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At its meeting on Friday, July 20, 2001, the VisuaLABS board of directors
received a report from its president, John Kendall, raising serious
concerns respecting the status and viability of the company's GroutFree
technology and misrepresentations made by the company's chief executive
officer, Sheldon Zelitt, at, and subsequent to, the company's annual and
special meeting held July 3, 2001. Mr. Kendall (who replaced Mr. Zelitt as
president on May 8, 2001) first became concerned as to the GroutFree
technology on Monday, July 16, 2001, consulted with counsel on Tuesday,
July 17, 2001, confronted Mr. Zelitt later that day, and shortly thereafter
called the July 20, 2001, board meeting, giving the required 48-hour notice
to all directors.
At the July 20 meeting, the board reviewed memoranda from Mr. Zelitt and
received his undertaking to co-operate fully with the special committee
established at that meeting to review the misrepresentations made by Mr.
Zelitt at the annual meeting and the status of the company's technology
generally, including its 3-D technology. Mr. Zelitt has failed to fully
co-operate with the special committee. In addition, Mr. Zelitt's memoranda
to the board also contained several further misrepresentations. As a result
of the special committee's concerns regarding Mr. Zelitt's memoranda to the
board and his overall lack of co-operation, the special committee has been
hampered in its efforts to fully complete its review.
To date, the special committee has not seen any prototype or other
demonstration of the company's GroutFree technology. Mr. Zelitt has refused
to return the original two-by-one prototype to the company. The special
committee has concluded that the GroutFree technology is clearly not as
advanced as represented. The large screen GroutFree prototype demonstrated
at the annual meeting was, in fact, a standard 42-inch plasma television
purchased by Mr. Zelitt, without the knowledge of any other company
official, at a local Calgary consumer electronics retailer on June 28,
2001. The device was modified by Mr. Zelitt in a minor way which was not
readily apparent, but in any event, does not substantiate the GroutFree
technology. The committee believes that no working prototype of a device
incorporating the GroutFree technology exists.
Additionally, the 3-D technology upon which the company was originally
founded, and for which Mr. Zelitt and Joy Zelitt received their shares in
the company, is also not as it has been represented. Mr. Zelitt has been
asked to identify and produce for the special committee's inspection any
3-D electro-optical or other hardware modifications, which he represented
to exist. Mr. Zelitt has failed to do so. The special committee has
concluded that the 3-D effect demonstrated by the company over the years
is, in fact, generated from the content of the tape and is not the product
of electro-optical or other hardware modifications to display devices. The
precise manner in which the 3-D effect is achieved in the demonstration
tape and the ownership of the technology to create the demonstration tape
is unknown to the special committee, although Mr. Zelitt has advised that
it is owned by VisuaLABS.
The company expects to take steps to have the shares held by Mr. and Mrs.
Zelitt cancelled without consideration and to pursue other available claims
and remedies. The company has terminated the employment of Mr. Sheldon and
Mrs. Zelitt effective immediately, for cause in the case of Mr. Zelitt. The
company has no evidence of any knowledge or involvement of Mrs. Zelitt or
any other person in any of Mr. Zelitt's actions. Mrs. Zelitt's co-operation
has been requested to determine the state of her knowledge of relevant
matters and assist in the determination of her entitlement, if any, to
severance. Further, the company has determined to wholly discontinue its
European office and operations effective immediately. These and other steps
are expected to reduce the company's general and administrative expenses by
approximately 50 per cent from recent levels.
The special committee has reported that there are two remaining early-stage
technological developments in the company, which have been produced by
other scientists working in the company's labs -- an alternate GroutFree
proposal and a real time depth recovery process to map depth in existing
2-D images.
The board is proposing to develop a plan acceptable to the shareholders
generally (excluding Mr. and Mrs. Zelitt) to permit the company to move
forward as a going concern. The plan is expected to include significant
reductions in the company's cash-usage rate and the deployment of the
company's available capital resources to further develop the company's
remaining technologies and pursue the commercialization of those
technologies. The board's proposals in this regard will be developed and
communicated to shareholders as soon as reasonably possible and in any
event by the end of August. At this point the company is, at best, an
early-stage technology company with significant liquid capital and human
resources.
Each of the directors of the company, excluding Mr. and Mrs. Zelitt who
will be asked to tender their resignations, has confirmed that he intends
to continue to serve as a director of the company at least until the future
business plan has been developed and disseminated. The directors wish to
acknowledge the invaluable assistance of all of the company's other
personnel in addressing these matters. Shareholders are thanked for their
patience and understanding in these difficult circumstances.
The company will co-operate with securities commissions and any other
authorities that commence investigations or proceedings with respect to
these matters.
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