The Nova Scotia Legislature

The House adjourned:
October 26, 2017.

Public Accounts -- Wed., Oct. 24, 2001

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HALIFAX, WEDNESDAY, OCTOBER 24, 2001

STANDING COMMITTEE ON PUBLIC ACCOUNTS

8:00 A.M.

CHAIRMAN

Mr. William Estabrooks

MR. CHAIRMAN: Good morning. I would like to formally welcome you to our session this morning where we will be speaking with the former senior officials from Knowledge House Inc.; welcome. Although we met you in the other room, we will ask you to introduce yourselves in here for the public record. I would like the members of the committee to introduce themselves.

[The committee members introduced themselves.]

MR. CHAIRMAN: If you could introduce yourselves please.

MR. DAN POTTER: My name is Dan Potter, Chairman and CEO of Knowledge House Inc.

MS. CATE MACNUTT: Good morning, I'm Cate MacNutt, a former senior VP of Knowledge House. I should mention that Mr. Potter is currently Chairman and CEO, not former. Thank you.

MR. CHAIRMAN: Thank you for that correction.

We traditionally have about a 15 minute presentation and I certainly appreciate the opportunity for the video in the lounge, and I spoke to Mr. Potter for a minute earlier. Perhaps it would be advisable to remain in the 10 to 12 minute category so we can stick to that time frame. Are you comfortable with that, sir?

MR. POTTER: That's fine.

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MR. CHAIRMAN: I would ask you to begin then.

MR. POTTER: Mr. Chairman, ladies and gentlemen, I would like to thank you for the invitation to appear before this committee to discuss Knowledge House Inc. Needless to say, I have followed your proceedings closely and I certainly respect the work you are doing. The close scrutiny of government spending is the cornerstone of any parliamentary democracy and I commend you for taking your time in this matter.

You have the right and the duty to know and understand the details of the company's business relationship with the Government of Nova Scotia. That relationship has been, and continues to be, a very ethical and open one; indeed, today I will leave you with documents that speak to this professionalism and the quality of that relationship in some detail; more on that later.

At the outset though, I would like to stress one thing. It has been widely reported in the province that Knowledge House is bankrupt or in receivership. Even my invitation to appear before this committee was addressed to a former chairman of the company. Well, in fact, I am still very much the active chairman and CEO of the company. Knowledge House is not in receivership or in bankruptcy. The company did have to curtail operations last month, but it is not bankrupt. In fact, we are in the process of making a proposal to creditors and I am continuing to work with investors to find a way to operate the company successfully once again.

I am determined to make this company succeed, despite the obstacles. I believe that the vision for education that Knowledge House has, and has had, can still play a vital role in Nova Scotia and in markets elsewhere. So no matter what you as a committee take away from this meeting today, it is critical for me, at least, that you understand that Knowledge House's mission is the delivery of highly engaging, experience-based, collaborative education programs designed to develop critical thinking and resourceful people who will be the kind of lifelong learners and team players ideally suited to the new economy in North America and elsewhere.

Research clearly shows that students learn better when you take them out of the lecture hall and help them work collaboratively in the real world. Knowledge House has wed that proven educational model with Internet technology and Web-based learning. The ultimate product of Knowledge House is skill-based people, highly skilled people, the kind of flexible, self-directed problem solvers that our society needs to thrive and prosper.

The notion that we need such citizens in this new world is in no way radical. There is a wealth of research material behind our programs, our ideas and our products. The Conference Board of Canada, which has been researching this issue since 1982, has concluded that today's model citizen and worker can communicate; manage information; use

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numbers; think and solve problems; demonstrate positive attitudes and behaviors; and be adaptable, learn continuously and work with others.

Our programs, like the Advanced Studies Program, that we were just beginning to introduce in Nova Scotia schools are the result of painstaking research and development. Knowledge House has been a very intensive research and development company and has invested well over $10 million in real research and development in the development of its products over the last two and a half to three years.

Any one of you who has seen the video we just screened in the room, or has talked to a student or teacher involved in our programs in Nova Scotia, will recognize the enthusiasm and the zest for learning that Knowledge House brought to the classrooms of the province. I know that this vision is not the subject that many of you want to ask questions about today, but I do believe it is important that you understand Knowledge House before you can start to understand the matters that we are here discussing today.

The documents I will leave you today provide important substance and context that your committee needs to fulfill its important role as the watchdog for public spending. They tell the story in detail and chronologically. The documents I will leave you will clearly show:

(1) Knowledge House was approached at the executive director level by professional staff in the Department of Education well over a year ago, in the summer of 2000, to deliver an educational program in Nova Scotia high schools. We did not approach the Nova Scotia Government in this regard, it approached us.

(2) That the province and Knowledge House committed to each other to deliver the Advanced Studies Program in some Nova Scotia schools beginning in September 2001.

(3) That this commitment was made in March 2001 and not in August when the first payment on a very old invoice was received.

(4) Knowledge House was ready and able to deliver the programs in Nova Scotia's schools this fall until external events intervened to impair that capacity.

(5) Knowledge House, at all times, exhibited openness and candour in its relationship with the Government of Nova Scotia.

Other details involving the collapse of Knowledge House's share values and its recent financial problems are now before the courts. I will address them as best I can in this forum.

I want to stress again that the business relationship between the company and the Nova Scotia Government was and is rigorous and professional, ethical and straightforward.

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I am more than willing to answer any questions you have about that relationship. Thank you very much.

MR. CHAIRMAN: Thank you, Mr. Potter. Ms. MacNutt, do you have anything to add?

MS. MACNUTT: Thank you, Chairman. I have nothing to add this morning, other than I accepted the invitation to be here as a former member of Mr. Potter's management team to assist in whatever way I can with his contribution to your proceedings. Thank you.

MR. CHAIRMAN: Thank you. The MLA for Richmond would like to have a copy of your prepared statement, Mr. Potter, if that is possible. I would assume all members would. Our usual method is that we will now turn over for questioning, 20 minutes to the Official Opposition, 20 minutes to the Liberal Party and 20 minutes to the government side.

I would like to, at this time, turn the floor over to the MLA for Fairview.

MR. GRAHAM STEELE: Thank you very much, Mr. Chairman. I would like to start by asking that the witnesses be sworn before I start my questions, please.

MR. RUSSELL MACKINNON: On a point of order, that is a given when any witness comes before this committee. Generally, the chairperson guides the witnesses. They know they are under oath and they are also given immunity from any prosecution. They are protected in this Chamber. So I think that is just being a little bit melodramatic and unfair to both these witnesses.

MR. STEELE: Mr. Chairman, I am not quite sure what point he is trying to make. A witness isn't sworn until a witness is sworn. There is no automatic swearing or assumed swearing and it has been relatively common in this committee in the past to ask witnesses to be sworn. So I would like to ask again that the witnesses be sworn before we start.

MR. CHAIRMAN: I was aware of the fact that this could happen and that a Bible would be provided to me by Ms. Stevens, and I am prepared to do that. At this stage, on a point of clarity, I would just respond to that initiative and swear both people in at this time, if I may. Thank you.

Heaven forbid, if my football coach ever saw me with a Bible in my hand. Mr. Potter, there is an oath or there is also a solemn affirmation.

MR. POTTER: The oath is fine.

MR. CHAIRMAN: Could you stand, please, and put your hand on the Bible. Do you, Dan Potter, swear that the evidence you shall give the Standing Committee on Public

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Accounts touching on matters pertaining to Knowledge House Inc. shall be the truth, the whole truth and nothing but the truth, so help you, God?

MR. POTTER: I do.

MR. CHAIRMAN: Do you, Cate MacNutt, swear that the evidence that you shall give to the Standing Committee on Public Accounts touching on the matters pertaining to Knowledge House Inc. shall be the truth, the whole truth and nothing but the truth, so help you God?

MS. MACNUTT: I do.

MR. CHAIRMAN: Thank you. The foundation of this dear old building is still with us. Could we begin, then, please. It is 8:14 a.m.

MR. STEELE: Thank you very much, Mr. Chairman. Mr. Potter, I would like to say, first of all that you are quite right about the mandate of this committee, that what we are interested in, what we are embarking on today is the question about how public money was spent. There is a great deal of other things going on around Knowledge House, as you know better than anybody, but our main enterprise today is on the spending of public money. I will touch on those other things only insofar as they are relative to the spending of public money.

Let me start by asking you - we had an answer on this from the Deputy Minister of Education last week but I would like to ask you the same question - to your knowledge, how much public money was received by Knowledge House and when was it received?

MR. POTTER: The contract that Knowledge House entered into with the Government of Nova Scotia for the Advanced Studies Program had an initial payment of $1.180 million or $1.2 million, approximately. The payment of that invoice was on August 16, 2001.

MR. STEELE: Mr. Potter, what would you say that the people of Nova Scotia got for their $1.180 million?

MR. POTTER: The people of Nova Scotia had the agreement that is, I think, in your possession, which provides that the e-learning platform, the SmarterTeams software, was part of the contract. The whole of the design of the Advanced Studies Program, which includes three academic years - Grades 11 and 12, and first-year university credits - and as well all of the work from March 19th to September 13th when our business operations were interrupted in terms of professional development, ongoing development of the program, installation of the program in the schools and the commencement of operations. On an ongoing basis the province has the right under the agreement which was negotiated to

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continue to use the program and the software that it rides for use in the schools of Nova Scotia into the future.

MR. STEELE: The relationship between the province and Knowledge House is described in the contract as strategic and multi-faceted. In your opening presentation this morning you said it was ethical and open, that it was characterized by openness and candour, that it was rigorous and professional, ethical and straightforward. So that's a pretty high standard. The relationship started, as you said, last year in the year 2000. One thing I am curious about though, the letter of understanding between Knowledge House and the province was signed on, or very close to, March 19, 2001. Why was it not publicly announced until May 10th?

MR. POTTER: I'm not exactly sure why, it was a province prerogative to announce the agreement when it wished. The work began in March and to the best of my recollection, it was simply a matter of when the parties were available and ready to take the next step. In fact, it wasn't that much of a gap between the initial date and the announcement date. The announcement was, I believe, May 8th by the province in a press release. So it was shortly more than a month after the work had been done.

MR. STEELE: There is another possible explanation. Knowledge House released its first-quarter financial statements on May 10th, which was two days after the province's news release and ACOA's news release and one day after Knowledge House's news release. At that point Knowledge House was sucking up cash at a fast rate. Is it possible that the reason the announcement was made at that point was because Knowledge House needed some good news?

MR. POTTER: Absolutely not. We were pressing for the release from the time we did the agreement, so it was really just logistics that made the four or five weeks go by - there is no relationship. In fact, until this moment I hadn't had any mental connection between our quarterly statements and this contract in terms of releases. I know there were delays, and so on, getting it coordinated with the federal ministry and that sort of thing, that took some time. I'm sure that the work began back in April to get that done and it just took into May with the fact that it was a federal-provincial matter that had to be coordinated between Ottawa and Halifax. So it was really nothing to do whatsoever with our particular financial statements.

MR. STEELE: There was unfortunately another unlucky coincidence for the province in August, and that is the final deal was signed on August 16th, which was the same day that the province handed over its $1.2 million. The very next day Knowledge House issued a news release saying that it needed another $5 million and needed to raise it on the market. It appears that the stock market reacted badly to that announcement; in fact, August 17th was the day that the slide in Knowledge House's stock price started. Was that just a coincidence as well, or is it possible that Knowledge House deliberately withheld the August 17th news release until it had pocketed the province's money?

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MR. POTTER: Absolutely not. The matters that occurred on August 16th were related to a real market panic, particularly in Nova Scotia, because abruptly on that day another education company that was publicly traded did go into receivership and caused a lot of pressure on the market and a lot of concern and panic in the market. In fact, our release that was issued on that day - and I will leave a copy for the committee - was really issued by way of saying that we have financial processes underway in order to provide financing; not to warn about it, but to indicate that even though this other education company had problems with running out of cash, that we had a plan underway that, in fact, dates back to July when we retained the investment bank.

Normally you wouldn't announce the results of the investment bank's work until they were virtually finished, which would have been in September and October, but we needed to put that release out for information to reassure the market that we did have financial processes underway in order to support the company's operations. So it was really the opposite reason for putting the release out; not to disclose something after a certain date, but to assure the market in relation to other jitters that it had because of the other education company.

MR. STEELE: On August 16th when you took the province's cheque for $1.2 million, did you tell the province specifically that you were about to issue a news release the following day with news that might be perceived by some as indicating the shakiness of Knowledge House's finances? Did you specifically tell them that that news release was coming?

MR. POTTER: On August 16th all that was done from our point of view was the finalization of a documentation process that had begun back on March 19th. On March 19th we entered into a substantive agreement with payment terms, and so on, that gave rise to the right invoice, and so on, and that the initial invoice - the $1.2 million that we are talking about - was dated April 1st. So on August 16th we were really looking at an invoice that was four and a half months old, even though it had been validly issued and approved, just because of the contract development process and not because of anything special about August 16th.

The coincidence of what happened on the market that day was purely a coincidence and it had nothing to do with the fact that the contract was signed. There wasn't any particular ceremony about the signing, it was just something that was in process for some four, almost five months.

MR. STEELE: Mr. Potter, some time shortly after that, the province woke up to the fact that there might be some problems with Knowledge House and on August 30th the Deputy Minister of Education wrote to you - and I am just summarizing his letter - saying what's going on, is everything okay? And you wrote this letter back to him and I am going to read from it and ask you whether, with the benefit of hindsight, this letter was in keeping

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with the ethical and open and rigorous and professional relationship that you have described. I'm not going to read the whole letter, Mr. Chairman, just a couple of sentences. It says:

"Further to our memo to you earlier this week, we have been working very hard to secure appropriate financing to continue to meet our operating needs. We have been successful in this regard in the last several days . . . Accordingly, DOE will not have to consider any back-up plan as referred to in my memorandum of August 26, or otherwise be concerned with our capacity to continue to perform under our contract with your Department."

That's August 31st; two weeks later the company has, what you have referred to as, an interruption in its operations. Mr. Potter, do you think now that this letter was misleading?

MR. POTTER: Not at all.

MR. CHAIRMAN: Excuse me, before you answer that, sir, could the member provide a copy of what he has quoted from to the other members of the committee?

MR. STEELE: Mr. Chairman, this is the same letter that was distributed to the members of the committee last week, so the members already have a copy. But if they would like another one, I am certainly pleased to.

MR. CHAIRMAN: A couple members of the government caucus have asked for that.

I'm sorry, Mr. Potter, your answer please.

MR. POTTER: Certainly. In fact, that letter was occasioned, Mr. Member, by a memorandum that we initiated, without any request to do so at all, on August 26th when I wrote a memorandum to the deputy minister about the Advanced Studies Program. From our own initiative, because we were having some challenges with our financing, we wanted to bring it to the attention of the deputy minister, it wasn't anything that was brought to our attention by them. In fact, we said the following, we are writing to give you "A status update regarding Knowledge House's finances and its ability to perform under the Advanced Studies contract;", and to provide a "Back-up plan to ensure that DOE can have a successful launch and implementation of the ASP, regardless of whether Knowledge House is able to continue to perform its obligations under the contract. We are being proactive here because we fully recognize and appreciate that this week has important implications for you and your Department in launching the pilot of the Advanced Studies initiative in the first five schools. We appreciate that you have a need to have comfort about the sustainability of the program once the students are engaged in it."

I will leave this for the committee members but it goes on for two pages to describe, in detail, the status of what we were doing in terms of financing and also, again, without ever

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having being requested to do so, provides a back-up plan in the event we have to get back to them to say we are not being successful in our financing efforts.

So, Mr. Steele, the whole evocation of the letter from the deputy minister on the 30th was given rise to by our proactivity, as I mentioned, our openness and our ethical stance on being very clear and open with our partner here, because we knew that school was starting in a couple of weeks and we wanted to be absolutely sure that if we were going to proceed, everyone knew exactly what the risks were and so on, so we did that. In fact, I had people come into the office on the Sunday before that, August 25th, and put this plan together so that we would have it on their e-mail and faxes the very first thing in the morning because that was the week before school and we were very concerned not to have any uncertainty about the information base that both parties were dealing with.

MR. STEELE: I guess we will have to let other people judge whether that letter was misleading or not. Mr. Potter, are you aware that complaints have been filed against you and Knowledge House with the Toronto Stock Exchange?

MR. CHAIRMAN: Excuse me, Mr. Potter, I have been asked that the letter you just quoted from, could you provide a copy of that to Ms. Stevens?

MR. POTTER: Yes, I have all of these. Do you want me to provide it at this point?

MR. CHAIRMAN: Thank you and again, I apologize for interrupting.

MR. POTTER: I think the normal practice for regulatory matters is for staff level work to be done and I am not aware of any particular details that you are talking about with the Toronto Stock Exchange.You mentioned the Toronto Stock Exchange?

MR. STEELE: Yes, I did. In that case, Mr. Potter, I will share some of the details with you. I have become aware of the details of at least one such complaint. The complaint alleges that your broker, Mr. Bruce Elliott Clarke, with your knowledge and participation, set up a numbered company in order to hold a trading account at National Bank Financial. Is that true?

MR. POTTER: No, the matters you are referring to are also the subject of other proceedings where detailed statements by us, by me, and my counsel, have been put on the public record. The true facts of those matters will, as you mentioned, be determined by other bodies that are set up to deal with that kind of factual evidence. At no time was such an account be set up. Any securities that would have been purchased, would have been purchased by a firm or a person as an investment in the company.

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MR. STEELE: The allegation which comes from a former officer and director of the company says that an account was set up known as the box account. Have you ever heard the phrase, the box account before?

MR. POTTER: I have heard that word referred to.

MR. STEELE: What is your understanding of the box account?

MR. POTTER: As I have said, we have undertaken to deal with that in the courts and we will deal with it if any further action comes forward to me from the TSE or any other body and we will respond fully with that. I am not here to debate the details of those allegations, I am telling you that those allegations are not correct.

[8:30 a.m.]

MR. STEELE: The allegation, from a former officer and director of the company, is that the purpose of the box account held by the numbered company was to hold, buy and sell Knowledge House Shares. Is that true?

MR. POTTER: Well, Mr. Steele, you can read into the record someone's complaint but it is not any type of adjudication of what actually happened in fact. Any person can make a complaint. Any person can say whatever they wish and allege whatever they wish, but I am telling you that my response to that is that those allegations and that complaint is not based on fact and is groundless and will be proven to be so in the appropriate forum.

MR. STEELE: This is one forum for questioning and we are trying to get to the bottom of how public money was held. It is entirely relevant to that what one of the province's partners was doing at the time. Is it true that at different times both you and the company's legal counsel, Mr. Blois Colpitts, actively discouraged other major shareholders from selling their Knowledge House shares, saying to them that if they did they would bring everything down, or words very much to that effect?

MR. POTTER: Mr. Steele, as I have said before, any allegations that you are referring to there are simply one person's complaint and our response will be clearly proven in the context of those matters. In fact, we have made our own allegations about what happened to the stock of Knowledge House. We have referred to aggressive short-selling and certain conduct or an organization that aided and abetted that, which in fact caused the stock to go down rapidly in price. That is my response, Mr. Steele, to those comments. That is what actually happened with our company.

MR. CHAIRMAN: Mr. Steele, you have two minutes remaining.

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MR. STEELE: Thank you, Mr. Chairman. Mr. Potter, did you or did any company that you control in whole or in part or anyone acting at your direction engage in unreported insider trading of Knowledge House shares?

MR. POTTER: No.

MR. STEELE: Mr. Potter, let me explain to you why this is so important, what we are doing here today and why I am a little disappointed with some of your answers. In my constituency we have teachers who say that the education system has been cut for 15 years and they simply can't do more with less. Many teachers pay for basic supplies out of their own pockets. I have special education students who don't get the resources they need and principals who say they would like to give them the resources but they simply can't because the funding is not there. In my constituency I have parents, students and teachers preparing for a very painful round of school closure hearings, so the school board can save a few tens of thousands of dollars by closing neighbourhood schools.

It is in this environment that Knowledge House comes along with a good idea, we all admit that, it was a good idea. They take over $1 million from the Department of Education and then essentially go out of business only weeks later - despite what you say - without having delivered a final product, it was a partly completed product. At the same time, allegations have been made by knowledgable people that you were busy with numbered companies, box accounts, margin trading, stock price manipulation. I don't know if those allegations are true, but if there is any truth to them at all, then we have to wonder whether the public trust has been betrayed when dealing with this amount of money.

The reason it is so important is that all of these parents, students and teachers, I think, are looking for some sign of contrition, some sign that somebody somewhere is taking responsibility and is sorry for the fact that over $1 million of education money has been wasted. So I would like to give you the opportunity to . . .

MR. CHAIRMAN: Mr. Steele, thank you. Mr. Potter, would you like to respond to that comment, please?

MR. POTTER: Certainly, thank you, Mr. Steele. I fully recognize the challenges in the education system. In fact, the program brought forward by Knowledge House was to address - and I think as the deputy minister said here last week - a very major need with high school students to better achieve at the high school level and to go on to be more successful at university and elsewhere. It is also a very big need and we have a rate in Nova Scotia today where every year more than 20 per cent of Grade 12 students do not graduate at all. Another 30 per cent below that find themselves going to university and dropping out by Christmas, so-called Christmas graduates. There is a very big gap between the school performance of these high school graduates and what they need to know when they get out into the world.

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It was that initiative and that need that the department was addressing and that our research and development was addressing.

Our company and our private shareholders, the shareholders of Knowledge House, invested over $10 million in addressing that very issue. We, as I will leave here with documents, were launching that program not in the public school system but privately to students who had not gotten what they needed from the public system and would be paying tuition to take the program. We announced that in June 2000. After that announcement, we were approached by the senior official in the Department of Education to say, we need a program like that. I will show you there is an e-mail dated June 5th, which I will leave with you today. Also, the June 1, 2000 release by Knowledge House about our Global Baccalaureate Program. That program was the precursor or the intellectual basis upon which the Advanced Studies Program was ultimately created. In fact, the Global Baccalaureate program was converted to be the Advanced Studies Program at the request of the Department of Education because they needed it in their schools.

Mr. Rich, who was the Executive Director in charge, as I mentioned, unsolicited by us wrote us to say that the Global Baccalaureate Program can work very well in our schools, I will get back to you with my thinking. On August 29, 2000, Mr. Rich got back to me in great detail - and I will leave that document with the others - in a four page letter and document to indicate further that the idea of taking our Global Baccalaureate Program and bringing it to address this very serious need in the high schools was something he wanted to engage us in. We were already undertaking the research and development; our shareholders, through my efforts and others, had invested in the company in treasury shares well over $10 million that was dedicated to the development of this program. So there is a very substantial private initiative underway and I fully understand that the public money is your concern and it is also my concern.

The whole project here was a very major and serious undertaking by a company in the development stage, operating in an environment where, after March 11, 2000, when the capital markets came under very serious constraint, for the next year and a half in fact, two years and still into the present, our company and many, many others have had the most difficult time in the history of the stock market, in terms of new companies to access capital. Our challenges relative to raising money to invest in our program were real, our success was very real, as I said, we had documented and audited well over $10 million of R & D and that was what was requested of us by the province. So, we all regret that this program is not running in the schools of Nova Scotia today.

We were on a course of action, we were invited and requested to bring that program to the school system. We did, in good faith, and proceeded with every initiative and effort we could possibly muster. Certain external things happened to our company, in terms of its access to capital and its share price, in and around the period we are talking about, which

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were events that happened to us, they are not something we initiated or were trying to do. But we had to cope with them and we coped with them as best we could.

MR. CHAIRMAN: Thank you, sir. It is 8:29 a.m. and for the next 20 minutes we will go to the Liberal caucus.

Mr. Samson.

MR. MICHEL SAMSON: Thank you, Mr. Chairman and Mr. Potter. Mr. Potter, you signed a letter of agreement with the Province of Nova Scotia on March 19, 2001, is that correct?

MR. POTTER: That's right.

MR. SAMSON: Based on the legal advice you would have received from your in-house counsel and others, as far as you are concerned, that letter of agreement, did that bind the Province of Nova Scotia to pay Knowledge House $1.2 million?

MR. POTTER: Yes, it did in conjunction with the other parts of the transaction which were the payment schedule and the work we performed under that contract, because work was already underway and continued after March 19th in earnest, under the contract. An invoice was authorized under the terms of that agreement for April 1st and it was issued. In fact, I will leave with the committee the copy of the invoice and a letter confirming its validity, dated in April, from the Deputy Minister of Economic Development. So I would say, yes, definitely, a very specific document, namely an invoice for approximately $1.2 million was issued by the company and ratified in writing as valid and due on April 1st by the deputy minister.

MR. SAMSON: On April 1, 2001, how many modules did you actually have ready to deliver to the Province of Nova Scotia, when you invoiced them on that date?

MR. POTTER: On April 1st?

MR. SAMSON: Yes.

MR. POTTER: The whole of the program, in the agreement that was ultimately documented, all of the schedule that wasn't in there, because it does represent intellectual property of the company, but in Schedule or Appendix A to the agreement, which I am happy to have any member view, under a viewing basis, has many pages of description of all eight modules. The whole of this program needs to be understood in terms of how it was built and designed.

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MR. SAMSON: With all due respect, I think this committee has a good understanding of the eight modules. My question to you is, on April 1st when you invoiced the Province of Nova Scotia for $1.2 million, how many modules did you have available on that particular date?

MR. POTTER: Module 1, and module 1 through 8 were under levels of design and development, and module 1 was in detail development.

MR. SAMSON: On April 1st, the Province of Nova Scotia was responsible for $1.2 million to be paid for one module of an eight-part module.

MR. POTTER: In addition, the whole of the SmarterTeam's platform, which was all developed and operating, had been developed as part and parcel of the program. The program did not only consist of the content of each module, but the overall design of all modules and the software that underlaid all modules, the SmarterTeam's platform, the design of all modules and detailed development under module 1.

MR. SAMSON: So there was one available April 1st. Mr. Potter, who initiated the August 26th memo that you provided to the Department of Education, providing you, I believe, with the status of financing and with the back-up plan?

MR. POTTER: I did.

MR. SAMSON: At any time before that had you been contacted by either the deputy minister, the Minister of Education or any senior officials demanding a financial update of Knowledge House?

MR. POTTER: Not in specific terms, but all throughout - and the document I will leave you will show you - the April, May, June, July, August period much correspondence went back and forth that talked about, among other things, financial risk, what assets the province would get for its purchase and so on. There are at least 15 letters back and forth, that I am leaving you today, that go into this in great detail. I can divert this conversation now, but I don't think it would be very productive. At all times, and that was my point at the beginning, there was a good exchange of information, it was a two-way street. I think the deputy minister said here last week that he was concerned about the financial capacity of the company because of the financing environment that we were operating in, we were concerned about it, we were all on that task. We were negotiating back and forth around that issue to ensure - the answer to your question earlier - what do we get for our money.

At every point, in terms of deliverables, which is not unusual in these kinds of contracts, the amount of deliverables should relate to the amount of money that is being contracted for at any given time, and through a rigorous negotiation all parties agreed that the payment schedule in the document, which outlined payments over the four-year period,

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were appropriately dated on the dates on which they should be dated because of what work had already been done, as I discussed before. It was all part of detailed negotiations which, in fact, took a long time to complete.

MR. SAMSON: Did the Province of Nova Scotia ever ask to have their auditors review your financial statements?

MR. POTTER: Not as such, no. As a public company our audited statements and other statements are on the public record.

MR. SAMSON: Was there ever a request to bring in a third party to review the actual financial status of Knowledge House, by the Province of Nova Scotia?

MR. POTTER: Not as such. The issues of financial risk and what the province got for its money under the contract were negotiated in terms of value received. We were a supplier, the province was a customer, and we were providing goods and services under a contract with a schedule of payments.

MR. SAMSON: With all due respect, I appreciate the risk element and everything, but I think it is safe to say, Mr. Potter, that it was very public knowledge that your company was in financial difficulties in its operating status, not because of the contract with the Province of Nova Scotia per se. My question to you is, at any time did the minister or the deputy minister demand from you detailed financial information about your financial health prior to launching the Advanced Studies Program for this scholastic year?

MR. POTTER: First of all, I never had any dealings on this with the minister; all the documentation, as you will see here is very much at a staff and professional level. In response to your question about the deputy minister, not in those specific terms, no. The whole issue about financial capacity and value for money was discussed and was contained and reflected in all the documentation.

MR. SAMSON: Mr. Potter, the deputy minister has recently revealed some questionable spending by two school boards in this province. One of them involves the Strait Regional School Board; it has been indicated that a private deal was done to provide a $500,000 personal guarantee to a top administrator with the board. Could you tell us if you have any personal knowledge of who that top administrator might be?

MR. POTTER: Yes, I have seen reports and I have personal knowledge of the person . . .

[Page 16]

MR. SAMSON: Do you have personal knowledge other the than media reports that have come out?

MR. POTTER: Yes.

MR. SAMSON: Could you indicate to us who that top administrator is?

MR. POTTER: Jack Sullivan.

MR. SAMSON: Could you also indicate to us, do you have personal knowledge of what that personal guarantee was for?

MR. POTTER: No. I wasn't even at Knowledge House at the time I see on the record that the guarantee relates to. I certainly don't have any personal knowledge of the details of it, no.

MR. SAMSON: Are you aware of whether any of that $500,000 was actually forwarded to Knowledge House or any of its subsidiaries?

MR. POTTER: None of any such monies were ever forwarded to Knowledge House or any of its subsidiaries, I know that. My relationship with Mr. Sullivan is from the year 2000 to the present. Any investments he made in Knowledge House were absolutely nothing to do with that, I can assure you.

MR. SAMSON: Are you aware of how much financial investment he may have made in Knowledge House, personal financial investment?

MR. POTTER: Yes.

MR. SAMSON: Could you tell us how much that investment was?

MR. POTTER: Approximately $100,000.

MR. SAMSON: Are you aware of where that $100,000 may have come from?

MR. POTTER: Yes.

MR. SAMSON: Where would that have come from?

MR. POTTER: It came from a loan that is under dispute now with the National Bank of Canada.

[Page 17]

MR. SAMSON: Is that in any way related to the personal guarantee provided by the Strait Regional School Board?

MR. POTTER: None whatsoever.

MR. SAMSON: That you are aware of?

MR. POTTER: That I am aware of, and I would be aware of that, and it isn't.

MR. SAMSON: Mr. Potter, the pilot project that you did launch was in the Chignecto-Central School Board. It has recently been reported that that board, I believe the superintendent, chief financial officer approved $1.7 million of program spending which was not approved by the elected board members. In your personal knowledge, are you aware of whether any of that $1.7 million would have been spent on Knowledge House or any of its subsidiaries?

MR. POTTER: I have no personal knowledge, and not to my knowledge. The program that we did there, the pilot, was funded by the private partners, Knowledge House, Alliant, Intel and others. It was a demonstration project, it wasn't a contract.

MR. SAMSON: Was there any investment by the Province of Nova Scotia or monies forwarded as part of that pilot project?

MR. POTTER: No.

MR. SAMSON: None. Mr. Potter, you have indicated and last week the deputy minister indicated that the intellectual property that is now left with the Province of Nova Scotia is of significant value, according to the deputy minister. Would you confirm today that under the terms of the agreement signed on August 16, 2001, which says that the agreement is in effect as of March 19, 2001, in effect prohibits the Province of Nova Scotia from entering into an agreement with a third party other than Knowledge House to provide Web support services to continue the Advanced Studies Program?

MR. POTTER: In event of a default, no, it wouldn't prohibit such work. The province can do whatever it needs to do with its copy of the software and its copy of the content, other than actively market it outside of the province. The rights upon termination are such that the province can do whatever it needs to do in terms of hiring either persons employed by it or contractors or others in order to take on the program in their own right.

MR. SAMSON: That is interesting to hear. You are familiar with the contract, are you?

[Page 18]

MR. POTTER: Yes. It is detailed, there is a lot of legalese in it, but I am familiar with the intent of it, yes.

MR. SAMSON: Are you familiar with Section 25.6 of the contract, which says, "In the event the Customer terminates due to the Supplier's material breach . . .", that would be a breach by Knowledge House and the customer - in this case, the Province of Nova Scotia, " . . . all of the Customer's rights and obligations under the Agreement, subject to Section 30.5, shall immediately terminate, except that, subject to the following terms and conditions . . ." Are you familiar with that section?

MR. POTTER: Are you saying 25.6?

MR. SAMSON: Section 25.6.

MR. POTTER: I am not, in detail, familiar with it, but I am looking at it now.

MR. SAMSON: Subsection (a) says that the province shall only have one copy of the program and software. Subsection (c) basically, in essence, says that the province shall not have, " . . . the right to make reproductions, copy, sell, resell, advertise . . . transmit . . . assign . . . transfer with any third party providing enabling . . . services, consulting services or professional services that may be necessary or desirable to implement further uses of the Licensed Program . . ." Would you not agree with me, Mr. Potter, that, in essence, that clause prevents the Province of Nova Scotia from being able to use your software with any other party other than Knowledge House?

MR. POTTER: Not at all. That whole section is related to commercialization. That is saying that the province is prohibited from going into the business of commercializing in its own right that product and taking it to other markets and selling it as a commercial enterprise. It is not about its own use for its own purposes at all.

MR. SAMSON: Would you agree with Section 25.6 (e) that the Province of Nova Scotia, whatever materials they do have, that they have them only until the year 2006, and they have the option of either returning it to you or destroying it?

MR. POTTER: Yes, it was a five year period on the licence, which is normal, to have a term.

MR. SAMSON: What the province has now, in effect, after 2006, they will no longer have?

MR. POTTER: Unless there are other provisions that provide for an extension or other rights on a breach. It is a five year licence.

[Page 19]

MR. SAMSON: Mr. Potter, there is an indication in the clause about an upcoming December 1, 2001 payment. Could you indicate what that payment would have been?

MR. POTTER: An amount?

MR. SAMSON: An amount and where it was coming from.

MR. POTTER: December 2001, on Appendix B, $1,498,520.

MR. SAMSON: And who was that going to come from?

MR. POTTER: Come from?

MR. SAMSON: What source?

MR. POTTER: Vis-à-vis us, it would come through the contract and be paid as an amount under the contract to Knowledge House.

MR. SAMSON: By who?

MR. POTTER: By the Department of Education under the regime set up under the contract.

MR. SAMSON: Under the contract, what would have been the total cost to the Province of Nova Scotia?

MR. POTTER: Over the period to April 2005 - the five year period - it is about $7.5 million, roughly. I don't have a total here on the payment schedule, but there are four payments totalling approximately that amount.

MR. SAMSON: When you signed the contract or the letter of agreement on March 19, 2001, it was under the understanding that you had to raise an additional $6 million from other sources; basically, my understanding under the contract, it would be under federal and provincial programs. When that letter of agreement was signed by the Province of Nova Scotia, what written or verbal assurances did you have that your company would actually be able to raise that necessary amount of money to carry out this program?

MR. POTTER: At that date, there was no specific commitment from any third party. That was a process that was contemplated under the agreement and was underway.

MR. SAMSON: The deputy minister indicated to this committee last week that the Department of Education felt there was a good chance that you would actually be successful.

[Page 20]

Is it safe to say, Mr. Potter, that you basically had the same financial approach to this, that there was a good chance you would actually be able to get this money?

MR. POTTER: I wouldn't disagree with whatever phrase he wanted to use, but there was a whole process of funding under this agreement which had a co-operative aspect, and each party would work together with each other to seek these sources of funds. It really was quite typical of some of the federal-provincial funding formulas and so on, and it was set up that way to take advantage of that.

MR. SAMSON: But when the Province of Nova Scotia signed an agreement to give $1.2 million of taxpayers' money into a program which required you to raise an additional $6 million, did you have anything at all in writing indicating you would actually be able to raise that money?

MR. POTTER: Nothing in writing, but that wouldn't have been contemplated, in any event, because it was a four year payment schedule. During the whole of the program, a number of different aspects would come to pass, and the contract would be funded under more than one source from time to time. To have that all in advance would have obviated the need to have any of these clauses in the beginning.

MR. SAMSON: I won't get into an argument on that, I guess I will let people decide what they think of the government giving up $1.2 million on a wing and a prayer, basically, that the money would be able to be provided. On June 7, 2001, Knowledge House split into two companies, going with Knowledge House Technology Solutions and another company to be known as Knowledge Solutions. Why did this take place?

MR. POTTER: First of all, you say split into two sections, prior to that date and for two or three years, the parent company is called Knowledge House Inc., that is the company that we are talking about today in terms of its contract for the Advanced Studies Program. It owned, and still owns actually, a company called Knowledge House Technology Solutions Limited, which was in the technology services and products business. The transaction you are referring to in June 2001 was a sale of the operating assets of Knowledge House Technology Solutions Limited to a third company.

The companies that you are referring to, in the Knowledge House group, are Knowledge House Inc. and Knowledge House Technology Solutions Limited. It was the sale of the operating assets of Technology Solutions Limited that occurred in June.

MR. SAMSON: Knowledge House Solutions . . .

MR. CHAIRMAN: Mr. Samson, you have two minutes remaining.

[Page 21]

MR. SAMSON: Did Knowledge House Solutions assume any of the debt that had been accumulated by Knowledge House Technology Solutions? Did Knowledge House Solutions assume, when it was divided, when it purchased some of the assets, any of the debt that existed in either Knowledge House Technology Solutions or Knowledge House Inc.?

MR. POTTER: I am not sure I'm understanding, Mr. Samson. Did who assume?

MR. SAMSON: There is a new company named Knowledge Solutions, and it purchased assets from Knowledge House Technology Solutions, correct?

MR. POTTER: I don't think the name is Knowledge Solutions, but let's just say the new company, to be clear; I don't want to confuse the issue. I think it is Knowledge Technology Solutions or some such name.

MR. SAMSON: That is the new company.

MR. POTTER: KTS.

MR. SAMSON: That would be the company, Ms. MacNutt, that you . . .

MS. MACNUTT: Yes.

MR. SAMSON: When that company was formed, did it assume any of the existing debt of either the previous company or Knowledge House Inc.?

MR. POTTER: It assumed the major obligations of the company, which were the employee contracts.

MR. SAMSON: What interest do you have in this new company?

MR. POTTER: None.

MR. SAMSON: You have no interest?

MR. POTTER: No.

MR. SAMSON: Any of the shareholders which would have been under Knowledge House Technology Solutions and Knowledge House Inc., other than Ms. MacNutt, did they also transfer over to this new company?

MR. POTTER: Well, 70 employees, in total, transferred.

MR. SAMSON: But investors?

[Page 22]

MR. POTTER: Well, a number of those employees were shareholders in Knowledge House, because it is a publicly-traded company. I would say all of them probably own some shares.

MR. SAMSON: All of the shareholders in Knowledge House would own some shares in the new company.

MR. POTTER: No, no, the opposite. All of the employees who became employees of the new company probably owned some Knowledge House shares.

MR. SAMSON: If I bought stock in Knowledge House Inc. on the stock market, when this company was transferred as Knowledge Solutions, would my stock have gone over with this new company?

MR. POTTER: No.

MR. SAMSON: Why not?

MR. POTTER: We just sold the assets, the operating assets of the company.

MR. SAMSON: The investors, the private investors, the average Nova Scotian who put money into Knowledge House Inc. did not go over or have any of his interest go over to this new company?

MR. POTTER: No.

MR. CHAIRMAN: Thank you, Mr. Samson. Mr. Potter, I'm sorry, I didn't hear your answer to that one.

MR. POTTER: No, that wasn't the nature of the transaction.

MR. CHAIRMAN: I will turn the next 20 minutes over to the PC caucus, the government caucus. I understand the MLA for Sackville-Beaver Bank is leading off. Mr. Barnet.

MR. BARRY BARNET: Mr. Chairman, that's right. Thank you for appearing, Mr. Potter. Excuse me, I have a terrible cold, and I am going to try to fight through this. I guess my first question is, were you aware of or did you watch the proceedings last week of the Public Accounts Committee?

MR. POTTER: Yes, I saw a video of it.

[Page 23]

MR. BARNET: Last week at the Public Accounts Committee, Mr. Steele characterized your company as bleeding cash. Do you feel that is a fair characterization of your company?

MR. POTTER: Not at all. Our company, Knowledge House, completely and from the beginning was a research and development-based company and it was based on the investment of money in advance of selling products in the market. That's exactly the kind of company that it was, which is the kind of knowledge-based company that is sought and developed in every part of the world, especially in markets where the knowledge economy is buoyant. So to say that it was - whatever the phrase was - starving cash, the whole purpose of the company was to develop products using research and development funds.

[9:00 a.m.]

MR. BARNET: Mr. Potter, did Knowledge House, during its early stages, develop a business case with respect to the total cost of developing the Advanced Studies Program, and how does this compare with the revenues expected from the Province of Nova Scotia with respect to the payments for the receipt of those services?

MR. POTTER: The Province of Nova Scotia agreement was important to us for the main reason that it was a proof of concept for future licensing. Based on that success already as of June, we were in negotiations with school districts in British Columbia who, except for our problems in September - and there is an exchange of correspondence on this as well - were ready to buy our programs based on the fact that they had already been adopted in Nova Scotia. So the revenue, over the course of the five years, wouldn't be anywhere near the cost of operating the company or continuing to develop the program, but it would be a significant first customer for this new program.

MR. BARNET: Can you give us, on a percentage basis, what you feel the revenue from the Province of Nova Scotia would have been with respect to the cost . . .

MR. POTTER: Over the five year period?

MR. BARNET: Over the entire contract and the entire program.

MR. POTTER: Oh, the return on that one contract would be negative. The amount spent by the time the contract was fully delivered by us, including the initial research and development, would be well in excess of $20 million and this contract would be $7 million. So 20 per cent of it, maybe 30 per cent, but even that would be low based on the fact that the cost of operating the company over the five year period would be higher than the $20 million that I mentioned.

[Page 24]

MR. BARNET: Earlier you indicated to us that you had had discussions with other school districts in Canada. Can you explain to this committee, or provide to this committee, any other details with respect to other potential clients that you were working with, with respect to your Advanced Studies Program?

MR. POTTER: We had very active selling going on throughout the whole piece. We were engaged with organizations in the U.S. and Europe, school districts in western Europe as well as in the United States and Ontario. We had been working with the Toronto District School Board, the Durham school district and a number of others in active demonstrating and presenting of our program. As well, we did host our program at the Commonwealth Conference of Education Ministers here in Halifax in November 2000, where we did put on a major demonstration of its capacity linking students from Bermuda, Halifax and Ottawa to demonstrate the product. In that case, we were dealing with school ministries, and so on, from 52 countries. So it was a very active program.

As well, in partnership with the Conference Board of Canada, we had been demonstrating and piloting the product in Edmonton, Alberta, and were negotiating with the Calgary District School Board - in fact, a sports school there - for implementation of a similar product. So there was very much a multi-faceted, active sales campaign.

MR. BARNET: Were any of these clients in an advanced stage of development that you would say were imminent in terms of reaching an agreement with?

MR. POTTER: Certainly the West Vancouver school district - we actually, during the period we are talking about in August and so on, we were doing professional development and demonstrating the program that was their final work before putting their team to work on the program with us, because they wanted to start modules similar to the Advanced Studies modules as early as January 2002. So that whole contract, had we not had our operations interrupted, would have begun in September.

MR. BARNET: Mr. Potter, are they the only ones you would describe as being imminent, the ones that potentially would be . . .

MR. POTTER: Of the ones I mentioned, they are the ones that were ready to sign. Remember, this really had only been launched in the market in the spring of 2001. So it was new in the sense that we started developing it, as I mentioned, and we were going to launch it in the private market in 2000; we were engaged with the Province of Nova Scotia to introduce it in the public system here in 2001. In fact, based on the time frame that we were engaged in this business model, we did have a lot of sales work in progress.

MR. BARNET: Just to shift gears a little bit. There has been a lot printed in the media with respect to Knowledge House in the last couple of weeks in terms of the creditors and the ongoing activity surrounding stocks and that type of thing. Obviously what I would

[Page 25]

like to learn is some facts from you with respect to your company and one particular creditor. It has been stated in the media that a former Cabinet Minister, Richie Mann, was listed as a creditor for services that he provided to Knowledge House. Could you describe to us what services Richie Mann provided for Knowledge House?

MR. POTTER: He had actually been retained on an earlier project where we were looking at developing further our Silicon Island initiative in Cape Breton. In relation to this program, when we determined that federal and provincial funding was the best way to go, he did provide some advisory services to us on federal funding options.

MR. BARNET: Would it be fair to describe Mr. Mann's services as lobbying, either provincial or federal members or staff?

MR. POTTER: I think in the federal jurisdiction they have terminology about lobbying. For us it was really advisory services and consulting on applicable programs.

MR. BARNET: Could you describe for this committee whether or not there was any direction by your company, or yourself, to Mr. Mann to speak to members of this Legislature or staff of the Department of Education with respect to support of this particular program or any particular program dealing with Knowledge House?

MR. POTTER: I didn't prohibit it or request it, all I asked for was advice and services from Mr. Mann, not directed at any person in particular, but helping us understand how we could access and define our applications for programs.

MR. BARNET: Could you describe or tell this committee how much money Knowledge House may have paid Mr. Mann or his company for services and how much Mr. Mann claims is outstanding?

MR. POTTER: I actually don't have the information that you are looking for, but it would have been maybe $20,000 or $30,000, in that level I would think.

MR. BARNET: Has it been a common practice for your company to hire consultants like Mr. Mann's firm?

MR. POTTER: We have consultants of all types: accounting, legal, marketing - marketing is a bit issue for us - advisory services of all types, because it is a very complex business and multi-faceted, and you need all sorts of help and advice.

MR. BARNET: I am going to change gears one more time, then I will pass it on to one of my other colleagues. It has been reported that you or your firm is seeking $4.6 million in relief from the National Bank, and obviously this will be dealt with through some judicial process. You claim that the bank was negligent in breaching its duties to you as a company

[Page 26]

shareholder in connection with Knowledge House's demise; can you provide this committee with the evidence to support your claim and can you tell us who might be responsible for this demise, in your opinion?

MR. POTTER: Well, the best thing to do is for me to refer you to the actual detailed pleadings, because they do go on to some great length and there is a lot of evidence referred to in the pleadings. It is very self-explanatory what is being said with dates, times, who did what. A number of people and companies are named in those pleadings, and so on. So it is a very detailed statement of claim that I have issued and it is, as you say, being dealt with in the court process through our legal counsel.

MR. BARNET: Thank you, Mr. Potter. I am going to pass to my colleague, the member for Kings West. But before I do, I want to say that I too am very concerned about the use by the Department of Education of the Province of Nova Scotia taxpayers' money for programs. I believe that the program you offered, or were about to offer, was probably a good idea and a concept I supported. It is unfortunate, however, that the situation has forced you and your company, and the students in the Province of Nova Scotia, into a situation where the program is not being offered and there are perceived losses.

I would say that it is my hope and expectation that some program like this will survive as a result of what happened. I will pass it on to the member for Kings West.

MR. CHAIRMAN: Mr. Potter, would you like to respond to that last comment?

MR. POTTER: I would, to the extent of saying, as I mentioned in my opening remarks, in fact, the very process we have underway is to realize on all of that work and all of the intellectual property and the assets that are there, we have had a lot of interest expressed - and that is what encouraged me in late September - to enter into this proposal process to resurrect the value of the company and to once again begin employing people and continue the development. So I am very hopeful, it is challenging obviously in this environment, but there is a lot of value there and it is a very innovative program that can be used here and in many other places over the next several years.

MR. CHAIRMAN: The MLA for Kings West you have just under 9 minutes. Mr. Carey.

MR. JON CAREY: Mr. Potter, over the past number of years you have had a successful and reasonably - I would say - good relationship with this government and the previous one. Would that be a fair statement?

MR. POTTER: As a supplier our company and the companies we acquired have done work with the Province of Nova Scotia successfully, yes.

[Page 27]

MR. CAREY: Going back, I think from the record it shows about four years where each successive year the government did a little bit more business with your company each time. I think it started out with several thousand dollars and then moved up. Would any of these products that were purchased prior to this particular contract, would there have been payment made up front, or prior to receiving the product, as there was in this contract?

MR. POTTER: Well, actually, it wasn't that way in this contract either. The amounts that were paid were paid on a date when certain rights and products were signed over to the province, as of that date. So this contract had a schedule of payments that tracked the deliverables and the value received at every point in the contract. So, I believe, the misunderstanding here might be the fact that looking at the situation from the point of view from August, what had really happened, in fact, on the ground, the software had been installed, the teachers had been trained, the property had passed, we conveyed very valuable rights to software and did a lot of training and pre-work and continued development work throughout the whole of the contract period, from March 19th forward. So I would respectfully say that this wasn't either a contract where amounts were paid up front. It was paid in installments against deliverables.

MR. CAREY: So I can take from that, I guess, that you feel the product delivered had a value of $1.2 million?

MR. POTTER: Absolutely. With software and published content, the ability to continue to operate it does affect its value but yes, certainly in terms of money's worth, we conveyed very valuable property to the province under the business terms that were arranged and agreed to on March 19th, yes.

MR. CAREY: I realize you have straightened out my error in the contract but of the previous purchases, would the government have paid you before delivery?

MR. POTTER: No, those were supply contracts that, again, had a schedule of payments and the amount of payment, as is normal in these contracts, would reflect the stage of the contract. So normally, under all of these contracts, payment is in installments against signed-off deliverables. In a way, that would be not that much different from technology hardware and technology software. In the case of hardware, obviously it is easier to see, but it is no less concrete in ownership terms, whether you are talking about software or hardware.

MR. CAREY: When you get into procurement and you do single-sourcing, then the reason for that, of course, would be you were the only supplier available to provide what was required by the Department of Education. Is that a fair statement?

MR. POTTER: As I mentioned earlier - and I am leaving the documents - where early in 2000, because of the work we had already done in terms of creating a unique learning program for high school, it was based on, in terms of sourcing, that the department sourced

[Page 28]

us in the sense of having approached us directly to say, we see this as unique and particularly applicable to our high schools. We would like to enter into an engagement with you to bring that to our high schools. In that sense, that is how the sourcing started in this case, which is one of the normal processes for sourcing, particularly when you are dealing with new programs or new products such as this.

MR. CAREY: I think we can say - being a former teacher, I know - that Nova Scotia has been progressive in getting programs in the school system. Going back to the old days of 1963 or 1964 - maybe prior to that - teaching by television was an innovation at that time. This was another area where the Department of Education in Nova Scotia was being progressive.

Under the financial restraints that we have, would the risk have been very exceptionally high for them to proceed in this type of endeavor when it was started?

MR. POTTER: Well, there are always risks when you are dealing with new things and innovation and also with software, knowledge-based assets and intellectual property versus real property. We can all see buildings and physical equipment and understand that, but the real heart of the innovation and what is needed is the intellectual innovation, as well as the physical work. That is really the answer, that the amount of work involved and the amount of investment required to bring such programs to bear is very substantial. In fact, as I have indicated before, $10 million had already been spent by the company, without reference to any government whatsoever. It was completely after tax dollars, investment by individual people taking a risk because they wanted to involve themselves in a growth industry. Education is a great industry, as well as a great social responsibility around the world, and there are a lot of successful education companies; I have run them myself and have been very successful at it. That was our whole intent and is still my intent with Knowledge House for the future, because it is a great area that needs a lot of research and development.

In the public system throughout the world there is very little research and development done within the public school system. By contrast, if you look at innovative companies in the knowledge sector, like Microsoft or those, they are spending in excess of 10 per cent of all revenue on research and development. We really need innovation and research and development in our schools. This kind of approach, I think, was very reasonable from the point of view that the lion's share of all the risk and expense was being borne by our shareholders.

MR. CHAIRMAN: Mr. Carey, you have just about a minute left.

MR. CAREY: Quickly, rapidly expanding companies, regardless of what industry they deal with, can easily find themselves cash-strapped. Would you say in this situation that there was an unexpected requirement for cash, or it cost more than was anticipated to

[Page 29]

develop? The funding that was set up originally to do this, what would have been the - I realize the stock market was a major factor, but your financiers and so on . . .

MR. POTTER: Our record on that is clear, that we intended and had on the record stated in 2000 that we were setting out to raise $10 million in new financing to fund research and development. During the latter part of 2000 and into 2001, we, in fact, were successful in raising about $5.5 million in two or three transactions. In October-November, we were able to book a $3.25 million new equity investment. In fact, in April, after we had done this agreement with the Department of Education, we raised a further $2 million of new equity from shareholders and that really was our course of action. We had another $3 million investment in treasury shares under negotiation during this whole period which, unfortunately - and it happens in these transactions - that particular one didn't materialize near the end of June. But that initiative was certainly well understood and known by the officials at the Department of Education.

As I mentioned earlier, in July we entered into a $5 million investment banking transaction with a Toronto-based investment bank, which was well underway at all material times here and as I mentioned in August, when we announced it, it was really, ironically, to provide some assurance that we had our work in progress underway, in terms of financing, because of the jitters that were on the market relative to this other education company and so on. So it is a process of financing.

We knew we needed $10 million, we had already raised $5.5 million, we had another $5 million signed up, but in the meantime we needed to do interim financing, which you will see referred to in these documents I am leaving you, which included the sale of certain non-strategic assets and other interim financing, all of which was progressing well and we were proceeding on the basis of plans, intent and undertakings that were made.

Unfortunately, and without certainly any warning after the beginning of September, some of these material transactions that would have provided the working capital on an ongoing basis to bridge to the $5 million financing in September-October, fell through. I have left some information about that in the files here so that you can see the basis upon which we were entering into our dialogue with the department and bringing them up-to-date information, including my memo of August 26th about how we were doing on the ground in each of these transactions.

MR. CAREY: Thank you.

MR. CHAIRMAN: Thank you, Mr. Potter. Considering the time remaining, we would like to allow some wrap-up time at the end. We have one small item of business. Having done the math here, I would allocate 10 minutes to each of the caucuses. It is now 9:22 a.m.

[Page 30]

Mr. Steele.

MR. STEELE: Mr. Potter, I really have to take issue with this idea that the province got value for its money, because what the province actually got for its $1.2 million was the beginnings of a program, a program from which no student will graduate, a program that will require millions of dollars of further investment in order to make it a reality. Last week the Deputy Minister of Education said the province is not prepared to put any more money into it. They are hoping to find some partners to put some money into it. Maybe you can find millions of more dollars to put some money into it, but right now what the province has, as I said last week, is the headlights and bumper of a car and a drawing of the rest. You just can't drive a car like that.

The member for Sackville-Beaver Bank quoted me from last week but he didn't use the right phrase. The phrase I used last week was that Knowledge House was burning through cash and if he doesn't like that, I could say that it was sucking up cash like a vacuum cleaner. On August 16th you got the cheque from the province for $1.2 million. That same day - or maybe it was the day before - you got the final installment payment of $825,000 from your German investors, so in the course of one or two days the company got $2 million. Ten days later, it was sending a clear signal to the province that the company was in trouble. Four weeks later the company was out of business. What happened to that $2 million that you got on or around August 16th? Where is it?

MR. POTTER: Well, as I have shown here in these documents I am leaving you, in the case of April, the first invoice, the $1 million was really part of a receivable security for our bank, so that covered the period from April, May, June, July, August. The receipt of money from the province in August - as I said - was a receivable, which at that time was over four and a half months old. So the work and ongoing operations of the company needed to be funded on an everyday basis, week to week and month to month.

In the whole scheme of things, in terms of our operating cash flow, the $2 million was like any other money that we bring in, part of the cash flow that was required. In the case of the $800,000 installment that you mentioned, the final installment on the $3.25 million, that had already been securitized for purposes of raising money to operate the company, which is normal. We were raising money and borrowing money against that which we raised, like every other company does.

MR. STEELE: Let me change the subject for a moment then, because part of the problem with this whole deal is that it raises a lot of the ghosts of the past of the Nova Scotia education system, including P3 schools. I know that I am right in saying that one of the major sources of revenue for Knowledge House over the last year and a bit, particularly the year 2000, was its contract to provide FFET, furniture, fixtures, equipment and technology, for the P3 schools that were being developed by the Ashford Group.

[Page 31]

Now, it has been suggested to us - I don't know if it is true - that when Jack Sullivan was the Superintendent of the Strait Regional School Board, he told Ashford Investments that they had to get rid of their existing technology partner and hire on Knowledge House to provide the technology. Now to you knowledge, Mr. Potter, is that true?

MR. POTTER: No, not at all. Our agreements there were all done with the P3 developers based on our skill and knowledge that we had and our experience and leadership in providing technology in schools. The company, and the company that it acquired, had been doing this for 12 years and was a leader in that field.

MR. STEELE: Is it the case that Knowledge House took over the contract with Ashford Investments from another technology company?

MR. POTTER: I don't believe take over is the right word. I think the contract was entered into with Knowledge House by Ashford. Whatever it was doing previously, I think it had probably done two or three different things. The real work of providing the technology under those contracts only began after we took it on, so there wasn't another company that was in the middle of it and then they signed it over, no. We began the work with them, as we did with the other P3 developer.

MR. STEELE: Now the allegation is that Mr. Sullivan exerted his influence on Ashford to get Knowledge House given the contract and that three months later he went on a leave of absence to take on a senior executive position with Knowledge House.

MR. POTTER: No, the leadership that we had that brought Ashford our way was the fact that our company had won the IEI contract, that our company had won the negotiations for the SLC P3 schools and we really were the leader and had the resources and the capability to provide it, and that is the basis on which I negotiated that contract with Patrick Gillespie of the Ashford consortium.

MR. STEELE: To your knowledge was Jack Sullivan involved in those negotiations in any way?

MR. POTTER: He wasn't involved in my negotiations, no.

MR. STEELE: The member for Sackville-Beaver Bank also raised the question of a lobbyist and for reasons best known to himself, whenever he raises this issue he only talks about one who happens to be a Liberal, so maybe I will ask a more open-ended question and ask you, Mr. Potter, if you could please identify all of the individuals or companies that were hired by Knowledge House to engage in lobbying activities with government.

MR. POTTER: The only lobbying that I know of is related to the lobbying registration in the federal law where the term "lobbying" is defined. In that sense, on a prior

[Page 32]

occasion not related to this, we had engaged a firm, the principal of which is Richie Mann, as described earlier.

MR. STEELE: There is currently before the Legislature a bill called the Lobbyists' Registration Act, and it contains a definition of lobbying. It says, "'lobby' means to communicate with a public office holder in an attempt to influence", and in relation to a consultant lobbyist who is somebody who is paid to lobby, it means, " . . . to communicate with a public office holder in an attempt to influence the awarding of any contract by or on behalf of the Crown, or . . . to arrange a meeting between a public office holder and any other person;"

Now within that definition, Mr. Potter, did Knowledge House hire anybody to lobby the provincial or federal governments, apart from Mr. Mann?

MR. POTTER: I would say no, our engagements were for advisory consulting services on the strategy we would use. Our engagement with the Province of Nova Scotia was dated back to December 1999 and in fact, specifically, as I have shown in the documents where Mr. Rich invited us to engage in this process, we didn't need any meetings arranged with any officials whatsoever. We were already engaged in the process and any use we made of advisory services was really to help understand program availability and how we could fit with the process.

[9:30 a.m.]

As you will see from the documents that I am leaving here, it was a very rigorous process that was followed by us, engaged with the officials at the department. In every way, we went through a lot of process with those officials to do this. Our engagement, as a company, was with our customer.

MR. STEELE: One of the creditors listed among Knowledge House's list of creditors is Finlay MacDonald, Jr., he is a creditor to the tune of $17,000. What did Mr. [Finlay] MacDonald do for Knowledge House?

MR. POTTER: I engaged Mr. [Finlay] MacDonald some while ago, months ago initially, in relation to a strategy related to education investment by media companies. He is a person who knows about media companies and was helpful in me understanding which media companies in Canada and elsewhere might be interested in investments. So that is the first thing we did with him.

In addition, as we came to negotiate and engage in this process, I got advisory services from him on how we should conduct the process in terms of the negotiation of this arrangement and other financing arrangements that we were doing with the company. So he had a general, sort of advisory capacity with us around strategy and advice about how to

[Page 33]

understand the federal-provincial system, which he has experience in, and how to help us best put our negotiation forward.

MR. CHAIRMAN: Mr. Steele, you have 10 seconds.

MR. STEELE: I don't think I will ask a question and expect an answer in 10 seconds, Mr. Chairman.

MR. CHAIRMAN: I apologize for that, but I didn't want to interrupt the answer and I neglected to inform you at one minute; I guess the evidence was being presented so I allowed it continue.

Next, a member from the Liberal caucus, please.

MR. MICHEL SAMSON: Mr. Potter, what is the status of the agreement signed on August 16th with the Province of Nova Scotia and Knowledge House?

MR. POTTER: I would say it has been terminated in the sense that, under the appropriate clause, the deputy minister has sent a notice saying that based on the non-performance after September 13th, they wanted to invoke the termination clauses which means, among other things, the providing of the content and materials needed to have full possession of all the assets.

MR. SAMSON: Have you, in any way, been served with any notice or legal papers indicating that the Province of Nova Scotia intends to take legal action against you or any member of Knowledge House?

MR. POTTER: No, I haven't.

MR. SAMSON: In your memo of August 26th, which you have clearly indicated you initiated on your own and was not initiated by the deputy minister or anyone in government at the time, you have a backup plan. It says, "A back-up plan to ensure that DOE can have a successful launch"

In the third paragraph, you point out the fact that the province, under agreement, has some licensing privileges. Then it says, "Given these rights already in place under the contract, the Department can continue the launch and implementation of the ASP without Knowledge House through a back-up plan that would involve engaging a core group of learning designers and software people from among those currently employed by Knowledge House."

Then you go on to say, "We can readily put together all the elements of this back-up plan for DOE during this week, including lists of people and other resources, budgets, . . ."

[Page 34]

Then you say, "With this back-up plan in place, you will be able to confidently assure yourselves and your stakeholders that you have done and are doing everything required to protect everyone's interests and to realize successfully on your investment to date in the ASP."

What was done by the Department of Education to implement that backup plan?

MR. POTTER: Well, in fact, in the result, they decided not to implement a backup plan in the sense of not going forward. If we were not providing the services, I believe it is clear that their decision was not to proceed with their own plan. We gave it to them at that time as an option. At that time, in August, we were still very much in the mode of going ahead and we did go ahead.

MR. SAMSON: Shortly after this memo, did the Department of Education indicate that they were not interested in this backup plan?

MR. POTTER: Not in so many words, no. It really became a moot issue as of the end of the month when I was able to indicate that we had obtained interim financing to our $5 million investment. The issue of a backup plan was put forward earlier by me as an option to consider in the event that I had to come back and say that my financing had been interrupted. Had it been interrupted at that time in August, then the backup plan would have become sort of the top issue. But as a result of what did happen, it didn't become the top issue.

MR. SAMSON: Prior to September 13th, when Knowledge House ceased operations, did the Province of Nova Scotia make any efforts to put in place the backup plan that you have highlighted in your August 26th memo?

MR. POTTER: Not to my knowledge.

MR. SAMSON: Okay. I will pass over questions.

MR. CHAIRMAN: Mr. MacKinnon.

MR. RUSSELL MACKINNON: Thank you, Mr. Chairman. Mr. Potter, it is obvious there were some winners and losers in this situation, perhaps, when you are looking at dollars, there were quite a few losers. Did you lose any money invested in this venture, Knowledge House? Did you, personally, invest money and lose money?

MR. POTTER: Yes, absolutely. My family, including me, my wife and I, have lost several millions of dollars. I had been very successful in business in the last several years, paid my taxes and invested millions of dollars in the company.

[Page 35]

MR. MACKINNON: If we could, we will stay focused.

MR. POTTER: Right.

MR. MACKINNON: I appreciate that. What about yourself, Ms. MacNutt? Did you lose money in this?

MS. MACNUTT: Yes. I am a shareholder of Knowledge House and I lost money.

MR. MACKINNON: Now, did the company make any personal loans to individuals that were associated with the company, or not associated with the company?

MR. POTTER: Did the company make personal loans? The company has on its books certain loans to employees, yes.

MR. MACKINNON: Are you able to identify the amounts of the loans?

MR. POTTER: Approximately. I don't have the balance sheet here.

MR. MACKINNON: Round figures would be fine.

MR. POTTER: There is about a $400,000 amount due by one employee, Mr. Courtney, and there are, I think, only two in total. There is about a $60,000 amount of loan advance to Mr. Jack Sullivan.

MR. MACKINNON: Was there a loan to a Ray Courtney?

MR. POTTER: Yes.

MR. MACKINNON: Calvin Wadden?

MR. POTTER: I am not - I don't think there would be any - there might be a $15,000 amount or something for . . .

MR. MACKINNON: Not $97,000?

MR. POTTER: Uh. . .

MR. MACKINNON: Stephen Wilsack?

MR. POTTER: Oh, I understand. Those would have been amounts that were adjusted, based on the purchase of their businesses from them. They were paid . . .

[Page 36]

MR. MACKINNON: But they were personal loans?

MR. POTTER: Yes, they were - no, not personal loans. They were a rebate or an abatement under the purchase contract from them of the businesses that the company had bought from them. It wasn't a loan advance, no.

MR. MACKINNON: I'm curious. The contract was signed as of August 16th, but yet, you were invoicing back as far as April. Isn't that a little irregular to be invoicing and not knowing what the terms of reference were when you were looking for $1.2 million?

MR. POTTER: Well, not in this case. We had been doing this work and working on this since the summer of 2000. The whole process of negotiation was just that, a process. The document that resulted in March, the March 19th document, as you will see from my copy that I will leave you, had a detailed schedule of the scope of the work and was definite in all its material terms, including timing of payment, what the province would get and so on.

It did call for payments, including the payment on April 1, 2001.

MR. MACKINNON: Yes. I guess the thought that goes through my mind is, if the company was doing so well, why did it have to hire a lobbyist just shortly prior to signing the contract with the province?

MR. POTTER: Well, the company has advice from lawyers and accountants.

MR. MACKINNON: I realize that but it is all a question of optics, isn't it? If you are portraying the image that Knowledge House is doing so well and everything is so rosy with the province, why just shortly before the contract was signed, did your company hire a lobbyist to lobby, to secure the contract?

MR. POTTER: The only complexity that we had in this contract that required any specialized advice was the federal-provincial funding requirement which was . . .

MR. MACKINNON: No, but you're not answering the question.

MR. POTTER: Well, yes, any advice we had to get was because of the federal-provincial funding requirement that was complex beyond the dealings we had directly with the Department of Education. There were other bodies involved who were funding organizations, other than the Department of Education, that we had to understand the programs for and be able to understand how we could fall within those programs. So that would be the reason for any other advice.

MR. MACKINNON: Just shortly before you issued your public statement on the financial crisis within the company, you stepped down from the Nova Scotia Business Inc.

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Board of Directors, for lack of knowing the exact terminology. Did you have any discussions with the Minister of Economic Development on that?

MR. POTTER: No, I just called them on the day I did it.

MR. MACKINNON: Did you loan money for employees to purchase stock at the company?

MR. POTTER: Did I? No.

MR. MACKINNON: Did anyone within the company?

MR. POTTER: No. There were certain cross-guarantees and accounts that were used, but not for employees of the company. We didn't have such a program.

MR. CHAIRMAN: Excuse me, you have one minute.

MR. MACKINNON: Your decision to step down as Chairman of the Board of Directors of Nova Scotia Business Inc., from the Department of Economic Development, was just purely coincidental, that you announced that a week before you issued your public statement of the financial crisis within Knowledge House. Is that what you are telling us?

MR. POTTER: No . . .

MR. MACKINNON: So, it wasn't coincidental?

MR. POTTER: Our challenges, like all the other companies in our sector, had been going on for 18 months. This wasn't an August issue.

MR. MACKINNON: No, no. I realize that, but are you saying it is a coincidence or it isn't a coincidence?

MR. POTTER: It is part of the same challenge. I had to focus on the first priority, namely the business of Knowledge House, and couldn't afford any focus on any other activities. The other activities also deserved to have . . .

MR. MACKINNON: Did you aprise the Minister of Economic Development of this dilemma?

MR. POTTER: Only on the day I decided to resign.

MR. MACKINNON: But not before?

[Page 38]

MR. POTTER: No. I actually called him when he was travelling, because it was only minutes before I put out the press release.

MR. CHAIRMAN: Thank you, Mr. Potter, and thank you, Mr. MacKinnon. Could I have the final 10 minutes to the member for Pictou East.

MR. JAMES DEWOLFE: Thank you, Mr. Potter and Ms. MacNutt, for joining us here today. The name Finlay MacDonald came up, the NDP caucus had mentioned it. I would like to know, just very briefly, his background. He wasn't an elected official in the past, was he? He was surely not a Cabinet Minister, a past Cabinet Minister in my mind. At least I have never heard of him as a Cabinet Minister. Perhaps you could enlighten us as to his background.

MR. MACKINNON: He is a Tory bagman.

MR. CHAIRMAN: Could we have some order, please. Do you want to answer that, Mr. Potter?

MR. POTTER: I have known Mr. [Finlay] MacDonald for about 30 years, but I don't know of any political (Interruptions)

MR. CHAIRMAN: His elected record is not part of your knowledge?

MR. POTTER: No.

MR. CHAIRMAN: Thank you.

MR. DEWOLFE: I just wanted to establish that he wasn't an elected official, and he was involved with your organization.

MR. BARNET: But Richie Mann was.

MR. DEWOLFE: But Richie Mann, of course, was a past Cabinet Minister in a previous government. Could you tell me what advice he provided you? (Interruptions) You indicated previously that he was, indeed, an advisor and that the normal procedure is to have advisors around you.

MR. POTTER: And as I mentioned in response to an earlier question, the complexity here for us was the issue of federal-provincial funding. In fact, there were about three sources of funding for this contract to date, and we had to understand and fit within all those programs, and we needed help to do that. That only became an issue after we had the program well defined and established and so on. Any advice I got, in relation to that, would

[Page 39]

come in that aspect of the matter. The other advice, as I mentioned earlier, was general advice on an ongoing basis, mostly related to sources of financing from media companies.

MR. DEWOLFE: The fact is Mr. [Finlay] MacDonald had a fairly strong business background.

MR. POTTER: He had been very effective in helping companies, national media companies, understanding complex regulations and so on. He had a lot of experience that was relevant and helpful to us.

MR. DEWOLFE: So essentially he could provide corporate and strategic advice to Knowledge House?

MR. POTTER: That's exactly what I asked him to do.

MR. DEWOLFE: The department had indicated that they hadn't been lobbied by Finlay MacDonald. Would you agree with that statement?

MR. POTTER: I wouldn't disagree with that, no. I didn't see him lobbying them or any such thing. All the meetings I had with him were with us to talk about how we could go about furthering our business.

MR. DEWOLFE: One of my colleagues, just to go back to a comment that was made regarding the $1.2 million contract that was signed, said that it was signed on a wing and a prayer. I just want to reiterate the previous dealings with government, I just want to confirm that this company, your company, had many dealings, historically, with this government and the previous government. That is a fact.

MR. POTTER: Yes, and other suppliers through the government as well.

MR. DEWOLFE: During the course of those arrangements with this government and the previous government, was there any failure by Knowledge House to fulfill the commitments that were made to those governments?

MR. POTTER: No.

MR. DEWOLFE: There was, indeed, a fairly strong comfort level between government and Knowledge House, something that had evolved over a long period of time and a fairly good working relationship.

MR. POTTER: I would say so. We had a successful track record and we were doing innovative things, and we were successful in meeting our requirements over the last few years, yes.

[Page 40]

MR. DEWOLFE: There was no huge reason at that time to be terribly concerned. It was certainly not signed on a wing and a prayer because the comfort level was indeed there.

MR. POTTER: As I have said, the process that we went through in terms of arriving at all agreements and so on was very detailed, and the documentation is here to back that up, so it was a long and rigorous process.

MR. DEWOLFE: Thank you very much. That does shed some light on the situation. I will, at this time, Mr. Chairman, if I could, pass to my colleague.

MR. CHAIRMAN: The honourable member for Colchester North.

MR. WILLIAM LANGILLE: Mr. Potter, I am concerned about the letter dated August 31st. According to the Department of Education, Knowledge House gave assurance that it could meet its commitments in your August 31st letter to the department. Knowledge House later closed its doors on September 13th, saying it didn't have the money to continue, leaving approximately 70 workers unemployed at that time. Why did you close the doors only two weeks after serving the department with a letter of assurance?

MR. POTTER: Specifically, a transaction that we had been able to secure during the week of August 26th fell apart during the second week in September. That transaction would have provided the funds we needed to bridge to the $5 million of investment banking funds in September/October. At the time we made that statement, if I recall, my August 26th memo was, I am not sure we're there yet, please stand by, which they did. Then by the end of the week, by Friday of that week, August 31st was the date on which I wrote the memo, or the letter in question, based on the success we had achieved that week.

I am leaving with you, for your information, among other things there is a letter dated August 27th, which is the day after my August 26th memo raising my concern about financing to ECBC, with whom we had been negotiating earlier in terms of expansion of our Silicon Island project in Sydney, which is a wholly owned subsidiary of Knowledge House.

As I recite in the letter, we said to Mr. Beaton that we needed to dispose of these assets in order to fund our core business and we were willing to sell them very cheaply in order to do that, because the more important priority for Knowledge House was to meet its obligations as a new e-learning business as opposed to the ancillary business, which although we liked it and it was a very successful project, was not core to our needs.

There is a letter here dated August 27th where I offer the Silicon Island facility, from our point of view, at a very cheap price - $2 million. During that week he was co-operative to the extent that - because we had already been discussing other options - he put a team in place to do an appraisal and we entered into a negotiation and by Friday of that week, I received, by conference call, confirmation that they did, in fact, intend to buy it. During that

[Page 41]

whole process, we sacrificed the price very substantially; in fact, agreed at the end of the day to sell for $750,000, which I characterize here in the letter as a fire sale price. But the whole purpose of that was so we could indeed do exactly what we are talking about here today, which was deliver on this important contract and to bring the program to fruition in the schools. So that made sense from our shareholders' point of view.

We had $10 million of research and development to protect, we had our employees to protect, we had our 500 shareholders to protect, we had the 80-some students in the schools to protect, so the idea of sacrificing the price on Silicon Island was a small sacrifice during that week and we did it with our eyes wide open. It was confirmed to us, as I say, by their lawyer and chief project officer on Friday.

On the strength of that, on August 31st, not only did we send the letter that you refer to Mr. Cochrane, but the shareholders - in this case including my wife - advanced on the strength of that $150,000 or $143,000 because of the confidence we had with the go-forward, based on the $5 million investment banking commitment and the funds we would receive in the interim from the sale of these non-strategic assets. So we did that, it made sense, it was prudent, it was a very reasonable risk.

There was a letter that was followed up to me and my banker from ECBC, stating in its first sentence that we intend to purchase those assets. That had been told to me on August 31st, it was reaffirmed in writing to me and to my bank on September 7th, so it was very reasonable and prudent for me to come forward and in turn make the same representation to Mr. Cochrane, which I did. Not only that, I also encouraged - and was successful in that case - my wife, which was a very difficult investment for her based on all the money we had already invested, to put in another $143,000 of our own money on the faith and conviction that we had the next level of funding that we needed in order to carry on successfully throughout September and October, pending the completion of the financing from IBK Capital in Toronto. We did that with our eyes wide open, it was a reasonable risk.

The document here, which I will show you, is a September 7th letter addressed to my bank, with a copy to me, which says "The purpose of this letter is to inform you of Enterprise Cape Breton Corporation's (ECBC) intent to purchase certain assets of Knowledge House Inc. (KHI). In particular, ECBC intends to purchase KHI's interest in the Silicon Island property . . . The purchase price being negotiated for these assets is $750,000." Later in the letter, as you will see, it even indicated that part of the cash from that could be advanced to the company during September, which was part and parcel of our financing requirements.

So what we said to the deputy minister on August 26th, was that our feeling uncertain about our financing was overcome by this transaction during the week and on the strength of that we made the confirmation on August 31st. Unfortunately - and this would be for reasons known to them and not me - in the meantime, between those dates, a new chairman

[Page 42]

was appointed to this corporation and for whatever reason they changed their mind and there was nothing I could do about it. I got notified of that on September 12th and on September 13th, as we are discussing here, I had no choice but to stop operations because the next tranche of financing was dependent on the sale of those assets, which were intended to be purchased.

Now at this point, it is academic whether the purchase went through or not but at the time, our knowledge base, our belief, our candour, our frankness about this was completely on the record - and I am leaving those documents here for you to see - so that you can see why I would encourage my own family to put more money in because I was very encouraged that we had the capacity to carry on.

MR. CHAIRMAN: Thank you, Mr. Langille. It is tradition that we allow our witnesses a few minutes for a wrap-up. Mr. Potter and Ms. MacNutt, do you have any concluding comments.

MS. MACNUTT: Thank you, Mr. Chairman. No, I have no more comments.

MR. POTTER: I won't take much more time. I just want to point out - as I said in my opening remarks - that Knowledge House was and is a very serious research and development-based company. We have employed people in that regard and we are in the vanguard of research and development and education. This is my second education initiative, where I have worked on providing, I think, very innovative products and services in the education business.

As I said before, it is my hope - I am still active in the company - that we can realize this value. It is clearly regrettable for the students, the teachers who were so keen on it. During the last week that this thing was in operation, even after we had to cease operations, it went on for days and days, based on the enthusiasm for the product. Even during that last period, the Nova Scotia Teachers Union came out in favour of keeping it alive. It had very strong support. It was a great product and based on that, that is the encouragement I had on September 25th to enter my intent to propose a reorganization of the company so that we can pick up on it.

I know, last week, the deputy said that they had postponed this program. Whether they would want anything from us in the future or not, we hope to have, next year and over the course of the next coming months, a revived collaborative problem-based learning high school program that, hopefully, can be used. If they wish, they can certainly do so, use that new content in the schools of Nova Scotia.

We want to employ more Nova Scotians, get back on track. It has been the worst 22 months in the markets for knowledge-based companies, raising new money. It has been

[Page 43]

brutal and we have been part of that so-called tech-wreck, and it is very challenging for all parties concerned, big companies and small.

We did a lot of pathfinding in order to be successful. Unfortunately, as I mentioned here today and in other documents, external events have intervened to cause us to have to cease operations at this time, but we certainly hope that we can carry on in the future in a successful form. That would be my comment.

MR. CHAIRMAN: Well, thank you, to both of you.

I would like to call for a quick recess, as our witnesses leave, and could we reconvene - I'm sorry, Mr. DeWolfe.

MR. DEWOLFE: Will we get copies of the documents and the clerk can provide us those? Okay, thank you.

MR. CHAIRMAN: Thank you. Could we have a quick recess, please.

[9:57 a.m. The committee recessed.]

[9:59 a.m. The committee reconvened.]

MR. CHAIRMAN: Could we reconvene, please. We have a couple of quick orders of business concerning our future schedule, the immediacy of next week, and also that there will be an annual report from our committee that will have to be brought back to the ledge. Perhaps, Mora, if you could clarify the process with the annual report, to begin with.

MS. MORA STEVENS (Legislative Committee Coordinator): If members remember, this is the document that we have been working on for the past number of months. You would have drafting sessions on recommendations. It is just the final stage of everything that was put together for you to look at, so we can look towards tabling what had been done at the same time we did it last year. This is sort of just the follow-up. So that will be given out. I will send it to you this week so it can just be discussed for a few minutes - either before or after the Auditor General's briefing session next week on Health.We do have three meetings set up on Health after next week, so that will be our focus. I just finalized those yesterday, so what I will do is I will send out the schedule that we had talked about.

[10:00 a.m.]

MR. CHAIRMAN: So it is November 7th, 14th and 21st. I would request, if we could, please - because I know how it comes down to meetings - could we, in the order of business next week, take care of the finalization of the witnesses and then have the remaining time dealing with the AG and those reports, if agreed by the committee? I would sense that we

[Page 44]

could - I mean, we were going to stick to the guidelines of 8:00 a.m. to 10:00 a.m., but we certainly don't want to rush the Auditor General through.

Is it agreed?

It is agreed.

MR. STEELE: Could you explain to me, again, what next week's meeting is about?

MR. CHAIRMAN: Okay. Next week's meeting will be to confirm that we have in on November 7th, 14th and 21st, various officials from the Department of Health and that, secondly, we would be having an in-camera briefing session over in Committee Room 1, with the Auditor General concerning the Health Department.

Further comments or questions? Then can I call for an adjournment?

MR. MACKINNON: I so move, Mr. Chairman.

MR. CHAIRMAN: Thank you. We are adjourned.

[The committee adjourned at 10:02 a.m.]