder any of the
rights of a shareholder of the Company or any right to vote, give or
withhold consent to any action by the Company (whether upon any
recapitalization, issue of stock, reclassification of stock,
consolidation, merger, conveyance or otherwise), receive notice of
meetings of other action affecting shareholders or receive dividends
or otherwise, until the Rights evidenced thereby shall have been
exercised and the shares of Common Stock purchasable upon the exercise
thereof shall have become deliverable as provided in this Agreement
and in the Prospectus.
<PAGE> 5
10. (a) The Company covenants that all shares of Common Stock issued
upon exercise of the Rights will be validly issued, fully
paid, non-assessable and free of preemptive rights.
(b) Upon request, the Company shall furnish to the Agent an
opinion of counsel or other evidence satisfactory to the Agent
to the effect that a registration statement is then in effect
with respect to its shares of Common Stock issuable upon
exercise of the Rights set forth in the Subscription Rights.
Upon written advice to the Agent that the Securities and
Exchange Commission shall have issued or threatened to have
issued any order preventing or suspending the use of the
Prospectus, or if for any reason it shall be necessary to
amend or supplement the Prospectus in order to comply with the
Act, the Agent shall cease acting hereunder until receipt of
written instructions from the Company and such assurances as
it may reasonably request that it may comply with such
instruction without violations of the Act.
11. (a) Any corporation into which the Agent may be merged or
converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or
consolidation to which the Agent shall be a party, or any
corporation succeeding to the corporate trust business of the
Agent, shall be the successor to the Agent hereunder without
the execution or filing of any document by any of the parties
hereto, provided that such corporation would be eligible for
appointment as a successor to the Agent. In case at the time
such successor to the Agent shall succeed to the agency
created by this Agreement, any of the Subscription
Certificates shall have been countersigned but not delivered,
any such successor to the Agent may adopt the countersignature
of the Agent and deliver such Subscription Certificates as
countersigned, and in case at that time any of the
Subscription Certificates shall not have been countersigned,
the successor to the Agent may countersign such Subscription
Certificates either in the name of the Agent or in the name of
the successor Agent, and in all such cases such Subscription
Certificates shall have the full force and legal effect
provided in the Subscription Certificates and in this
Agreement.
(b) If, at any time, the name of the Agent shall be changed and at
such time any of the Subscription Certificates shall have been
countersigned but not delivered, the Agent may adopt the
countersignature under its prior name and deliver Subscription
Certificates so countersigned, and in case at that time any of
the Subscription Certificates shall not have been
countersigned, the Agent may countersign such Subscription
Certificates either in its prior name or in its changed name,
and in all such cases such Subscription Certificates shall
have the full force provided in the Subscription Certificates
and in this Agreement.
<PAGE> 6
12. The Company agrees to pay to the Agent at the completion of the
offering, on demand of the Agent, reasonable compensation for all
services rendered by it hereunder and also its reasonable
out-of-pocket expenses and other disbursements incurred in the
administration and execution of this Agreement and the exercise and
performance of its duties hereunder as provided for in Appendix A
attached hereto.
13. The Agent undertakes the duties and obligations imposed by this
Agreement upon the following terms and conditions:
(a) Whenever in the performance of its duties under this Agreement
the Agent shall deem it necessary or desirable that any fact
or matter be proved or established, prior to taking or
suffering any action hereunder, such fact or matter (unless
prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the
Board or President or a Vice President or the Secretary or
Assistant Secretary or the Treasurer of the Company delivered
to the Agent, and such certificate shall be full authorization
to the Agent for any action taken or suffered in good faith by
it under the provisions of this Agreement in reliance upon
such certificate.
(b) The Agent shall not be responsible for and the Company shall
indemnify and hold the Agent harmless from and against, any
and all losses, damages, costs, charges, counsel fees,
payments, expenses and liability arising out of or
attributable to all actions of the Agent or its agents or
subcontractors required to be taken pursuant to this
Agreement, provided that such actions are taken in good faith
and without negligence or willful misconduct.
(c) The Agent shall be liable hereunder only for its own
negligence or misconduct, and for the negligence or misconduct
of its agents or subcontractors.
(d) Nothing herein shall preclude the Agent from acting in any
other capacity for the Company or for any other legal entity;
(e) The Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties
hereunder from any officer or assistant officer of the Company
and to apply to any such officer or assistant officer of the
Company for advice or instructions in connection with its
duties, and shall be indemnified and not be liable for any
action taken or suffered by it in good faith in accordance
with instructions of any officer or assistant officer of the
Company; and
(f) The Agent shall be indemnified and shall incur no liability for
or in respect of any
<PAGE> 7
action taken, suffered, or omitted by it in reliance upon any
Subscription Certificate or Certificate for Common Stock,
instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent,
certificate, statement or other paper or document that it
reasonably believes to be genuine and to be signed, executed
and, where necessary, verified or acknowledged, by the proper
person or persons.
14. The Agent may, without the consent or concurrence of the Shareholders
in whose names Subscription Certificates are registered, by
supplemental agreement or otherwise, concur with the Company in making
any changes or corrections in a Subscription Certificate that it shall
have been advised by counsel (who may be counsel for the Company) is
appropriate to cure any ambiguity or to correct any defective or
inconsistent provision or clerical omission or mistake or manifest
error therein or herein contained, and which shall not be inconsistent
with the provisions of the Subscription Certificate or the Prospectus
except insofar as any such change may confer additional rights upon
the Shareholders.
15. All the covenants and provisions of this Agreement by or for the
benefit of the Company or the Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
16. The validity, interpretation and performance of this Agreement shall
be governed by the law of the Commonwealth of Massachusetts.
BANK OF BOSTON SANCTUARY WOODS MULTIMEDIA
CORPORATION, INC.,
_________________________ ____________________________
Signature Signature
_________________________ ____________________________
Title Title
<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-21510
SANCTUARY WOODS MULTIMEDIA CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
BRITISH COLUMBIA, CANADA 75-2444109
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1825 SOUTH GRANT STREET
SAN MATEO, CALIFORNIA 94402
(Address of principal executive offices) (Zip Code)
</TABLE>
(415) 286-6000
(Registrant's telephone number, including area code)
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 [ ]
The number of Common Shares of the registrant outstanding as of February
12, 1997 was 23,241,164.*
Except where the context otherwise requires, as used herein, the term
"Company" means Sanctuary Woods Multimedia Corporation and its subsidiaries.
- ---------------
* Does not include 4,000,000 voting Performance Shares which are held in escrow.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I -- FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1 -- Condensed Consolidated Financial Statements (unaudited)
Condensed consolidated balance sheets -- December 31, 1996 and March 31, 1996...... 3
Condensed consolidated statements of operations -- three months ended December 31,
1996 and 1995..................................................................... 4
Condensed consolidated statements of operations -- nine months ended December 31,
1996 and 1995..................................................................... 5
Condensed consolidated statements of cash flows -- nine months ended December 31,
1996 and 1995..................................................................... 6
Notes to condensed consolidated financial statements............................... 7
Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 11
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 22
Item 2. Changes in Securities......................................................... 22
Item 4. Submission of Matters to a Vote of Securities Holders......................... 22
Item 6. Exhibits and Reports on Form 8-K.............................................. 23
Signatures............................................................................ 24
</TABLE>
FORWARD-LOOKING STATEMENTS
The following description of the Company's business in this Report contains
forward looking statements within the meaning of section 27A of the Securities
Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those projected.
2
<PAGE> 3
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.......................................................... $ 1,053,133 $ 8,455
Accounts receivable........................................... 803,724 800,701
Inventories................................................... 884,615 1,384,840
Prepaid royalties............................................. 83,941 127,000
Prepaid expenses.............................................. 425,628 294,203
------------- -------------
Total current assets.................................. 3,251,041 2,615,199
PROPERTY AND EQUIPMENT.......................................... 600,546 1,834,266
DEFERRED ROYALTIES & OTHER ASSETS............................... 299,807 144,396
------------- -------------
TOTAL ASSETS.................................................... $ 4,151,394 $ 4,593,861
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank debt..................................................... $ 155,135 $ 2,226,781
Notes payable................................................. 1,563,666
Accounts payable.............................................. 999,260 3,087,886
Accrued expenses.............................................. 752,267 1,395,359
Royalty obligations........................................... 307,043 611,905
Current portion of capital lease obligations.................. 20,289 28,715
------------- -------------
Total current liabilities............................. 2,233,994 8,914,312
8% CONVERTIBLE DEBENTURES DUE 1999.............................. 5,302,000
LONG-TERM ROYALTY OBLIGATIONS................................... 114,000 534,000
CAPITAL LEASE OBLIGATIONS....................................... 13,781
------------- -------------
Total liabilities..................................... 7,649,994 9,462,093
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Authorized, 100,000,000 common shares, no par value; issued
and outstanding, 27,241,164 shares at December 31, 1996 and
22,158,580 shares at March 31, 1996........................ 34,742,521 31,763,839
Accumulated deficit........................................... (37,489,250) (35,874,113)
Accumulated translation adjustments........................... (751,871) (757,958)
------------- -------------
Total stockholders' equity (deficit).................. (3,498,600) (4,868,232)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT).......... $ 4,151,394 $ 4,593,861
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
SALES:
Consumer titles................................................ $ 808,882 $ (2,362,010)
Licensing revenue.............................................. 392,900 404,557
Publisher services............................................. 22,500
----------- ------------
Total sales -- net..................................... 1,201,782 (1,934,953)
----------- ------------
COST OF SALES:
Consumer titles................................................ 311,875 6,228,199
Technology amortization........................................ 96,783
Publisher services............................................. 205,449
----------- ------------
Total cost of sales.................................... 311,875 6,530,431
----------- ------------
GROSS MARGIN..................................................... 889,907 (8,465,384)
----------- ------------
OPERATING EXPENSES:
Research and development....................................... 404,461 1,276,386
Marketing and sales............................................ 980,305 2,429,858
Administration................................................. 743,255 955,067
Depreciation................................................... 76,512 315,506
----------- ------------
Total operating expenses............................... 2,204,533 4,976,817
----------- ------------
OPERATING LOSS................................................... (1,314,626) (13,442,201)
----------- ------------
OTHER INCOME (EXPENSE)
Foreign exchange loss.......................................... (1,234) 2,450
Interest expense -- net........................................ (148,266) (4,208)
Net loss on sale and disposal of assets........................ (47,997)
Other income (expense)......................................... (25,734) 3,456
----------- ------------
Total other income (expense)........................... (223,231) 1,698
----------- ------------
NET LOSS......................................................... $(1,537,857) $(13,440,503)
=========== ============
PRIMARY AND FULLY DILUTED NET LOSS PER SHARE..................... $ (0.07) $ (0.74)
SHARES USED IN COMPUTATION....................................... 23,241,164 18,123,179
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
SALES:
Consumer titles.................................................. $ 2,337,333 $ 7,800,636
Licensing revenue................................................ 1,960,790 1,308,792
Publisher services............................................... 366,554
----------- ------------
Total sales.............................................. 4,298,123 9,475,982
----------- ------------
COST OF SALES:
Consumer titles.................................................. 1,239,608 10,911,894
Technology amortization.......................................... 451,997
Publisher services............................................... 484,763
----------- ------------
Total cost of sales...................................... 1,239,608 11,848,654
----------- ------------
GROSS MARGIN....................................................... 3,058,515 (2,372,672)
----------- ------------
OPERATING EXPENSES:
Research and development......................................... 1,113,824 3,487,629
Marketing and sales.............................................. 2,234,805 6,525,990
Administration................................................... 1,721,586 2,758,873
Depreciation..................................................... 288,429 640,762
----------- ------------
Total operating expenses................................. 5,358,644 13,413,254
----------- ------------
OPERATING LOSS..................................................... (2,300,129) (15,785,926)
----------- ------------
OTHER INCOME (EXPENSE)
Foreign exchange gain (loss)..................................... (4,503) 6,526
Interest expense-net............................................. (263,013) (37,192)
Net gain on sale and disposal of assets.......................... 827,164 203
Other income..................................................... 125,344 14,940
----------- ------------
Total other income (expense)............................. 684,992 (15,523)
----------- ------------
NET LOSS........................................................... $(1,615,137) $(15,801,449)
=========== ============
PRIMARY AND FULLY DILUTED NET LOSS PER SHARE....................... $ (0.07) $ (0.92)
SHARES USED IN COMPUTATION......................................... 21,925,843 17,240,435
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................... $(1,615,137) $(15,801,449)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 292,300 1,352,930
Stock option and warrant compensation............................ 110,445 132,543
Sale of intellectual property rights in consideration for a
reduction in royalty obligations.............................. (429,688)
Net gain on sale and disposal of assets............................ (827,164)
Changes in assets and liabilities:
Accounts receivable........................................... (3,023) 590,729
Inventories................................................... 500,225 (1,196,885)
Prepaid royalties, expenses and other......................... (183,186) 3,042,108
Accounts payable and accrued expenses......................... (2,652,877) 2,698,467
----------- ------------
Net cash used in operating activities.................... (4,808,105) (9,181,557)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets..................................... 1,919,500
Purchase of property and equipment............................... (30,951) (686,160)
----------- ------------
Net cash provided (used) in investing activities......... 1,888,549 (686,160)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants............................... 750,000
Issuance of convertible debentures............................... 5,302,000
Issuance of common stock net of issue costs...................... 8,011,284
Net borrowings (payments) on bank debt........................... (2,071,646) 1,600,000
Payments on long-term debt....................................... (22,207)
----------- ------------
Net cash provided in financing activities................ 3,958,147 9,611,284
----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................ 6,087 (635)
----------- ------------
NET INCREASE IN CASH............................................... 1,044,678 (257,068)
CASH, BEGINNING OF PERIOD.......................................... 8,455 268,552
----------- ------------
CASH, END OF PERIOD................................................ $ 1,053,133 $ 11,484
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest...................................................... $ 85,955 $ 73,972
Income taxes.................................................. 800 1,600
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING
INFORMATION:
Conversion of notes payable into common stock.................... $ 1,563,666
Sale of intellectual property rights and issuance of common stock
for a reduction in royalty obligations........................ 550,000
Conversion of account payable into common stock.................. 195,000
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND CHANGE IN FISCAL YEAR-END
Sanctuary Woods Multimedia Corporation and its subsidiaries (the "Company")
develop, market and distribute interactive multimedia software products
("consumer titles") targeted at the children's education market. Products are
sold primarily through distributors into retail outlets. Sales are also made
directly to schools, hardware manufacturers and bundlers (OEM), and to
international distributors. Revenue is also generated from licensing and other
activities related to the Company's products and intellectual properties. Prior
to 1996, the Company published interactive entertainment products and provided
interactive multimedia services to trade and textbook publishers.
In 1996, the Board of Directors determined that it would be in the best
interests of the Company and its shareholders to change the Company's reporting
and tax fiscal year end to March 31 from December 31. The change was effected
April 1, 1996. Accordingly, the accompanying condensed consolidated financial
statements include the three and nine month periods ended December 31, 1996 and
1995.
The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with U.S. generally accepted accounting principles
("GAAP") for interim financial statements and include all adjustments which, in
the opinion of management, are necessary for a fair statement of the
consolidated financial position, results of operations and cash flows as of and
for the interim periods. Such adjustments consist of items of a normal recurring
nature except as described herein. The unaudited condensed consolidated
financial statements included herein should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1995 on
Form 10-K/A-3 as filed January 16, 1997.
2. HISTORICAL OPERATING LOSSES AND CERTAIN MANAGEMENT ACTIONS
The net loss for the nine months ended December 31, 1996 was $1,615,137
compared to a net loss of $15,801,449 for the nine months ended December 31,
1995. The net loss from operations for the nine months ended December 31, 1996
totalled $2,300,129 compared to a net operating loss of $15,785,926 for the same
period one year ago. Net cash used by operating activities was $4,808,105 for
the nine months ended December 31, 1996 compared to $9,181,557 for the same
period one year ago. At February 12, 1997 the Company had $925,000 in cash and
bank borrowings totalling $174,000.
A number of factors contributed to the Company's net loss in the three
months ended December 31, 1995. Sales of the Company's products in the December
1995 quarter were significantly below expectations and the Company experienced
significantly higher than expected returns. In light of the continued
competitive pressures in the marketplace, inventory levels in the retail
channel, the introduction of competitive products, downward pricing pressures
and the focusing of the Company's operations and cash resources on products
targeted at the children's education markets in the December 1995 quarter, the
Company accelerated write-offs of certain prepaid and deferred royalties and
made additional provisions for returns, price protection and inventory
obsolescence as follows:
<TABLE>
<S> <C>
Estimated sales returns and price protection............ $ 5,475,002
Write-offs of unrecoverable prepaid and deferred
royalties............................................. 4,260,532
Provision for inventory obsolescence.................... 1,033,389
Write-offs of licenses and other intangibles............ 235,000
-----------
Total......................................... $11,003,923
===========
</TABLE>
7
<PAGE> 8
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 - 1997 Management Actions
During 1996 and early 1997, the Company instituted measures to improve
operations and cash flows. Specific items accomplished through February 12, 1997
included the following:
- Appointment of a new Chairman, President and Chief Executive Officer,
Vice President of Marketing, and a Controller.
- Reduction of head count from 148 employees at December 31, 1995 to 32 at
February 12, 1997 and elimination of many part-time, temporary and
contract positions.
- Ceasing publication of new entertainment titles.
- Closure of the Publisher Services Division.
- Sale of substantially all of the fixed assets of the Entertainment
Division. This included the sale of a studio in Victoria, British
Columbia during May 1996 for $1,900,000, of which $500,000 was used to
reduce bank borrowings. The gain on the sale of the studio, included in
other income for the nine month period ended December 31, 1996, totaled
$897,260.
- Reduction by $2,398,000 of the outstanding borrowings under the bank line
of credit from its January 1996 peak level of $2,572,000 to $174,000 at
February 12, 1997.
- A 10% reduction in senior management salaries.
- Termination of all software development projects through outside
developers.
- The hiring of Strategic Marketing Partners to represent the Company's
product line in the retail distribution channel.
- Sale in June 1996 of certain entertainment product rights to one of its
licensors in consideration for a $429,688 reduction in royalty
obligations. Such sale was included as licensing revenue in the nine
month period ended December 31, 1996. The transaction also encompassed
the issuance of 175,000 shares of the Company's common stock in
consideration of an additional $120,000 reduction in royalty obligations.
- Sale of other entertainment product rights (included in licensing
revenue) for $150,000 in the nine month period ended December 31, 1996.
- Closure of the Company's office in Toronto, Ontario in January 1997.
Bank Line of Credit
The Company has a revolving bank line of credit which expires April 3, 1997
and provides for working capital borrowings not to exceed $750,000. Borrowings
under the line of credit are limited to 65% of eligible trade accounts
receivable. Interest is payable based on the bank's prime rate plus 2.50% (4% if
the Company is out of compliance with its borrowing base) and was 10.75% at
December 31, 1996.
The credit agreement contains restrictions on the Company's ability to
incur or guarantee indebtedness, enter into mergers or acquisitions, pay
dividends or lease property. The agreement also requires the Company to maintain
minimum levels of profitability and tangible net worth and to maintain certain
defined ratios of cash flow, liquidity and leverage and limit capital
expenditures. Amounts outstanding under the revolving credit agreement are
secured by substantially all of the Company's assets.
As a result of significant losses, the Company was in violation of certain
covenants of its bank line of credit at December 31, 1995 and thereafter. In
addition, the Company had borrowed in excess of the amounts
8
<PAGE> 9
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
then allowed under the credit agreement. As of August 15, 1996, the credit
agreement was amended to waive all previous covenant violations and to provide
the revolving credit described above.
In connection with two 1996 amendments to the bank credit agreement, the
Company issued the Bank warrants to purchase 400,000 shares (subject to
adjustment to not more than 600,000 shares in certain events) of common stock at
prices from $.50 to $.5625 per share.
For the quarter ended December 31, 1996, the Company did not to comply with
the earnings covenant set forth in the bank agreement. In January 1997 the bank
informed the Company that it would not enforce its default rights under the
agreement at this time and that it has elected not to renew the line of credit
when it matures April 3, 1997.
September 1996 Convertible Subordinated Debenture Issue
In September 1996, the Company privately placed for cash $5,302,000 in 8%
convertible debentures due July 31, 1999. A substantial portion of the proceeds
were used to repay bank and trade indebtedness. Interest is payable annually in
arrears and is to be paid only in shares of the Company's common stock valued at
a price equal to the average closing price for the ten trading days prior to the
date of payment. Interest will continue to accrue until the debentures are paid
or converted.
The debentures are convertible into shares of the Company's common stock at
the rate of one share for each $.55 of principal (9,640,000 shares) plus accrued
interest (subject to substantial adjustment in certain events -- see below). The
debentures are automatically convertible on July 31, 1999 or upon occurrence of
either of the following events: (a) the Company's obtaining any equity financing
in an amount not less than $2,000,000 at prices not less than $1.00 per share or
(b) the common stock of the Company having closed trading at a price of $1.375
or more per share for any 21 trading days in any consecutive 40 day trading
period. From April 1, 1997 to July 31, 1999 the debentures are convertible at
the option of the holder. The debentures are subordinate to senior debt and to
the security interest of the Company's bank. The Company may prepay the
debentures at any time without penalty.
The Company issued to each purchaser of the debentures a warrant to
purchase one share of common stock for each $2.00 invested or 2,651,000 shares
in total. Each warrant may be exercised at a price of $.6875 per share until
September 1999. The number of shares issuable upon exercise of these warrants
and the exercise price thereof are subject to substantial adjustments in certain
events -- see below. Pursuant to the warrant issue, the Company incurred a
deferred charge totaling $265,100 with an offsetting increase to paid-in
capital. The deferred charge is being expensed ratably over the life of the
warrants.
In December 1996, the Company agreed in principle, and subject to required
approvals, to exchange $550,000 principal amount of 8% convertible debentures
for shares of Series A Convertible Preferred Stock on terms to be negotiated.
The holders of stock issued upon conversion of debentures or Series A
Preferred Stock or exercise of warrants have certain rights to have these shares
registered.
* * * *
At February 12, 1997 the Company had cash of $925,000 and bank borrowings
of $174,000. The Company intends to raise funds through a rights offering (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments") and has filed a registration statement with
the Securities and Exchange Commission. The purpose of the rights offering is to
raise necessary working capital for the Company. In the event the rights
offering is delayed, the Company believes it has the ability to raise additional
capital on a near term basis from both existing shareholders and other sources.
In the event of a rights offering management believes that the Company's
existing cash resources, cash flows from operations and additional proceeds from
debt or equity financing or exercise of outstanding
9
<PAGE> 10
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
warrants, will enable the Company to repay the bank on April 3, 1997 and meet
its financial obligations and conduct its operations through September 30, 1997.
There can be no assurance that any intended rights offering will be conducted or
if conducted, be successful. If the rights offering is not conducted or is
unsuccessful, there can be no assurance that the Company will be able to raise
working capital from other sources. Failure to do so will have a material
adverse effect on the Company's financial condition and results of operations.
3. ACCOUNTS RECEIVABLE
The Company allows customers to exchange and/or return products. In order
to promote sell-through and limit product returns, the Company also provides
"price protection" on slow moving products. In addition, the Company's products
are sold with a ninety-day warranty against defects. The Company has recorded
reserves for sales returns and allowances and price protection based on
historical experience and management's current estimates of potential returns
and necessary price protection.
Accounts receivable consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ -----------
<S> <C> <C>
Accounts receivable -- trade.................... $ 1,928,412 $ 4,814,104
Less allowances for:
Doubtful accounts............................. (75,000) (207,352)
Sales returns and allowances.................. (1,049,688) (3,806,051)
----------- -----------
Accounts receivable -- net...................... $ 803,724 $ 800,701
=========== ===========
</TABLE>
4. INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ -----------
<S> <C> <C>
Finished goods...................................... $ 974,301 $ 1,967,558
Raw materials....................................... 614,327 866,957
---------- -----------
1,588,628 2,834,515
Less allowance for obsolete, slow-moving and
non-salable inventory............................. (704,013) (1,449,675)
---------- -----------
Inventories -- net.................................. $ 884,615 $ 1,384,840
========== ===========
</TABLE>
5. COMMON STOCK OPTIONS AND WARRANTS
At February 12, 1997 there were outstanding options to purchase 1,567,750
shares of common stock at $0.50 to $5.75 per share and warrants to purchase
4,931,000 shares of common stock at $0.50 to $0.875 per share (See note 2).
6. PERFORMANCE SHARES
In October 1991, in connection with the sale of 1,800,000 common shares to
the Company's founders and principal stockholders, the Company issued 4,000,000
common "performance" shares (the "Performance Shares") at CDN $0.01 per share to
certain of these individuals. These Performance Shares were issued pursuant to
Local Policy #3-07 of the British Columbia Securities Commission ("BCSC") and
Policy 19 of the Vancouver Stock Exchange, which provide the guidelines for the
issuance of performance shares. In July 1996, a total of 1,200,000 of these
shares were sold and transferred to certain members of current and former
management at their then estimated fair market value of $.03 per share.
10
<PAGE> 11
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Performance Shares are held in escrow to be released as the Company
achieves positive operating cash flow on an annual basis as defined by the BCSC
("BCSC Operating Cash Flow"). The holders of Performance Shares will be entitled
to a pro rata release from escrow on the basis of one share for every CDN $0.653
of annual positive BCSC Operating Cash Flow, subject to approval by the BCSC and
the Vancouver Stock Exchange. Performance Shares are permitted to be released
from escrow on an annual basis, and all of the Performance Shares will be
released once CDN $2,612,000 of annual positive BCSC Operating Cash Flow has
been generated by the Company.
At the time when BCSC Operating Cash Flow justifying release of the
Performance Shares, or a pro rata portion thereof, is probable, the Company will
record as compensation expense an amount equal to the difference between the CDN
$0.01 per share originally paid for the Performance Shares then issuable and the
market price of its common stock at that time. Such a pro rata or full expense
recognition will occur prior to the pro rata or full release from escrow of the
Performance Shares. If and when such expense recognition criteria becomes
probable, based on the closing price of the Company's common stock on the
Vancouver Stock exchange at February 12, 1997, of approximately US$.17 per share
(for example purposes only), the aggregate compensation expense that would be
recognized as a result of earning of all the performance shares would be
approximately $640,000. Any compensation expense recognized related to the
Performance Shares will be a noncash charge and will have no net impact on total
stockholders' equity (deficit).
The Company may pursue an early release of all or a large portion of the
Performance Shares. Such an early release from escrow would reduce a source of
continuing uncertainty surrounding the Company's consolidated financial
statements, but could also result in compensation expense in the quarter in
which the release is made.
If and when the Performance Shares are earned, the number of shares used to
calculate primary net income (loss) per share will increase by the number of
Performance Shares earned. Through February 12, 1997, no Performance Shares have
been earned or released.
The Company is negotiating in principle with holders of these performance
shares to exchange these shares for common stock or warrants or a combination of
both. The transaction is subject to approval by the Vancouver Stock Exchange.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
Item 1 of this Quarterly Report, the audited consolidated financial statements
and notes thereto included in the Company's report on Form 10-K/A-3 as filed on
January 16, 1997 and Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the Company's Forms 10-Q for the three
month periods ended March 31, June 30, 1996 and September 30, 1996 as filed with
the Securities and Exchange Commission.
The following description of the Company's business in this Item and other
Items in this Report contains forward looking statements within the meaning of
section 27A of the Securities Act of 1933, as amended, and section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected as a result of the risk factors discussed herein
and elsewhere in the Company's reports on Form 10-K/A-3 for the year ended
December 31, 1995 and on Form 10-Q for the three month periods ended March 31,
1996, June 30, 1996 and September 30, 1996 and in the financial statements and
notes thereto in the Company's Report on Form 8-K dated October 30, 1996.
Recent Developments
The Company presently intends to issue to its non-Canadian holders of its
Common Stock and 8% Convertible Debentures due 1999 rights ("Rights") to
subscribe for more than 50,000,000 shares of
11
<PAGE> 12
Common Stock. The preliminary terms of this Rights offering are more
particularly described in a registration statement filed on Form S-2 with the
Securities and Exchange Commission (the "Commission") and are subject to change.
The Company will not offer the Rights until the registration statement is
declared effective by the Commission. The Company will reserve the right to not
conduct the Rights offering even if the registration statement is declared
effective.
In addition, the Company plans to change its jurisdiction of incorporation
from British Columbia, Canada to Delaware, U.S.A. and, in connection therewith,
plans to effect a consolidation of its shares. The Company intends to hold a
special meeting of shareholders to vote upon these and certain other matters.
The Company has filed with the Commission a preliminary proxy statement and
registration statement on Form S-4 with respect to these matters. No
solicitation of shareholder votes by the Company will occur with respect to
these matters until the Company files definitive proxy materials with the
Commission and the Commission declares the registration statement effective. The
Company may determine not to seek shareholder approval of these matters at any
time based upon market and business conditions.
Overview
In 1996, the Company changed its fiscal year to end March 31.
Throughout 1995, the Company generated a major portion of its revenue from
the sale of products for the home entertainment market. Due to the poor sell
through of these titles, and the resulting operating losses and cash constraints
experienced by the Company, management decided in 1996 to discontinue the
manufacture and promotion of entertainment titles and focus its efforts solely
on developing and publishing children's curriculum-based educational software
products.
A number of factors contributed to the Company's net loss in the three
months ended December 31, 1995. Sales of the Company's products in the December
1995 quarter were significantly below expectations and the Company experienced
significantly higher than expected returns. In light of the continued
competitive pressures in the marketplace, inventory levels in the retail
channel, the introduction of competitive products, downward pricing pressures
and the focusing of the Company's operations and cash resources on products
targeted at the children's education markets in the December 1995 quarter, the
Company accelerated write-offs of certain prepaid and deferred royalties and
made additional provisions for returns, price protection and inventory
obsolescence as follows:
<TABLE>
<S> <C>
Estimated sales returns and price protection............ $ 5,475,002
Write-offs of unrecoverable prepaid and deferred
royalties............................................. 4,260,532
Provision for inventory obsolescence.................... 1,033,389
Write-offs of licenses and other intangibles............ 235,000
-----------
Total......................................... $11,003,923
===========
</TABLE>
For most of the first nine months of calendar 1996, the Company lacked
sufficient operating scale and capital resources to adequately fund sales,
marketing and other operational activities. The Company estimates that lower
than satisfactory sales volume for the nine month period ended December 31, 1996
was at least partially due to the lack of resources needed to market and promote
its titles.
The net loss for the nine months ended December 31, 1996 was $1,615,137
compared to a net loss of $15,801,449 for the nine months ended December 31,
1995. The net loss from operations for the nine months ended December 31, 1996
totaled $2,300,129 compared to a net operating loss of $15,785,926 for the same
period one year ago. Net cash used by operating activities was $4,808,105 for
the nine months ended December 31, 1996 compared to $9,181,557 for the same
period one year ago. The net loss for the three and nine month periods ended
December 31, 1995 was primarily due to charges totaling over $11,000,000 related
to sales returns and markdowns, royalties, inventory obsolescence and other
write-offs (see above).
At February 12, 1997 the Company had $925,000 in cash and bank borrowings
totaling $174,000.
12
<PAGE> 13
1996-1997 Management Actions
During 1996 and early 1997, the Company instituted measures to improve
operations and cash flows. Specific items accomplished through February 12, 1997
included the following:
- Appointment of a new Chairman, President and Chief Executive Officer,
Vice President of Marketing, and a Controller.
- Reduction of head count from 148 employees at December 31, 1995 to 32 at
February 12, 1997 and elimination of many part-time, temporary and
contract positions.
- Ceasing publication of new entertainment titles.
- Closure of the Publisher Services Division.
- Sale of substantially all of the fixed assets of the Entertainment
Division. This included the sale of a studio in Victoria, British
Columbia during May 1996 for $1,900,000, of which $500,000 was used to
reduce bank borrowings. The gain on the sale of the studio, included in
other income for the nine month period ended December 31, 1996, totaled
$897,260.
- Reduction by $2,398,000 of the outstanding borrowings under the bank line
of credit from its January 1996 peak level of $2,572,000 to $174,000 at
February 12, 1997.
- A 10% reduction in senior management salaries.
- Termination of all software development projects through outside
developers.
- The hiring of Strategic Marketing Partners to represent the Company's
product line in the retail distribution channel.
- Sale in June 1996 of certain entertainment product rights to one of its
licensors in consideration for a $429,688 reduction in royalty
obligations. Such sale was included as licensing revenue in the nine
month period ended December 31, 1996. The transaction also encompassed
the issuance of 175,000 shares of the Company's common stock in
consideration of an additional $120,000 reduction in royalty obligations.
- Sale of other entertainment product rights (included in licensing
revenue) for $150,000 in the nine month period ended December 31, 1996.
- Closure of the Company's office in Toronto, Ontario in January 1997.
In addition, under the direction of its new management, the Company has now
focused on the development and publishing of its children's curriculum-based
educational software products. From the beginning of the current fiscal year
(April 1, 1996) through February 3, 1997, the Company has completed the
development of seven new or revised products: Major League Math(TM), Franklin
Learns Math(TM), How Do You Spell Adventure?(TM), Orion Burger(TM), NFL(TM)
Math, NFL(TM) Reading and Franklin's Activity Center(TM). The Company currently
sells six of the titles and has sold the publishing rights to Orion Burger(TM)
to a third party publisher.
Liquidity and Capital Resources.
Due to more than $25,000,000 in operating losses incurred during calendar
1995 and 1996, the Company experienced severe liquidity problems through
September 30, 1996.
In September 1996, the Company privately placed for cash $5,302,000 in 8%
convertible debentures due July 31, 1999. A substantial portion of the proceeds
were used to repay bank and trade indebtedness. Interest (which the holders
referred to below have agreed to forego) is payable annually in arrears and is
to be paid only in shares of the Company's common stock valued at a price equal
to the average closing price for the ten trading days prior to the date of
payment. Interest will continue to accrue until the debentures are paid or
converted.
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<PAGE> 14
The debentures are convertible into shares of the Company's common stock at
the rate of one share for each $.55 of principal (9,640,000 shares) plus accrued
interest. The debentures are automatically convertible on July 31, 1999 or upon
occurrence of either of the following events: (a) the Company's obtaining any
equity financing in an amount not less than $2,000,000 at prices not less than
$1.00 per share or (b) the common stock of the Company having closed trading at
a price of $1.375 or more per share for any 21 trading days in any consecutive
40 day trading period. From April 1, 1997 to July 31, 1999 the debentures are
convertible at the option of the holder. The debentures are subordinate to
senior debt and to the security interest of the Company's bank. The Company may
prepay the debentures at any time without penalty.
The Company originally issued to each purchaser of the debentures a warrant
to purchase one share of common stock for each $2.00 invested or 2,651,000
shares in total. Each warrant may be exercised at a price of $.6875 per share
until September 1999. Pursuant to the warrant issue, the Company incurred a
deferred charge totaling $265,100 with an offsetting increase to paid-in
capital. The deferred charge is being expensed ratably over the life of the
warrants.
In December 1996, the Company agreed in principle, and subject to required
approvals, to exchange $550,000 principal amount of 8% convertible debentures
for shares of Series A Convertible Preferred Stock on terms to be negotiated.
The holders of stock issued upon conversion of debentures or Series A
Preferred Stock or exercise of warrants have certain rights to have these shares
registered.
The Company presently intends to issue to its non-Canadian holders of its
Common Stock and 8% Convertible Debentures due 1999 rights ("Rights") to
subscribe for more than 50,000,000 shares of Common Stock. The preliminary terms
of this Rights offering are more particularly described in a registration
statement filed on Form S-2 with the Securities and Exchange Commission (the
"Commission") and are subject to change. The Company will not offer the Rights
until the registration statement is declared effective by the Commission. The
Company will reserve the right to not conduct the Rights offering even if the
registration statement is declared effective.
The Company also renegotiated its revolving bank line of credit to expire
April 3, 1997 and provide for working capital borrowings not to exceed $750,000.
Borrowings under the line of credit are limited to 65% of eligible trade
accounts receivable. Interest is payable based on the bank's prime rate plus
2.50% (4% if the Company is out of compliance with its borrowing base) and was
10.75% at December 31, 1996.
The credit agreement contains restrictions on the Company's ability to
incur or guarantee indebtedness, enter into mergers or acquisitions, pay
dividends or lease property. The agreement also requires the Company to maintain
minimum levels of profitability and tangible net worth and to maintain certain
defined ratios of cash flow, liquidity and leverage and limit capital
expenditures. Amounts outstanding under the revolving credit agreement are
secured by substantially all of the Company's assets.
As a result of significant losses, the Company was in violation of certain
covenants of its bank line of credit at December 31, 1995 and thereafter. In
addition, the Company had borrowed in excess of the amounts allowed under the
credit agreement. As of August 15, 1996, the credit agreement was amended to
waive all previous covenant violations and to provide the revolving credit
described above.
In connection with two 1996 amendments to the bank credit agreement, the
Company issued the Bank warrants to purchase 400,000 shares (subject to
adjustment to not more than 600,000 shares in certain events) of common stock at
prices from $.50 to $.5625 per share.
For the quarter ended December 31, 1996, the Company did not to comply with
the earnings covenant set forth in the bank agreement. In January 1997 the bank
informed the Company that it would not enforce its default rights under the
agreement at this time and that it has elected not to renew the line of credit
when it matures April 3, 1997.
At February 12, 1997, the Company had cash of $925,000 and bank borrowings
of $174,000. The Company intends to raise funds through a rights offering (see
"Recent Developments" above). The purpose of the rights offering is to raise
necessary working capital for the Company and the Company has filed a
registration statement with the Securities and Exchange Commission. In the event
the rights offering is delayed, the Company believes it has the ability to raise
additional capital on a near term basis from both
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<PAGE> 15
existing shareholders and other sources. In the event of a rights offering
management believes that the Company's existing cash resources, cash flows from
operations and additional proceeds from debt or equity financing or exercise of
outstanding warrants, will enable the Company to repay the bank on April 3, 1997
and meet its financial obligations and conduct its operations through September
30, 1997. There can be no assurance that any intended rights offering will be
conducted or if conducted, be successful. If the rights offering is not
conducted or is unsuccessful, there can be no assurance that the Company will be
able to raise working capital from other sources. Failure to do so will have a
material adverse effect on the Company's financial condition and results of
operations.
NASDAQ Listing.
In July 1996, it was determined that the Company no longer met the
requirements for inclusion on the NASDAQ Small Cap Market because it failed to
meet the continuing inclusion requirements for tangible net worth and minimum
bid price. As of July 1, 1996, the Company's stock ceased trading on the
National Small Cap Market and began trading on the OTC Bulletin Board.
RESULTS OF OPERATIONS -- THREE MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995
Net Loss. The net loss for the quarter ended December 31 ,1996 was
$1,537,857 compared to a net loss of $13,440,503 in the quarter ended December
31, 1995. The net loss in the December 1996 quarter was primarily due to lower
than expected revenues and included the following:
-- bad debt losses totaling $138,985 partly related to bankruptcy filings
by two of the Company's significant customers.
-- interest expense totaling $106,040 related to the September 1996
convertible debenture issuance. This is a non-cash cash charge payable
only in common stock of the Company.
-- charges relating to the closure of the Company's office in Toronto,
Ontario and other shutdown expenses of approximately $123,000 including
$47,997 on the disposal of the Toronto assets.
With the Company completing a financing in September 1996, the three month
period ended December 1996 represented first full quarter in calendar 1996 in
which the Company was able to allocate resources to restart the marketing of its
products. During the quarter the Company allocated over $400,000 to sales and
marketing programs.
Sales. Total net sales were $1,201,782 in the quarter ended December 31,
1996 compared to negative $(1,934,953) in the quarter ended December 31, 1995.
Net sales for consumer titles were $808,882 in the quarter ended December 31,
1996 compared to negative $(2,362,010) in the quarter ended December 31, 1995.
The Company and the multimedia industry experienced the effects of an
increasingly competitive marketplace during the 1995 quarter that resulted in
lower than expected sales, higher than expected returns, and downward pricing
pressures. The negative sales of consumer titles for the 1995 quarter were
primarily attributable to the $5,475,002 in reserves the Company provided for
estimated returns and price protection. Excluding the provision for returns and
price protection, sales of consumer titles decreased to $1,063,133 in the
quarter ended December 31, 1996 from $3,112,992 in the quarter ended December
31, 1995. Beginning in 1996, the Company decided to discontinue the manufacture
and promotion of entertainment titles and focus its efforts solely on developing
and publishing children's curriculum-based educational software products. Thus,
sales of consumer titles in the December 1996 quarter reflect a narrower product
mix compared to the December 1995 quarter which included the sale of
entertainment products.
<TABLE>
<CAPTION>
QUARTERLY CONSUMER TITLE SALES
-------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Gross sales.................................. $ 1,063,133 $ 3,112,992
Provision for returns and Markdowns........ (254,251) (5,475,002)
---------- -----------
Net sales.................................. $ 808,882 $(2,362,010)
========== ===========
</TABLE>
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<PAGE> 16
Licensing revenues decreased 2.9% to $392,900 in the quarter ended December
31, 1996 from $404,557 in the quarter ended December 31, 1995.
In January, 1996, the Company decided to close its office in Dallas, Texas
and discontinue its publisher services operation. There were no sales related to
these operations in the quarter ended December 31, 1996.
Cost of Sales/Gross Margins. Total cost of sales was $311,875 for the
quarter ended December 31, 1996 compared to $6,530,431 in the quarter ended
December 31, 1995. The December 1995 quarter includes significant charges
totaling $5,831,263 which include the write-off of $4,260,532 in unrecoverable
royalty advances, $1,033,389 of inventory obsolescence, $96,783 in technology
amortization (which was fully expensed in 1995), $205,449 in publisher services
costs and $235,000 in write-offs of licenses and trademarks. Gross margins were
74% of sales in the quarter ended December 31, 1996. Because of the significant
write-off discussed above, gross margins were negative (438%) in the quarter
ended December 31, 1995.
Research and Development Costs. Research and development costs decreased
68% to $404,461 in the quarter ended December 31, 1996 from $1,276,386 in the
quarter ended December 31, 1995. This decrease is primarily due to a reduction
in personnel and facility costs associated with the sale of the Company's
Victoria studio in May 1996 and the overall reduction of the Company's work
force.
Marketing and Sales. Marketing and sales expenditures decreased 60% to
$980,305 in the quarter ended December 31, 1996 from $2,429,858 in the quarter
ended December 31, 1995. This decrease was due to reduced personnel and facility
expenses due to the elimination of its entertainment products and the related
reduction of the Company's work force. In the quarter ended December 1995, the
Company invested substantial sums to promote its entertainment titles Buried In
Time and Ripleys:Riddle of Master Lu.
Administrative Costs. Administrative expenses decreased 22% to $743,255 in
the quarter ended December 31, 1996 from $955,067 in the quarter ended December
31, 1995 due to the reduction in the Company's work force. As a percentage of
sales, administrative costs increased primarily due to expenses for bad debts
and legal and professional fees.
As of February 12, 1997, the Company had 32 full time employees in San
Mateo, California. These employees were employed in the following functions:
<TABLE>
<S> <C>
Product Development -- Children's Educational Products.......... 6
Marketing, Sales, Customer Service and Technical Support........ 17
Administrative.................................................. 9
--
Total................................................. 32
==
</TABLE>
RESULTS OF OPERATIONS -- NINE MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995
Net Loss. The net loss for the nine month period ended December 31 ,1996
was $1,615,137 compared to a net loss of $15,801,449 in the nine month period
ended December 31, 1995. The net loss in the December 1996 period was primarily
due to weak sales. The Company also experienced significant bad debt expenses
associated with the bankruptcy of two of the Company's customers and legal and
professional expenses related to the Company's reorganization. The net loss for
the nine months ended December 31, 1996 was due to charges totaling over
$11,000,000 related to sales returns and markdowns, royalties, inventory
obsolescence and other write-offs (see above). The nine month period ended
December 1995 included significant sales of two of the Company's entertainment
titles Buried in Time and Ripleys:Riddle of Master Lu into the retail
distribution channel. In 1996, due to the poor sell through of these
entertainment titles, and the severe losses and cash constraints experienced by
the Company, management decided to discontinue the manufacture and promotion of
entertainment titles and focus its efforts on developing and publishing
children's curriculum-based educational software products.
Net Sales. Sales decreased 55% to $4,298,123 for the nine month period
ended December 31, 1996 from $9,475,982 in the nine month period ended December
31, 1995 primarily due to the elimination of the entertainment products
business. For most of the first nine months of calendar 1996, the Company lacked
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<PAGE> 17
sufficient operating scale and capital resources to adequately fund sales,
marketing and other operational activities. The Company estimates that the
reduction in its volume of sales was at least partially due to the lack of
resources needed to market and promote its products.
Licensing revenues increased 50% to $1,960,790 in the nine month period
ended December 31, 1996 from $1,308,792 in the nine month period ended December
31, 1995. The increase was primarily due to the sale of publishing rights to
certain entertainment titles and increased royalties from international sales.
In January, 1996, the Company decided to close its office in Dallas, Texas
and discontinue its publisher services operation. There were no sales related to
these operations in the nine months ended December 31, 1996.
Cost of Sales/Gross Margins. Total cost of sales was $3,058,515 for the
nine months ended December 31, 1996 compared to $11,848,654 in the nine months
ended December 31, 1995. The nine month period ended December 1995 includes
significant charges totaling $5,528,921 which include the write-off of
$4,260,532 in unrecoverable royalty advances, $1,033,389 of inventory
obsolescence, and $235,000 in write-offs of licenses and trademarks. The nine
month period ended December 1995 also included $451,997 in technology
amortization (which was fully expensed in 1995) and $484,763 in publisher
services costs. Gross margins were 71% of sales in the nine months ended
December 31, 1996. Because of the significant write-off discussed above, gross
margins were negative (25%) in the nine months ended December 31, 1995.
Research and Development Costs. Research and development costs decreased
68% to $1,113,824 in the nine month period ended December 31, 1996 from
$3,487,629 in the same period last year. This decrease is primarily due to a
reduction in personnel and facility costs associated with the sale of the
Company's Victoria studio in May 1996 and the overall reduction of the Company's
work force.
Marketing and Sales. Marketing and sales expenditures decreased 66% to
$2,234,805 in the nine month period ended December 31, 1996 from $6,525,990 in
the same period last year. This decrease was due primarily to the Company's lack
of resources to fund advertising and promotion activities until the latter part
of September 1996. In addition, the Company has reduced personnel expenses due
to the elimination of its entertainment products and sale of the studio in
Victoria, Canada. During the nine month period ended December 1995, the Company
invested substantial sums to promote the release of its entertainment titles
Buried In Time and Ripleys:Riddle of Master Lu. As a percentage of sales, sales
and marketing costs were 52% in the nine month period ended December 31, 1996
compared to 69% for the same period last year.
Administrative Costs. Administrative expenses decreased 38% to $1,721,586
in the nine month period ended December 31, 1996 from $2,758,873 in the nine
month period ended December 31, 1995, primarily due to the reduction in the
Company's work force. As a percentage of sales, administrative costs were 40% in
the nine month period ended December 31, 1996 versus 29% in the same period last
year. This increase is primarily due to substantially reduced sales from the
elimination of the Company's entertainment products and to increased bad debt
expense and legal and professional fees.
Other. During the quarter ended September 30, 1996 the Company negotiated
settlements with certain trade creditors to reduce payments owed to them on past
due obligations. Savings generated from the settlements approximating $115,000
are included in other income in the nine months ended December 31, 1996.
ADDITIONAL RISK FACTORS
There are numerous additional risks associated with the Company's on-going
operations, including without limitation the following:
Continued Losses; Fluctuations in Operating Results; Seasonality. The
Company has not been profitable on an annual basis in the last three years. The
Company has experienced, and expects to continue to experience, significant
fluctuations in operating results due to a variety of factors, including the
size and rate of growth of the consumer software market, market acceptance of
the Company's products and those of its competitors, development and promotional
expenses relating to the introduction of new products or new
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<PAGE> 18
versions of existing products, projected and actual changes in computing
platforms, the timing and success of product introductions, product returns,
changes in pricing policies by the Company and its competitors, difficulty in
securing retail shelf space for the Company's products, the accuracy of
retailers' forecasts of consumer demand, the timing of orders from major
customers, order cancellations and delays in shipment. In response to
competitive pressures, the Company may take certain pricing or marketing actions
that could materially adversely affect the Company's business, operating results
and financial condition. The Company may be required to pay fees in advance or
to guarantee royalties, which may be substantial, or to obtain licenses to
intellectual properties from third parties before such properties have been
introduced or achieved market acceptance. A significant portion of the Company's
operating expenses are relatively fixed, and planned expenditures are based in
part on sales forecasts. If net sales do not meet the Company's expectations,
the Company's business, operating results and financial condition could be
materially adversely affected.
Possible write-offs from Product Returns, Price Protection; Bad Debts;
Collections. In accordance with industry practice, the Company recognizes
revenue from the sale of its products (net of an allowance for product returns
and price protection) upon shipment to its distributors and retailers. The
Company had a reserve balance for price protection and returns as of December
31, 1996, of $1,049,688. Product returns or price protection concessions that
exceed the Company's reserves could materially adversely affect the Company's
business, operating results and financial condition and could increase the
magnitude of quarterly fluctuations in the Company's operating and financial
results. In addition, the Company has experienced in the past, and continues to
experience, significant delays in the collection of its accounts receivable.
Further, if the Company's assessment of the creditworthiness of its customers
receiving products on credit proves incorrect, the Company could be required to
significantly increase the reserves previously established.
Impact of Reorganization of Operations. The Company may take additional
steps to reorganize or consolidate its operations. These steps may include,
among other things, the sale of certain assets of the Company. In an effort to
reduce its expense structure, the Company reorganized its operations during the
first half of calendar 1996, reduced its work force by more than 66% and revised
its product development plans for 1996. These changes or other future actions to
reorganize and reduce expenses could result in the delayed introduction of new
products which could have a material adverse effect on the Company's financial
condition and results of operations.
Dependence on Key Personnel; Retention of Employees. The Company's success
depends in large part on the continued service of its key creative, technical,
marketing, sales and management personnel and its ability to continue to
attract, motivate and retain highly qualified employees. Because of the
multifaceted nature of interactive media, key personnel often require a unique
combination of creative and technical talents. Such personnel are in short
supply, and the competition for their services is intense. The process of
recruiting key creative, technical and management personnel with the requisite
combination of skills and other attributes necessary to execute the Company's
strategy is often lengthy. The Company has entered into at-will employment
agreements with its management and certain other personnel, who may generally
terminate their employment at any time. The loss of the services of key
personnel or the Company's failure to attract additional qualified employees
could have a material adverse effect on the Company's results of operations and
research and development efforts. In particular, the Company has recently
reorganized its operations and has undergone a reduction in force among its
employees. Such reduction in force, combined with the Company's disappointing
operating performance, the price of the Company's stock, and the availability of
substantial alternative employment opportunities for talented employees of the
Company, may result in key employees and managers leaving the Company, which
could materially adversely impact the Company's ability to develop and sell its
products. The Company does not have key person insurance covering any of its
personnel.
Dependence on New Product Development; Product Delays. The success of the
Company depends on the continual and timely introduction of successful new
products. In general, consumer preferences for software products are difficult
to predict and are often short-lived. The retail life of software programs has
become shorter, and may now last only 9 to 12 months (or even less for
unsuccessful products), while the Company typically requires 6 to 9 months or
longer for the development of a new educational CD-ROM title. The short life
span of a product combined with a lengthy development cycle makes it especially
difficult to predict whether a product will be a success by the time it comes to
market. There can be no assurance that
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<PAGE> 19
new products introduced by the Company will achieve any significant market
acceptance or that, if such acceptance occurs, it will be sustained for any
significant period. If the Company does not correctly anticipate and respond to
demand for its products in a timely manner, the Company's business, operating
results and financial condition will be materially adversely affected.
A significant delay in the introduction of, or the presence of a defect in,
one or more products could have a material adverse affect on the Company's
business, operating results and financial condition, particularly in view of the
seasonality of the Company's business. Further, delays in a product introduction
near the end of a fiscal quarter may materially adversely affect operating
results for that quarter, as initial shipments of a product may move from one
quarter to the next and may represent a substantial percentage of annual
shipments of a product. The timing and success of software development is
unpredictable due to the technological complexity of software products, inherent
uncertainty in anticipating technological developments, the need for coordinated
efforts of numerous creative and technical personnel and difficulties in
identifying and eliminating errors prior to product release. In the past, the
Company has experienced delays in the introduction of certain new products.
There can be no assurance that new products will be introduced on schedule or at
all or that they will achieve market acceptance or generate significant
revenues.
Competition. The software industry is intensely competitive, and market
acceptance for any of the Company's products may be adversely affected by the
introduction by the Company's competitors of similar products with greater
consumer demand. The Company competes against a large number of other companies
of varying sizes and resources. Most of the Company's competitors have
substantially greater financial, technical and marketing resources, as well as
greater name recognition and better access to consumers. Existing competitors
may continue to broaden their product lines and potential competitors, including
large computer or software manufacturers, entertainment companies, diversified
media companies, and book publishers, may enter or increase their focus on the
CD-ROM school and home education markets, resulting in increased competition for
the Company. Retailers of the Company's products typically have a limited amount
of shelf space and promotional resources, and there is intense competition among
consumer software producers for high quality and adequate levels of shelf space
and promotional support from retailers. To the extent that the number of
consumer software products and computer platforms increases, this competition
for shelf space may intensify. Due to increased competition for limited shelf
space, retailers and distributors are increasingly in a better position to
negotiate favorable terms of sale, including price discounts and product return
policies. Retailers often require software publishers to pay fees in exchange
for preferred shelf space. There can be no assurance that retailers will
continue to purchase the Company's products or provide the Company's products
with adequate levels of shelf space. Increased competition could result in loss
of shelf space for, and reduction in sell-through of, the Company's products at
retail stores and significant price competition, any of which could materially
adversely affect the Company's business, operating results and financial
condition. In addition, other types of retail outlets and methods of product
distribution, such as on-line services, may become important in the future, and
it may be important for the Company to gain access to these channels of
distribution. There can be no assurance that the Company will gain such access
or that the Company's access will be on terms favorable to the Company.
Changing Product Platforms and Formats. The Company's software products
are intended to be used on machines built by other manufacturers. The operating
systems of machines currently being manufactured are characterized by several
competing and incompatible formats or "platforms," and new platforms will
probably be introduced in the future. The Company must continually anticipate
the emergence of, and adapt its products to, popular platforms for consumer
software. When the Company chooses a platform for its products, it must commit
substantial development time and investment in advance of shipments of products
on that platform. If the Company invests in a platform that does not achieve
significant market penetration, the Company's planned revenues from those
products will be adversely affected and it may not recover its development
investment. If the Company does not choose to develop for a platform that
achieves significant market success, the Company's revenues may also be
adversely affected. The Company is currently developing products for PC and
Macintosh computers. The Company has terminated virtually all current
development for other platforms such as the Sony PlayStation and Sega Saturn.
There can be no assurance that the Company has chosen to support the platforms
that ultimately will be successful.
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<PAGE> 20
Changes in Technology and Industry Standards. The consumer software
industry is undergoing rapid changes, including evolving industry standards,
frequent new product introductions and changes in consumer requirements and
preferences. The introduction of new technologies, including operating systems
and media formats, can render the Company's existing products obsolete or
unmarketable. Recent operating setbacks at Apple may adversely affect future
sales of Macintosh Computers. The development cycle for products utilizing new
operating systems, microprocessors or formats may be significantly longer than
the Company's current development cycle for products on existing operating
systems, microprocessors and formats and may require the Company to invest
resources in products that may not become profitable. There can be no assurance
that the current demand for the Company's products will continue or that the mix
of the Company's future product offerings will keep pace with technological
changes or satisfy evolving consumer preferences or that the Company will be
successful in developing and marketing products for any future operating system
or format.
Limited Protection of Intellectual Property and Proprietary Rights; Risk of
Litigation. The Company regards its software as proprietary and relies
primarily on a combination of trademark, copyright and trade secret laws, and
employee and third-party nondisclosure agreements and other methods to protect
its proprietary rights. However, the Company does not have signed license
agreements with its end-users and does not include in its products any mechanism
to prevent or inhibit unauthorized copying. Unauthorized parties may copy the
Company's products or reverse engineer or otherwise obtain and use information
that the Company regards as proprietary. If a significant amount of unauthorized
copying of the Company's products were to occur, the Company's business,
operating results and financial condition could be materially adversely
affected. Further, the laws of certain countries in which the Company's products
are or may be distributed do not protect applicable intellectual property rights
to the same extent as the laws of the United States. In addition, the Company
holds no patents, and, although the Company has developed and continues to
develop certain proprietary software tools, the copyrights to which are owned by
the Company, most of the technology used to develop the Company's products is
not proprietary. There can be no assurance that the Company's competitors will
not independently utilize existing technologies to develop products that are
substantially equivalent or superior to the Company's. Also, as the number of
software products in the industry increases and the functionality of these
products further overlaps, software developers and publishers may increasingly
become subject to infringement claims. There can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products.
As is common in the industry, from time to time the Company receives
notices from third parties claiming infringement of intellectual property or
other rights of such parties. The Company investigates these claims and responds
as it deems appropriate. There has been substantial litigation regarding
copyright, trademark and other intellectual property rights involving computer
software companies in general. The Company may also face suits as a result of
employment matters, publicity rights, governmental or regulatory investigations,
or due to claims of breach of the Company's obligations under various agreements
to publish or develop products, or for goods or services provided to the
Company. Adverse determinations in such claims or litigation could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company may find it necessary or desirable in the
future to obtain licenses relating to one or more of its products or relating to
current or future technologies. There can be no assurance that the Company will
be able to obtain these licenses or other rights on commercially reasonable
terms or at all.
Relationship with Vendors. Failure to pay vendors on a timely basis may
result in loss of the availability of the services of such vendors, which could
hamper the Company's ability to manufacture and ship products, and may
ultimately result in the Company being sued for collection of such amounts as
may be owed to such vendors. If the Company is unable to produce its products to
fill orders, the Company's operating results and financial condition could be
materially adversely affected. In the event that suits by vendors are filed
against the Company, the Company may be required to incur unanticipated legal
expenses or find it necessary to seek protection under the applicable bankruptcy
statutes of Canada and/or the United States.
Market for Common Stock; Stock Price Volatility. The Common Stock has been
quoted on the Vancouver Stock Exchange since December 1991, and was quoted on
the NASDAQ Stock Market from September 8, 1993 until July 2, 1996, when it began
trading the OTC Bulletin Board. Based upon historical trends in the market for
other software company stocks, the Company anticipates that the trading price of
its
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Common Stock may be subject to wide fluctuations in response to quarterly
variations in operating results, changes in actual earnings or in earnings
estimates by analysts, announcements of technological developments by the
Company or its competitors, general market conditions or other events largely
outside the Company's control. In addition, the stock market has experienced,
from time to time, extreme price and volume fluctuations which have particularly
affected the market prices of high technology stocks. These fluctuations have
often been disproportionate or unrelated to the operating performance of these
companies. These broad market fluctuations, general economic conditions or other
factors outside the Company's control, as well as the Company's results of
operations and financial condition, may adversely affect the market price of the
Company's stock.
Performance Shares and Related Compensation Expense. In October 1991, in
connection with the sale of 1,800,000 common shares to the Company's founders
and principal stockholders, the Company issued 4,000,000 common "performance"
shares (the "Performance Shares") at CDN $0.01 per share to certain of these
individuals. These Performance Shares were issued pursuant to Local Policy #3-07
of the British Columbia Securities Commission ("BCSC") and Policy 19 of the
Vancouver Stock Exchange, which provide the guidelines for the issuance of
performance shares. In July 1996, a total of 1,200,000 of these shares were sold
and transferred to certain members of current and former management at their
then estimated fair market value of $.03 per share.
The Performance Shares are held in escrow to be released as the Company
achieves positive operating cash flow on an annual basis as defined by the BCSC
("BCSC Operating Cash Flow"). The holders of Performance Shares will be entitled
to a pro rata release from escrow on the basis of one share for every CDN $0.653
of annual positive BCSC Operating Cash Flow, subject to approval by the BCSC and
the Vancouver Stock Exchange. Performance Shares are permitted to be released
from escrow on an annual basis, and all of the Performance Shares will be
released once CDN $2,612,000 of annual positive BCSC Operating Cash Flow has
been generated by the Company.
At the time when BCSC Operating Cash Flow justifying release of the
Performance Shares, or a pro rata portion thereof, is probable, the Company will
record as compensation expense an amount equal to the difference between the CDN
$0.01 per share originally paid for the Performance Shares then issuable and the
market price of its common stock at that time. Such a pro rata or full expense
recognition will occur prior to the pro rata or full release from escrow of the
Performance Shares. If and when such expense recognition criteria becomes
probable, based on the closing price of the Company's common stock on the
Vancouver Stock exchange at February 12, 1997 of approximately US$.17 per share
(for example purposes only), the aggregate compensation expense that would be
recognized as a result of earning of all the performance shares would be
approximately $640,000. Any compensation expense recognized related to the
Performance Shares will be a noncash charge and will have no net impact on total
stockholders' equity (deficit).
The Company may pursue an early release of all or a large portion of the
Performance Shares. Such an early release from escrow would reduce a source of
continuing uncertainty surrounding the Company's consolidated financial
statements, but could also result in compensation expense in the quarter in
which the release is made.
If and when the Performance Shares are earned, the number of shares used to
calculate primary net income (loss) per share will increase by the number of
Performance Shares earned. Through February 12, 1997 no Performance Shares have
been earned or released.
The Company is negotiating in principle with holders of these performance
shares to exchange these shares for common stock or warrants or a combination of
both. The transaction is subject to approval by the Vancouver Stock Exchange.
Shares Eligible for Future Sale; Possible Adverse Effect on Future Market
Price. Sale of substantial amounts of shares in the public market or the
prospect of such sales or the sales or issuance of convertible securities or
warrants could adversely affect the market price of the Company's Common Stock.
Other than the 4,000,000 Performance Shares issued to the Company's founders and
management (which are currently held in an escrow account and are subject to
release upon satisfaction of specified conditions as discussed
21
<PAGE> 22
above) substantially all of the Company's issued and outstanding shares are
freely tradable, subject to, in certain circumstances, compliance with Rule 144
or Rule 701 or the effectiveness of a resale registration statement. In
addition, as of February 12, 1997, the Company had outstanding options to
purchase 1,567,750 shares of Common Stock, warrants to purchase 4,931,000 shares
of Common Stock and debentures convertible into 9,640,000 shares of Common
Stock. Furthermore, the Company has reserved approximately 2,432,250 additional
shares of Common Stock for future issuance pursuant to the Company's 1995 Stock
Option Plan.
No Dividends. The Company has not paid any cash dividends since inception
and does not anticipate paying cash dividends in the foreseeable future. The
Company's bank credit agreement prohibits the payment of cash dividends without
the prior written consent of the lender.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1996, Sanctuary Woods was sued by Starpak, Inc. in the state courts of
Colorado. This action was settled and dismissed with prejudice in November 1996.
The Company's payment to Starpak in connection with the settlement was accrued
in September 1996.
ITEM 2. CHANGES IN SECURITIES
At the Company's annual general meeting held on November 12, 1996, the
Company's shareholders approved a resolution authorizing a new class of
preferred stock and authorized the Company's Board of Directors to set the
preferences, limitations and rights of such class of preferred. In connection
with the possible conversion of the Company's outstanding 8% convertible
debentures, the Company intends to create a class of Series A Preferred Stock
which will have preferential rights to dividends and a liquidation preference
relative to the Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
An annual general meeting of the Company was held on November 12, 1996. The
Company furnished its security holders proxy soliciting material which was filed
with the Securities and Exchange Commission. During the meeting, the following
matters were voted upon and passed on motion duly made and seconded on vote of
the shareholders as indicated:
1. To fix the number of Directors for the ensuing year ensuing year:
<TABLE>
<CAPTION>
BROKER
FOR: AGAINST: WITHHELD: ABSTAINED NON VOTES
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
22,172,255 125,420 0 49,501 0
</TABLE>
2. To elect three Directors of the Company to hold office until the 1997
Annual Meeting of Shareholders or until their successors have been duly
elected and qualified:
<TABLE>
<CAPTION>
BROKER
FOR: AGAINST: WITHHELD: ABSTAINED NON VOTES
----------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
N. John Campbell....... 22,218,631 0 1,500 127,045 0
Grant N. Russell....... 22,219,931 0 200 127,045 0
Charlotte J. Walker.... 22,212,113 0 8,018 127,045 0
</TABLE>
3. To approve the appointment of Deloitte & Touche LLP, certified public
accountants, as independent auditors of the Company for its fiscal year
ending March 31, 1997 and to authorize the Board of Directors to fix the
remuneration to be paid to the auditors.
22
<PAGE> 23
<TABLE>
<CAPTION>
BROKER
FOR: AGAINST: WITHHELD: ABSTAINED NON VOTES
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
22,246,406 0 69,470 31,300 0
</TABLE>
4. To approve amendments of the Company's 1995 Stock Option Plan to (a)
increase the number of shares of Common Stock reserved for issuance
thereunder by 2,030,000 shares from 1,970,000 shares to 4,000,000 shares
and (b) to change the formula for granting options to Directors.
<TABLE>
<CAPTION>
BROKER
FOR: AGAINST: WITHHELD: ABSTAINED NON VOTES
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
11,793,335 2,922,693 0 153,251 7,477,897
</TABLE>
5. To approve, as a special resolution, the consolidation of the Company's
share capital on the basis of one (1) new share for each three (3)
existing shares and to approve an increase to the Company's authorized
capital.
<TABLE>
<CAPTION>
BROKER
FOR: AGAINST: WITHHELD: ABSTAINED NON VOTES
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
21,682,460 566,766 0 97,950 0
</TABLE>
6. To approve, as a special resolution, an amendment to the Company's
Articles of Incorporation authorizing a class of preferred stock with
preferences, limitations and relative rights as determined by the Board
of Directors
<TABLE>
<CAPTION>
BROKER
FOR: AGAINST: WITHHELD: ABSTAINED NON VOTES
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
11,433,084 3,314,395 0 121,800 7,477,897
</TABLE>
There were 22,353,408, shares present or represented by proxy at the
meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<S> <C>
11 Computation of Net Income (Loss) Per Common Share
27 Financial Data Schedule
Third Amendment to Loan Agreement between Sanctuary Woods Multimedia, Inc. and a
99.1 bank, dated August 15, 1996.
</TABLE>
(b) Reports on Form 8-K:
Filed October 30, 1996 (Items 5 and 7 -- Other events and exhibits)
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SANCTUARY WOODS MULTIMEDIA CORPORATION
By: /s/ CHARLOTTE J. WALKER
------------------------------------
Charlotte J. Walker, Chairman,
President
and Chief Executive Officer
By: /s/ PETER NICHTER
------------------------------------
Peter Nichter
Controller
Dated: February 14, 1997
24
<PAGE> 1
EXHIBIT 23.2
February 25, 1997
Securities and Exchange Commission
Washington, D.C.
U.S.A. 20549
Dear Sirs:
We consent to the incorporation by reference in this Amendment No. 1 to the
Registration Statement No. 333-19933 of Sanctuary Woods Multimedia Corporation
on Form S-2 of our report dated February 9, 1994, except for comments therein on
reconciling differences between Canadian and United States generally accepted
accounting principles which are as of September 20, 1995, appearing in the
Annual Report on Form 10-K/A-3 of Sanctuary Woods Multimedia Corporation for the
year ended December 31, 1995.
Mackay & Partners is carrying on the business of Chambers, Phillips & Co.
effective January 1, 1997.
Yours very truly,
/s/ Mackay & Partners
Vancouver, British Columbia
<PAGE> 1
EXHIBIT 23.3
Independent Auditors' Consent
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-19933 of Sanctuary Woods Multimedia Corporation
on Form S-2 of our report dated February 23, 1995 (except for Note 2 which is as
of March 10, 1995 and Notes 9 and 15 which are as of September 20, 1995) which
includes explanatory paragraphs referring to the Company's change in functional
and reporting currency to United States dollars from Canadian dollars effective
July 1, 1994 and November 1, 1994, respectively, and the 1994 consolidated
financial statements having been prepared in accordance with generally accepted
accounting principles of the United States, appearing in the Annual Report on
Form 10-K/A-3 of Sanctuary Woods Multimedia Corporation for the year ended
December 31, 1995.
Deloitte & Touche
CHARTERED ACCOUNTANTS
Vancouver, Canada
February 27, 1997
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1
Registration Statement No. 333-19933 of Sanctuary Woods Multimedia Corporation
and its subsidiaries (the "Company") on Form S-2 of our reports dated October
11, 1996 appearing in the Annual Report on Form 10-K/A-3 of Sanctuary Woods
Multimedia Corporation for the year ended December 31, 1995 and in the Report on
Form 8-K of the Company dated October 30, 1996.
Deloitte & Touche LLP
San Francisco, California
February 27, 1997
