Sirit Inc. - MRRS Decision
Headnote
Mutual reliance review system for exemptive relief applications -- National Instrument 51-102 Continuous Disclosure Obligations -- significant acquisition through court-ordered receivership process -- issuer does not have access to historical accounting records of acquired business and cannot produce certain interim financial statements for acquired business -- issuer granted relief from the requirement to include certain interim financial statements in the business acquisition report, subject to certain conditions.
Applicable Legislative Provisions
National Instrument 51-102 Continuous Disclosure Obligations, Part 8 and s. 13.1.
Companion Policy to National Instrument 51-102 -- Continuous Disclosure Obligations, s. 8.9(4)(b).
August 18, 2006
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
YUKON TERRITORY, ALBERTA, SASKATCHEWAN,
MANITOBA, ONTARIO, QUEBEC, NOVA SCOTIA,
NEWFOUNDLAND AND LABRADOR AND
NEW BRUNSWICK (the Jurisdictions)
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
SIRIT INC. (the Filer)
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption from the requirement to include certain interim financial statements in a business acquisition report (the BAR) required to be filed under Part 8 of National Instrument 51-102 (NI 51-102) in connection with the Filer's acquisition of all of the assets of SAMSys Technologies Inc. (Samsys) pursuant to a receivership process (the Requested Relief).
Under the Mutual Reliance Review System for Exemptive Relief Applications:
a) the Ontario Securities Commission is the principal regulator for this application; and
b) this MRRS decision document evidences the decision of each Decision Maker.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer was incorporated in the province of British Columbia pursuant to the Company Act (British Columbia) on January 15, 1987. On July 27, 1998, the Filer was continued into the Yukon under the Yukon Business Corporations Act. On May 5, 2003, the Filer changed its name from iTECH Capital Corp. to Sirit Inc. to better reflect its current form of business. The Filer's head office is located in Toronto, Ontario.
2. The Filer's business is the design, development, manufacturing and sale of radio frequency identification products and solutions.
3. The Filer is a reporting issuer, or the equivalent, in each of the Jurisdictions, British Columbia and Prince Edward Island and, to the best of its knowledge, except for not filing the BAR, the Filer is not in default of any applicable requirements under the securities legislation of the Jurisdictions.
4. The authorized capital of the Filer consists of an unlimited number of common shares and 100 million preferred shares. As of July 12, 2006, 145,523,786 common shares and no preferred shares are issued and outstanding.
5. The common shares of the Filer are listed for trading on the Toronto Stock Exchange under the symbol "SI".
6. Samsys was in the business of providing radio frequency identification reader solutions. Samsys was a reporting issuer in Ontario, British Columbia, Alberta and Quebec, and its shares were listed for trading on the Toronto Stock Exchange under the symbol "SMY".
7. On February 24, 2006, Samsys issued a press release confirming that it had repaid $2,000,000 of the principal amount outstanding under its secured debenture issued on August 31, 2005 (the Debenture) to Fund 321 Limited Partnership doing business as Wellington Financial Fund II (the Secured Creditor).
8. On February 27, 2006, Samsys issued a material change report which stated, among other things, that the repayment of the $2,000,000 principal amount under the Debenture was necessitated by a financial covenant contained in the Debenture which required such repayment if Samsys' revenue for the quarter ended December 31, 2005 did not meet certain thresholds.
9. On March 28, 2006, Samsys issued a press release announcing that it had received a notice of default from the Secured Creditor, which notice of default alleged that a non-payment related event of default had occurred under the terms of the Debenture.
10. On or about March 30, 2006, the Filer and the Secured Creditor entered into negotiations relating to the potential purchase of the Samsys assets by way of a court-appointed receivership process (the Receivership Process).
11. On April 5, 2006, the Filer and the Secured Creditor entered into a letter agreement (the Agreement) which provided for the purchase of the Samsys assets and undertaking by the Filer pursuant to a Receivership Process. Samsys acknowledged and agreed to the terms of the Agreement, but was not involved in the negotiation of the Agreement.
12. The Agreement contemplated the sale by Samsys and its Canadian subsidiaries of all their assets, including the shares of their U.S. subsidiaries, to the Filer, but the transaction was subject to certain conditions, including the appointment of a receiver by the Ontario Superior Court of Justice (the Court) and the closing of the transaction by April 13, 2006.
13. The Agreement provided that Samsys would provide access to its premises and its books, records and reports, as well as access for interviews of its personnel. However, the Filer's actual access to Samsys' books, records and reports and personnel was limited due to Samsys' multiple locations and the limited time frames provided for in the Agreement. Under the terms of the Agreement, Samsys was not required to make the historical accounting records available to the Filer.
14. On April 13, 2006, pursuant to an appointment and vesting order issued by the Court (the Court Order) pursuant to the Receivership Process initiated by the Secured Creditor, Samsys was placed into receivership (the Receivership) and PricewaterhouseCoopers Inc. was appointed as interim receiver (the Interim Receiver).
15. On April 13, 2006, pursuant to the Court Order, the terms of the Agreement were approved by the Court and the Filer completed the purchase of the assets and undertaking of Samsys from the Interim Receiver (the Receivership Purchase).
16. The Filer paid the Interim Receiver cash consideration of $4,000,000 plus transaction costs and accrued interest under the Secured Creditor's Debenture in connection with the Receivership Purchase pursuant to the Agreement.
17. The purchase price for the Receivership Purchase was negotiated between the Filer and the Secured Creditor to reflect the value of the Samsys assets, and the purchase price was approved by the Court.
18. On April 28, 2006, the Interim Receiver was discharged by the Court such that it had no further responsibilities relating to the Samsys assets.
19. The Filer, the Secured Creditor, the Interim Receiver and Samsys were arm's-length parties.
20. The Receivership Purchase constitutes a "significant acquisition" for the Filer for the purposes of NI 51-102, requiring the Filer to file a BAR pursuant to sections 8.2 and 8.5(1)2 of NI 51-102.
21. Pursuant to section 8.4 of NI 51-102, the BAR must be accompanied by certain financial statements, including:
a) audited annual financial statements for Samsys for the years ended September 30, 2005 and 2004, together with the auditors' report thereon and notes thereto;
b) interim financial statements for Samsys for the six month period beginning on October 1, 2005 and ending March 31, 2006 together with comparative interim financial statements for the six month period ended March 31, 2005 (the BAR Interim Financial Statements);
c) a pro forma balance sheet for the Filer as at March 31, 2006; and
d) pro forma income statements for the Filer for the year ended December 31, 2005 and for the three month period ended March 31, 2006
(the BAR Financial Statements).
22. The Filer proposes to include the following financial statements in the BAR:
a) audited annual financial statements for Samsys for the years ended September 30, 2005 and 2004, together with the auditors' report thereon and notes thereto;
b) interim financial statements for Samsys for the three month period beginning on October 1, 2005 and ending December 31, 2005 together with comparative interim financial statements for the three month period ended December 31, 2004 (the Samsys First Quarter Statements);
c) a pro forma balance sheet for the Filer as at March 31, 2006, based on the Samsys First Quarter Statements; and
d) pro forma income statements for the Filer for the year ended December 31, 2005 and for the three month period ended March 31, 2006, based on the Samsys First Quarter Statements
(the Proposed BAR Financial Statements).
23. Samsys had prepared and filed the Samsys First Quarter Statements prior to the Receivership.
24. Samsys was not required to file the interim financial statements for its second quarter ending on March 31, 2006 (the Samsys Second Quarter Statements) until May 15, 2006, more than a month after the date of the Receivership.
25. Upon the completion of the Receivership Purchase by the Filer, the Filer was advised that Samsys and its Canadian subsidiaries had ceased all operations and no longer employed any employees, all of the directors and officers of Samsys had resigned, and there was no management in place at Samsys to prepare the Samsys Second Quarter Statements.
26. Subsequent to the Receivership Purchase, the Filer made every reasonable effort to obtain access to, or copies of, the historical accounting records of Samsys necessary to prepare the Samsys Second Quarter Statements but such efforts were unsuccessful since Samsys had ceased its operations, the historical accounting records obtained by the Filer were incomplete and there were no Samsys management or employees to assist in providing complete, accurate and reliable records to the Filer.
27. The Filer has been advised by the former chief financial officer of Samsys that he is unable to compile the Samsys Second Quarter Statements.
28. The Filer has been advised by the former auditors of Samsys that they are unable to compile the Samsys Second Quarter Statements. The Samsys former auditors advised the Filer that they would require the assistance of prior Samsys management who would be familiar with the consolidation process as well as the compilation process to complete the compilation, and they advised that they did not have sufficient detailed familiarity with the internal accounting ledgers and methodologies of Samsys to prepare the requested statements.
29. The Filer is unable to prepare the Samsys Second Quarter Statements required under section 8.4 of NI 51-102 for the BAR.
30. Consequently, the BAR Interim Financial Statements include the Samsys First Quarter Statements only.
31. Apart from the requirement to include the Samsys Second Quarter Statements, the Filer is otherwise able to prepare and file the BAR (including the BAR Financial Statements), provided that the pro forma statements to be included in the BAR are based on the Samsys First Quarter Statements and not the Samsys Second Quarter Statements. The Filer will include in the BAR additional disclosure requirements as set out under section 8.9(4)(b) of the Companion Policy of NI 51-102.
Decision
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the Decision has been met, and that this Decision evidences the decision of each of the Decision Makers.
The decision of the Decision Makers under the Legislation is that the Requested Relief is granted, provided that:
(a) the Filer discloses in the BAR:
(i) the fact that the Receivership Purchase was made pursuant to a Receivership Process approved by the Court;
(ii) based on the fact that the Filer made every reasonable effort to obtain the historical accounting records of Samsys but such efforts were unsuccessful, current management of the Filer and the Filer are effectively denied access to the historical accounting records of Samsys necessary to prepare the Samsys Second Quarter Statements; and
(b) The Filer files with the BAR (i) audited annual financial statements for Samsys for the years ended September 30, 2005 and 2004, together with the Auditor's Report thereon and notes thereto, (ii) the Samsys First Quarter Statements, (iii) a pro forma balance sheet for the Filer as at March 31, 2006, which is based on the Samsys First Quarter Statements, (iv) pro forma income statements for the Filer for the year ended December 31, 2005 and for the three-month period ended March 31, 2006, based on the Samsys First Quarter Statements, and (v) the accompanying compilation report signed by the Filer's auditors.