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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
or
__ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number 000-26696
BIOMETRIC SECURITY CORP.
(formerly known as Sonoma Resource Corp.)
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
Wyoming Pending
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Suite 1940, 400 Burrard Street, Vancouver, British Columbia, Canada V6C 3A6
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (604) 687-4144
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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<CAPTION>
Title of each class Name of each exchange on which registered
<S> <C>
N/A N/A
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares with no par value
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ ] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 1, 1999, based upon the closing price of the common
stock on the Vancouver Stock Exchange for such date, was approximately
$6,790,252. Shares of common stock held by each officer and director and by
each person who owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Not Applicable
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of outstanding shares of the Registrant's common stock on
March 15, 1999 was 32,501,078.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
CURRENCY AND EXCHANGE RATES
All dollar amounts set forth in this report are in Canadian dollars, except
where otherwise indicated. The following table sets forth (i) the rates of
exchange for the Canadian dollar, expressed in U.S. dollars, in effect at the
end of each of the periods indicated; (ii) the average of the exchange rates in
effect on the last day of each month during such periods; (iii) the high and low
exchange rate during such periods, in each case based on the noon buying rate in
New York City for cable transfers in Canadian dollars as certified for customs
purposes by the Federal Reserve Bank of New York.
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Years ending December 31,
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1998 1997 1996 1995 1994
---- ---- ---- ---- ----
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<S> <C> <C> <C> <C> <C>
Rate at end of Period $0.6504 $0.6999 $0.7301 $0.7323 $0.7103
-------------------------------------------------------------------------------------------------------
Average Rate During Period 0.6740 0.7197 0.7333 0.7285 0.7321
-------------------------------------------------------------------------------------------------------
High Rate 0.7105 0.7487 0.7513 0.7527 0.7632
-------------------------------------------------------------------------------------------------------
Low Rate 0.6341 0.6945 0.7245 0.7023 0.7103
-------------------------------------------------------------------------------------------------------
</TABLE>
On March 12, 1999, the noon buying rate in New York City for cable transfer in
Canadian dollars as certified for customs purposes by the Federal Reserve Bank
of New York was $0.6564 U.S. = $1.00 Canadian.
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TABLE OF CONTENTS
PART I
ITEM 1 Business
ITEM 2 Properties
ITEM 3 Legal Proceedings
ITEM 4 Submission of Matters to a Vote of Security Holders
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters
PART II
ITEM 6 Selected Financial Data
ITEM 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
ITEM 8 Financial Statements and Supplemental Data
ITEM 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
PART III
ITEM 10 Directors and Executive Officers of the Registrant
ITEM 11 Executive Compensation
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
ITEM 13 Certain Relationships and Related Transactions
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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PART I
ITEM 1 BUSINESS
Certain of the information contained in this Form 10-K constitutes
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and other applicable laws or regulatory policies.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results to be materially different
from any future results, performance or achievements expressed or implied by
such forward looking statements. Although the Company has attempted to identify
important factors, including those listed under "Risk Factors" below, that could
cause actual results to differ materially, there may be other factors that can
cause actual results not to be as anticipated, estimated or intended. There can
be no assurance that such statements will prove to be accurate as actual results
and future events could differ materially from those anticipated in such
statements. Accordingly, readers should not place undue reliance on
forward-looking statements.
OVERVIEW
Biometric Security Corp. (the "Company") was incorporated by
registration of its memorandum and articles under the Company Act (British
Columbia) on January 16, 1979 under the name "North American Power Petroleums
Inc.". The Company changed its name to "Sonoma Resource Corp." effective as of
January 5, 1990. The Company's original articles were replaced with a new set of
articles effective as of July 19, 1996.
Effective as of November 10, 1998, the Company was continued to the
State of Wyoming, U.S.A., changed its name from "Sonoma Resource Corp." to
"Biometric Security Corp." and the Company's memorandum was replaced with new
Wyoming articles of continuance. Effective as of November 12, 1998, the Company
increased its authorized capital to an unlimited number of common shares.
(Please see Item 3 -- Legal Proceedings regarding certain U.S. securities
matters and the Company's current plans to continue back to British Columbia.)
The Company's head and principal office is located at Suite 1940, 400
Burrard Street, Vancouver, British Columbia, Canada, V6C 3A6. The Company's
registered office and address for service in British Columbia is care of its
solicitors, Catalyst Corporate Finance Lawyers, Suite 1100, 1055 West Hastings,
Vancouver, British Columbia, Canada V6E 2E9. The Company's registered office and
address for service in Wyoming is care of its Wyoming attorneys, Hathaway,
Speight & Kunz, LLC, 2515 Warren Avenue, P.O. Box 1208, Cheyenne, Wyoming,
U.S.A. 82003-1208.
As at December 31, 1998, the Company had a total of six subsidiaries
related to its Argentinean resource activities (see Business of the Company --
Historical Operations). The Company plans to sell or otherwise dispose of these
subsidiaries. The particulars regarding these subsidiaries are as follows:
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Date of Jurisdiction of Percentage
Name of Subsidiary Incorporation Incorporation Ownership(1)
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<S> <C> <C> <C>
Sonoma Resource de Argentina S.A. November 30, 1995 Argentina 100%
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Castano S.A. August 7, 1996 Argentina 100%
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Castano Mining (Barbados) Ltd. June 6, 1996 Barbados 100%
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Cerro Toro S.A. August 5, 1996 Argentina 100%
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Cerro Toro Mining (Barbados) Ltd. June 6, 1996 Barbados 100%
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Sonoma Resource (Bermuda) Ltd. June 5, 1996 Bermuda 100%
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(1) Represents the percentage of voting securities held. None of the
subsidiaries has any non-voting securities outstanding.
The Company also has one dormant subsidiary, Supron Energy Corp., which
is also a resource company and which the Company also plans to sell or otherwise
dispose of.
In June, 1998, the Company made an investment in Biometric
Identification, Inc. ("BII"), a private California corporation. This purchase
represents a significant change for the Company, which is shifting from the
resource business into the technology industry. See Business of the Company
below for a full discussion of the BII investment.
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BUSINESS OF THE COMPANY
Historical Operations
The Company, historically, had been in the mineral exploration
business. As at December 31, 1998, the Company still owned 100% of the Cerro
Toro Project located in the San Juan Province of Argentina and the Apeleg Claim
Block located in the Chubut Province of Argentina. In light of the state of the
precious metals markets, the Company made a strategic decision to leave the
resource sector. It significantly reduced its staff and overhead in
Argentina and cut back on its exploration activities in 1998.
In November 1998, the Company reached an agreement to sell up to a 100%
interest in 9 mineral properties comprising 93,709 hectares, located in the San
Juan, Chubut, and Santa Cruz provinces in Argentina to Inlet Resources Ltd.
("Inlet"). In order to acquire a 90% interest in the properties, Inlet must pay
US$750,000 and issue 300,000 shares to the Company over a three year period and
complete a US$2,150,000 work commitment. Inlet may acquire the remaining 10% by
the payment of US$2,000,000 to the Company. A formal agreement was signed by the
parties on January 21, 1999, and was approved as at February 15, 1999, by
Canadian regulatory authorities. To March 1, 1999, the Company received
US$150,000 and 100,000 common shares of Inlet in accordance with the terms of
the agreement. The Company does not anticipate acquiring any new resource
properties.
Current Activity
On June 12, 1998, the Company entered into an agreement (the "BII
Agreement") to acquire up to US$5,000,000 of convertible debentures to be issued
by Biometric Identification, Inc. ("BII"), a private California corporation. The
Company's principal business now consists of its investment in BII.
BII is currently controlled by Arete Associates ("Arete") which is also
a private California corporation. Arete has been a Department of Defense
research and development contractor for over 20 years specializing in sensor
systems and pattern recognition software development. Many of Arete's
mathematicians and physicists helped develop the BII fingerprint identification
technology. This technology has been exclusively licensed to BII by Arete.
Pursuant to the BII Agreement, the Company proposes to invest up to US$5,000,000
in convertible debentures to be issued by BII. If all such convertible
debentures are acquired and all rights of conversion are exercised, the Company
will hold approximately 45% of the issued shares of BII. Approximately 83% of
the issued shares of BII are currently held by Arete. The remaining shares are
held primarily by employees of BII and Arete.
As of March 15, 1999, the Company has purchased US$2,875,000 of the
convertible debentures of BII pursuant to the BII Agreement. Under the BII
Agreement, as amended, the Company can acquire another US$2,125,000 of
convertible debentures bringing the total
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investment in BII to US$5,000,000. If the Company does not purchase all of the
convertible debentures in a particular tranche by the outside purchase date
specified in the following table, the Company will lose its right to purchase
additional convertible debentures.
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- -----------------------------------------------------------------------------------------------------------------
Designation Principal Amount Outside Purchase Date
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tranche A & B US$ 350,000 Previously advanced
- -----------------------------------------------------------------------------------------------------------------
Tranche C US$ 900,000 Advanced on June 12, 1998
- -----------------------------------------------------------------------------------------------------------------
Tranche D US$ 500,000 Advanced on August 12, 1998
- -----------------------------------------------------------------------------------------------------------------
Tranche E:
- -----------------------------------------------------------------------------------------------------------------
First advance US$ 75,000 Advanced on November 13, 1998
- -----------------------------------------------------------------------------------------------------------------
Second advance US$ 250,000 Advanced on November 25, 1998
- -----------------------------------------------------------------------------------------------------------------
Third advance US$ 250,000 Advanced on December 18, 1998
- -----------------------------------------------------------------------------------------------------------------
Fourth advance US$ 550,000 Advanced on January 29, 1999
- -----------------------------------------------------------------------------------------------------------------
Fifth advance US$ 125,000 April 2, 1999
- -----------------------------------------------------------------------------------------------------------------
Tranche F US$ 500,000 April 2, 1999
- -----------------------------------------------------------------------------------------------------------------
Tranche G US$ 1,500,000 May 12, 1999
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- -----------------------------------------------------------------------------------------------------------------
Total: US$ 5,000,000
==============
=================================================================================================================
</TABLE>
The convertible debentures will bear interest at the lowest interest
rate imputed under the U.S. Internal Revenue Code and, if not converted, will
become payable five years after the closing date of the first acquisition which
was June 12, 1998.
The Company may exercise its rights of conversion at any time. The
convertible debentures will automatically be converted on the earlier of an
initial public offering by BII or the acquisition of BII by a third party. If
all rights of conversion are exercised, the Company will be entitled to receive
the percentages of issued common stock of BII specified in the following table.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
% Upon Conversion
Designation of Entire Tranche Aggregate %(1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tranche A, B & C 20.00% 20.00%
- -----------------------------------------------------------------------------------------------------------------
Tranches D & E 13.33% 33.33%
- -----------------------------------------------------------------------------------------------------------------
Tranches F & G 11.67% 45.00%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total percentage for the Tranche and all prior Tranches.
While the Company is not legally obligated to purchase additional
convertible debentures or to exercise its rights of conversion, the Company's
intention is to acquire all of the convertible debentures under the BII
Agreement and, in due course, if business conditions warrant, to exercise
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all of the conversion rights. If all of the convertible debentures are purchased
and all rights of conversion are exercised, the Company will ultimately hold 45%
of the issued shares of the common stock of BII. The interest of the Company may
be subject to dilution resulting from the issuance of shares on exercise of
options granted under BII's stock incentive plan and may be subject to
additional dilution resulting from future grants of stock options or under
certain additional financings which may be undertaken by BII.
The parties have also agreed that BII may be merged into or acquired by
the Company. The parties have agreed to examine this from a tax, securities and
commercial perspective to determine the best structure for this potential
merger.
This acquisition was arranged by Rand Edgar Capital Corp. ("RECC"), a
private company controlled by the spouses of Brian Edgar and William Rand. Mr.
Rand is a director of the Company. RECC originally entered into a memorandum of
understanding with BII and with Arete dated March 18, 1998, amended and replaced
May 20, 1998 (collectively the "MoA"). RECC assigned its interest in the MoA to
the Company on May 21, 1998 in exchange for a fee of US$145,000, plus
reimbursement of its expenses. As of June 12, 1998, RECC had elected to take its
fee in the form of 715,575 common shares of the Company to be issued at a price
of $0.30 per share. These shares were to be issued in pro rata tranches in
accordance with the tranche advances being made by the Company to BII. These
finders fee shares were actually issued in the form of special warrants at a
price of $0.30 per special warrant. Each special warrant is exercisable without
the payment of any additional consideration into one common share of the
Company. As at December 31, 1998, the Company had issued 250,450 shares to RECC
under the terms of this agreement. In addition, the Company has allotted (but
not yet issued) an aggregate of 161,005 shares for issuance to RECC in respect
of debentures purchased on November 13 and 25, 1998, December 18, 1998, and
January 29, 1999.
Overview of BII's Operations
Biometrics is the science of identifying an individual through his/her
own unique personal physiology. Examples of the range of biometric-based
products are fingerprint readers, hand geometry, eye scanners and face-
recognition. Behavioral-based devices include voice response and keystroke
systems.
BII is focusing on the commercial market for the supply and integration
of biometric fingerprint identification technology. Under a license agreement
made between BII and Arete, Arete's fingerprint recognition technology has been
exclusively licensed world-wide to BII. The license agreement provides that BII
will pay to Arete a license fee of US$0.10 per unit for the first 2,500,000
products and US$0.05 per unit for the next 20,000,000 products. Upon the payment
of US$1,250,000 of royalties having been made, Arete will transfer ownership of
the intellectual property outright to BII.
Fingerprint biometrics has specific applications within many different
markets, and include both closed and open systems. Examples of a closed system
are time and attendance control and security access. Examples of open systems
are Internet security and electronic commerce. The Company has been informed
that BII's strategy has been to initially focus upon the time and attendance and
access control markets where a need exists.
BII's products allow the ability to register/enroll a fingerprint of an
individual, save a template of it, and then at a later time verify the identity
of the individual by retrieving the fingerprint template and performing a
comparison with a newly obtained fingerprint image. Generally, competitive
fingerprint identification systems are based on algorithms that read
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"minutia" (imaging points of interest on the fingerprint) which can be fooled by
temporary alterations such as changes to the finger due to cuts or swelling.
This could result in a loss of accuracy, especially over time. BII's products
utilize a full finger Pattern Recognition fingerprint verification software
system, exclusive to BII. This system images the entire two-dimensional ridge
pattern of the fingerprint, and provides accuracy over time at the highest
security level. BII's products are generally not affected by temporary changes
to the finger, and provide a response time of less than one second, an
enrollment time of less than five seconds, and an accuracy rate of less than one
per thousand of false positive and less than one per thousand false negative.
BII's product line of biometric fingerprint identification products
includes products which can be deployed in stand-alone mode or as part of a
larger application. BII has recently begun marketing the Veriprint 2100 for
access control and time and attendance applications. This system has a variety
of applications and is being used by the Venezuelan Legislature in verification
terminals that allow members of the Chamber of Deputies and Senate, and their
authorized surrogates, to vote electronically from their desks.
Also recently introduced was the Veriprint 1100 Fingerprint
Identification System. The Veriprint 1100 is a silicon sensor based system
incorporating BII software. Applications include safeguarding Internet access,
intranet access, local area networks, electronic commerce and other sensitive
data applications.
Many competitive products rely on Application Specific Integrated
Circuit ("ASIC") technology which is less flexible than other technologies and
can be harder to integrate with external applications. BII has developed a fully
programmable device architecture which facilitates ease of integration with
external original equipment manufacturers ("OEM") and value added retailers
("VAR"). A complete application software development kit has been constructed so
that any VARs and integrators can easily interface their software with BII's
products. The software is Windows 95/NT compatible and is provided in the form
of a complete dynamic link library ("DLL"), allowing the user to customize all
aspects of the BII product line such as, for example, using BII's hardware and
alogrithms and the user's time and attendance software.
BII was incorporated in 1995 as a subsidiary of Arete. To date, more
than US$4,000,000 has been invested by Arete in BII for research and development
and working capital. The audited Statement of Operations for BII's fiscal year
ended December 31, 1997 shows revenues of US$494,000 and a net loss of
US$1,332,000. The unaudited Statement of Operations for the eleven month period
ended November 30, 1998 shows revenues of US$1,066,051 and a net loss of
US$3,288,441. With the additional capital from the Company and from Arete, BII
plans to increase its marketing and engineering efforts.
BII has a total of 35 employees and consultants. (See Item 10 --
Management of BII).
The Products
BII's fingerprint identification system is small, versatile and
inexpensive. To fully understand BII's products, BII's management has stated
that it is necessary to see the improvements BII has made in two areas:
verification (i.e., comparison and decision making) software and programmable
network interface (hardware). Management of BII believes that verification
software is the critical component in biometric devices. BII's software uses
sophisticated algorithms resulting in accuracy and reliability while utilizing
cost effective hardware.
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Many fingerprint verification software techniques involve the use of
minutia points. The BII technique does not use individual points, but rather
images the entire two dimensional ridge structure of the fingerprint. The print
presented for comparison is processed so that differences between it and the
stored template are corrected mathematically within program parameters.
Distortion, dislocation, rotation, sensor noise, finger swelling and scarring
are all compensated for as much as possible in the algorithm. Only after all of
these compensatory techniques are performed, and the two print images still do
not match, is the candidate print declared dissimilar to the template.
Management of BII believes that BII's method of handling these
potential distortions in the fingerprint is a key aspect of its technology.
Distortion handling allows BII's products to identify and verify fingerprints
over extended time horizons. Minutia-based systems often have problems in this
area, and over time become increasingly unreliable as the minutia points on the
fingerprint change over time. This unreliability can cause a requirement to
re-enroll and also increase the probability of a false rejection.
BII has integrated its fingerprint algorithms and software with newly
introduced solid state technology and is presently working with the 5 major
vendors, Veridicom, Inc. ("Veridicom"), ST Micro, CSF Thomson, Siemens, and
Authentic. Management of BII believes that BII was the first company to complete
this integration into a self-contained system the size of a business card. BII's
management believes that many of the other biometric companies like Identix,
Inc., Identicator Technology ("Identicator"), and Sony Corp. ("Sony") may take
longer to integrate their products given their ASIC approach which typically
represents software frozen into silicon. Management of BII believes that the
flexibility and programmable design of its products is a key area of BII's
technology.
BII has also completed product integration with a number of other
manufacturers including Radionics, Inc. ("Radionics"), Westinghouse Security
Electronics ("Westinghouse"), Chubb Security, Simplex, Northern Computer and
Apollo. Management of BII is currently in discussion with many other companies
with the intention of integrating their products.
BII's Veriprint 2100, is a complete system consisting of a processor,
scanner, terminal and BII's proprietary patent pending software. The Veriprint
2100 is a self-contained system geared toward applications such as time and
attendance and access control. To date, over 2,000 Veriprint 2100's have been
installed in customer locations. This product sells for less than US$900 retail.
BII released its second product, the Veriprint 1100, in June 1998. The
Veriprint 1100 is a desktop fingerprint verification system that uses the
computer's processor/memory and is designed to integrate for PC or network
security applications. This product sells for less than US$340 retail.
BII hopes to introduce the Veriprint 1500 in the second quarter of
1999. The Veriprint 1500 is to be a hybrid of the Veriprint 1100 and the
Veriprint 2100. The Veriprint 1500 will contain a limited amount of storage for
the fingerprint templates. Additionally, BII expects that it will generate
revenues from the license of its proprietary fingerprint algorithms to large
OEM's in such areas as: smart card technology, electronic commerce and computer
equipment.
BII has developed a fully programmable device architecture which
facilitates ease of integration with external OEM and VAR applications, in
contrast to competitive products which rely on ASIC technology. Again, BII's
management believes that ASIC technology is less flexible
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than other technologies and can be harder to integrate with external
applications. BII's management believes that this is a significant advantage for
BII in its marketing efforts.
BII has developed a complete application software development kit so
that VARs and integrators can easily integrate their products with BII's
products. BII's software, which is Windows 95/NT compatible and is provided in
the form of a complete DLL, allows the user to customize a number of aspects of
the BII product lines.
Management of BII believes that its fingerprint verification software
is one of the best in the industry (less than 1 per thousand false positive and
less than 1 per thousand false negative). It has one touch enrollment (less than
5 seconds), relatively fast response time (less than 1 second), and has a
programmable architecture which allows rapid integration with the end
applications of OEMs and VARs.
In 1997, BII introduced its first Biometric fingerprint product based
on optical sensor technology, and recently introduced its second generation
optical device in October, 1998. There are over 2,000 units installed in various
sites around the world. Additionally, BII believes it has become an acknowledged
expert on "silicon chip" based fingerprint sensor technology which appears to be
the next generation sensor, replacing optics over time. BII has a "virtual
manufacturing" strategy pursuant to which BII utilizes sub-contractors to
assemble parts. BII has also established a strategic relationship with
PrimeTech, an ISO 9000 qualified manufacturer, and BII has developed three major
products:
1. Veriprint 2100 Optical Terminal ("V2100") - Complete biometric terminal
with case, keypad and LED screen.
- - The V2100 is presently an "optically based sensor" product. BII hopes to
achieve "silicon sensor" integration during 1999 which is superior to an
optically based sensor product because through the use of silicon, the
product can be made much smaller.
- - The V2100 sells for approximately US$800 to US$900. The V2100 has been in
existence for over one year and there are approximately 2,000 already
deployed for time and attendance and access control applications.
2. Veriprint 1100 Silicon Sensor, Integration Component ("V1100").
- - The V1100 integration component features what BII believes to be the first
ever use of "silicon sensor" technology in a self-contained fingerprint
system.
- - The V1100 is very small and provides a form factor which can be easily
integrated into OEM products (readers, keyboards, etc.). This
product is smaller than a business card and no thicker than a half dollar.
- - The V1100 features on board verification and template storage for
fingerprint data from up to 1500 people and on-board Programmable Digital
Signal Processor.
3. BII Fingerprint Software Suite - Crucial component, featuring a new
decision algorithm "Ridge Recognition" and a complete software Suite for
the operation and management of a fingerprint biometric system. This suite
features the following:
- - Ridge Recognition Algorithm - BII's "patent pending" fingerprint
verification algorithm. BII believes that recognition algorithm is the key
decision engine for a biometric system and a
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crucial area of competitive advantage for BII. BII has developed what it
believes is an entirely new approach to fingerprint recognition focusing on
ridge patterns instead of minutia.
- - Fake Finger Detection - BII believes that a crucial issue for biometric
systems is their ability to respond to challenges to security. BII believes
it has developed a technology solution which can detect a latex/rubber fake
finger. To date, BII believes this program is unique and will provide
significant advantage in the field.
- - Other Features of the Suite - Encryption, "One to Many" (which utilizes a
data base search) and Application Software Interface.
Market for Products
Biometrics is the use of unique physiological traits or behaviors to
distinguish one person from another. The industry started with forensic
applications using fingerprints for law enforcement and government security
applications. In the last 30 years, electronic fingerprinting has evolved as an
alternative storage and retrieval medium to paper and ink.
Today, biometrics is a US$500 million industry (Yankee Group, 1995
Study), and a US$1 billion market if one includes sales of related computer
systems (Benjamin Miller, Editor, Personal Identification News). The biometric
industry can be divided into the following major types: face recognition, hand
geometry, iris/retina scanning, voice print, signature recognition and
fingerprint scanning. Of these options, BII's management believes that the
fingerprint scanning option is the most widely accepted.
Face recognition is a relatively inexpensive option and is considered
easy to use. However, management of BII believes that face recognition can be
considered intrusive, may be subject to physical conditions such as available
light which affect function and usually has a large template size. Face
recognition has been used in governmental applications in the U.S., such as in
welfare agencies and the departments of motor vehicles. Historically, face
recognition has been a very small portion of the private biometric marketplace.
Hand geometry systems are moderately expensive biometric solutions.
Hand geometry was one of the earliest biometric approaches because it was
considered relatively easy to use. Conversely, BII's management believes that
hand geometry is generally considered slow and less accurate than fingerprint
scanning. In management's view, the equipment utilized in hand geometry systems
is relatively large and in many cases easily vandalized. Management of BII
believes that over time hand geometry will decrease in market importance as
fingerprint technology continues to improve.
BII's management believes that iris/retina scanning systems are
accurate biometric solutions and have been used in very high security
applications such as nuclear power plants. This option is fairly expensive to
implement and suffers from user acceptance issues. BII is aware of numerous
banks which have recently been evaluating this option for their automated teller
machine ("ATM") security. ATMs are an example of a system which, in BII's
management's view, could justify a high cost per installation. BII's management
believes that consumer acceptance is still a very open issue and that in the
long run, this biometric option is not anticipated to grow substantially.
Voice recognition systems are relatively inexpensive and have been
applied in remote access applications such as remote banking. However, BII's
management believes that voice recognition is slow in application and can be
affected by physical condition or emotional state.
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Signature recognition systems are relatively inexpensive and have been
used primarily in document processing applications in both the financial and
insurance industries, as well as government applications. However, BII's
management believes that the accuracy of signature recognition systems can be
affected by emotional or physical condition and their overall accuracy has been
questioned.
BII's management believes that the fingerprint identification segment
is the largest and most widely accepted method of biometric identification. BII
has prepared its business plan on the assumption that the fingerprint
identification segment will experience considerable growth as applications are
developed (access control, network security, electronic commerce, etc.) which
match up well with the characteristics of this option. BII's management believes
that there is considerable investment being made in this area and, with chip
options becoming available, the ability of this segment to improve price and
overall function is being greatly increased. Fingerprint identification systems
are considered by BII's management to be very accurate and the cost to deploy
the application is believed to be decreasing in line with broad market needs.
Management believes that fingerprint identification technology has historically
suffered from inaccuracy and problems with false rejections and acceptances and
that consumer acceptance of this option is crucial to long term market growth.
BII's management believes that there are many biometric applications
for electronic fingerprint devices with long term prospects, including point of
sale devices, electronic commerce and inter/intranet security. BII's management
believes that certain of the major credit card companies are exploring the use
of fingerprint identification technology using "open systems" which require
complex solutions because there are many members and multiple locations. In
BII's management's view, closed systems, where there are a finite number of
users and the database can be stored locally, are more easily and affordably
solvable today. Therefore, BII's management is focusing on closed system
commercial applications which it believes have the most market potential in the
short term (one to two years). These include time and attendance, access control
and the network security markets.
Biometrics, specifically hand geometry and fingerprint, have been
deployed in the time and attendance market for several years. To date, the
performance errors of the early devices and relatively high price has limited
the introduction of biometrics in a major way into this market. Recent advances
in fingerprint biometrics have given this market a solution with price and
performance characteristics which are allowing players in the market to actively
launch biometrics applications in 1998/1999. Based on BII's discussion with some
of the largest time and attendance companies in the U.S., BII believes that a
significant portion of this market will begin using biometric products.
One of the primary motivators for the deployment of biometrics in this
market is the reduction of fraud associated with "buddy punching" (clocking in
and out for an absent co-worker). According to market researcher Frost and
Sullivan (1997, World Biometrics Market), companies lose over US$l billion every
year because of this problem. Buddy punching is relatively easy because cards
and person identification numbers ("PINs") are not intrinsically linked to the
card holder. Biometric information can also be interfaced with a company's
payroll and productivity systems and can present data in a more accurate, secure
and efficient fashion.
The physical security market can be divided into three broad segments:
perimeter security, internal security and access control. According to Frost and
Sullivan (1997), in the U.S. this market generated revenues of over US$2 billion
in 1997. The largest segment of the physical security market is the "electronic
access control" segment which was estimated at US$750 million
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in 1997. To date, the introduction of biometric devices in this market has been
limited, given the overall size of this marketplace, largely due to cost and
functionality. The electronic access control market is dominated by card and
proximity reader devices placed on entries to control and limit access.
Based upon BII's discussions at trade shows and with access control
companies, it appears that if biometric solutions could approach the cost level
of card and proximity reader devices, then a biometric solution might start to
become a primary application, rather than a niche application. BII has designed
its Veriprint 1500/2100 product line to meet these cost levels. Additionally,
the administration of card reader systems is more complicated than a biometric
solution due to the need to record and physically control the cards in card
reader systems.
The access control market is largely comprised of smaller regional
access control companies combined with a selected number of larger companies.
The larger companies include Card Key, Westinghouse, Amana Appliances and
Radionics. BII has completed, or is in the process of completing, product
integration with all of these companies except Card Key, which has not yet
decided to adopt biometrics. BII's management believes that biometrics makes
sense in this market segment as PIN codes, keys and slide cards can get lost or
stolen and may be problematic in the event of personnel turnover. Applications
for access control are diverse and include corporate offices, sensitive
government locations, law and other professional firms, hospitals, banks,
correctional institutions, airports and educational institutions.
BII's management believes that U.S. companies spend large amounts of
funds annually on computer security for personal computers ("PCs"), networks and
databases. In a recent survey of management information systems administrators
by Frost and Sullivan (1997), 54% of the respondents said their company suffered
a loss related to information security and disaster recovery. More than 25% of
the respondents experienced losses of nearly US$250,000. Recent trends and
strategic decisions made by systems integrators and manufacturers in the
computer industry imply a growing potential security market.
A primary market application for biometrics is the protection of PC and
network access (NT or Novell) through a mouse-like device (or eventually, as an
integrated component into the computer/keyboard itself). This is a market
opportunity for biometrics where interest appears to be increasing. BII believes
that this is a market area where competitive products are surfacing.
There are a significant number of PCs installed in corporations
worldwide and connected to networks. As the network computer continues its
penetration in the marketplace, the number of "network" connected units is
expected to grow. These networked units include not only NT and/or Novell
networks, but also units tied to a company's intranet.
The network security market is expected by BII to be one of the largest
of the biometric markets. BII believes that the installed base is extensive and
the increasing reliance on computers, local and wide area networks,
internet/intranets and extranets creates a potential pool of customers. The new
network computer is geared for access to a central database (the 90's version of
the mainframe) and increasingly it will be important to know exactly who is on
the network.
There are estimated to be over 40 million PCs in U.S. households (home
offices, etc.), with approximately 7.5 million new PCs sold into the home market
each year (U.S. Consumer Electronic Association). BII does not expect the home
PC market to be as large a market as the corporate marketplace. However,
protection of the home PC and its information is expected to increase as people
become increasingly electronically focused. As with other new technologies,
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the proving grounds for biometrics will be in the corporate marketplace. As
these devices achieve acceptance, BII believes that it is reasonable to expect
that over time these products will deploy in the home market and that retail
distribution will be achieved.
BII is presently working with Radionics, integrating BII biometrics
into their access control and intrusion systems. Radionics is one of the largest
home security companies in the United States.
In U.S. government applications, public agencies use biometrics to
verify the identity of persons who wish to receive a service from the agency or
pass through an application process. Examples include welfare agencies,
departments of motor vehicles, and the U.S. Immigration and Naturalization
Service. BII believes that there is interest in this area from governments due
to concerns about fraud.
Marketing Plan
BII's goal is to become an industry leader in the market for
speed-dependent, closed system commercial verification applications such as time
and attendance and access control. BII intends to position itself strategically
to compete in the long term through strategic alliances with various companies
in the industry. By providing quality fingerprint technology in the time and
attendance and access control markets, BII intends to forge a solid reputation
and list of references which can be leveraged as it competes for longer term,
strategic markets.
BII has defined its target markets, being the time and attendance and
access control markets. In each of these markets, BII has focused on key
customers and actively sought alliances. In BII's view, the alliance process
involves one of validating technology. Once the alliance has been created, the
next step would be for BII to work together with its allies to integrate their
products. This integration process is time consuming and expensive.
In competitive comparisons, BII believes its product has performed
favorably. BII believes that this favorable performance, combined with
aggressive pricing, has enabled it to be effective in securing relationships
with several large companies. Once the integration process is complete, BII
hopes that the OEMs will then introduce its products into their distribution
channels.
BII has been executing its sales strategy through its sales team and
has been actively marketing its product since September of 1997. In this time,
it has developed a list of alliances that includes Westinghouse, Panasonic
(Matsushita Electric Corporation of America), Radionics, Veridicom and Kronos
Incorporated ("Kronos").
BII is targeting both large and small companies. In its view, the
larger companies offer long term sales potential. By comparison, the innovative
smaller VARs and OEMs are more often the first to adopt new technologies and
create early stage demand from consumers. In BII's view, these early adopters
take business from industry leaders which creates incentive for the big
companies to follow suit. BII is also going to target systems integrators and
large consulting firms that thrive on introducing new technologies to their
customers.
In BII's experience, the sales/adoption cycle for integration of a
biometric solution into VAR/OEM end applications varies, but is approximately
four to six months.
To date, BII has focused on the time and attendance and access control
markets where biometric solutions are actively being sought and the ability to
generate sales revenues is
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immediate. During 1999, it will expand its marketing efforts to include direct
contact with financial institutions, smart and credit card companies, electronic
commerce and computer equipment companies where interest in biometrics is
growing, but the creation of significant sales revenue is not expected in the
near future. BII would like to leverage relationships in both Silicon Valley and
financial markets to create a "business development" approach which is respected
and has impact. From BII's perspective, solutions in the electronic commerce and
financial transaction areas will occur in an alliance situation with important
players.
In June of 1998, BII introduced its Veriprint 1000 product line. This
product has a package size smaller than a computer mouse and is targeted at the
NT network security, electronic commerce and PC security marketplaces. BII has
received interest in this product line from VARs and OEMs such as Westinghouse,
Radionics and Kronos. BII hopes that this product will open up new marketplaces
for BII in the general computer/data network marketplace where corporations
and/or institutions want to increase the protection of confidential information.
Actual market applications which BII is presently pursuing with potential
customers include security for NT networks and patient record security at
hospitals.
BII intends to launch an aggressive marketing campaign focusing on
landing high profile accounts to generate more publicity. BII believes that it
needs to match its technological abilities with aggressive high level publicity
and marketing. Additionally, BII attends trade shows to showcase its products,
such as the Card Tech Security Trade Show.
BII has a website for general customer information at
www.biometricID.com.
BII has retained a small marketing company located in the United
Kingdom as a representative for BII in the European market area. In BII's view,
the European market provides another marketing possibility for BII. BII would
like to secure several sales representatives to assist BII in introducing its
products into the European and Asian marketplaces.
Research and Development Plan
BII's management believes that the development of a self-contained
fingerprint verification unit requires expertise in three primary areas: signal
processing and detector development, software engineering and parallel
processing. The Veriprint research and development team at Arete is qualified in
all three of these technical fields. Arete is an applied research corporation
with over 20 years of experience and more than 140 staff members skilled in
electro-optics, image processing and analysis, algorithm design and software
development. Arete has obtained the recognition of the technical community
through an integration of scientific knowledge and advanced sensor systems
expertise. Arete's original focus was oceanographic research and remote sensing,
but expanded to encompass development and implementation of real-time
processors, design and analysis of active and passive optical sensors, and
formulation of sophisticated likelihood-based detection algorithms.
The Tucson, Arizona office of Arete is Arete's primary location for
active and passive electro-optic remote sensing. This office has been involved
in the development, optimization and evaluation of advanced high resolution
sensors for shallow water imaging applications. BII has stated that particular
areas of expertise include receiver development, real-time processing, field
test evaluation, performance assessment, physical modeling and data analysis.
The staff scientists at Arete developed the fingerprint verification
algorithm. The algorithm was designed to exploit all of the significant
information contained within the fingerprint. Unlike
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the majority of algorithms on the market which use only a small fraction of the
image, referred to as the minutia, the Veriprint algorithm exploits the entire
ridge pattern. In BII's view, the "full print" approach should be more accurate
and more stable over time.
Because of the overall sophistication of the algorithms and parallel
processing technologies used within the Veriprint unit, the software development
effort requires experience in real-time signal processing, digital signal
processor-based parallel processing methodologies, microprocessor-based coding
and stringent adherence to software engineering principles. Arete's experience
in implementation and assessment of real-time advanced sensor systems provides
the necessary background to perform this software development.
BII intends to aggressively develop a suite of fingerprint software
products leveraging its ridge recognition algorithms as the primary element.
This software suite will be marketed to large information technology companies
working to create a software standard. Future research and development work will
focus on:
- - V-1100 - the design and production of a new V-1100 chip which will have
template storage on the chip as well and the ability for the unit to
perform verification.
- - V-1500 - product development - the unit will incorporate a second board
which will provide additional functions, such as ethernet connection,
multiple communication paths, additional memory and built-in Weigand
capability ("Weigand" is a primitive computer language used for
inter-computer communications). Weigand capability is important for the
access control market.
Competition
There appear to be dozens of biometric companies in the business or
publicizing that they are entering the biometric industry. BII believes that it
is only reasonable to expect that as market opportunities start to materialize,
competition will increase. In analyzing the current competitive landscape, BII
believes that the majority of the new companies entering the market are focused
in the areas of PC and NT network security and the financial transaction areas
(smart card and electronic commerce). BII believes that the majority of its
competitors are leveraging "minutia"-based algorithms, either of their own
creation or licensed from another company. BII believes that its two-dimensional
ridge approach with distortion handling is superior for this market-place.
BII is developing a product line which will allow it to target several
key market segments. The Veriprint 2100 and the upcoming Veriprint 1500 will be
marketed to the access control and time and attendance markets. In BII's
experience, there is aggressive activity by participants in these markets and a
growing, forming marketplace.
There are also markets where an end consumer identity is not important
as BII integrates with OEM and VAR applications. BII believes that function,
ease of integration and price drive these markets. BII has developed its
Veriprint 1100 to compete in the PC network, information technology and
financial transaction areas. BII expects that this is where it will face the
bulk of its competition.
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The PC network security market is starting to develop and appears to be
ahead of the electronic commerce and point of sale/electronic commerce
transaction marketplace, which will take time to put together a solution which
works for all involved. In the early stage of electronic commerce, the
stand-alone mouse-like product will be a key component, adding functionality to
existing installed PCs. In the long run, electronic commerce and security
functionality could be integrated into a key board or a lap top and be as common
as a mouse is today. These markets appear to be wide open.
To BII's knowledge, to date there are two companies, Identix, Inc. and
Recognition Systems, Inc., who have been the early players in the biometric
market area. It is against these companies that BII believes it will be
primarily competing in the time and attendance and access control marketplaces.
Identix, Inc. is a 15 year old company based in Sunnyvale, California,
with a strong presence in the law enforcement market, and a growing presence in
access/control. It is a public company with US$79 million in annual revenue and
uses fingerprint identification. Most of the business comes from the law
enforcement segment. Identix appears to have strong marketing ties and an
established track record, as reflected by its recent joint venture with Oracle,
the largest database company in the world.
Recognition Systems, Inc. is a private company based in Campbell,
California, that uses hand geometry and concentrates on the commercial market.
While this technology is less sophisticated than fingerprint technology (with
larger databases they will have duplication because hand geometry is less
unique), the company offers a solution that is considered flexible and
programmable. The ten year old company produced the biometric system for access
to the Olympic Village in Atlanta, Georgia.
Another fingerprint identification competitor is Mytec Technologies
("Mytec") based in Ontario, Canada. Mytec specializes in the access control
market. It is publicly held with annual sales to June, 1998 of more than $10
million, mostly in alarm monitoring and response. Its subsidiary, Counterforce,
monitors security alarms and has approximately 33,000 accounts. The company
focuses on niche markets such as database and medical record access, rather than
mainstream access markets, so that it can leverage its encryption technology.
Mytec has announced strategic alliances with Compaq Computer and Casinoworld.
A number of other competitors of BII largely focus on PC network
security and financial/electronic commerce marketplaces. One of these, The
National Registry, is a public company which has been in the news frequently and
has strategic alliances with Key Tronic Corp., which designs and manufactures
keyboards, and Unisys Corp. Based in St. Petersburg, Florida, The National
Registry is focusing on fingerprint technology for mass market computer station
applications.
Digital Personna is a privately-held relatively new company located in
Redwood City, California which will be introducing a unit focused on PC/NT and
electronic commerce marketplace. Digital Personna also appears to be focused on
the consumer marketplace.
American Biometric Company is a privately held company and has recently
introduced the "BioMouse". The BioMouse is a peripheral device which attaches to
the serial port and is focused on PC and NT security. It has been on the market
for only a short time. The BioMouse is optically based, utilizing a
minutia-based algorithm.
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Sony has introduced a fingerprint identification unit focused on PC and
NT security. The Sony unit is optically based utilizing minutia-based
algorithms. BII understands from Veridicom that Sony may integrate with its
chip.
Additionally, there are several other companies in the PC/NT security
market such as Identicator, Digital Biometrics, Inc., FingerMatrix, Inc., and
Printrak International, Inc. These companies are mostly start-ups or established
forensic companies now entering the commercial market.
Patents, Trademarks, and Copyrights
Arete has provided an exclusive license to BII for its five pending
patents in fingerprint sensing and algorithms. The patent applications have been
filed during the past three years with the U.S. patent office and three have
proceeded to filings under the Patent Cooperation Treaty. Of these, one has
proceeded to national stage filings in Brazil, Japan and Canada, and with the
European Patent Office. Effective, January 8, 1999, a patent on key technology
elements of ridge recognition is in the process of being issued in the United
States.
RISK FACTORS
The Company's business now consists primarily of its investment in BII
(See "Business of the Company"). Therefore, an investment in the shares of the
Company is subject to, primarily, the risks associated with BII's business. The
risks inherent to BII's business may be summarized as follows:
Uncertainty of Market Acceptance and Development
Substantially all of BII's product revenues to date have been, and for
the foreseeable future are anticipated to be, derived from biometric identity
verification ("Bio-ID") products and biometric imaging products. These products
represent new technologies, which have not yet gained widespread commercial
acceptance. In particular, Bio-ID products represent a new approach to identity
verification, which has only been used in limited applications to date. The
expansion of the market for BII's products depends on a number of factors,
including the cost and reliability of BII's products and products of
competitors, customers' perception of the benefits of these products, public
perceptions of the intrusiveness of these products and the manner in which
agencies are using the fingerprint information collected, public confidence as
to protection of private information, customers' satisfaction with BII's
products and publicity regarding these products. Public objections have been
raised as to the use of biometric products for some applications on civil
liberties grounds.
BII's future success is dependent upon the development and expansion of
markets for Bio-ID products and biometric imaging products both domestically and
internationally. In addition, even if markets develop for Bio-ID products and
additional markets develop for biometric imaging products, there can be no
assurance that BII's products will gain wide market acceptance in these markets.
A number of factors may limit the market acceptance of BII's products, including
the performance and price of BII's products compared to competitive products or
technologies, the practicalities of developing the infrastructure necessary to
support certain Bio-ID applications such as ATMs and point-of-sale applications,
the nature of technological innovations and new product development activities
by BII and its competitors, and the extent of marketing efforts by BII's
collaborators or partners. If the markets for BII's products fail to develop or
develop more slowly than anticipated or if BII's Bio-ID products fail to gain
wide market acceptance, or biometric
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imaging products lose market share, BII's business, financial condition and
results of operations would be materially and adversely affected.
Risks of Competition and Rapid Technological Change
The markets for Bio-ID products and biometric imaging systems are
extremely competitive and are characterized by rapid technological change, as a
result of technical developments exploited by competitors, the changing
technical needs of customers, and frequent introductions of new features. BII
expects competition to increase as other companies introduce additional and more
competitive products. In order to compete effectively in this environment, BII
must continually be able to develop and market new and enhanced products and
market those products at competitive prices.
There can be no assurance that BII will be able to make the
technological advances necessary to compete successfully in its products
business. Some of BII's present and potential competitors have financial,
marketing and research resources substantially greater than those of BII.
Existing and new competitors may enter or expand their efforts in BII's product
markets, or develop new products to compete against BII products. No assurance
can be given that BII's competitors will not develop new technologies or
enhancements to existing products or introduce new products that will offer
superior price or performance features or that new products or technologies will
not render obsolete the products of BII.
Dependency on New Products and Risks of Rapid Innovation
BII's future success will depend upon its ability to address the needs
of the market by enhancing its current products and by developing and
introducing new products on a timely basis that keep pace with technological
developments and emerging industry standards, respond to evolving customer
requirements and achieve market acceptance. The development of new,
technologically-advanced products and product enhancements is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. Any failure by BII to
anticipate or adequately respond to technological developments or end user
requirements, or any significant delays in product development or introduction,
could result in a loss of competitiveness or revenue.
There can be no assurance that BII will be successful in developing and
marketing product enhancements or new products on a timely basis if at all, that
BII will not experience difficulties that could delay or prevent the successful
development, introduction and sale of these products, or that any of its new
products and product enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. If BII is unable, for technological
or any other reason, to develop, introduce and sell its products in a timely
manner, BII's business, financial condition and results of operations would be
materially and adversely affected.
Inability to Establish Strategic Relationships for Product Distribution
BII's strategy for the distribution of certain of its products requires
entering into various strategic relationships with OEMs, systems integrators and
resellers. Some of these relationships are formalized in agreements; however,
such agreements may often be terminated with little or no notice, and subject to
periodic amendment. Although BII believes that the OEMs, systems integrators and
resellers with which it works have an economic motivation to promote or use
BII's products, the amount and timing of resources to be devoted to these
activities are not within the control of BII. There can be no assurance that
such parties will actively promote BII's products or
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pursue installations which use BII equipment, that any distribution or other
arrangements with BII will not be terminated or renegotiated or that BII will
derive any revenues from such arrangements. BII intends to continue to seek
strategic relationships to distribute and sell certain of its products. There
can be no assurance that BII will be able to negotiate acceptable strategic
relationships in the future or that current or future strategic relationships
will be successful.
Risk of Product Defects and Failure to Meet Performance Criteria
Complex products such as those offered by BII may contain undetected or
unresolved defects or may fail initially to meet customers' performance criteria
when first introduced or as new versions are released. There can be no assurance
that, despite testing by BII, defects or performance flaws will not be found in
new products or new versions of products following commercial release or that
performance failures will not result, causing loss of market share, delay in or
loss of market acceptance, additional warranty expense or product recall. In
addition, the failure of products to meet performance criteria could result in
delays in recognition of revenue and higher operating expenses during the period
required to correct such defects. There is a risk that for unforeseen reasons
BII may be required to repair or replace a substantial number of products in use
or to reimburse persons for products that fail to work or meet strict
performance criteria. Any such occurrence could have a material adverse effect
on BII's business, financial condition and results of operations.
Uncertainty of Protection of Proprietary Technology
BII's ability to compete effectively will depend in part on its ability
to maintain the proprietary nature of its technology, products and manufacturing
processes. BII principally relies upon patent, copyright, trade secret and
contract law to establish and protect its proprietary rights. The success of
BII's products business will depend in part on its proprietary technology and
BII's protection of such technology. BII holds United States and foreign patents
covering certain of its products and technologies and has other patent
applications pending.
No assurance can be given that the claims allowed on any patents held
by BII will be sufficiently broad to protect BII's technology. In addition, no
assurance can be given that any patents issued to BII will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
competitive advantages to BII. The loss of patent protection on BII's technology
or the circumvention of its patent protection by competitors could have a
material adverse effect on BII's ability to compete successfully in its products
business. There can be no assurance that any existing or future patent
applications by BII will result in issued patents with the scope of the claims
sought by BII, or at all, that any current or future issued or licensed patents,
trade secrets or know-how will afford sufficient protection against competitors
with similar technologies or processes, or that any patents issued will not be
infringed upon or designed around by others.
In addition, there can be no assurance that others will not
independently develop proprietary technologies and processes, which are the same
as, substantially equivalent or superior to those of BII. Further, there can be
no assurance that BII has not or will not infringe on prior or future patents
owned by others, that BII will not need to acquire licenses under patents
belonging to others for technology potentially useful or necessary to BII, or
that such licenses will be available to BII, if at all, on terms acceptable to
BII. Litigation, which could result in substantial cost to BII and diversion of
management attention, may also be necessary to enforce any patents issued to BII
or to determine the scope and validity, of other parties' proprietary rights.
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BII also relies on trade secrets and proprietary know-how which it
seeks to protect by confidentiality agreements with its employees and
consultants and with third parties. There can be no assurance that these
agreements will not be breached, that BII will have adequate remedies for any
breach, or that its trade secrets and proprietary know-how will not otherwise
become known or be independently discovered by others. See "Patents, Trademarks
and Copyrights".
Dependence on Key Personnel
BII's success will depend upon its ability to retain its current senior
management team and key technical, marketing and sales personnel and its ability
to identify, attract and retain additional highly qualified personnel. The BII's
employees may voluntarily terminate their employment with BII at any time, and
competition for qualified employees, especially engineers, is intense. The
process of locating additional personnel with the combination of skills and
attributes required to carry out BII's strategy is often lengthy. The loss of
the services of key personnel, or the inability to attract additional qualified
personnel, could have a material adverse effect on the BII's business, financial
condition and results of operations. As BII is also dependent on relationships
it has developed with the staff of Arete Associates, any breakdown of these
relationships could also have a similar material adverse effect.
Applicability of Company Management's Expertise
The expertise and experience of the Company's management is principally
in the resource exploration and development industry. As such, at least in the
immediate future, the Company's management must rely to a large extent upon the
expertise and experience of BII's management.
Risk of Year 2000 Noncompliant Systems
The year 2000 issue is a general term used to refer to certain business
implications of the arrival of the new millennium. In simple terms, these
implications arise largely because it has been normal practice for computer
hardware and software to use only two digits rather than four to record the year
in date fields. On January 1, 2000, when the year is designated as "00", many
computer systems could either fail completely or create erroneous data as a
result of misinterpretation of the year. In some cases, date sensitive systems
may begin to fail prior to January 1, 2000. The results of failures may range
from relatively minor processing inaccuracies to catastrophic system
malfunctions. Failures may affect not only hardware and software used to process
every day business information but also the imbedded computers that control
plant machinery, robotics, office equipment, elevators and building climate and
security systems.
The Company does not anticipate that it will experience significant
year 2000 issues, because it utilizes commercial programs and systems that are
standard, Year 2000 compliant, business products. The Company is in the process
of contacting its principal suppliers to make sure that they are also Year 2000
compliant and anticipates that it will have completed its assessment of
suppliers by the third quarter of 1999.
The Company has asked BII to evaluate the products and services that
BII offers, as well as its information technology infrastructure, to determine
whether BII or its customers may have exposure to Year 2000 problems, and to
make inquiries of BII's key suppliers, to determine their readiness with respect
to Year 2000 problems.
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remains at risk of disruption to its business, however, if Year 2000 problems
are experienced by BII's customers, suppliers, systems integrators, OEMs or
other third parties upon which BII is dependent for the conduct of its business.
The Year 2000 problem is pervasive and complex and there can be no
assurance that the Company and BII have been or will be able to identify all of
the Year 2000 issues that may affect their products, services or internal
computer systems, or that any remedial efforts undertaken by the Company and BII
will adequately address any potential Year 2000 problems.
Risk of Monetary Exchange Rate Fluctuation
The profitability of BII and the Company may be adversely affected by
fluctuations in the rate of exchange of Canadian dollars into U.S. dollars.
Neither BII nor the Company typically has the capital available to take steps to
hedge against currency fluctuations.
Credit Risks Related to Investment in Convertible Debentures of BII
The Company's business now consists only of its investment in
convertible debentures issued by BII, a U.S. development stage company. These
convertible debentures are unsecured and do not provide for regular payments of
principal or interest to the Company. Until the Company exercises its rights of
conversion under the convertible debentures, the Company will not have the
voting and other rights provided to the shareholders of BII through their
shareholdings. The Company does not have any control over the shareholders or
the Board of Directors of BII.
Risk of Failure to Meet Future Capital Needs
As growing businesses, both the Company and BII typically need more
capital than they have available to them or can expect to generate through the
sale of their products. In the past, both the Company and BII have had to raise,
by way of debt and equity financing, considerable funds to meet their capital
needs. BII has been operating at a substantial deficit and has substantial
monthly expenses which are expected to grow as BII expands. There is no
guarantee that the Company or BII will be able to continue to raise funds needed
for their business. Failure to raise the necessary funds in a timely fashion
will limit both the Company's and BII's growth. The initial funds advanced by
the Company to BII will not be sufficient to maintain BII's solvency for any
significant period of time. Further, if the Company is not able to provide
additional capital for BII, the Company's interest in BII may be diluted if BII
seeks additional equity financing from other sources.
Dividends
The Company has not paid dividends in the past and does not anticipate
paying dividends in the near future. See "Dividend Record and Policy".
Conflict of Interest
Certain officers and directors of the Company may hereafter become
associated with other technology companies that acquire interests in various
technologies. Such associations could give rise to conflicts of interest from
time to time. The directors of the Company are required by law, however, to act
honestly and in good faith with a view to the best interests of the Company and
its shareholders, and to disclose any personal interest which they may have in
any material transaction
19
<PAGE> 23
which is proposed to be entered into with the Company and to abstain from voting
as a director for the approval of any such transaction. Certain transactions may
also require shareholder approval under applicable law or the rules of the
Vancouver Stock Exchange.
ITEM 2 PROPERTIES
The Company occupies approximately 2,300 square feet of leased space at
Suite 1940, 400 Burrard Street, Vancouver, British Columbia under a lease
expiring October 31, 2000. A total of four employees of the Company operate out
of its Vancouver, British Columbia office.
BII occupies two administration offices in California, an engineering
office in Tucson, Arizona and sales offices in Dayton, Ohio and London, England.
BII's California offices occupy a total of approximately 4,200 square
feet and are located at 5000 Van Nuys Blvd., Sherman Oaks, California and 324
E-11th Street, Tracy, California. A total of 25 employees and consultants
operate out of the California offices. A total of 10 employees and consultants
operate out of the Arizona, Ohio, and London offices.
ITEM 3 LEGAL PROCEEDINGS
Other than as disclosed below, no material legal proceedings are
pending to which the Company is a party or of which any of its properties is
subject.
Effective as of November 10, 1998, in compliance with the
"continuation" procedure provided for under the Company Act (British Columbia),
the Company continued into the State of Wyoming (the "Continuation"), where it
is now governed by the Wyoming Business Corporations Act. The Company's
management has subsequently determined that the Company should continue back to
British Columbia. In order to solicit shareholder approval for such
continuation, the Company filed on March 5, 1999, as required by the Securities
Exchange Act of 1934 (the "Exchange Act"), a preliminary proxy statement with
the U.S. Securities and Exchange Commission (the "SEC") which was reviewed by
the staff (the "Staff") of the SEC in accordance with rules promulgated under
the Exchange Act. Based on such review, the Staff informally advised the Company
that the Staff believes that the original Continuation was an event that would
have required, under the Securities Act of 1933 (the "Act"), the filing of a
registration statement with the SEC. The Staff further advised that it would
consider arguments that registration was not so required. The Company has
requested its special counsel for U.S. securities matters ("U.S. Counsel") to
conduct further analysis in response to the Staff's advice. Following such
analysis U.S. Counsel concluded that there are substantial arguments that under
applicable law the effectuation of the Continuation should not have required the
filing of a registration statement. Upon request of the Company, U.S. Counsel
prepared a written submission, dated march 19, 1999, to present these
arguments to the Staff.
In response to this submission, on March 25, 1999, the Staff orally
advised the Company's U.S. Counsel that the Staff was maintaining its original
position that the Continuation required registration under the Act. The Company
is currently evaluating its options to resolve this matter. One option would be
for the Company to file a registration statement under the Securities Act for an
"offer in rescission" (the "Registration Statement") in connection with the
shares deemed to have been offered in connection with the Continuation. In that
event, during the period between the Continuation and the effective date of the
Registration Statement (effectiveness occurring only after the Company has
successfully responded to all comments of the Staff regarding the Registration
Statement, including possibly in an amendment thereto) persons who were U.S.
shareholders at the time of the Continuation may have common law remedies for a
possible violation of the registration requirement under the Securities Act. The
exposure of the Company in that event is difficult to quantify because such U.S.
shareholders were provided their statutory right of dissent under the Company
Act (British Columbia) to be paid the fair market value
20
<PAGE> 24
of their shares if they dissented from the Continuation. No U.S. or other
holder of Company shares exercised such dissent right. Although the mechanics
of effecting a rescission remain to be finally determined, should the Company
decide to pursue this option, it is likely that U.S. holders of Company shares
at the time of the Continuation would be offered the right to have their shares
repurchased by the Company at their fair market value at the time of the
Continuation.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 9, 1998, at an Extraordinary General Meeting, the
shareholders of the Company voted to continue the Company in the state of
Wyoming, to change the name of the Company to Biometric Security Corp., and to
increase the Company's its authorized capital to an unlimited number of common
shares. The shareholder vote for the continuance was 4,883,862 votes in favor,
24,226 votes against, and 440 abstentions. The shareholder vote for the name
change was 4,895,524 votes in favor, 12,664 votes against, and 400 abstentions.
The shareholder vote for the increase in common shares was 4,901,744 votes in
favor, 6,824 votes against, and zero abstentions.
Effective November 10, 1998, the change of name and continuance of the
Company in the state of Wyoming had been completed. Effective November 12, 1998,
the increase of the Company's authorized capital to an unlimited number of
common shares had taken place.
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common shares (the "Common Shares") of the Company are quoted for
trading on the Vancouver Stock Exchange (the "VSE") under the symbol "BMS". As
of March 15, 1999, there were 32,501,078 Common Shares issued and outstanding.
The following table sets out the range of high and low closing prices as
reported on the Vancouver Stock Exchange for the fiscal periods indicated:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
HIGH LOW
(Cdn. $) (Cdn. $)
-------------------------------------------------------------------------------
<S> <C> <C>
Fiscal Year ended Dec. 31, 1997
-------------------------------------------------------------------------------
First Quarter 1.15 1.05
-------------------------------------------------------------------------------
Second Quarter 0.86 0.50
-------------------------------------------------------------------------------
Third Quarter 0.46 0.30
-------------------------------------------------------------------------------
Fourth Quarter 0.33 0.27
-------------------------------------------------------------------------------
Fiscal Year ended Dec. 31, 1998
-------------------------------------------------------------------------------
First Quarter 0.27 0.16
-------------------------------------------------------------------------------
Second Quarter 0.52 0.18
-------------------------------------------------------------------------------
Third Quarter 0.36 0.16
-------------------------------------------------------------------------------
Fourth Quarter 0.25 0.18
-------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 25
On March 15, 1999, the closing price of the Common Shares on the
Vancouver Stock Exchange was $0.25.
Dividend Record and Policy
The Company has not paid any dividends since incorporation and it has
no plans to pay dividends in the immediate future. The Company expects to retain
any earnings to finance further growth and, when appropriate, retire debt. The
directors of the Company will determine if and when dividends should be declared
and paid in the future based on the Company's financial position at the relevant
time. All of the common shares of the Company are entitled to an equal share in
any dividends declared and paid.
Private Placements During the Last Three Years
For the Period Ended December 31, 1998
On December 29, 1998, the Company offered 11,666,666 units (the
"Units") to qualified investors at a price of $0.15 per Unit. Each Unit offered
hereunder consisted of one common share and one non-transferable share purchase
warrant. Each warrant is exercisable for a period of two years from closing and
will entitle the holder to purchase one common share at a price of $0.15 per
share during the first year after closing and at a price of $0.17 per share
during the second year after closing. For this Offering, Goepel McDermid Inc.
(the "Agent") acted as agent and placed 6,666,666 Units. The Company placed
5,000,000 Units directly. The Agent received a commission of 10% of the gross
proceeds raised from its portion of the offering, which was paid in cash. As
additional compensation, the Agent was granted a warrant to acquire up to that
number of shares equal to 15% of the number of Units placed by it for a period
of two years at a price of $0.15 per share during the first year after closing
and at a price of $0.17 per share during the second year after closing. The
price of the Units was determined by the Company and the Agent with reference to
the recent trading prices of the Company's common shares on the Vancouver Stock
Exchange.
The Offering commenced on December 29, 1998 and closed on January 29,
1999. The Company received $1,650,000 in net proceeds. None of the securities
were offered or sold in the United States or to "U.S. persons" other than
"distributors" (as such quoted terms are defined in Regulation S).
On September 10, 1998, the Company completed a private placement of
660,000 units at $0.15 per unit. Each unit consisted of one common share and one
non-transferable share purchase warrant. Each warrant is exercisable at a price
of $0.15 per share if purchased on or before September 10, 1999, or at a price
of $0.17 per share if purchased from and including September 11, 1999 to
September 10, 2000. The Company received $99,000 in cash proceeds.
On May 15, 1998, the Company completed a private placement of 3,375,000
special warrants at a price of $0.15 per special warrant. Each special warrant
is exchangeable, at no additional cost, into one common share and one
non-transferable share purchase warrant that allows the holder to purchase one
common share at a price of $0.15 per share if exercised within the first year
and $0.17 per share if exercised within the second year. The Company received
$506,250 in cash proceeds.
22
<PAGE> 26
For the Period Ended December 31, 1997
In January 1997, the Company issued the 5,000,000 shares and 5,000,000
one-half share purchase warrants upon exercise of the 5,000,000 Special Warrants
offered in October 1996 (and described below). 250,000 compensation options were
also issued to the underwriter upon the exercise of 250,000 special compensation
options. In addition, the net proceeds of $5,106,645 from the sale of Special
Warrants, together with $39,286 in interest earned thereon, were released to the
Company.
For the Period Ended December 31, 1996
On October 22, 1996, the Company completed the private placement of
5,000,000 Special Warrants at an issue price of $1.10 per Special Warrant. Each
Special Warrant entitled the holder to acquire, without further consideration,
one unit comprising one common share and one-half of a share purchase warrant,
with each whole warrant entitling the holder to purchase one additional share at
$1.30 per share for a two year period. The Company also granted the underwriters
250,000 special compensation options as partial compensation for the placement
of the Special Warrants. Each special compensation option entitled the
underwriter to acquire, without further consideration, one compensation option.
Each compensation option is exercisable for one unit at a price of $1.10 per
unit to January 31, 1999. Each unit consists of one common share and one-half of
a share purchase warrant, with each whole warrant entitling the underwriter to
purchase one additional share for $1.30 per share to January 31, 1999.
On August 21, 1996 the Company entered into subscription agreements for
the private placement of an aggregate of 1,400,000 units of the Company at a
price of $1.10 per unit. Each unit consisted of one common share of the Company
and one non-transferable share purchase warrant entitling the holder to purchase
an additional common share of the Company for a period of two years at a price
of $1.25 per share. The Company received $1,540,000 in cash proceeds.
On January 26, 1996, the Company entered into a subscription agreement
with Federico Brown pursuant to which Mr. Brown purchased, by way of private
placement, a total of 37,000 units of the Company at a price of $1.28 per unit.
Each unit consisted of one common share of the Company and one non-transferable
share purchase warrant to purchase an additional share of the Company for a
period of two years at a price of $1.28 per share during the first year of the
term and $1.47 per share during the second term. At the time of the private
placement, Mr. Brown was an employee of the Company. The Company received
$47,360 in cash proceeds.
On February 20, 1996, the Vancouver Stock Exchange approved a private
placement, announced on December 5, 1995, of 100,000 units of the Company at a
price of $0.80 per unit. Daniel J. Kunz, at the time the President and a
director of the Company, was the sole participant in the private placement.
Each unit in the private placement consisted of one common share and one
non-transferable share purchase warrant entitling Mr. Kunz to purchase a
further common share of the Company for two years at a price of $0.80 per share
during the first year and $0.92 per share during the second year.
PART II
ITEM 6 SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect
to the Company's consolidated statements of operations for each of the three
fiscal years in the period ended December 31, 1998 and with respect to the
consolidated balance sheets at December 31, 1998 and 1997, are derived from the
23
<PAGE> 27
Company's audited consolidated financial statements included elsewhere in this
Annual Report on Form 10-K. Consolidated statement of operations data for the
years ended December 31, 1995 and 1994, and balance sheet data at December 31,
1996, 1995 and 1994 have been derived from audited consolidated financial
statements of the Company not included in this Annual Report on Form 10-K.
(These financial statements, which included a note reconciling differences
between U.S. and Canadian GAAP, were filed with the Company's Annual Reports on
Form 20-F.)
The following selected financial consolidated financial data should be
read in conjunction with the consolidated financial statements for the Company
and the notes thereto appearing in Item 8 of this Annual Report on Form 10-K.
Historical operating results are not necessarily indicative of the results that
may be expected in any future period.
As a result of the Company's Continuation into the State of Wyoming,
the Company has adopted U.S. Generally Accepted Accounting Principles ("U.S.
GAAP") and restated prior years figures to be in accordance with U.S. GAPP. As
the functional currency of the Company is Canadian dollars, all amounts are in
Canadian dollars.
<TABLE>
<CAPTION>
(STATED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------------------------------------------------
For the fiscal years ended Dec. 31,
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $159 $175 $102 $211 $36
------------------------------------------------------------------------------------------------------------
Net income (loss) ($5,684) ($2,200) ($1,259) ($1,142) ($406)
------------------------------------------------------------------------------------------------------------
Net income (loss) per share ($0.30) ($0.13) ($0.14) ($0.20) ($0.10)
------------------------------------------------------------------------------------------------------------
Working capital $10 $3,072 $6,369 $1,936 $1,846
------------------------------------------------------------------------------------------------------------
Total assets $4,007 $8,274 $10,451 $2,721 $2,010
------------------------------------------------------------------------------------------------------------
Total liabilities $299 $283 $571 $91 $143
------------------------------------------------------------------------------------------------------------
Share capital $13,789 $12,388 $12,077 $3,567 $1,662
------------------------------------------------------------------------------------------------------------
Retained earnings (deficit) ($10,080) ($4,397) ($2,197) ($937) $204
------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 28
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
As noted above, the statements in this Annual Report on Form 10-K that
relate to future plans, events or performance are forward-looking statements.
Actual results could differ materially due to a variety of factors, including
the factors described under "Risk Factors" and the other risks described in this
Annual Report on Form 10-K. The Company undertakes no obligation to publicly
update these forward-looking statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
Current Capital Resources and Liquidity
Since inception, the Company's capital resources have been limited.
Since cash generated from operations has been nominal, the Company has had to
rely upon the sale of equity and debt securities for cash required for
investments and operations, among other things. The Company has acquired the
right to invest up to U.S. $5,000,000 into BII by way of the acquisition of
convertible debentures (see Item 1 -- Business of the Company). As at December
31, 1998, the Company had invested U.S. $2,325,000 into BII, and invested an
additional US$550,000 on January 29, 1999, leaving another U.S. $2,125,000 to
possibly be invested in the future. As at December 31, 1998, the Company had
working capital of approximately $10,478. In January 1999, the Company raised an
additional $1,650,000 by way of the sale of shares of the Company, some of which
was used to make the additional US$550,000 investment in BII. The Company's
current working capital is not sufficient to make the rest of the investment in
BII.
Since the Company is unlikely to have cash flow in the near future, the
Company will have to continue to rely upon equity and debt financing during such
period. There can be no assurance that financing, whether debt or equity, will
always be available to the Company in the amount required at any particular time
or for any particular period or, if available, that it can be obtained on terms
satisfactory to the Company. Other than in respect of the BII acquisition, the
Company does not have any commitments for material capital expenditures over
either the near or long term and none are presently contemplated over normal
operating requirements.
FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
Results of Operations
A $0.30 loss per share in the fiscal year ended December 31, 1998
results from cash and short-term investment earnings of $159,118 less expenses
of $1,250,578 and mineral property write-offs of $4,592,237. This is compared to
a $0.13 loss per share in the fiscal year ended December 31, 1997 from cash and
short-term investment earnings of $175,185, expenses of $759,182, and mineral
property write-offs of $1,615,898.
Administrative costs in 1998 increased 67% over 1997, primarily as a
result of the Company incurring increased professional fees and finders fees.
Liquidity and Capital Resources
Cash flow from operations has not to date satisfied all of the
Company's operational requirements and cash commitments. The Company has not yet
completed its capital budget and therefore cannot project accurately capital
expenditures; however, with working capital of approximately $10,478 as at
December 31, 1998, the Company does not presently have sufficient financial
resources to acquire the remaining debentures in BII anticipated to be acquired
pursuant to the agreement with BII. In the past, the Company relied on sales of
debt and equity securities to meet its cash requirements to the extent that they
exceeded cash flow from operations. If the Company cannot raise the necessary
financing directly by way of debt, equity or other means, it may be forced to
curtail its purchase of debentures of BII and its operating activities. At this
time, the Company is seeking but does not have specific arrangements to obtain
the necessary financing. There is no assurance that the Company will be
successful in obtaining any such financing.
During 1998, the Company completed a 3,375,000 unit private placement
that raised proceeds of $506,250 and a 660,000 unit private placement that
raised proceeds of $99,000. In addition, the Company raised $23,000 from the
exercise of 100,000 stock options. The Company also issued 250,450 Common Shares
at a deemed value of $75,135 for finders fees in connection with the BII
debentures.
25
<PAGE> 29
Balance Sheets
Total cash and short-term investments at December 31, 1998 were
$245,182 as compared to $3,330,110 at December 31, 1997 and working capital
decreased to $10,478 as at December 31, 1998 compared to $3,072,259 as at
December 31, 1997.
As at December 31, 1998, a total of $3,637,219 (US$2,325,000)
including accrued interest of $79,989 had been invested in debentures of BII.
Subsequent Events
Subsequent to December 31, 1998, the Company:
a) Completed a Private Placement announced on December 29, 1998,
which consisted of:
i) a best efforts brokered private placement of
6,666,666 units at $0.15 per unit for total proceeds
of $1,000,000.
ii) a non-brokered private placement of 5,000,000 units
at $0.15 per unit for total proceeds of $750,000.
Each unit consisted of one common share and one two-year,
non-transferable share purchase warrant. Each warrant is
exercisable at a price of $0.15 per share in the first year
and $0.17 per share in the second year. Remuneration paid to
the broker for acting as agent consisted of a 10% commission
($100,000) payable in cash and a two year broker's warrant
exercisable into 1,000,000 shares of the Company. The broker's
warrants are exercisable at a price of $0.15 per share in the
first year and $0.17 per share in the second year.
b) Announced a $1,750,000 Private Placement, which is awaiting
Canadian regulatory approval as of March 15, 1999. The private
placement will consist of 11,666,666 units, brokered on a best
efforts basis, at a price of $0.15 per unit for total proceeds
of $1,750,000. Each unit will consist of one common share and
one two-year non-transferable share purchase warrant. Each
warrant will be exercisable at a price of $0.15 per share in
the first year of and $0.17 per share in the second year.
Remuneration to be paid to the broker for acting as agent will
consist of a 10% commission payable in cash and a two year
broker's warrant exercisable into shares of the Company not
exceeding 15% of the number of units issued to investors
pursuant to the private placements. The broker's warrants will
be exercisable at a price of $0.15 per share in the first year
and $0.17 per share in the second year.
c) Invested an additional US$550,000 in BII debentures.
d) Announced an extraordinary general meeting to the
shareholders of the Company to be held on April 12, 1999, at
which time the shareholders would vote on the Company's
proposal to continue to the Province of British Columbia and
to consolidate the Company's share capital on the basis of one
post-consolidated share for each five pre-consolidated shares.
The meeting date was subsequently postponed and has not yet
been rescheduled. (See Item 3 - Legal Proceedings regarding
certain U.S. Securities matters and the Company's current
plans to continue back to British Columbia.)
YEARS ENDED DECEMBER 31, 1997 AND 1996
Results of Operations
A $0.13 loss per share in the fiscal year ended December 31, 1997
results from cash and short-term investment earnings of $175,185 less expenses
of $759,182 and mineral property write-offs of $1,615,898. This is compared to a
$0.14 loss per share in the fiscal year ended December 31, 1996 from cash and
short-term investment earnings of $102,147, expenses of $826,609 and mineral
property write-offs of $534,853.
Administrative costs in 1997 decreased 13% over 1996 as a result of the
Company cutting back promotional, travel, consultants and other costs.
26
<PAGE> 30
Liquidity and Capital Resources
During 1997, the Company completed a special warrant placement of
5,000,000 units that raised net proceeds of $5,106,645 (see 1996 liquidity and
capital resources below) and raised $184,000 from the exercise of 200,000
warrants and $126,400 from the exercise of 120,000 options.
Balance Sheets
Total cash and short-term investments at December 31, 1997 were
$3,330,110 as compared to $1,742,133 (excluding $5,106,645 of cash in escrow) at
December 31, 1996 and working capital decreased to $3,072,259 as at December 31,
1997 compared to $6,369,429 as at December 31, 1996.
A total of $3,171,103 of mineral property costs were expended in
Argentina and initially capitalized during 1997.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Results of Operations
A $0.14 loss per share in the fiscal year ended December 31, 1996
resulted from cash and short-term investment earnings of $102,147 less expenses
of $826,609 and mineral property write-offs of $534,853. This is compared to a
$0.20 loss per share in the fiscal year ended December 31, 1995 from cash and
short-term investment earnings of $210,620, expenses of $606,230 and resource
property write-downs of $746,371.
Administrative costs of 1996 increased 36.4% over 1995 as a result of
the Company's move to new office premises, the hiring of additional personnel,
advertising, promotional, exploration and travel costs incurred to support the
Company's mineral projects.
Liquidity and Capital Resources
On October 22, 1996, the Company completed the private placement of
5,000,000 Special Warrants at an issue price of $1.10 per Special Warrant. Each
Special Warrant entitled the holder to acquire, without further consideration,
one unit comprising one common share and one-half of a share purchase warrant,
with each whole warrant entitling the holder to purchase one additional share at
$1.30 per share for a two year period. The proceeds from the sale of Special
Warrants of
27
<PAGE> 31
$5,106,645, net of commissions and other offering costs, were being held in
escrow at December 31, 1996, pending completion of a prospectus qualifying the
common shares and share purchase warrants for distribution.
The Company also granted the underwriters 250,000 special compensation
options as partial compensation for the placement of the Special Warrants. Each
special compensation option entitles the underwriter to acquire, without further
consideration, one compensation option. Each compensation option is exercisable
for one unit at a price of $1.10 per unit to January 31, 1999. Each unit
consists of one common share and one-half of a share purchase warrant, with each
whole warrant entitling the underwriter to purchase one additional share for
$1.30 per share to January 31, 1999.
In January 1997, the Company issued the 5,000,000 shares and 5,000,000
one-half share purchase warrants upon exercise of the 5,000,000 Special
Warrants. 250,000 compensation options were also issued to the underwriter upon
the exercise of 250,000 special compensation options. In addition, the net
proceeds from the sale of Special Warrants, together with interest earned
thereon, were released to the Company.
Additional financing during 1996 was received from the net proceeds of
$1,486,568 from three private placements during 1996 totaling 1,537,000 common
shares, $1,828,138 from the exercise of 2,022,250 warrants and $88,800 from the
exercise of 110,000 options granted to employees.
Balance Sheets
Total cash and short-term investments at December 31, 1996 were
$1,742,133 (excluding $5,106,645 of cash in escrow) as compared to $1,796,691 at
December 31, 1995 and working capital increased to $6,369,429 as at December 31,
1996 compared to $1,935,574 as at December 31, 1995.
A total of $2,998,691 in mineral property costs were expended in
Argentina and initially capitalized during 1996.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
1. Auditors Report to the Shareholders
2. Consolidated Balance Sheets as at December 31, 1998 and 1997
3. Consolidated Statements of Operations and Deficit for the Years
Ended December 31, 1998, 1997 and 1996
4. Consolidated Statements of Cash Flows for the Years Ended December
31, 1998, 1997 and 1996
5. Notes to Consolidated Financial Statements.
28
<PAGE> 32
Consolidated Financial Statements of
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
29
<PAGE> 33
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Biometric Security Corp.
(formerly Sonoma Resource Corp.) as at December 31, 1998 and 1997 and the
consolidated statements of operations and deficit and cash flows for each of the
years in the three year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1998
and 1997 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 1998 in accordance with
generally accepted accounting principles in the United States.
Chartered Accountants
Vancouver, Canada
February 23, 1999
30
<PAGE> 34
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
December 31, 1998 and 1997
<TABLE>
<CAPTION>
===============================================================================================================
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 245,182 $ 3,330,110
Amounts receivable 55,076 19,002
Prepaid expenses 9,257 6,252
- ---------------------------------------------------------------------------------------------------------------
309,515 3,355,364
Equipment and leasehold improvements (note 3) 60,758 248,213
Mineral properties (note 4) -- 4,670,516
Investment (note 5) 3,637,219 --
- ---------------------------------------------------------------------------------------------------------------
$ 4,007,492 $ 8,274,093
===============================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 148,262 $ 283,105
Loan payable (note 6) 150,775 --
----------------------------------------------------------------------------------------------------------
299,037 283,105
Shareholders' equity:
Share capital (note 7):
Authorized:
Unlimited (1997 - 100,000,000) common shares
Issued:
20,834,412 (1997 - 16,448,962) common shares 13,128,263 12,387,691
Advances on share subscriptions (note 7(b)) 660,592 --
Deficit (10,080,400) (4,396,703)
- ---------------------------------------------------------------------------------------------------------------
3,708,455 7,990,988
Continuing operations (note 1)
Commitments and contingencies (notes 5 and 13)
Subsequent events (notes 5, 6, 7 and 14)
- ---------------------------------------------------------------------------------------------------------------
$ 4,007,492 $ 8,274,093
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
Director
- -------------------------------------
Director
- -------------------------------------
31
<PAGE> 35
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Consolidated Statements of Operations and Deficit
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
=================================================================================================================
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Interest and other income $ 159,118 $ 175,185 $ 62,670
Gain on disposal of marketable securities -- -- 39,477
- -----------------------------------------------------------------------------------------------------------------
159,118 175,185 102,147
General and administrative expenses:
Business consultants 78,306 87,345 158,305
Depreciation and depletion 9,858 67,100 8,500
Finder's fee (Note 5) 99,822 -- --
Foreign exchange gain (80,041) (20,198) (20,630)
Interest and bank charges 14,449 2,159 2,507
Legal, audit and accounting 563,234 141,256 66,461
Management fees 120,059 127,121 164,451
Office expense 113,851 113,570 136,891
Public listing 66,153 37,035 38,080
Salaries, wages and administration 56,129 61,979 68,841
Travel, accommodation and promotion 159,891 103,332 203,203
------------------------------------------------------------------------------------------------------------
1,201,711 720,699 826,609
- -----------------------------------------------------------------------------------------------------------------
(1,042,593) (545,514) (724,462)
Other expenses:
Write-off of mineral properties (note 4) 4,592,237 1,615,898 534,853
Mineral exploration -- 16,395 --
Loss on disposal of equipment 48,867 22,088 --
------------------------------------------------------------------------------------------------------------
4,641,104 1,654,381 534,853
- -----------------------------------------------------------------------------------------------------------------
Loss for the year (5,683,697) (2,199,895) (1,259,315)
Deficit, beginning of year (4,396,703) (2,196,808) (937,493)
- -----------------------------------------------------------------------------------------------------------------
Deficit, end of year $(10,080,400) $ (4,396,703) $(2,196,808)
- -----------------------------------------------------------------------------------------------------------------
Loss per share $ (0.30) $ (0.13) $ (0.14)
- -----------------------------------------------------------------------------------------------------------------
Weighted average number of shares 18,825,977 16,170,395 8,933,410
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 36
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
=================================================================================================================
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss for the year $(5,683,697) $(2,199,895) $(1,259,315)
Adjustments to reconcile loss for the year to net
cash used in operating activities:
Write-off of mineral properties 4,592,237 1,615,898 534,853
Loss on disposal of equipment 48,867 22,088 --
Depreciation and depletion 9,858 67,100 8,500
Accrued interest income on investment (79,989) -- --
Non-cash fees and expenses 112,322 -- --
Gain on disposal of marketable securities -- -- (39,477)
Decrease (increase) in amounts receivable (36,074) 29,846 107,230
Decrease (increase) in prepaid expenses (3,005) 36,303 31,331
Increase (decrease) in accounts payable and
accrued liabilities (134,844) (287,647) 479,671
- -----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,174,325) (716,307) (137,207)
Cash flows from investing activities:
Proceeds on sale of marketable securities -- -- 193,527
Equipment and leasehold improvements (22,781) (79,658) (223,643)
Proceeds on disposal of equipment and leasehold
improvements 151,512 -- --
Mineral properties (145,306) (3,033,103) (2,998,691)
Security deposit (paid) recovered 185,335 -- (138,000)
Proceeds on sale of mineral properties 38,250 -- --
Investment (3,557,230) -- --
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,350,220) (3,112,761) (3,166,807)
Cash flows from financing activities:
Loan payable 250,000 -- --
Repayment of loan payable (99,225) -- --
Issuance of common shares 628,250 5,417,045 3,403,506
Advances on share subscriptions 660,592 -- --
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,439,617 5,417,045 3,403,506
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (3,084,928) 1,587,977 99,492
Cash, beginning of year 3,330,110 1,742,133 1,642,641
- -----------------------------------------------------------------------------------------------------------------
Cash, end of year $ 245,182 $ 3,330,110 $ 1,742,133
=================================================================================================================
</TABLE>
Supplementary cash flow information (note 9)
See accompanying notes to consolidated financial statements.
33
<PAGE> 37
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
1. CONTINUING OPERATIONS:
The Company was incorporated under the laws of British Columbia, Canada.
During 1998, the Company changed its principal business activity from the
exploration and development of resource properties to an investment holding
company, with its principal holding being its investment in Biometric
Identification Inc. ("BII") (note 5). BII's principal business activity is
the development, manufacture and marketing of fingerprint identification
systems in the United States. BII has not yet achieved profitable
operations. In connection with this change in business activity during
1998, the Company changed its name from Sonoma Resource Corp. to Biometric
Security Corp., and on November 10, 1998, the Company was continued under
the laws of the State of Wyoming (also see note 14(a)).
These financial statements have been prepared in accordance with accounting
principles applicable to a going concern, which assumes that the Company
will realize its assets and discharge its liabilities in the ordinary
course of business. At December 31, 1998, the Company has a net working
capital position of approximately $10,000, which is not sufficient to meet
its commitments or fund ongoing operations. The ability of the Company to
settle its liabilities as they come due and to fund its commitments and
ongoing operations is dependent upon the ability of the Company to obtain
additional equity financing (also see notes 7(b) and 14(b)). The
recoverability of the Company's investment in BII is dependent upon the
establishment of profitable commercial operations in BII, the ability of
the Company to obtain additional debt or equity financing to complete the
acquisition of BII or the proceeds from the disposition of the Company's
interest in BII.
2. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These consolidated financial statements have been prepared in
accordance with accounting principles and practices that are generally
accepted in the United States, which conform, in all material respects,
with those generally accepted in Canada, except as explained in note
15.
(b) Basis of consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are directly or indirectly
wholly-owned, and include (with the jurisdiction of incorporation in
brackets):
Sonoma Resources de Argentina S.A. (Argentina)
Sonoma Resource (Bermuda) Ltd. (Bermuda)
Cerro Toro Mining (Barbados) Ltd. (Barbados)
Cerro Toro S.A. (Argentina)
Castano Mining (Barbados)
Castano S.A. (Argentina)
All intercompany balances and transactions have been eliminated.
34
<PAGE> 38
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 2
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(c) Equipment and leasehold improvements:
Equipment and leasehold improvements are stated at cost and depreciated
over their estimated useful lives on a declining-balance basis at 15%
per year.
(d) Mineral properties:
Mineral property acquisition costs and related exploration and
development expenditures are deferred until the property is placed into
production, sold or abandoned. These costs will be amortized over the
estimated life of the property following commencement of commercial
production or written off if the property is sold, allowed to lapse or
abandoned. Administration expenditures are expensed in the period
incurred.
Mineral property acquisition costs include the cash consideration and
the fair market value of common shares issued for mineral property
interests. A property acquired under an option agreement or by joint
venture, where payments are made at the sole discretion of the Company,
is recorded in the accounts at the time of payment.
On an on-going basis, the Company evaluates the status of its mineral
properties based on results to date to determine the nature of
exploration and development work that is warranted in the future. If
there is little prospect of further work on a property being carried
out, the deferred costs related to that property are written down to
their estimated recoverable amount.
The amounts shown for mineral properties reflect costs incurred to
date, less write-offs and recoveries, and are not intended to reflect
present or future values.
(e) Investments:
The investment in BII (note 5) is classified by the Company as a
held-to-maturity investment, as BII is not a public company and the
Company intends to hold the debt securities until maturity, or until
conversion. Held-to-maturity investments are recorded at cost. A
decline in value of held-to-maturity investments that is deemed to be
other than temporary results in a reduction in the carrying amount to
fair value. The impairment would be charged to earnings in the period
such determination is made and a new cost basis for the investment is
established. Dividend and interest income are recognized when earned.
(f) Stock options:
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, in
accounting for its stock options. As such, compensation expense would
be recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price.
35
<PAGE> 39
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 3
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(g) Loss per share:
Basic loss per share is calculated using the weighted average number of
shares outstanding during the year. Diluted loss per share has not been
presented as the effect on basic loss per share would be anti-dilutive.
(h) Foreign currency translation:
Transactions of the Company and its subsidiaries that are denominated
in foreign currencies are recorded in Canadian dollars at exchange
rates in effect at the related transaction dates. Monetary assets and
liabilities denominated in foreign currencies are adjusted to reflect
exchange rates at the balance sheet date. Exchange gains and losses
arising on the translation of monetary assets and liabilities are
included in the determination of operations for the year.
(i) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant areas requiring
the use of management estimates relate to the determination of
impairment of mineral properties and equipment, useful lives for
depreciation and the carrying value of the investment in BII. Actual
results could differ from those estimates.
(j) Comparative figures:
Certain of the prior years comparative figures have been reclassified
to conform with the presentation adopted for 1998.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
<TABLE>
<CAPTION>
==================================================================================
1998 1997
----------------------------------------------------------------------------------
<S> <C> <C>
Equipment $67,759 $ 71,320
Automotive equipment -- 209,179
Leasehold improvements 19,138 15,941
----------------------------------------------------------------------------------
86,897 296,440
Accumulated depreciation 26,139) (48,227)
----------------------------------------------------------------------------------
$60,758 $248,213
==================================================================================
</TABLE>
36
<PAGE> 40
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 4
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
4. MINERAL PROPERTIES:
The continuity of mineral property acquisition costs, exploration and
development expenditures, write-offs and deferred expenditures at year
end is as follows:
<TABLE>
<CAPTION>
==============================================================================================================================
Chubut and
Cerri Toro Castano San Luis
Properties (a) Group (b) Properties (c) Other (c) Total
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 3,983,092 $- $ 687,424 $- $ 4,670,516
Exploration and development
expenditures:
Access costs 772 -- -- -- 772
Assays -- -- 2,882 -- 2,882
Communication -- -- 332 -- 332
Contract labour and supervision 5,737 -- -- -- 5,737
Data acquisition and analysis 941 -- 596 -- 1,537
Equipment and field supplies 5,231 -- 259 -- 5,490
Field administration 21,674 -- -- -- 21,674
Field car rental and 3,271 -- 389 -- 3,660
transportation
Geological and geophysical 40,471 -- 28,810 -- 69,281
Insurance 5,762 -- -- -- 5,762
Legal and other 19,552 -- 6,687 -- 26,239
Travel and accommodation 1,669 -- 271 -- 1,940
------------------------------------------------------------------------------------------------------------------------------
105,080 -- 40,226 -- 145,306
------------------------------------------------------------------------------------------------------------------------------
4,088,172 -- 727,650 -- 4,815,822
Recovery of security deposit -- (185,335) -- -- (185,335)
Deposit received on option agreement -- -- -- (38,250) (38,250)
Write-offs (4,088,172) 185,335 (727,650) 38,250 (4,592,237)
------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ -- $ -- $ -- $ -- $ --
==============================================================================================================================
</TABLE>
37
<PAGE> 41
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 5
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
4. MINERAL PROPERTIES (CONTINUED)
<TABLE>
<CAPTION>
==============================================================================================================================
Chubut and
Cerro Toro Castano San Luis
Properties (a) Group (b) Properties (c) Other (c) Total
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $1,591,602 $ 1,000,818 $217,877 $ 305,014 $ 3,115,311
Acquisition costs 7,610 165,308 55,726 31,637 260,281
Exploration and development
expenditures:
Access costs 66,273 -- 27,030 -- 93,303
Assays 109,858 -- -- -- 109,858
Camp 2,121 -- -- -- 2,121
Communication 15,802 -- -- -- 15,802
Contract drilling 1,203,985 -- -- -- 1,203,985
Contract labour and supervision 82,045 -- 16,685 -- 98,730
Data acquisition and analysis 19,512 -- 2,364 22,516 44,392
Equipment and field supplies 156,120 -- 42,676 512 199,308
Field administration 149,318 -- 860 -- 150,178
Field car rental and 77,563 -- 15,021 364 92,948
transportation
Geological and geophysical 394,316 1,400 200,277 30,280 626,273
Insurance 23,369 -- 1,308 707 25,384
Legal and other 19,852 -- 33,002 55,620 108,474
Travel and accommodation 63,746 -- 74,598 1,722 140,066
-------------------------------------------------------------------------------------------------------------------------
2,383,880 1,400 413,821 111,721 2,910,822
------------------------------------------------------------------------------------------------------------------------------
3,983,092 1,167,526 687,424 448,372 6,286,414
Write-offs -- (1,167,526) -- (448,372) (1,615,898)
------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $3,983,092 $ -- $687,424 $ -- $ 4,670,516
==============================================================================================================================
</TABLE>
A brief description of the Company's mineral properties is as follows:
(a) Cerro Toro Properties:
On February 15, 1995, the Company filed three exploration permits with
the regulatory authorities in San Juan Province, Argentina covering
1,845 hectares located in San Juan Province. The Company was
subsequently notified that 100% of the rights of ownership established
by the procedures of the Province belong to the Company.
During 1998, all deferred expenditures relating to the Cerro Toro
Properties were written off.
(b) Castano Group:
In 1996, the Company entered into a purchase/option agreement to
acquire 100% of the rights and interests in the Castano Group of
mineral properties located in San Juan Province, Argentina. In 1997,
the Company terminated the purchase/option agreement in accordance with
the provisions provided therein and wrote off the remaining deferred
expenditures on the Castano Group. During 1998, the Company recovered a
security deposit that had previously been written off.
38
<PAGE> 42
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 6
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
4. MINERAL PROPERTIES (CONTINUED)
(c) Other Argentina properties:
During 1995, the Company staked and applied for a number of cateos and
manifestaciones within Cordova, San Luis, Chubut and Santa Cruz
provinces, all of which were of a grass roots nature. At December 31,
1997, the Company had staked and applied for 13 cateos and 20
manifestaciones in the San Luis and Chubut provinces.
In 1997, the Company wrote-off costs incurred relating to properties in
provinces other than San Luis and Chubut that the Company did not
intend to pursue.
As the Cordova and San Luis cateos and manifestaciones were not renewed
during 1999, all deferred expenditures relating to these properties
were written off during 1998.
During 1998, the Company entered into a letter agreement to grant Inlet
Resources Ltd. ("Inlet") an option to purchase up to a 100% interest in
the Company's Argentine properties. Under the terms of the agreement, the
Company granted Inlet an option to purchase up to 90% of the properties,
over a three year period, with a buyout of the remaining 10% for U.S.
$2,000,000. During the first year, the agreement requires Inlet to pay the
Company U.S. $150,000 in stages, issue the Company 100,000 shares and
complete a U.S. $650,000 work program, to earn a 50% interest in the
properties. During the second and third years, the agreement provides that
Inlet will pay the Company a total of U.S. $600,000 in stages, issue
200,000 shares and complete work commitments totalling U.S. $1,500,000 to
earn an additional 40% interest in the properties. To December 31, 1998,
the Company received a cash deposit of U.S. $25,000 relating to the option
agreement.
5. INVESTMENT:
<TABLE>
<CAPTION>
=========================================================================
<S> <C>
Investment, at cost $ 3,557,230
Accrued interest receivable 79,989
-------------------------------------------------------------------------
$ 3,637,219
=========================================================================
</TABLE>
During 1998, the Company entered into an agreement to purchase convertible
debentures entitling the Company to acquire up to a 45% interest in
Biometric Identification Inc. ("BII"), a private California-based company
in the business of developing, manufacturing and marketing fingerprint
recognition technology. Under the terms of the agreement, the Company has
the right to acquire up to U.S. $5,000,000 of convertible debentures to be
issued by BII. If all such debentures are acquired and converted into
shares of BII, the Company will hold approximately 45% of the issued shares
of BII.
39
<PAGE> 43
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 7
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
5. INVESTMENT (CONTINUED):
This investment was initiated by a related party which assigned its
interest to the Company in exchange for a fee up to U.S. $145,000, plus
reimbursement of its expenses. The related party elected to take this fee
in the form of 715,575 common shares at a deemed price of $0.30 per share.
These shares will be issued in pro-rata tranches on the same basis the
debentures are purchased by the Company.
The debentures have a term of five years from the date of the closing of
the first acquisition and bear interest at the lowest interest rate imputed
under the U.S. Internal Revenue Code.
At December 31, 1998, the Company had acquired debentures of BII totalling
U.S. $2,325,000 in accordance with the terms of the agreement and had
issued 250,450 shares and allotted 82,292 shares, at a total value of
$99,822, to the related party. Additional debenture acquisitions and share
issuances for finders fees under the terms of the original agreement are
scheduled as follows:
<TABLE>
<CAPTION>
================================================================================================
Debenture
Dates Amounts (U.S. $) Shares
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
February 1, 1999 (paid) $ 550,000 78,713
February 22, 1999 125,000 17,889
March 12, 1999 500,000 71,558
May 12, 1999 1,500,000 214,673
------------------------------------------------------------------------------------------------
$2,675,000 382,833
================================================================================================
</TABLE>
Subsequent to December 31, 1998, the debenture acquisitions scheduled to be
made on February 22, 1999 and March 12, 1999 were deferred, by mutual
agreement, until April 2, 1999.
6. LOAN PAYABLE:
During 1998, a company controlled by a director loaned the Company a total
of $250,000. The loan is unsecured, non-interest bearing and was due on
December 26, 1998. A total of $99,225 of the loan was repaid on
December 29, 1998, and the balance of the loan of $150,775 was repaid
subsequent to December 31, 1998.
The Company also allotted 65,789 shares at a deemed price of $0.19 per
share at December 31, 1998, as allowed for under the rules of the Vancouver
Stock Exchange, as consideration for the loan.
40
<PAGE> 44
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 8
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
7. SHARE CAPITAL:
(a) Issued:
<TABLE>
<CAPTION>
===============================================================================================
Number
of Shares Amount
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1996 11,128,962 $ 6,970,646
Issued during the year for cash by way of:
Private placement of special warrants, net of issue costs 5,000,000 5,106,645
Exercise of warrants 200,000 184,000
Exercise of options 120,000 126,400
-----------------------------------------------------------------------------------------------
Balance at December 31, 1997 16,448,962 12,387,691
Issued during the year for cash by way of:
Private placements 4,035,000 605,250
Exercise of options 100,000 23,000
Issued during the year for finder's fee (note 5) 250,450 75,135
-----------------------------------------------------------------------------------------------
20,834,412 13,091,076
Allotted during the year for:
Finder's fee (note 5) 82,292 24,687
Carrying charges (note 6) 65,789 12,500
-----------------------------------------------------------------------------------------------
Balance at December 31, 1998 20,982,493 $13,128,263
===============================================================================================
</TABLE>
During 1997, the Company issued the 5,000,000 common shares and
5,000,000 one-half share purchase warrants upon exercise of 5,000,000
previously issued special warrants. In addition, 250,000 compensation
options were issued to the underwriter upon the exercise of 250,000
special compensation options granted to the underwriter in connection
with this special warrant private placement. Each compensation option
entitles the underwriter to acquire a unit, consisting of one share and
one-half of a share purchase warrant, at an exercise price of $1.10 per
share prior to January 20, 1999. Each whole warrant entitles the
underwriter to acquire one share at an exercise price of $1.30 prior to
January 20, 1999. Subsequent to December 31, 1998, these compensation
options expired unexercised.
During 1998, the Company completed a 3,375,000 unit private placement
at a price of $0.15 per unit and a 660,000 unit private placement at a
price of $0.15 per unit. Each unit consisted of one common share and
one non-transferable share purchase warrant. Each warrant is
exercisable for a period of two years and entitles the holder to
purchase one additional common share at a price of $0.15 per share in
the first year and $0.17 per share in the second year.
41
<PAGE> 45
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 9
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED):
(b) Advances on share subscriptions:
At December 31, 1998, the Company had received advances on share
subscriptions for 4,403,950 units at $0.15 per unit in connection with:
* a brokered private placement of 6,666,666 units at $0.15 per unit
for total proceeds of $1,000,000; and
* a non-brokered private placement of 5,000,000 units at $0.15 per
unit for total proceeds of $750,000.
Each unit consists of one common share and one non-transferable share
purchase warrant exercisable for a period of two years. Each warrant
will be exercisable at a price of $0.15 per share in the first year and
$0.17 per share in the second year. The agent will be paid a 10%
commission payable in cash and brokers' warrants exercisable into
shares of the Company for a period of two years not exceeding 15% of
the number of units issued to investors pursuant to the private
placements. The brokers' warrants will be exercisable at a price of
$0.15 per share the first year and $0.17 per share in the second year.
Subsequent to December 31, 1998, the Company received the additional
$1,089,408 of proceeds, paid the $100,000 commission, issued the
11,666,666 shares and share purchase warrants and issued the 1,000,000
brokers' warrants.
(c) Share purchase warrants:
The continuity of share purchase warrants during 1998 is as follows:
<TABLE>
<CAPTION>
=====================================================================================================
BALANCE, BALANCE,
EXERCISE DECEMBER 31, EXPIRED OR DECEMBER 31,
EXPIRY DATE PRICE 1997 GRANTED EXERCISED CANCELLED 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
January 26, 1998 $ 1.47 37,000 -- -- (37,000) --
August 21, 1998 1.25 1,400,000 -- -- (1,400,000) --
October 22, 1998 1.30 2,500,000 -- -- (2,500,000) --
October 22, 1998/1999 0.15/0.17 -- 660,000 -- -- 660,000
March 31, 1999/2000 0.15/0.17 -- 3,375,000 -- -- 3,375,000
-----------------------------------------------------------------------------------------------------
3,937,000 4,035,000 -- (3,937,000) 4,035,000
-----------------------------------------------------------------------------------------------------
The continuity of share purchase warrants during 1997 is as follows:
<CAPTION>
==================================================================================================
BALANCE, BALANCE,
EXERCISE DECEMBER 31, EXPIRED OR DECEMBER 31,
EXPIRY DATE PRICE 1996 GRANTED EXERCISED CANCELLED 1997
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
January 26, 1997/1998 $1.28/1.47 37,000 -- -- -- 37,000
June 22, 1997 0.92 700,000 -- (100,000) (600,000) --
June 29, 1997 0.92 300,000 -- -- (300,000) --
September 14, 1997 0.92 150,000 -- -- (150,000) --
December 5, 1997 0.92 100,000 -- (100,000) -- --
August 21, 1998 1.25 1,400,000 -- -- -- 1,400,000
October 22, 1998 1.30 -- 2,500,000 -- -- 2,500,000
--------------------------------------------------------------------------------------------------
2,687,000 2,500,000 (200,000) (1,050,000) 3,937,000
==================================================================================================
</TABLE>
(d) Stock options:
(i) Continuity:
The continuity of stock options during 1998 is as follows:
<TABLE>
<CAPTION>
==========================================================================================================
BALANCE, BALANCE,
EXERCISE DECEMBER 31, EXPIRED OR DECEMBER 31,
EXPIRY DATE PRICE 1997 GRANTED EXERCISED CANCELLED 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
April 27, 1998 $1.00 100,000 -- -- (100,000) (a) --
September 14, 1998 0.34 30,000 -- -- (30,000) (a) --
October 30, 1999 1.33 387,261 -- -- (387,261) (a) --
January 21, 2000 0.34 130,000 -- -- (130,000) (a) --
January 21, 2000 1.36 390,000 -- -- (390,000) (a) --
July 6, 2000 0.32 -- 50,000 -- -- 50,000
August 28, 2000 0.20 -- 100,000 -- -- 100,000
January 28, 2001 0.23 -- 1,640,000 (a) (100,000) (285,000) 1,255,000
----------------------------------------------------------------------------------------------------------
1,037,261 1,790,000 (100,000) (1,322,261) 1,405,000
==========================================================================================================
(a) During 1998, these 1,037,261 outstanding options were
cancelled and replaced with the 1,640,000 options at $0.23 per
share expiring January 28, 2001.
The continuity of stock options during 1997 is as follows:
<CAPTION>
=================================================================================================
BALANCE, BALANCE,
EXERCISE DECEMBER 31, EXPIRED OR DECEMBER 31,
EXPIRY DATE PRICE 1996 GRANTED EXERCISED CANCELLED 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
February 16, 1997 $0.90 40,000 -- (40,000) -- --
January 30, 1998 0.91 50,000 -- -- (50,000) --
April 27, 1998 1.00 100,000 -- -- -- 100,000
September 14, 1998 1.10 70,000 -- (40,000) (30,000) (b) --
September 14, 1998 0.34 -- 30,000 (b) -- -- 30,000
December 8, 1998 0.97 373,635 -- -- (373,635) --
July 31, 1999 1.12 10,000 -- -- (10,000) --
September 25, 1999 1.16 50,000 -- (40,000) (10,000) --
October 30, 1999 1.33 387,261 -- -- -- 387,261
January 21, 2000 1.36 -- 620,000 -- (230,000) (b) 390,000
January 21, 2000 0.34 -- 230,000 (b) -- (100,000) 130,000
-------------------------------------------------------------------------------------------------
1,080,896 880,000 (120,000) (803,635) 1,037,261
=================================================================================================
</TABLE>
(b) During 1997, these options were repriced to $0.34 per share.
(ii) Compensation expense:
The Company's Board of Directors grants stock options to its officers,
directors and key employees in accordance with the rules prescribed by
the Vancouver Stock Exchange. Stock options are granted with an
exercise price equal to the stock's quoted value on the Vancouver Stock
Exchange at the date of grant. Stock options granted generally have
varying terms of up to three years and vest and become fully
exercisable from the date of grant.
The per share weighted-average fair value of stock options granted
during 1998, 1997 and 1996 was $0.16, $0.17 and $0.89 on the date of
grant, using the Black Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
=============================================================================================
1998 1997 1996
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Risk-free interest rate 6.2% 5.0% 6.1%
Expected life (years) 2 2 2
Expected volatility over expected life 139% 139% 139%
=============================================================================================
</TABLE>
42
<PAGE> 46
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 10
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED):
(d) Stock options (continued):
(ii) Compensation expense (continued)
The Company applies APB Opinion No. 25 in accounting for granting stock
options and accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under Statement of Financial Accounting Standards
No. 123, Accounting for Stock Based Compensation ("FAS 123"), the
Company's loss for the year would have increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
==========================================================================================================
1998 1997 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss for the year:
As reported $(5,683,697) $(2,199,895) $(1,259,315)
Compensation expense under FAS 123 286,558 152,888 458,384
----------------------------------------------------------------------------------------------------------
Pro forma loss for the year $(5,970,255) $(2,352,783) $(1,717,699)
----------------------------------------------------------------------------------------------------------
Pro forma loss per share $ (0.32) $ (0.15) $ (0.19)
==========================================================================================================
</TABLE>
43
<PAGE> 47
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 11
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
8. FINANCIAL INSTRUMENTS:
The fair values of the Company's cash, amounts receivable, accounts payable
and accrued liabilities and loan payable approximate their carrying amounts
because of the immediate or short term to maturity of these financial
instruments.
44
<PAGE> 48
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 12
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
9. NON-CASH FINANCING AND INVESTING ACTIVITIES:
The Company has the following non-cash financing and investing activities:
<TABLE>
<CAPTION>
===============================================================================================
1998 1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financing activities:
Shares issued and allotted for finders fee $ 99,822 $-- $--
Shares allotted as consideration for loan payable 12,500 -- --
-----------------------------------------------------------------------------------------------
$112,322 $-- $--
===============================================================================================
Investing activities:
Accrued interest income on investment $(79,989) $-- $--
===============================================================================================
</TABLE>
10. SEGMENTED INFORMATION:
During 1998, the Company adopted the accounting standards related to
segment disclosures recently approved by the accounting standard-setting
bodies in the United States and Canada. The information presented below is
consistent with these standards. The Company has not allocated general and
administrative expenses from the corporate segment.
(a) Operating segments:
The Company has determined its operating segments to be mineral
exploration and development, and corporate, which includes holding
investments, based on the way management organizes and manages its
business.
<TABLE>
<CAPTION>
======================================================================================
Mineral
exploration and
1998 development Corporate Total
----------------------------------- --------------- ----------- -----------
<S> <C> <C> <C>
Revenue $ -- $ 159,118 $ 159,118
General and administrative expenses -- 1,201,711 1,201,711
Other expenses 4,592,237 48,867 4,641,104
----------------------------------- ------------ ----------- -----------
Loss for the year $ (4,592,237) $(1,091,460) $(5,683,697)
=================================== ============ =========== ===========
Capital expenditures (recovered) $ (78,279) $ 3,428,299 $ 3,350,220
=================================== ============ =========== ===========
Identifiable assets $ -- $ 4,007,492 $ 4,007,492
=================================== ============ =========== ===========
1997
----------------------------------- ------------ ----------- -----------
Revenue $ -- $ 175,185 $ 175,185
General and administrative expenses -- 720,699 720,699
Other expenses 1,632,293 22,088 1,654,381
----------------------------------- ------------ ----------- -----------
Loss for the year $ (1,632,293) $ (567,602) $(2,199,895)
=================================== ============ =========== ===========
Capital expenditures $ 3,033,103 $ 79,658 $ 3,112,761
=================================== ============ =========== ===========
Identifiable assets $ 4,670,516 $ 3,603,577 $ 8,274,093
=================================== ============ =========== ===========
1996
----------------------------------- ------------ ----------- -----------
Revenue $ -- $ 102,147 $ 102,147
General and administrative expenses -- 826,609 826,609
Other expenses 534,853 -- 534,853
----------------------------------- ------------ ----------- -----------
Loss for the year $ (534,853) $ (724,462) $(1,259,315)
=================================== ============ =========== ===========
Capital expenditures $ 3,136,691 $ 30,116 $ 3,166,807
=================================== ============ =========== ===========
</TABLE>
(b) Geographic information:
As previously disclosed (note 4), all of the Company's mineral
exploration and development activities during 1996 through 1998 were
in Argentina.
Except for the Company's investment in BII (note 5) and related
accrued interest income and foreign exchange gain, substantially all
of the Company's corporate activities during 1996 through 1998 were
in Canada.
11. RELATED PARTY TRANSACTIONS:
During 1998, fees of $156,620 (1997 - $233,348; 1996 - $324,500) were
charged by certain directors or companies controlled by them for
management, consulting, accounting and administrative services. Management
believes the costs of related party services approximate amounts that would
have been paid for similar services rendered by unrelated parties.
Included in accounts payable and accrued liabilities at December 31, 1998
is $15,044 (1997 - $35,332) payable to a director and a company controlled
by a director related to the above fees.
12. INCOME TAXES:
As at December 31, 1998, the Company has approximately $3,000,000 of
losses for Canadian income tax purposes that expire between 2000 and 2005
and that may be available to reduce taxable income in Canada in future
years. In addition, the Company had deducted approximately $8,000,000 for
book purposes in excess of amounts deducted for tax purposes, primarily
for expenditures incurred on the Company's mineral properties and
equipment. The Company has taken a valuation allowance of the full amount
of the tax benefit thereon due to the uncertainty of whether these
deferred tax assets will be realized.
13. CONTINGENCIES:
(a) Uncertainty due to the Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effect of the Year
2000 Issue may be experienced before, on, or after January 1, 2000,
and, if not addressed, the impact on operations and financial reporting
may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 Issue
affecting the Company, including those related to the efforts of
investees, suppliers or other third parties, will be fully resolved.
45
<PAGE> 49
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 14
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
13. CONTINGENCIES (CONTINUED):
(b) Contingent liability:
As disclosed elsewhere in these financial statements (notes 1 and
14(a)), the Company continued its jurisdiction of incorporation from
British Columbia to the State of Wyoming, effective November 10, 1998,
and has proposed to continue from Wyoming back into British Columbia in
1999. In the course of their review of the Company's proposal, the
United States Securities and Exchange Commission (the "SEC") has
advised the Company that they believe the original continuance to
Wyoming was an event that would have required the filing of a
registration statement with the SEC. As a result, the Company appears
to have been in technical violation of the U.S. Securities Act of 1933
(the "Act") and United States holders of shares of the Company, at the
time of the original continuance to Wyoming may have common law
remedies under the Act. In addition, the Company may be required to
offer such United States holders of shares of the Company the right to
have their shares repurchased by the Company at their fair market value
at the time of the original continuance.
The Company is currently reviewing its options to resolve this matter.
No provision has been recorded in the accounts for any contingent loss,
as the outcome is not determinable at this time.
14. SUBSEQUENT EVENTS:
(a) Corporate continuance:
Subsequent to December 31, 1998, the Company announced an extraordinary
general meeting of the shareholders of the Company to be held on April
12, 1999, at which time the shareholders will vote on the Company's
proposal to continue the Company to the Province of British Columbia
and to consolidate the Company's share capital on the basis of one
post-consolidated share for each five pre-consolidated shares. The
meeting date was subsequently postponed and has not yet been
rescheduled.
(b) Private placement:
Subsequent to December 31, 1998, the Company announced, subject to
regulatory approval, a best-efforts brokered private placement of up to
11,666,666 units at $0.15 per unit to raise gross proceeds of up to
$1,750,000. Each unit will consist of one common share and one
non-transferable share purchase warrant exercisable at $0.15 per share
in the first year and $0.17 per share in the second year. The agent
will be paid a 10% commission, payable in cash, and up to 1,750,000
brokers' warrants exercisable at $0.15 per share in the first year and
$0.17 per share in the second year.
47
<PAGE> 50
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 15
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
15. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES:
Accounting practices under United States and Canadian generally accepted
accounting principles ("GAAP"), as they affect the Company, are
substantially the same, except for the following:
(a) Unrealized gains for trading securities:
Investments held principally for the purpose of selling them in the
near term are considered trading securities. Under Canadian GAAP,
unrealized gains on trading securities are not recorded in the accounts
until realized. Under United States GAAP, unrealized gains and losses
for trading securities are included in earnings. Accordingly, under
Canadian GAAP, the gain on disposal of marketable securities during
1996 would be recorded as $72,400, as under Canadian GAAP, the $32,923
unrealized holding gain at December 31, 1995 would not have been
included in earnings in 1995.
(b) Stock-based compensation:
Canadian GAAP for stock-based compensation is similar to that provided
in APB Opinion No. 25 under United States GAAP (note 2(f)), although
FAS 123 requires additional disclosure of the effects of accounting for
stock-based compensation using the fair value method (note 7(c)).
Accordingly, under Canadian GAAP, there would be no material
differences in the consolidated financial statements in respect of
stock-based compensation.
(c) Foreign currency translation:
Canadian GAAP requires that non-current, foreign currency denominated
monetary items that have a fixed or ascertainable life extending beyond
the end of the following fiscal year should be translated into Canadian
dollars at the exchange rate in effect at the transaction date and
adjusted to reflect the current exchange rate at each balance sheet
date, with any gain or loss relating to the initial translation and
balance sheet date adjustment being deferred and amortized over the
remaining life of the item. United States GAAP requires such gains or
losses to be included in operations in the period. Accordingly, under
Canadian GAAP, the foreign exchange gain of $85,875 relating to the
revaluation of the investment recorded at December 31, 1998 would
initially be recorded as a deferred credit on the consolidated balance
sheet and amortization of $9,551 would be recorded for the 1998 fiscal
year.
A reconciliation of the effects of the differences between Canadian GAAP
and United States GAAP on the balance sheets and statements of operations
and deficit is summarized as follows:
<TABLE>
<CAPTION>
=================================================================================================
1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Total liabilities under United States GAAP $299,037 $283,105
Deferred foreign exchange gain, net of amortization of $9,551 76,324 --
-------------------------------------------------------------------------------------------------
Total liabilities under Canadian GAAP $375,361 $283,105
=================================================================================================
</TABLE>
48
<PAGE> 51
BIOMETRIC SECURITY CORP.
(Formerly Sonoma Resource Corp.)
Notes to Consolidated Financial Statements, page 16
(Expressed in Canadian Dollars)
Years ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
15. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED):
<TABLE>
<CAPTION>
================================================================================================
1998 1997
------------------------------------------------------------------------------------------------
<S> <C> <C>
Shareholders' equity under United States GAAP $3,708,455 $7,990,988
Adjustments:
Deferral of foreign exchange gain (85,875) --
Amortization of deferred foreign exchange gain 9,551 --
-------------------------------------------------------------------------------------------
(76,324) --
------------------------------------------------------------------------------------------------
Shareholders' equity under Canadian GAAP $3,632,131 $7,990,988
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
===============================================================================================
1998 1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss for the year under United States GAAP $ (5,683,697) $(2,199,895) $(1,259,315)
Adjustments:
Deferral of foreign exchange gain (85,875) - -
Amortization of deferred foreign exchange gain 9,551 - -
Realized gain on disposal of trading securities - - 32,923
------------------------------------------------------------------------------------------
(76,324) - 32,923
-----------------------------------------------------------------------------------------------
Loss for the year under Canadian GAAP (5,760,021) (2,199,895) (1,226,392)
Deficit, beginning of year under Canadian GAAP (4,396,703) (2,196,808) (970,416)
-----------------------------------------------------------------------------------------------
Deficit, end of year under Canadian GAAP $(10,156,724) $(4,396,703) $(2,196,808)
===============================================================================================
Loss per share under Canadian GAAP $ (0.31) $ (0.13) $ (0.14)
===============================================================================================
</TABLE>
49
<PAGE> 52
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not Applicable.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth the names, ages, positions and offices
of directors and officers of the Company.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Name Age Positions and Offices With the Company
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Patrick W. McCleery 59 Chairman, President and Director
----------------------------------------------------------------------------------------------------------
Chester Idziszek 51 Director
----------------------------------------------------------------------------------------------------------
William A. Rand 55 Director
----------------------------------------------------------------------------------------------------------
Wayne Johnstone 44 Director
----------------------------------------------------------------------------------------------------------
Saundra Zimmer 36 Corporate Secretary
----------------------------------------------------------------------------------------------------------
</TABLE>
Management of the Company
The Company has a total of four full and part-time employees and
consultants. The employees and consultants forming the management team and the
directors of the Company and their resumes are described briefly below.
Patrick W. McCleery, Chairman, President and Director
Mr. McCleery is the Chairman, President and a Director of the Company and is
employed by the Company on a full time basis. Mr. McCleery devotes approximately
100% of his time to the Company. Mr. McCleery has served the Company as
President since September 11, 1997, as Chairman since November 1, 1995 and as a
Director since February, 1984. Mr. McCleery has been a director and/or senior
officer of a several publicly listed junior resource issuers (these companies
included International All-North Resources Ltd. (formerly, All-North Resources
Ltd.) and Medsana Medical Systems Inc. (formerly, Northfork Ventures Inc.)).
Chester Idziszek, Director
Mr. Idziszek is a Director of the Company. Mr. Idziszek devotes approximately
10% of his time to the Company. Mr. Idziszek has served the Company in this
capacity since March 1, 1995. Mr. Idziszek is also the President and CEO of
Adrian Resources Ltd., the President and Director of Birchwood Ventures Ltd.,
Fresco Developments Ltd. and Madison Enterprises Corporation, and a Director of
Arequipa Resources Ltd. (between July 1993 and August 1996), and Norcan
Resources Ltd. In addition, from 1990 to 1992, he was the Chief Executive
Officer, President and a Director of Prime Equities International Corporation.
Mr. Idziszek was also President of Prime Explorations Ltd. from 1987 to 1990. In
addition, he has been a director and/or officer of numerous other junior mining
and resource companies trading on the Vancouver Stock Exchange (these companies
include Image Data International, La Plata Gold Corporation, Barrier Technology,
Haddington Resources Ltd., Arlo Resources Ltd., Minamerica Corporation, Waseco
Resources Inc., Braddick Resources Ltd., Cross Lake Minerals Ltd., Kazakhstan
Minerals Corporation, and Maracote Int. Resources Inc. (formerly, Cherry Lane
Fashion Group)). Mr. Idziszek has a B.Sc. (Geology) degree from University of
Waterloo (1971) and an M.Sc. (Appl. Min. Expl.) degree from McGill University
(1975).
50
<PAGE> 53
William A. Rand, Director
Mr. Rand is a Director of the Company. Mr. Rand devotes approximately 10% of
his time to the Company. Mr. Rand has served the Company in this capacity since
November 1, 1995. Mr. Rand is a Director of Rand Edgar Investment Corp., an
investment firm in Vancouver, B.C. which provides advisory services to the
Company. Prior to that, Mr. Rand was a partner in a law firm and practiced
securities law. Mr. Rand currently sits on the board of a number of publicly
traded resource companies (these companies include Argentina Gold Corp.,
Citation Resources Inc., Consolidated Team Resources Corp., International
Broadlands Resources Corp., International Curator Resources Ltd., Dome
Ventures, Inc., International Uranium Corp., Lundin Oil AB, Red Sea Oil
Corporation, Santa Catalina Mining Corp., South Atlantic Resources Corp.,
Lexacal Investment Corp., Tanganyika Oil Co. Ltd., and Tenke Mining Corp.).
Mr. Rand has considerable expertise in organizing and managing emerging public
mineral resource exploration companies. Mr. Rand has a B.Comm. degree from
McGill University (1963), an LLB degree from Dalhousie University (1966) and an
LLM degree from the London School of Economics (1977).
Wayne Johnstone, Director
Mr. Johnstone is a Director of the Company. Mr. Johnstone devotes approximately
70% of his time to the Company. Mr. Johnstone has served the Company in this
capacity since June 30, 1998. Mr. Johnstone is a self-employed chartered
accountant providing consulting and accounting services to various publicly
traded companies. Prior to that Mr. Johnstone served as a senior accountant for
Viceroy Resource Corp. and controller of Baja Gold Inc. (a company which merged
with Viceroy Resource Corp.) from February, 1994 to December, 1996. Prior to
that Mr. Johnstone served as an accountant for Weston Mineral Services Ltd., a
private British Columbian company. Mr. Johnstone has a B.Comm. degree from The
University of British Columbia (1978).
Saundra Zimmer, Secretary
Ms. Zimmer is the Secretary of the Company and is employed by the Company on
essentially a full time basis. Ms. Zimmer devotes approximately 75% of her time
to the Company. Ms. Zimmer has served the Company as Secretary since June 21,
1995 and was previously Secretary of the Company from August 1989 and May 1993.
Ms. Zimmer has been the Administrative Assistant of the Company since August 1,
1995 and before that from 1986 and 1990. From 1990 to 1995, she was the
Administrative Assistant of Rich Coast Resources Ltd.
Directors and Senior Officers.
The following is a list of the current directors and senior officers of
the Company, their municipalities of residence, their current positions with the
Company and their principal occupations during the past five years:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Name and Municipality Principal Occupation for
of Residence Previous Five Years
------------------------------------------------------------------------------------------------------------------
<S> <C>
Patrick W. McCleery (1) Director of the Company since February, 1984; Chairman of the Company since
Vancouver, B.C. November, 1995; President of the Company since September, 1997.
Chairman, President, Director
------------------------------------------------------------------------------------------------------------------
Chester Idziszek Director of the Company since March, 1995; President of Adrian Resources
West Vancouver, B.C. Ltd., a junior resource company located in Vancouver, B.C. since April,
Director 1993 and CEO since June, 1994; prior to that he was CEO, President and
Director of Prime Equities International Corporation, an investment firm
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
<S> <C>
located in Vancouver, B.C., from June 1990 to December 1992 and from
February 1987 to June 1990 was President of Prime Explorations Ltd., the
exploration arm for the Prime Group of Companies.
------------------------------------------------------------------------------------------------------------------
William A. Rand (1) Director of the Company since November, 1995; he has been an investment
Vancouver, B.C. banker with Rand Edgar Capital Corp., an investment banking firm located in
Director Vancouver, B.C., since October, 1992; prior to that he was a partner of
Rand, Edgar and Sedun, a law firm located in Vancouver.
------------------------------------------------------------------------------------------------------------------
Wayne Johnstone (1) Director of the Company since June, 1998; he has been a self-employed
Bowen Island, B.C. chartered accountant since January, 1997. Prior to that he was a senior
Director accountant for Viceroy Resource Corp. and controller of Baja Gold Inc. (a
company which merged with Viceroy Resource Corp.) from February, 1994 to
December, 1996. Prior to that he was an accountant for Weston Mineral
Service Ltd. from January, 1990 to January, 1994.
------------------------------------------------------------------------------------------------------------------
Saundra J. Zimmer Secretary of the Company since June, 1995; prior to that she was Admin.
Langley, B.C. Assist. of Rich Coast Resources Ltd., a junior resource company located in
Secretary Vancouver, B.C. from October, 1990 to August, 1995; prior to that she was
Admin. Assist. of the Company.
------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Member of the Company's Audit Committee.
Other than receiving stock options from time to time, the directors of
the Company are not compensated for serving as directors (see "Stock Options").
See "Principal Holders of Securities" for particulars of the shares held by the
directors and senior officers.
Appointment of Directors
The directors of the Company are elected by the shareholders at each
annual general meeting and typically hold office until the next annual general
meeting at which time they may be re-elected or replaced.
The articles of the Company permit the directors to appoint directors
to fill any casual vacancies that may occur on the board. The articles also
permit the directors to add additional directors to the board between successive
annual general meetings so long as the number appointed does not exceed more
than one-third of the number of directors appointed at the last annual general
meeting. Individuals appointed as directors to fill casual vacancies on the
board or added as additional directors hold office as does any other director
until the next annual general meeting at which time they may be re-elected or
replaced.
During the past three years, except as set out below none of the
principals of the Company was a principal of another reporting issuer that was,
during his tenure, struck from the register of companies (or a similar authority
in the issuer's jurisdiction of incorporation if the issuer was incorporated
outside of British Columbia) or the securities of which were the subject of a
cease trade or suspension order for a period of more than 30 consecutive days.
Similarly, none of the principals of the Company has, during the past ten years,
been the subject of any penalties or sanctions by a court or securities
regulatory authority relating to the trading in securities or the promotion,
formation or management of a publicly traded company or involving theft or
fraud.
Mr. McCleery was a director of Medsana Medical Systems Inc. between
January, 1992 and December, 1995. Medsana was cease-traded on January 21, 1994
by the British Columbia
52
<PAGE> 55
Securities Commission for failure to file financial statements. To Mr.
McCleery's knowledge, the cease trade order is still in effect.
None of the principals of the Company has, during the past five years,
been declared bankrupt or made a voluntary assignment in bankruptcy or made a
proposal under bankruptcy or insolvency legislation or been subject to or
instituted any proceedings, arrangement or compromise with creditors or had a
receiver, receiver manager or trustee appointed to hold his assets.
Management of BII
As of March 1, 1998, BII had a total of 35 employees and consultants
(See "Personnel of BII" below). The directors and management team of BII and
their resumes are described briefly below.
Stephen Lubard, Chairman
Dr. Lubard is Chairman and founder of BII. He is also one of the founders and
Chief Executive Officer of Arete. It was Dr. Lubard's efforts that took the
Veriprint from concept to a manufactured product in less than one year. In
addition to BII, Dr. Lubard formed Arete Image Software in 1996, a commercial
software company marketing to the entertainment industry. Dr. Lubard brings over
20 years of experience in managing highly complex projects and development of
software and systems for solving complex image processing problems. Dr. Lubard
holds a Ph.D. in aerospace engineering from the University of Maryland.
Robert Kamm, Chief Executive Officer
Mr. Kamm is an experienced technology entrepreneur and has started two previous
technology companies. In 1988, Mr. Kamm co-founded a value-added software
company called Online Mortgage Documents ("Online") as the company's President.
Online provided a mortgage document preparation service similar to CompuTax's
tax preparation service for certified public accountants. In 1996, Mr. Kamm
co-founded VideoActive Corp. ("VideoActive") and served as the company's Chief
Operating Officer and Chief Financial Officer. VideoActive was formed to create
a digital Pay Per View ("PPV") movie/video service for implementation within the
cable industry. VideoActive is a technology/entertainment company whose PPV
movie service relies on unique Digital Video Server technology internally
developed by VideoActive. Mr. Kamm is co-author of a software-oriented patent
which is currently pending. Mr. Kamm left VideoActive when the company retained
an individual with an extensive cable/entertainment background to take the
company to the next level. Mr. Kamm has an MBA in Finance from UCLA.
Parker Eagerton
Mr. Eagerton is the Vice-President of Operations and has over 20 years
manufacturing experience. Mr. Eagerton's career includes experience with Alcatel
Corporation where he was responsible for establishing a plant location in Mexico
and most recently for Solectron Corporation, a turnkey manufacturer
("Solectron"). At Solectron, Mr. Eagerton was a Senior Manufacturing Advisor and
was responsible to Sun for the manufacturing strategy of its new fibre channel
product. Mr. Eagerton has expertise in the areas of devising cost effective
manufacturing strategies and assuring that products are engineered and designed
with manufacturing in mind.
David Gittelson
Mr. Gittelson is Vice-President of Sales for BII and has over ten years'
experience selling sophisticated electronics systems to major organizations in
the security and telecommunication fields. He has worked closely with major
companies such as MCI, Sprint, ADT, Ameritech and Wells Fargo to tailor large
orders to their specifications.
53
<PAGE> 56
Mel Wieting
Mr. Wieting is Vice-President of Engineering for BII and has 15 years of
experience in software and hardware engineering. He worked for 14 years at
Lawrence Livermore National Laboratory, where he worked on and managed projects
involving the design and development of complex computer based electronic
systems. Mr. Wieting specializes in overall systems design and is an experienced
programmer.
Personnel of BII
As of March 1, 1999, BII had a total of 35 full-time employees and
consultants. Of these, five (5) employees serve in a management and
administration capacity, thirteen (13) employees serve in a sales and marketing
capacity, sixteen (16) employees serve in an engineering and research and
development capacity, and one (1) employee serves in a manufacturing capacity.
These employees operate out of the following offices of BII:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
ENGINEERING,
MGMT. & SALES & RESEARCH &
OFFICE LOCATION ADMIN. MARKETING DEVELOPMENT MANUFACTURING TOTAL
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sherman Oaks, CA 4 5 9 0 18
-------------------------------------------------------------------------------------------------------------------
Tracy, CA 1 2 3 1 7
-------------------------------------------------------------------------------------------------------------------
Tucson, AZ 0 0 4 0 4
-------------------------------------------------------------------------------------------------------------------
Dayton, Ohio 0 1 0 0 1
-------------------------------------------------------------------------------------------------------------------
London, England and other
sales staff 0 5 0 0 5
-------------------------------------------------------------------------------------------------------------------
Totals: 5 13 16 1 35
= == == = ==
============================================================================================================-------
</TABLE>
ITEM 11 EXECUTIVE COMPENSATION
Summary Compensation Table
The table below shows certain compensation information regarding
Patrick W. McCleery in his capacity as Chairman, President and Director of the
Company during the fiscal year ended December 31, 1998. No other executive
officer of the Company received compensation exceeding $100,000 in compensation
during this period.
<TABLE>
<CAPTION>
==================================================================================================================
Annual Compensation Long Term Compensation
-------------------------------- ------------------------------------
Awards Payouts
------------------------ -------
Name and Year Salary Bonus Other Securities Restricted LTIP All Other
Principal ($) ($) Annual Under Shares or Payouts Compensation
Position Compensation Options/ Restricted ($) ($)
($) SARs Share Units
Granted (#) ($)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Patrick W. 1998 0 0 $120,059 420,000 0 0 0
McCleery
President and
Director
==================================================================================================================
</TABLE>
54
<PAGE> 57
Option Grants During the Most Recently Completed Fiscal Year
The table below shows information regarding grants of stock options
made to Patrick W. McCleery in his capacity as Chairman, President and Director
of the Company during the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
==================================================================================================
Market Value
Securities % of Total of Securities
Under Options/SARs Underlying
Options/SARs Granted to Exercise or Options/SARs
Granted Employees in Base Price on the Date of Expiration
Name (#) Fiscal Year ($/Security) Grant ($/Security) Date
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Patrick W. 420,000 29.9% $0.23 $0.23 Jan. 28,
McCleery 2001
==================================================================================================
</TABLE>
Options Exercised During the Most Recently Completed Fiscal Year and Fiscal Year
End Option Values
The following table summarizes the number of underlying Common Shares
acquired by Patrick W. McCleery in his capacity as Chairman, President and
Director of the Company, pursuant to exercises of stock options during the
12-months ended December 31, 1998, and the aggregate value realized upon
exercise and the number of Common Shares of the Company covered by unexercised
options as at December 31, 1998. Value realized upon exercise is the difference
between the fair market value of the underlying stock on the exercise date and
the exercise or base price of the option.
<TABLE>
<CAPTION>
=================================================================================================================
Unexercised Options/SARs at Value of Unexercised in the
Securities Aggregate Dec. 31, 1998 (#) Money Options/SARs at
Name Acquired on Value Realized Dec. 31, 1998 ($)
Exercise ($) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Patrick W. 0 0 420,000 N/A
McCleery
=================================================================================================================
</TABLE>
Compensation of Directors and Renumeration of Senior Officers
The Company has no standard arrangement to which Directors are
compensated by the Company for their services in their capacity as Directors
other than the unissued Treasury shares reserved for the grant of Directors'
Stock Options. There has been no other arrangement pursuant to which Directors
were compensated by the Company in their capacity as Directors or for services
rendered as consultants or experts during the Company's financial year ended
December 31, 1998.
During the Company's most recently completed fiscal year, 665,000
incentive stock options were granted to directors of the Company (this number
does not include the 420,000 options granted to Mr. McCleery, which are
referenced above) and no incentive stock options were exercised by directors of
the Company who are not executive officers.
55
<PAGE> 58
Two (2) senior officers received an aggregate cash renumeration of
$154,600 for the fiscal year ended December 31, 1998. In addition, a total of
$36,561 was paid to Rand Edgar Investment Corp. and Wayne Johnstone for
consulting fees.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the knowledge of management of the Company as of March 1, 1998, no
person beneficially owns more than five percent (5%) of any class of the
Company's voting securities. The following table sets forth the total amount of
any class of the Company's voting securities owned by its executive officers and
directors, as a group, as of March 1, 1998.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Number of Percentage
Name and Address Common Shares of Class
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
All executive officers and directors
as a group (5 persons) 2,978,241(1) 9%
----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Of these shares, a total of 2,089,633 shares are held by Mrs. McCleery, Mrs.
Johnstone, and by Rand Edgar Capital Corp., a private British Columbia company,
which is owned by the wives of Mr. Rand and Brian Edgar and of which Mr. Rand is
a director. Although these shares are included above, Messrs. McCleery,
Johnstone, and Rand disclaim any beneficial interest in shares held by their
spouses or by companies controlled by their spouses.
Section 16(a) Beneficial Ownership Reporting Compliance
On February 2, 1999, Forms 3 were filed late for Patrick W. McCleery,
President and Director; William A. Rand, Director; Chester Idziszek, Director;
Wayne D. Johnstone, Director, and Saundra J. Zimmer, Corporate Secretary. On
February 26, 1999, Forms 4 were filed late for Patrick W. McCleery, President
and Director (reporting periods -- November 1998; December 1998) and Wayne D.
Johnstone, Director (reporting periods -- November 1998; January 1999). On
February 26, 1999, Forms 5 were filed late for Patrick W. McCleery, President
and Director; William A. Rand, Director ; Chester Idziszek, Director; Wayne D.
Johnstone, Director, and Saundra J. Zimmer, Corporate Secretary.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain directors of the Company are officers and/or directors of, or
are associated with, other publicly traded companies and such associations
could give rise to conflicts of interest from time to time. Given that most of
these companies are natural resource companies, such conflicts seem unlikely.
Nevertheless, the directors are required by law to act honestly and in good
faith with a view to the best interests of the Company and its shareholders and
to disclose any personal interest which they may have in any material
transaction which is proposed to be entered into with the Company and to
abstain from voting as a director for the approval of any such transaction.
The only material transactions between the Company or any of its
subsidiaries and any director, senior officer, principal shareholder or any
associates or affiliates of the foregoing, within the past three years, are as
follows:
June 12, 1998 Acquisition of Interest in BII
The BII acquisition was arranged by Rand Edgar Capital Corp. ("RECC"),
a private company controlled by the spouses of Brian Edgar and William Rand. Mr.
Rand is a director of the Company. RECC originally entered into a memorandum of
understanding with BII and with Arete dated March 18, 1998, amended and replaced
May 20, 1998 (collectively the "MoA"). RECC assigned its interest in the MoA to
the Company on May 21, 1998 in exchange for a fee of US$145,000, plus
reimbursement of its expenses. As of June 12, 1998, RECC had elected to take its
fee in the form of 715,575 common shares of the Company to be issued at a price
of $0.30 per share. These shares were to be issued in pro rata tranches in
accordance with the tranche advances being made by the Company to BII. These
finders fee shares were actually issued in the form of special warrants at a
price of $0.30 per special warrant. Each special warrant is exercisable without
the payment of any additional consideration into one common share of the
Company. As at December 31, 1998, the Company had issued 250,450 shares to RECC
under the terms of this agreement.
56
<PAGE> 59
December 29, 1998 Private Placement
Patrick W. McCleery, Wayne Johnstone, Rand Edgar Capital Corp. and
Wendy McCleery, wife of Patrick W. McCleery, agreed to participate in the
December 29, 1998 Offering (see Item 5 above) as follows: Mr. McCleery
subscribed for 500,000 Units, Mr. Johnstone for 96,050 Units, Mrs. McCleery for
823,000 Units and Rand Edgar Capital Corp. for 661,500 Units.
May 15, 1998 Private Placement
Insiders of the Company who participated in the May 15, 1998 Private
Placement (see Item 5 above) were Wendy McCleery (as to 1,000,000 special
warrants), Rand Edgar Capital Corp. (as to 300,000 special warrants) and Wayne
Johnstone (as to 100,000 special warrants).
August 21, 1996 Private Placement
Patrick W. McCleery participated in the August 21, 1996 Private
Placement (see Item 5 above) as to 500,000 units.
June 29, 1996 Private Placement
The following insiders participated in the June 29, 1996 Private
Placement (see Item 5 above): Patrick W. McCleery subscribed for 750,000 units
and Rand Edgar Capital Corp. subscribed for 100,000 units.
As of December 31, 1998, there were no management contracts between the
Company and any of its officers or directors, and no officer or director was
indebted to the Company.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a)1 and (a)2. Financial Statements
This information is contained in Item 8 of this Annual Report on Form
10-K.
(a)3. Exhibits
3.1 Registrant's Articles of Continuance into the State of Wyoming.
3.2. Registrant's By-Laws, as amended.
3.3 Registrant's Articles of Amendment re Authorized Stock.
10.1 BII Agreement, dated June 12, 1998
10.2 Inlet Resources, Ltd. Agreement, dated January 21, 1998
27.1 Financial Data Schedule
(b) Reports on Form 8-K
57
<PAGE> 60
No reports on Form 8-K were filed by the Company during the three
months ended on December 31, 1999.
(c) Financial Data Schedule
58
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BIOMETRIC SECURITY CORP.
Registrant
By: /s/ Patrick W. McCleery
-----------------------------
Name: Patrick W. McCleery
Title: President
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, being a majority of
the Directors of the registrant, on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By /s/ Patrick W. McCleery Patrick W. McCleery, Chairman, President and Director
-------------------------------
Date: March 30, 1999
By /s/ William A. Rand William A. Rand, Director
-------------------------------
Date: March 30, 1999
By /s/ Wayne Johnstone Wayne Johnstone, Director
-------------------------------
Date: March 30, 1999
</TABLE>
59
<PAGE> 1
APPLICATION FOR CERTIFICATE OF REGISTRATION
AND
ARTICLES OF CONTINUANCE
Pursuant to Wyo. Stat. ss. 17-16-1710 of the Wyoming Business
Corporation Act, the undersigned hereby applies for a Certificate of
Registration, and for that purpose hereby submits the following Articles of
Continuance:
1. The name of the corporation is SONOMA RESOURCE CORP. (the
"Corporation") and it is incorporated under the laws of British Columbia,
Canada. Upon continuance into the State of Wyoming, the name of the corporation
shall be BIOMETRIC SECURITY CORP.
2. The Corporation's date of incorporation is January 16, 1979. The
period of duration of the Corporation is perpetual. Certified copies of the
Articles of Incorporation and all amendments thereto are attached hereto as
Attachment A.
3. The address of the principal office of the Corporation and the
mailing address where correspondence and annual reports can be sent is:
400 Burrard Street, Suite 1940
P.O. Box 31
Vancouver, British Columbia
V6C 3A6
Attention: Saundra Zimmer
4. The physical address of the proposed registered office in Wyoming
and the name of its registered agent at that address is:
Rick A. Thompson
Hathaway, Speight & Kunz, LLC
P.O. Box 1208
2515 Warren Avenue, Suite 500
Cheyenne, Wyoming 82003-1208
5. The purpose or purposes which the Corporation proposes to pursue in
the transaction of business in the State of Wyoming may include any lawful
business which corporations existing under the Wyoming Business Corporation Act
may engage in, other than banking or insurance.
-1-
<PAGE> 2
6. The names and respective business addresses of the directors and
officers of the corporation are:
OFFICE NAME ADDRESS
------ ---- -------
President, Patrick W. McCleery 4510 Beverly Crescent
Chairman & Director Vancouver, B.C.
V6J-4E6
Secretary Saundra Zimmer 20433 36th Avenue
Langley, B.C.
V3A-2R6
Director Chet Idziszek No. 6-2250 Bellevue Avenue
West Vancouver, B.C.
V7V 1C6
Director William A. Rand 2136 S.W. Marine Drive
Vancouver, B.C.
V6P 6B5
Director Wayne Johnstone 1133 Miller Road
E-28, RR#1
Bowen Island, B.C.
VON-1G0
7. The aggregate number of shares or other ownership units which the
Corporation has the authority to issue, itemized by classes, par value of
shares, shares without par value, and series, if any, within a class is:
NUMBER OF SHARES CLASS SERIES PAR VALUE PER SHARE
- ---------------- ----- ------ -------------------
100,000,000 Common n/a no par value
8. The aggregate number of issued shares or other ownership units
itemized by classes, par value of shares, shares without par value, and series,
if any, within a class is:
NUMBER OF SHARES CLASS SERIES PAR VALUE PER SHARE
- ---------------- ----- ------ -------------------
20,834,412 Common n/a no par value
-2-
<PAGE> 3
9. The Corporation accepts the Constitution of the State of Wyoming in
compliance with the requirements of Article 10, Section 5 of the Wyoming
Constitution.
DATED this 4th day of November, 1998.
SONOMA RESOURCE CORPORATION
By: /s/ Patrick W. McCleery
------------------------------
Patrick W. McCleery
Title: President
PROVINCE OF B.C. )
) ss
CITY OF VANCOUVER )
I, Pamela J. Egger, Notary Public, do hereby certify that on this 4th
day of November, 1998, before me personally appeared Patrick W. McCleery, who
being by me first duly sworn, declared that he signed the foregoing document as
president of the corporation, and that the statements therein are true.
In witness whereof, I have hereunto set my hand and seal this 4th day
of November, 1998.
/s/ Pamela J. Egger
----------------------------
Pamela J. Egger
Notary Public
-3-
<PAGE> 1
FORM 21
(SECTION 371)
PROVINCE OF BRITISH COLUMBIA
Certificate of
Incorporation No. 185259
COMPANY ACT
SPECIAL RESOLUTION
The following special resolution was passed by the undermentioned Company on the
date stated:
Name of Company: SONOMA RESOURCE CORP.
Date resolution passed: JUNE 20, 1996
Resolution:
"RESOLVED, as a Special Resolution, THAT the existing Articles of the
Company as filed with the Registrar of Companies be cancelled and that
the form of Articles attached hereto and marked Schedule "A" be adopted
as the Articles of the Company in substitution for, and to the
exclusion of, the existing Articles of the Company."
Certified a true copy the 20th day of June, 1996.
(Signature) /s/ David J. Raffa
---------------------------
David J. Raffa
(Relationship to Company) Solicitor
<PAGE> 2
SCHEDULE "A"
ARTICLES
- of -
SONOMA RESOURCE CORP.
TABLE OF CONTENTS
-----------------
PART PAGE
- ---- ----
1. Interpretation
2. Shares and Share Certificate
3. Issue of Shares
4. Share Registers
5. Transfer of Shares
6. Transmission of Shares
7. Alteration of Capital
8. Purchase and Redemption of Shares
9. Borrowing Powers
10. General Meetings
11. Proceedings at General Meetings
12. Votes of Members
13. Directors
14. Election and Removal of Directors
15. Powers and Duties of Directors
16. Disclosure of Interest of Directors
<PAGE> 3
17. Proceedings of Directors
18. Executive and Other Committees
19. Officers
20. Indemnity and Protection of Directors, Officers and Employees
21. Dividends and Reserve
22. Record Dates
23. Documents, Records and Financial Statements
24. Notices
25. Seal
26. Prohibitions
<PAGE> 4
COMPANY ACT
ARTICLES
SONOMA RESOURCE CORP.
PART 1 - INTERPRETATION
-----------------------
1.1 In these Articles, unless the context otherwise requires:
(a) "Company Act" means the Company Act of the Province of British
Columbia from time to time in force and all amendments thereto and
includes all regulations and amendments thereto made pursuant to that
Act;
(b) "designated security" means a security of the Company that is not a
debt security and that:
(i) carries a voting right in all circumstances or under
some circumstances that have occurred and are continuing, or
(ii) carries a residual right to participate in the earnings
of the Company or, upon the liquidation or winding up of the
Company, in its assets;
(c) "Directors", "Board of Directors" or "Board" means the Directors or,
if the Company has only one Director, the Director of the Company for
the time being;
(d) "month" means calendar month;
(e) "registered address" of a Director means the address of the Director
recorded in the register of directors;
(f) "registered address" of a member means the address of the member
recorded in the register of members;
(g) "registered owner" or "registered holder" when used with respect to a
share in the capital of the Company means the person registered in the
register of members in respect of such share;
(h) "regulations" means the regulations made pursuant to the Company Act;
(i) "seal" means the common seal of the Company, if the Company has one.
<PAGE> 5
1.2 Expressions referring to writing shall be construed as including
references to printing, lithography, typewriting, photography and other modes of
representing or reproducing words in a visible form.
1.3 Words importing the singular include the plural and vice versa, words
importing male persons include female persons and words importing persons shall
include corporations.
1.4 The meaning of any words or phrases defined in the Company Act shall,
if not inconsistent with the subject or context, bear the same meaning in these
Articles.
1.5 The rules of construction contained in the Interpretation Act shall
apply, mutatis mutandis, to the interpretation of these Articles.
1.6 The provisions contained in Table A in the First Schedule to the
Company Act shall not apply to the Company.
PART 2 - SHARES AND SHARE CERTIFICATES
--------------------------------------
2.1 Every share certificate issued by the Company shall be in such form as
the Directors may approve from time to time and shall contain such statements as
are required by, and shall otherwise comply with, the Company Act.
2.2 Every member is entitled, without charge, to one certificate
representing the share or shares of each class held by him except that, in
respect of a share or shares held jointly by several members, the Company shall
not be bound to issue more than one certificate, and delivery of a certificate
for a share to one of several joint registered holders or to his duly authorized
agent shall be sufficient delivery to all. The Company shall not be bound to
issue certificates representing redeemable shares if such shares are to be
redeemed within one month of the date on which they were allotted.
2.3 Any share certificate may be sent by registered mail to the member
entitled thereto, and neither the Company nor any transfer agent shall be liable
for any loss occasioned to the member resulting from the loss or theft of any
such share certificate so sent.
2.4 If a share certificate:
(a) is worn out or defaced, the Directors may, upon production to the
Company of the certificate and upon such other terms, if any, as they
may think fit, order the certificate to be cancelled and issue a new
certificate in lieu thereof;
(b) is lost, stolen or destroyed, the Directors may, upon proof thereof to
their satisfaction and upon such indemnity, if any, being given as
they consider
<PAGE> 6
adequate, issue a new share certificate in lieu thereof to the person
entitled to such lost. Stolen or destroyed certificate; or
(c) represents more than one share and the registered owner thereof
surrenders it to the Company with a written request that the Company
issue in his name two or more certificates each representing a
specified number of shares and in the aggregate representing the same
number of shares as the certificate so surrendered, the Directors
shall cancel the certificate so surrendered and issue in lieu thereof
certificates in accordance with such request.
2.5 If a member owns shares of a class or series represented by more than
one share certificate and surrenders the certificates to the Company with a
written request that the Company issue in his name one certificate representing
in the aggregate the same number of shares as the certificates so surrendered,
the Directors shall cancel the certificates so surrendered and issue in lieu
thereof a certificate in accordance with such request.
2.6 The Directors may from time to time determine the amount of a charge,
not exceeding an amount prescribed by the regulations or the Company Act, to be
imposed for each certificate issued pursuant to Articles 2.4 and 2.5.
2.7 Every share certificate shall be signed manually by at least one
officer or Director of the Company, or by or on behalf of a registrar, branch
registrar, transfer agent or branch transfer agent of the Company and any
additional signatures may be printed or otherwise mechanically reproduced and,
in such event, a certificate so signed is as valid as if signed manually,
notwithstanding that any person whose signature is so printed or mechanically
reproduced shall have ceased to hold the office that he is stated on such
certificate to hold at the date of the issue of the certificate.
2.8 Except as required by law, statute or these Articles, no person shall
be recognized by the Company as holding any share upon any trust, and the
Company shall not be bound by or compelled in any way to recognize (even when
having notice thereof) any equitable, contingent, future or partial interest in
any share or in any fractional part of a share or (except as provided by law,
statute or these Articles or as ordered by a court of competent jurisdiction)
any other rights in respect of any share except an absolute right to the
entirety thereof in its registered holder.
PART 3 - ISSUE OF SHARES
------------------------
3.1 Except as provided in the Company Act, the Memorandum of the Company
and these Articles, and subject to any direction to the contrary contained in a
resolution of the members authorizing any increase or alteration of capital, the
shares of the Company shall be under the control of the Directors who may,
subject to the rights of the holders of issued shares of the Company, allot and
issue, or grant options in respect of shares authorized but not issued or issued
and redeemed or purchased, at such times and to such persons, including
<PAGE> 7
Directors, and in such manner and upon such terms and conditions, and at such
price or for such consideration, as the Directors in their absolute discretion
may determine.
3.2 If the Company is, or becomes, a company which is not a reporting
company and the Directors are required by the Company Act before allotting any
shares to offer them pro rata to the members, the Directors shall, before
allotting any shares, comply with the applicable provisions of the Company Act.
3.3 Subject to the provisions of the Company Act, the Company may pay a
commission or allow a discount to any person in consideration of his subscribing
or agreeing to subscribe, whether absolutely or conditionally, for its shares,
or procuring or agreeing to procure subscriptions, whether absolutely or
conditionally, for any such shares, but if the Company is not a specially
limited company, the rate of the commission and discount shall not in the
aggregate exceed 25% of the amount of the subscription price of such shares.
3.4 No share may be issued until it is fully paid and the Company shall
have received the full consideration therefor in cash, property or past services
actually performed for the Company. A document evidencing indebtedness of the
allottee is not property for the purpose of this Article. The value of property
or services for the purpose of this Article shall be the value determined by the
Directors by resolution to be, in all the circumstances of the transaction, no
greater than the fair market value thereof. The full consideration received for
a share issued by way of dividend shall be the amount determined by the
Directors to be the amount of the dividend.
PART 4 - SHARE REGISTERS
------------------------
4.1 The Company shall keep or cause to be kept a register of members, a
register of transfers and a register of allotments within British Columbia, all
as required by the Company Act, and may combine one or more of such registers.
If the Company's capital shall consist of more than one class of shares, a
separate register of members, register of transfers and register of allotments
may be kept in respect of each class of shares. The Directors may appoint a
trust company to keep the aforesaid registers or, if there is more than one
class of shares, the Directors may appoint a trust company, which need not be
the same trust company, to keep the registers for each class of shares. The
Directors may also appoint one or more trust companies, including the trust
company which keeps the said registers of its shares or of a class thereof, as
transfer agent for its shares or such class thereof, as the case may be, and the
same or another trust company or companies as registrar for its shares or such
class thereof, as the case may be. The Directors may terminate the appointment
of any such trust company at any time and may appoint another trust company in
its place.
4.2 Unless prohibited by the Company Act, the Company may keep or cause to
be kept within the Province one or more branch registers of members and may, if
the Company is, or becomes, a reporting company, cause to be kept outside the
Province one or more branch register of members.
<PAGE> 8
4.3 The Company shall not at any time close its register of members.
PART 5 - TRANSFER OF SHARES
---------------------------
5.1 Subject to the provisions of the Memorandum of the Company and these
Articles and to restrictions on transfer, if any, contained in these Articles,
any member may transfer any of his shares by instrument of transfer executed by
or on behalf of such member and delivered to the Company or its transfer agent.
The instrument of transfer shall be in the form, if any on the back of the
Company's share certificates or in such other form as the Directors may from
time to time approve. If the Directors so require, each instrument of transfer
shall be in respect of only one class of shares. Except to the extent that the
Company Act may otherwise provide, the transferor shall be deemed to remain the
holder of the shares until the name of the transferee is entered in the register
of members or a branch register of members in respect thereof.
5.2 The signature of the registered owner of any shares, or of his duly
authorized attorney, upon an authorized instrument of transfer shall constitute
a complete and sufficient authority to the Company, its Directors, officers and
agents to register in the name of the transferee as named in the instrument of
transfer the number of shares specified therein or, if no number is specified,
all the shares of the registered owner represented by share certificates
deposited with the instrument of transfer. If no transferee is named in the
instrument of transfer, the instrument of transfer shall constitute a complete
and sufficient authority to the Company, its Directors, officers and agents to
register, in the name of the person on whose behalf any certificate for the
shares to be transferred is deposited with the Company for the purpose of having
the transfer registered, the number of shares specified in the instrument of
transfer or, if no number is specified, all the shares represented by all share
certificates deposited with the instrument of transfer.
5.3 The Company and its Directors, officers and transfer agent or agents
shall not be bound to enquire into the title of the person named in the form of
transfer as transferee or, if no person is named therein as transferee, of the
person on whose behalf the certificate is deposited with the Company for the
purpose of having the transfer registered, or be liable to any claim by such
registered owner or by any intermediate owner or holder of the certificate or of
any of the shares represented thereby or any interest therein for registering
the transfer, and the transfer, when registered, shall confer upon the person in
whose name the shares have been registered a valid title to such shares.
5.4 Every instrument of transfer shall be executed by the transferor and
left at the registered office of the Company or at the office of its transfer
agent or registrar for registration together with the share certificate for the
shares to be transferred and such other evidence, if any, as the Directors, the
transfer agent or registrar may require to prove the title of the transferor or
his right to transfer the shares and the right of the transferee to have the
transfer registered. All instruments of transfer where the transfer is
registered shall be retained by the Company or its transfer agent or registrar
and any instrument of transfer,
<PAGE> 9
where the transfer is not registered, shall be returned to the person depositing
the same together with the share certificate which accompanied the same when
tendered for registration.
5.5 There shall be paid to the Company in respect of the registration of
any transfer such sum, if any, as the Directors may from time to time determine.
PART 6 - TRANSMISSION OF SHARES
-------------------------------
6.1 In the case of the death of a member, the survivor or survivors where
the deceased was a joint registered holder of shares, and the legal personal
representative of the deceased member where he was the sole holder, shall be the
only persons recognized by the Company as having any title to his interest in
the shares. Before recognizing any legal personal representative the Directors
may require him to produce a certified copy of a grant of probate or letters of
administration, or grant of representation, will, order or other instrument or
other evidence of the death under which title to the shares is claimed to vest,
and such other documents as the Company Act requires.
6.2 Upon the death or bankruptcy of a member, his personal representative
or trustee in bankruptcy, as the case may be, although not a member, shall have
the same rights, privileges and obligations that attach to the shares formerly
held by the deceased or bankrupt member if the documents required by the Company
Act shall have been deposited at the Company's registered office.
6.3 Any person becoming entitled to a share in consequence of the death or
bankruptcy of a member shall upon such documents and evidence being produced to
the Company as the Company Act requires, or who becomes entitled to a share as a
result of an order of a Court of competent jurisdiction or a statute, have the
right either to be registered as a member in his representative capacity in
respect of such share or, if he is a personal representative or trustee in
bankruptcy, instead of being registered himself, to make such transfer of the
share as the deceased or bankrupt person could have made; but the Directors
shall, as regards a transfer by a personal representative or trustee in
bankruptcy, have the same right, if any, to decline or suspend registration of a
transferee as they would have in the case of a transfer of a share by the
deceased or bankrupt person before the death or bankruptcy.
PART 7 - ALTERATION OF CAPITAL
------------------------------
7.1 The Company may by ordinary resolution amend its Memorandum to
increase its authorized capital by:
(a) creating shares with par value or shares without par value, or both;
<PAGE> 10
(b) increasing the number of shares with par value or shares without par
value, or both; or
(c) increasing the par value of a class of shares with par value, if no
shares of that class are issued.
7.2 The Company may by special resolution alter its Memorandum to:
(a) subdivide all or any of its unissued or fully paid issued shares with
par value into shares with smaller par value;
(b) subdivide all or any of its unissued or fully paid issued shares
without par value so that the number of those shares is increased;
(c) consolidate all or any of its shares with par value into shares of
larger par value;
(d) consolidate all or any of its shares without par value so that the
number of those shares authorized is reduced;
(e) change all or any of its unissued or fully paid issued shares with par
value into shares without par value;
(f) change all or any of its unissued shares without par value into shares
with par value;
(g) alter the name or designation of all or any of its issued or unissued
shares; or
(h) alter the provisions as to the maximum price or consideration at or
for which shares without par value may be issued,
but only to the extent, in such manner and with such consents of members holding
shares of a class or series which are the subject of or are affected by such
alteration as the Company Act provides.
7.3 The Company may alter its Memorandum or these Articles:
(a) by special resolution, to create, define and attach special rights or
restrictions to any shares, whether issued or unissued, and
(b) by special resolution and by otherwise complying with any applicable
provision of its Memorandum or these Articles, to vary or abrogate any
<PAGE> 11
special rights or restrictions attached to any shares, whether issued
or unissued,
and in each case by filing a certified copy of such resolution with the
Registrar but no right or special right attached to any issued shares shall be
prejudiced or interfered with unless all members holding shares of each class or
series whose right or special right is so prejudiced or interfered with consent
thereto in writing, or unless a separate resolution is consented thereto by the
members holding shares of each such class or series passed by a majority of 3/4
of the votes case, or such greater majority as may be specified by the special
rights attached to the class or series, of the issued shares of such class or
series.
7.4 Notwithstanding such consent in writing or such separate resolution,
no such alteration shall be valid as to any part of the issued shares of any
class or series unless the holders of the rest of the issued shares of such
class or series either all consent thereto in writing or consent thereto by a
separate resolution passed by a majority of 3/4 of the votes cast.
7.5 If the Company is, or becomes, a reporting company, no resolution to
create, vary or abrogate any special right of conversion or exchange attaching
to any shares shall be submitted to any general meeting, class meeting or series
meeting of members unless, if so required by the Company Act, the Superintendent
of Brokers, the British Columbia Securities Commission, or other applicable
regulatory authority, as the case may be, has first consented to the resolution.
7.6 Unless these Articles otherwise provide, the provisions of these
Articles relating to general meetings shall apply, with the necessary changes
and so far a they are applicable, to a class meeting or series meeting but the
quorum at a class meeting or series meeting shall be one person holding or
representing by proxy one-third of the shares affected.
PART 8 - PURCHASE AND REDEMPTION OF SHARES
------------------------------------------
8.1 Subject to the special rights and restrictions attached to any shares,
the Company may, by a resolution of the Directors and in compliance with the
Company Act, purchase any of its shares at the price and upon the terms
specified in such resolution or redeem any shares that have a right of
redemption attached to them in accordance with the special rights and
restrictions attaching thereto. No such purchase or redemption shall be made if
the Company is insolvent at the time of the proposed purchase or redemption or
if the proposed purchase or redemption would render the Company insolvent.
8.2 Unless shares are to be purchased by the Company through a stock
exchange or the Company is purchasing the shares from a dissenting member
pursuant to the requirements of the Company Act or the Company is purchasing the
shares from a bona fide employee or bona fide former employee of the Company or
of an affiliate of the Company, the Company shall make its offer to purchase pro
rata to every member who holds shares of the class or series to be purchased.
<PAGE> 12
8.3 If the Company proposes at its option to redeem some but not all of
the shares of a particular class or series, the Directors may, subject to the
special rights and restrictions attached to the shares of such class or series,
decide the manner in which the shares to be redeemed shall be selected.
8.4 Subject to the provisions of the Company Act, the Company may reissue
a cancelled share that it has redeemed or purchased, or sell a share that it has
redeemed or purchased but not cancelled, but the Company may not vote or pay or
make any dividend or other distribution in respect of a share that it has
redeemed or purchased.
PART 9 - BORROWING POWERS
-------------------------
9.1 The Directors may from time to time in their discretion authorize the
Company to:
(a) borrow money in such amount, in such manner, on such security, from
such sources and upon such terms and conditions as they think fit;
(b) guarantee the repayment of money borrowed by any person or the
performance of any obligation of any person;
(c) issue bonds, debentures, notes and other debt obligations either
outright or as continuing security for any indebtedness or liability,
direct or indirect, or obligations of the Company or of any other
person; and
(d) mortgage, charge (whether by way of specific or floating charge) or
give other security on the undertaking or on the whole or any part of
the property and assets of the Company, both present and future.
9.2 Any bonds, debentures, notes or other debt obligations of the Company
may be issued at a discount, premium or otherwise and with any special
privileges as to redemption, surrender, drawing, allotment of or conversion into
or exchange for shares or other securities, attending and voting at general
meetings of the Company, appointment of Directors or otherwise and may by their
terms be assignable free from any equities between the Company and the person to
whom they were issued or any subsequent holder thereof, all as the Directors may
determine.
9.3 The Company shall keep or cause to be kept within the Province of
British Columbia in accordance with the Company Act a register of its debentures
and a register of debentureholders, which registers may be combined, and,
subject to the provisions of the Company Act, may keep or cause to be kept one
or more branch registers of its debentureholders at such place or places as the
Directors may from time to time determine and the Directors may by resolution,
regulation or otherwise make such provisions as they think fit respecting the
keeping of such branch registers.
<PAGE> 13
9.4 Every bond, debenture, note or other debt obligation of the Company
shall be signed manually by at least one Director or officer of the Company or
by or on behalf of a trustee, registrar, branch registrar, transfer agent or
branch transfer agent for the bond, debenture, note or other debt obligation
appointed by the Company or under any instrument under which the bond,
debenture, note or other debt obligation is issued and any additional signatures
may be printed or otherwise mechanically reproduced thereon and, in such event,
a bond, debenture, note or other debt obligation so signed is as valid as if
signed manually notwithstanding that any person whose signature is so printed or
mechanically reproduced shall have ceased to hold the office that he is stated
on such bond, debenture, note or other debt obligation to hold at the date of
the issue thereof.
9.5 If the Company is, or becomes, a reporting company, it shall keep or
cause to be kept a register of its indebtedness to every Director or officer of
the Company or an associate of any of them in accordance with the provisions of
the Company Act.
PART 10 - GENERAL MEETINGS
--------------------------
10.1 Subject to any extensions of time permitted under the Company Act, the
first annual general meeting of the Company shall be held within 15 months from
the date of incorporation and thereafter an annual general meeting shall be held
once in every calendar year at such time (not being more than 13 months after
the date that the last annual general meeting was held or was deemed to have
been held) and place as may be determined by the Directors.
10.2 If the Company is, or becomes, a company which is not a reporting
company and all the members are entitled to attend and vote at an annual general
meeting consent in writing to the business required to be transacted at such
meeting, the meeting shall be deemed to have been held on the date specified in
the consent or in the resolutions consented to in writing dealing with such
business and the meeting need not be held.
10.3 The Directors may, whenever they think fit, convene a general meeting.
A general meeting, if requisitioned in accordance with the Company Act, shall be
convened by the Directors or, if not convened by the Directors, may be convened
by the requisitionists as provided in the Company Act.
10.4 If the Company is, or becomes, a reporting company, advance notice of
any general meeting at which Directors are to be elected shall be published in
the manner required by the Company Act.
10.5 A notice convening a general meeting, specifying the place, date and
hour of the meeting and, in case of special business, the general nature of that
business, shall be given as provided in the Company Act and in the manner
provided in these Articles, or in such other manner (if any) as may be
prescribed by ordinary resolution, whether previous notice thereof has been
given or not, to such persons as are entitled by law or pursuant to these
<PAGE> 14
Articles to receive such notice from the Company. Accidental omission to give
notice of a meeting to, or the non-receipt of notice of a meeting, by any member
shall not invalidate the proceedings at that meeting.
10.6 All the members of the Company entitled to attend and vote at a
general meeting may, by unanimous consent in writing given before, during or
after the meeting, or if they are present at the meeting by a unanimous vote,
waive or reduce the period of notice of such meeting and an entry in the minute
book of such waiver or reduction shall be sufficient evidence of the due
convening of the meeting.
10.7 Except as otherwise provided by the Company Act, where any special
business at a general meeting includes considering, approving, ratifying,
adopting or authorizing any document or the execution thereof or the giving of
effect thereto, the notice convening the meeting shall, with respect to such
document, be sufficient if it states that a copy of document or proposed
document is or will be available for inspection by members at the registered
office or records office of the Company or at some other place in British
Columbia designated in the notice during usual business hours up to the date of
such general meeting.
PART 11 - PROCEEDINGS AT GENERAL MEETINGS
-----------------------------------------
11.1 All business shall be deemed special business which is transacted at:
1. An annual general meeting, with the exception of the conduct of and
voting at such meeting, consideration of financial statements and the
respective reports of the Directors and the auditor, fixing or
changing the number of directors the election of Directors, the
appointment of an auditor, fixing of the remuneration of the auditor
and such other business as by these Articles or the Company Act may be
transacted at a general meeting without prior notice thereof being
given to the members or any business which is brought under
consideration by the report of the Directors; and
2. Any other general meeting, with the exception of the conduct of and
voting at such meeting.
11.2 No business, other than election of the chairman or the adjournment or
termination of the meeting, shall be conducted at any general meeting unless the
required quorum of members, entitled to attend and vote, is present at the
commencement of the meeting, but a quorum need not be present throughout the
meeting.
11.3 Except as provided in the Company Act and these Articles a quorum
shall be two persons present and being, or representing by proxy, members
holding not less than 10% of the shares entitled to be voted at the meeting. If
there is only one member the quorum is one person present and being, or
representing by proxy, such member. The Directors, the senior officers of the
Company, the solicitor of the Company and the auditor of the
<PAGE> 15
Company, if any, shall be entitled to attend at any general meeting but no such
person shall be counted in the quorum or be entitled to vote at any general
meeting unless he shall be a member or proxyholder entitled to vote at such
meeting.
11.4 If within half an hour from the time appointed for a general meeting a
quorum is not present, the meeting, if convened upon the requisition of members,
shall be terminated. In any other case the meeting shall stand adjourned to the
same day in the next week, at the same time and place, and, if at the adjourned
meeting a quorum is not present within half an hour from the time appointed for
the meeting, the person or persons present and being, or representing by proxy,
a member or members entitled to attend and vote at the meeting shall be a
quorum.
11.5 The Chairman of the Board or in his absence, or if there is no
Chairman of the Board, the President or in his absence a Vice-President, if any,
shall be entitled to preside as chairman at every general meeting of the
Company.
11.6 If at any general meeting neither the Chairman of the Board nor the
President nor a Vice-President is present within 15 minutes after the time
appointed for holding the meeting or if any of them is present and none of them
is willing to act as chairman, the Directors present shall choose one of their
number to be chairman, or if all the Directors present decline to take the chair
or shall fail to so choose or if no Director is present, the members present
shall choose one of their number or any other person to be chairman.
11.7 The chairman of a general meeting may, with the consent of the meeting
if a quorum is present, and shall, if so directed by the meeting, adjourn the
meeting from time to time and from place to place, but no business shall be
transacted at any adjourned meeting other than the business left unfinished at
the meeting from which the adjournment took place. When a meeting is adjourned
for 30 days or more, notice, but not "advance notice", of the adjourned meeting
shall be given as in the case of the original meeting. Save as aforesaid, it
shall not be necessary to give any notice of an adjourned meeting or of the
business to be transacted at an adjourned meeting.
11.8 No motion proposed at a general meeting need be seconded and the
chairman may propose or second a motion.
11.9 Subject to the provisions of the Company Act, every motion or question
submitted to a general meeting shall be decided on a show of hands, unless
(before or on the declaration of the result of the show of hands) a poll is
directed by the chairman or demanded by at least one member entitled to vote who
is present in person or by proxy. The chairman shall declare to the meeting the
decision on every motion or question in accordance with the result of the show
of hands or the poll, and such decision shall be entered in the record of
proceedings of the Company. A declaration by the chairman that a motion or
question has been carried, or carried unanimously, or by a particular majority,
or lost, or not carried by a particular majority and an entry to that effect in
the record of the proceedings of the Company shall be conclusive evidence of the
fact without proof of the number or proportion of the votes recorded in favour
of or against that motion or question.
<PAGE> 16
11.10 The chairman of the meeting shall be entitled to vote any shares
carrying the right to vote held by him but in the case of an equality of votes,
whether on a show of hands or on a poll, the chairman shall not have a second or
casting vote in addition to the vote or votes to which he may be entitled as a
member.
11.11 No poll may be demanded on the election of a chairman. A poll demanded
on a question of adjournment shall be taken forthwith. A poll demanded on any
other question shall be taken as soon as, in the opinion of the chairman, is
reasonably convenient, but in no event later than 7 days after the meeting and
at such time and place and in such manner as the chairman of the meeting
directs. The result of the poll shall be deemed to be the resolution of and
passed at the meeting at which the poll was demanded. Any business other than
that upon which the poll has been demanded may be proceeded with pending the
taking of the poll. A demand for a poll may be withdrawn. In any dispute as to
the admission or rejection of a vote the decision of the chairman made in good
faith shall be final and conclusive.
11.12 Every ballot cast upon a poll and every proxy appointing a proxyholder
who casts a ballot upon a poll shall be retained by the Secretary for such
period and be subject to such inspection as the Company Act may provide.
11.13 On a poll a person entitled to cast more than one vote need not, if he
votes, use all his votes or cast all the votes he uses in the same way.
11.14 Unless the Company Act, the Memorandum or these Articles otherwise
provide, any action to be taken by a resolution of the members may be taken by
an ordinary resolution.
PART 12 - VOTES OF MEMBERS
--------------------------
12.1 Subject to any voting rights or restrictions attached to any class of
shares and the restrictions as to voting on joint registered holders of shares,
on a show of hands every member who is present in person and entitled to vote at
a general meeting or class meeting shall have one vote and on a poll every
member entitled to vote shall have one vote for each share of which he is the
registered holder and may exercise such vote either in person or by proxyholder.
12.2 Any person who is not registered as a member but is entitled to vote
at a general meeting or class meeting in respect of a share, may vote the share
in the same manner as if he were a member but, unless the Directors have
previously admitted his right to vote at that meeting in respect of the share,
he shall satisfy the Directors of his right to vote the share before the time
for holding the meeting, or adjourned meeting, as the case may be, at which he
proposes to vote.
12.3 Any corporation, not being a subsidiary of the Company, which is a
member of the Company may be resolution of its directors or other governing body
authorize such
<PAGE> 17
person as it thinks fit to act as its representative at any general meeting or
class meeting and to speak and vote at any such meeting or to sign resolutions
of members. The person so authorized shall be entitled to exercise in respect of
any at any such meeting the same powers on behalf of the corporation which he
represents as that corporation could exercise if it were an individual member of
the Company personally present, including, without limitation, the right, unless
restricted by such resolution, to appoint a proxyholder to represent such
corporation, and he shall be counted for the purpose of forming a quorum if
present at the meeting. Evidence of the appointment of any such representative
may be sent to the Company by written instrument, telegram, telex, telecopier or
any method of transmitting legibly recorded messages. Notwithstanding the
foregoing, a corporation being a member may appoint a proxyholder.
12.4 In the case of joint registered holders of a share the vote of the
senior who exercises a vote, whether in person or by proxyholder, shall be
accepted to the exclusion of the votes of the other joint registered holders;
and for this purpose seniority shall be determined by the order in which the
names stand in the register of members. Several legal personal representatives
of a deceased member whose shares are registered in his sole name shall for the
purpose of this Article be deemed joint registered holders.
12.5 A member of unsound mind entitled to attend and vote, in respect of
whom an order has been made by any court having jurisdiction, may vote, whether
on a show of hands or on a poll, by his committee, curator bonis, or other
person in the nature of a committee or curator bonis appointed by that court,
and any such committee, curator bonis or other person may appoint a proxyholder.
12.6 A member holding more than one share in respect of which he is
entitled to vote shall be entitled to appoint one or more proxyholders to
attend, act and vote for him on the same occasion. If such a member should
appoint more than one proxyholder for the same occasion he shall specify the
number of shares each proxyholder shall be entitled to vote. A member may also
appoint one or more alternate proxyholders to act in the place and instead of an
absent proxyholder.
12.7 A form of proxy shall be in writing under the hand of the appointor or
of his attorney duly authorized in writing, or, if the appointor is a
corporation, either under the seal of the corporation or under the hand of a
duly authorized officer or attorney.
12.8 Any person may act as proxyholder whether or not he is a member. The
proxy may authorize the proxyholder to act as such for the appointor for such
period, at such meeting or meetings and to the extent permitted by the Company
Act.
12.9 A form of proxy and the power of attorney or other authority, if any,
under which it is signed or a notarially certified copy thereof shall be
deposited at the registered office of the Company or at such other place as is
specified for that purpose in the notice calling the meeting, or shall be
deposited with the chairman of the meeting. In addition to any other method of
depositing proxies provided for in these Articles, the Directors may from time
to time by resolution make regulations relating to the depositing of proxies at
any place
<PAGE> 18
or places and providing for particulars of such proxies to be sent to the
Company or any agent of the Company in writing or by letter, telegram, telex,
telecopies or any method of transmitting legibly recorded messages so as to
arrive before the commencement of the meeting or adjourned meeting at the
registered office of the Company or at the office of any agent of the Company
appointed for the purpose of receiving such particulars and also providing that
proxies so deposited may be acted upon as though the proxies themselves were
deposited as required by this Part, and votes given in accordance with such
regulations shall be valid and shall be counted.
12.10 Unless the Company Act or any other statute or law which is applicable
to the Company or to any class or series of its shares requires any other form
of proxy, a proxy, whether for a specified meeting or otherwise, shall be in the
following form, or in such other form that the Directors or the chairman of the
meeting shall approve:
(Name of Company)
The undersigned, being a member of the above Company, hereby appoints
_______________________________ ___________________ or failing him
_____________________________________________as proxyholder for the undersigned
to attend, act and vote for and on behalf of the undersigned at the general
meeting of the Company to be held on the__________day of____________,19__ and at
any adjournment thereof.
Signed this_____day of__________,19__.
_________________________________
(Signature of member)
12.11 A vote given in accordance with the terms of a proxy is valid
notwithstanding the previous death or incapacity of the member giving the proxy
or revocation of the proxy or of the authority under which the proxy was
executed or transfer of the share or shares in respect of which the proxy is
given unless notification in writing of such death, incapacity, revocation or
transfer shall have been received at the registered office of the Company or by
the chairman of the meeting or adjourned meeting for which the proxy is given
before the vote is taken.
12.12 Every proxy may be revoked by an instrument in writing:
(a) executed by the member giving the same or by his attorney authorized
in writing or, where the member is a corporation, by a duly authorized
officer or attorney of the corporation; and
(b) delivered either at the registered office of the Company at any time
up to and including the last business day preceding the day of the
meeting or adjourned meeting for which the proxy is given, or to the
chairman of the meeting on the
<PAGE> 19
day of the meeting or any adjournment thereof before any vote in
respect of which the proxy is given shall have been taken, or in any
other manner provided by law.
PART 13 - DIRECTORS
-------------------
13.1 The subscribers to the Memorandum of the Company are the first
Directors. The Directors to succeed the first Directors may be appointed in
writing by all the subscribers or by resolution passed at a meeting of the
subscribers or, if not so appointed, they shall be elected by the members
entitled to vote on the election of Directors and the number of Directors shall
be the same as the number of Directors so appointed or elected. The number of
Directors, excluding additional Directors, may be fixed or changed from time to
time by ordinary resolution, whether previous notice thereof has been given or
not, but notwithstanding anything contained in these Articles the number of
Directors shall never be less than one or, if the Company is, or becomes, a
reporting company, less than three.
13.2 The remuneration of the Directors as such may from time to time be
determined by the Directors or, if the Directors shall so decide, by the
members. Such remuneration may be in addition to any salary or other
remuneration paid to any officer or employee of the Company as such who is also
a Director. The Directors shall be repaid such reasonable traveling,
accommodation and other expenses as they incur in and about the business of the
Company and if any Director shall perform any professional or other services for
the Company that in the opinion of the Directors are outside the ordinary duties
of a Director or shall otherwise be specially occupied in or about the Company's
business, he may be paid a remuneration to be fixed by the Board, or, at the
option of such Director, by the Company in general meeting, and such
remuneration may be either in addition to or in substitution for any other
remuneration that he may be entitled to receive. Unless otherwise determined by
ordinary resolution, the Directors on behalf of the Company may pay a gratuity,
pension or retirement allowance to any Director who has held any office or
appointment with the Company or to his spouse or dependents and may make
contributions to any fund and pay premiums for the purchase or provision of any
such gratuity, pension or allowance.
13.3 A Director shall not be required to hold a share in the capital of the
Company as qualification for his office but shall be qualified to become or act
as a Director as required by the Company Act.
PART 14 - ELECTION AND REMOVAL OF DIRECTORS
-------------------------------------------
14.1 At each annual general meeting of the Company all the Directors shall
retire and the members entitled to vote at the meeting shall elect a Board of
Directors consisting of the number of Directors for the time being fixed
pursuant to these Articles. If the Company is, or becomes, a company that is not
a reporting company and all the members entitled to attend and vote at an annual
general meeting consent in writing to the business required to be
<PAGE> 20
transacted at such meeting, the meeting shall be deemed for the purpose of this
Part to have been held on the date specified in the consent or in the
resolutions consented to in writing dealing with such business.
14.2 A retiring Director shall be eligible for re-election.
14.3 Where the Company fails to hold an annual general meeting or the
members fail to consent to the business required to be transacted at such
meeting, the Directors then in office shall be deemed to have been elected or
appointed as Directors on the last day on which the annual general meeting could
have been held pursuant to these Articles and they may continue to hold office
until other Directors are appointed or elected or until the day on which the
next annual general meeting is held.
14.4 If at any general meeting at which there should be an election of
Directors, the places of any of the retiring Directors are not filled by such
election, such of the retiring Directors who are not re-elected as may be
requested by the newly elected Directors shall, if willing to do so, continue in
office to complete the number of Directors for the time being fixed pursuant to
these Articles until further new Directors are elected at a general meeting
convened for the purpose. If any such election or continuance of Directors does
not result in the election or continuance of the number of Directors for the
time being fixed pursuant to these Articles such number shall be fixed at the
number of Directors actually elected or continued in office.
14.5 Any casual vacancy occurring in the Board of Directors may be filled
by the remaining Directors or Director.
14.6 The office of a Director shall be vacated if the Director:
(a) resigns his office by notice in writing delivered to the registered
office of the Company; or
(b) ceases to be qualified to act as a Director pursuant to the Company
Act.
14.7 The Company may by special resolution remove any Director before the
expiration of his period of office and may by an ordinary resolution appoint
another person in his stead.
14.8 Notwithstanding anything contained in these Articles, the Company may
at any time by ordinary resolution, increase the number of Directors previously
fixed or determined and may, by ordinary resolution, elect such person or
persons to fill the vacancy or vacancies thereby created.
14.9 Between successive annual general meetings the Directors shall have
power to appoint one or more additional Directors but the number of additional
Directors shall not at any time exceed 1/3 of the number of Directors elected or
appointed at the last annual general meeting of the Company. Any additional
Director so appointed shall hold office only until
<PAGE> 21
the next following annual general meeting of the Company but shall be eligible
for election at such meeting and so long as he is an additional Director the
number of Directors shall be increased accordingly.
14.10 Any Director may by instrument in writing, telegram, telex, telecopier
or any other method of transmitting legibly recorded messages delivered or sent
to the Company appoint any person to be his alternate to act in his place at
meetings of the Directors at which he is not present unless the Directors shall
have disapproved of the appointment of such person as an alternate and shall
have given notice to that effect to the Director appointing the alternate within
a reasonable time after delivery of such instrument to the Company. Every such
alternate shall be entitled to notice of meetings of the Directors and to attend
and vote as a Director at a meeting at which the person appointing him is not
personally present and, if he is a Director, to have a separate vote on behalf
of the Director by whom he was appointed in addition to his own vote. A Director
may at any time by instrument, telegram, telex, telecopier or any other method
of transmitting legibly recorded messages delivered or sent to the Company
revoke the appointment of an alternate appointed by him. The remuneration
payable to such an alternate shall be payable out of the remuneration of the
Director appointing him.
PART 15 - POWERS AND DUTIES OF DIRECTORS
----------------------------------------
15.1 The Directors shall manage, or supervise the management of, the
affairs and business of the Company and shall have authority to exercise all
such powers of the Company as are not, by the Company Act, the Memorandum of the
Company or these Articles, required to be exercised by the Company in general
meeting.
15.2 The Directors may from time to time by power of attorney or other
instrument under the seal of the Company appoint any person to be the attorney
of the Company for such purposes, and with such powers, authorities and
discretions (not exceeding those vested in or exercisable by the Directors under
these Articles and excepting the powers of the Directors relating to the
constitution of the Board and of any of its committees and the appointment or
removal of officers and the power to declare dividends) and for such period,
with such remuneration and subject to such conditions as the Directors may think
fit, and any such appointment may be made in favour of any of the Directors or
any of the members of the Company or in favour of any corporation, or any of the
members, directors, nominees or managers of any corporation, firm or joint
venture and any such power of attorney may contain such provisions for the
protection or convenience of persons dealing with such attorney as the Directors
think fit. Any such attorney may be authorized by the Directors to sub-delegate
all or any of the powers, authorities and discretions for the time being vested
in him.
<PAGE> 22
PART 16 - DISCLOSURE OF INTEREST OF DIRECTORS
---------------------------------------------
16.1 A Director who is, in any way, directly or indirectly interested in an
existing or proposed contract or transaction with the Company or who holds any
office or possesses any property whereby, directly or indirectly, a duty or
interest might be created to conflict with his duty or interest as a Director
shall declare the nature and extent of his interest in such contract or
transaction or of the conflict or potential conflict with his duty and interest
as a Director, as the case may be, in accordance with the provisions of the
Company Act.
16.2 A Director shall not vote in respect of any such contract or
transaction with the Company in which he is interest and if he shall do so his
vote shall not be counted, but he shall be counted in the quorum present at the
meeting at which such vote is taken. Subject to the provisions of the Company
Act, the foregoing prohibitions shall not apply to:
(a) any such contract or transaction relating to a loan to the Company,
which a Director or a specified corporation or a specified firm in
which he has an interest has guaranteed or joined in guaranteeing the
repayment of the loan or any part of the loan;
(b) any contract or transaction made or to be made with, or for the
benefit of a holding corporation or a subsidiary corporation of which
a Director is a director;
(c) any contract by a Director to subscribe for or underwrite shares or
debentures to be issued by the Company or a subsidiary of the Company,
or any contract, arrangement or transaction in which a Director, is
directly or indirectly, interested if all the other Directors are
also, directly or indirectly interested in the contract, arrangement
or transaction;
(d) determining the remuneration of the Directors;
(e) purchasing and maintaining insurance to cover Directors against
liability incurred by them as Directors; or
(f) the indemnification of any Director or officer by the Company.
The foregoing exceptions may from time to time be suspended or amended to any
extent approved by the Company in general meeting and permitted by the Company
Act, either generally or in respect of any particular contract or transaction or
for any particular period.
16.3 A director may hold any office or appointment with the Company (except
as auditor of the Company) in conjunction with his office of Director for such
period and on such terms (as to remuneration or otherwise) as the Directors may
determine and no Director or intended Director shall be disqualified by his
office from contracting with the Company either with regard to his tenure of any
such other office or appointment or as vendor, purchaser or otherwise and,
subject to compliance with the provisions of the Company Act, no contract or
transaction entered into by or on behalf of the Company in which a Director is
in any way interested shall be liable to be voided by reason thereof.
<PAGE> 23
16.4 Subject to compliance with the provisions of the Company Act, a
Director or his firm may act in a professional capacity for the Company (except
as auditor of the Company) and he or his firm shall be entitled to remuneration
for professional services as if he were not a Director.
16.5 A Director may be or become a director or officer or employee of, or
otherwise interested in, any corporation or firm in which the Company may be
interested as a member or otherwise, and, subject to compliance with the
provisions of the Company Act, such Director shall not be accountable to the
Company for any remuneration or other benefits received by him as director,
officer or employee of, or from his interest in, such other corporation or firm,
unless the Company in general meeting otherwise directs.
PART 17 - PROCEEDINGS OF DIRECTORS
----------------------------------
17.1 The Chairman of the Board or, in his absence or if there is no
Chairman of the Board, the President shall preside as chairman at every meeting
of the Directors.
17.2 If at any meeting of Directors neither the Chairman of the Board nor
the President is present within 15 minutes after the time appointed for holding
the meeting or if either of them is present but is not willing to act as
chairman or if the Chairman of the Board, if any, and the President have advised
the Secretary that they will not be present at the meeting, the Directors
present shall choose one of their number to be chairman of the meeting.
17.3 The Directors may meet together for the dispatch of business, adjourn
and otherwise regulate their meetings as they think fit. Questions arising at
any meeting shall be decided by a majority of votes. In case of an equality of
votes the chairman shall not have a second or casting vote.
17.4 A director may participate in a meeting of the Board or of any
committee of Directors by means of telephone or other communications facility by
means of which all Directors participating in the meeting can hear each other
and provided that all such Directors agree to such participation. A meeting so
held in accordance with this Article shall be deemed to be an actual meeting of
the Board and any resolution passed at such meeting shall be as valid and
effectual as if it had been passed at a meeting where the Directors are
physically present. A Director participating in a meeting in accordance with
this Article shall be deemed to be present at the meeting and to have so agreed
and shall be counted in the quorum therefor and be entitled to speak and vote at
the meeting.
17.5 A Director may at any time, and the Secretary or an Assistant
Secretary upon request of a Director shall, call a meeting of the Board.
17.6 Notice of a meeting of the Board shall be given to each Director and
alternate Director at least 48 hours before the time fixed for the meeting and
may be given orally, personally or by telephone, or in writing, personally or by
delivery through the post or by
<PAGE> 24
letter, telegram, telex, telecopier or any other method of transmitting
legibly recorded messages in common use. When written notice of a meeting is
given to a Director, it shall be addressed to him at his registered address.
Where the Board has established a fixed time and place for the holding of its
meetings, no notices of meetings to be held at such fixed time and place need be
given to any Director. A Director entitled to notice of a meeting may waive or
reduce the period of notice convening the meeting and may give such waiver
before, during or after the meeting.
17.7 For the first meeting of the Board to be held immediately following
the election of a Director at an annual general meeting of the Company or for a
meeting of the Board at which a Director is appointed to fill a vacancy on the
Board, no notice of such meeting shall be necessary to such newly appointed or
elected Director in order for the meeting to be properly constituted.
17.8 Any Director who may be absent temporarily from the Province may file
at the registered office of the Company a waiver of notice, which may be by
letter, telegram, telex, telecopier or any other method of transmitting legibly
recorded messages, of meetings of the Directors and may at any time withdraw the
waiver, and until the waiver is withdrawn, no notice of meetings of Directors
shall be sent to that Director, and any and all meetings of Directors, notice of
which has not been given to that Director shall, provided a quorum of the
Directors is present, be valid and effective.
17.9 The quorum necessary for the transaction of the business of the
Directors may be fixed by the Directors and if not so fixed shall be a majority
of the Directors or, if the number of Directors is fixed at one, shall be one
Director.
17.10 The continuing Directors may act notwithstanding any vacancy in their
body but, notwithstanding Article 17.9, if and so long as their number is
reduced below the number fixed pursuant to these Articles as the necessary
quorum of Directors, the continuing Directors may not for the purpose of
increasing the number of Directors to that number or of summoning a general
meeting of the Company, but for no other purpose.
17.11 Subject to the provisions of the Company Act, all acts done by any
meeting of the Directors or of a committee of Directors, or by any person acting
as a Director, shall, notwithstanding that it be afterwards discovered that
there was some defect in the qualification, election or appointment of any such
Directors or of the members of such committee or person acting as aforesaid, or
that they or any of them were disqualified, be as valid as if every such person
had been duly elected or appointed and was qualified to be a Director.
17.12 A resolution consented to in writing, whether by document, telegram,
telex, telecopier or any method of transmitting legibly recorded messages or
other means, by all of the Directors for the time being in office without their
meeting together shall be as valid and effectual as if it had been passed at a
meeting of the Directors duly called and held, shall be deemed to relate back to
any date stated therein to be the effective date thereof and shall be filed in
the minute book of the Company accordingly. Any such resolution may consist of
<PAGE> 25
one or several documents each duly signed by one or more Directors which
together shall be deemed to constitute one resolution in writing.
PART 18 - EXECUTIVE AND OTHER COMMITTEES
----------------------------------------
18.1 The Directors may by resolution appoint an Executive Committee
consisting of such member or members of the Board as they think fit, which
Committee shall have, and may exercise during the intervals between the meetings
of the Board, all the powers vested in the Board except the power to fill
vacancies in the Board, the power to change the membership of or fill vacancies
in said Committee or any other committee of the Board and such other powers, if
any, as may be specified in the resolution. The said Committee shall keep
regular minutes of its transactions and shall cause them to be recorded in books
kept for that purpose, and shall report the same to the Board of Directors at
such times as the Board of Directors may from time to time require. The Board
shall have the power at any time to revoke or override the authority given to or
acts done by the Executive Committee except as to acts done before such
revocation or overriding and to terminate the appointment or change the
membership of such Committee and to fill vacancies in it.
18.2 The Directors may by resolution appoint one or more other committees
consisting of such member or members of the Board as they think fit and may
delegate to any such committee between meetings of the Board such powers of the
Board (except the power to fill vacancies in the Board, the power to change the
membership of or fill vacancies in any committee of the Board, the power to
appoint or remove officers appointed by the Board and such other powers as may
be specified in the resolution) subject to such conditions as may be prescribed
in such resolution, and all committees so appointed shall keep regular minutes
of their transactions and shall cause them to be recorded in books kept for that
purpose, and shall report the same to the Board of Directors at such times as
the Board of Directors may from time to time require. The Directors shall also
have power at any time to revoke or override any authority given to or acts to
be done by any such committee except as to acts done before such revocation or
overriding and to terminate the appointment or change the membership of a
committee and to fill vacancies in it.
18.3 Committees appointed under this Part may make rules for the conduct of
their business and may appoint such assistants as they may deem necessary. A
majority of the members of a committee shall constitute a quorum thereof.
18.4 Committees appointed under this Part may meet and adjourn as they
think proper. Questions arising at any meeting of a committee shall be
determined by a majority of votes of the members of the committee present, and
in case of an equality of votes the chairman shall not have a second or casting
vote. The provisions of Article 17.12 shall apply mutatis mutandis to
resolutions consented to in writing by the members of a committee appointed
under this Part.
<PAGE> 26
PART 19 - OFFICERS
------------------
19.1 The Directors shall from time to time appoint a President and a
Secretary and such other officers, if any, as the Directors shall determine and
the Directors may at any time terminate any such appointment. No officer shall
be appointed unless he is qualified in accordance with the provisions of the
Company Act.
19.2 One person may hold more than one of such offices except that the
offices of President and Secretary shall be held by different persons unless the
Company has only one member. Any person appointed as the Chairman of the Board,
President or Managing Director shall be a Director. The other officers need not
be Directors.
19.3 The remuneration of the officers of the Company as such and the terms
and conditions of their tenure of office or employment shall from time to time
be determined by the Directors. Such remuneration may be by way of salary, fees,
wages, commission or participation in profits or any other means or all of these
modes and an officer may in addition to such remuneration be entitled to receive
after he ceases to hold such office or leaves the employment of the Company a
gratuity, pension or retirement allowance.
19.4 The Directors may decide what functions and duties each officer shall
perform and may entrust to and confer upon him any of the powers exercisable by
them upon such terms and conditions and with such restrictions as they think fit
and may from time to time revoke, withdraw, alter or vary all or any of such
functions, duties and powers. The Secretary shall, inter alia, perform the
functions of the secretary specified in the Company Act.
19.5 Every officer of the Company who holds any office or possesses any
property whereby, whether directory or indirectly, duties or interests might be
created in conflict with his duties or interests as an officer of the Company
shall, in writing, disclose to the President the fact and the nature, character
and extent of the conflict.
PART 20 - INDEMNITY AND PROTECTION
----------------------------------
OF DIRECTORS, OFFICERS AND EMPLOYEES
------------------------------------
20.1 Subject to the provisions of the Company Act, the Directors may, with
the approval of the Court, cause the Company to indemnify a Director or former
Director of the Company or a director or former director of a corporation of
which the Company is or was a member, and the heirs and personal representatives
of any such person, against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment, actually and reasonably incurred
by him, including an amount paid to settle an action or satisfy a judgment in a
civil, criminal or administrative action or proceeding to which he is made a
party by reason of being or having been a Director of the Company or a director
of such corporation, including any action or proceeding brought by the Company
or any such corporation. Each Director of the Company on being elected or
appointed shall be deemed to have contracted with the Company on the terms of
the foregoing indemnity.
<PAGE> 27
20.2 Subject to the provisions of the Company Act, the Directors may cause
the Company to indemnify any officer, employee or agent of the Company or of a
corporation of which the Company is or was a member (notwithstanding that he is
also a Director) and his heirs and personal representatives against all costs,
charges and expenses whatsoever incurred by him and resulting from his acting as
an officer, employee or agent of the Company or such corporation. In addition
the Company shall indemnify the Secretary or an Assistant Secretary of the
Company (if he shall not be a full time employee of the Company and
notwithstanding that he is also a Director) and his heirs and personal
representatives against all costs, charges and expenses whatsoever incurred by
him and arising out of the functions assigned to the Secretary by the Company
Act or these Articles. Each such Secretary and Assistant Secretary on being
appointed shall be deemed to have contracted with the Company on the terms of
the foregoing indemnity.
20.3 For the purposes of Article 20.1, a civil, criminal or administrative
action or proceeding shall include a civil, criminal, administrative or other
investigation or enquiry the subject of which concerns the acts or conduct of
the Director or former Director of the Company while a Director of the Company.
20.4 The failure of a Director or officer of the Company to comply with the
provisions of the Company Act, the Memorandum of the Company or these Articles
shall not invalidate any indemnity to which he is entitled under this Part.
20.5 The Directors may cause the Company to purchase and maintain insurance
for the benefit of any person who is or was serving as a Director, officer,
employee or agent of the Company or as a director, officer, employee or agent of
any corporation of which the Company is or was a member and his heirs or
personal representatives against any liability incurred by him as such Director,
director, officer, employee or agent.
PART 21 - DIVIDENDS AND RESERVE
-------------------------------
21.1 The Directors may from time to time declare and authorize payment of
such dividends, if any, as they may deem advisable and need not give notice of
such declaration to any member. No dividend shall be paid otherwise than out of
funds or assets properly available for the payment of dividends and a
declaration by the Directors as to the amount of such funds or assets available
for dividends shall be conclusive. The Company may pay any such dividend wholly
or in part by the distribution of specific assets and in particular by paid up
shares, bonds, debentures or other securities of the Company or any other
corporation or in any one or more such ways as may be authorized by the Company
or the Directors and where any difficulty arises with regard to such a
distribution the Directors may settle the same as they think expedient, and in
particular may fix the value for distribution of such specific assets or any
part thereof, and may determine that cash payments in substitution for all or
any part of the specific assets to which any members are entitled shall be made
to any members on the basis of the value so fixed in order to adjust the rights
of all parties and may vest any such specific assets in trustees for the persons
entitled to the dividend as may seem expedient to the Directors.
<PAGE> 28
21.2 Any dividend declared on shares of any class may be made payable on
such date as is fixed by the Directors.
21.3 Subject to the rights of members, if any, holding shares with special
rights as to dividends, all dividends on shares of any class shall be declared
and paid according to the number of such shares held.
21.4 The Directors may, before declaring any dividend, set aside out of the
funds properly available for the payment of dividends such sums as they think
proper as a reserve or reserves, which shall, at the discretion of the
Directors, be applicable for meeting contingencies or for equalizing dividends
or for any other purpose to which such funds of the Company may be properly
applied, and pending such application may, at the like discretion, either be
employed in the business of the Company or be invested in such investments as
the Directors may from time to time think fit. The Directors may also, without
placing the same in reserve, carry forward such funds which they think prudent
not to divide.
21.5 If several persons are registered as joint holders of any share, any
one of them may give an effective receipt for any dividend, interest or other
moneys payable in respect of the share.
21.6 No dividend shall bear interest. Where the dividend to which a member
is entitled includes a fraction of a cent, such fraction shall be disregarded in
making payment thereof and such payment shall be deemed to be payment in full.
21.7 Any dividend, interest or other moneys payable in respect of shares
may be paid by cheque or warrant sent by mail directed to the registered address
of the holder, or in the case of joint holders, to the registered address of
that one of the joint holders who is first named on the register, or to such
person and to such address as the holder or joint holders may direct in writing.
Every such cheque or warrant shall be made payable to the order of the person to
whom it is sent. The mailing of such cheque or warrant shall, to the extent of
the sum represented thereby (plus the amount of any tax required by law to be
deducted) discharge all liability for the dividend, unless such cheque or
warrant shall not be paid on presentation or the amount of tax so deducted shall
not be paid to the appropriate taxing authority.
21.8 Notwithstanding anything contained in these Articles the Directors may
from time to time capitalize any undistributed surplus on hand of the Company
and may from time to time issue as fully paid and non-assessable any unissued
shares or any bonds, debentures or other debt obligations of the Company as a
dividend representing such undistributed surplus on hand or any part thereof.
21.9 A transfer of a share shall not pass the right to any dividend
declared thereon before the registration of the transfer in the register.
<PAGE> 29
PART 22 - RECORD DATES
----------------------
22.1 The Directors may fix in advance a date, which shall not be more than
the maximum number of days permitted by the Company Act preceding the date of
any meeting of members or any class or series thereof or of the payment of any
dividend or of the proposed taking of any other proper action requiring the
determination of members, as the record date for the determination of the
members entitled to notice of, or to attend and vote at, any such meeting and
any adjournment thereof, or entitled to receive payment of any such dividend or
for any other proper purpose and, in such case, notwithstanding anything
elsewhere contained in these Articles, only members of record on the date so
fixed shall be deemed to be members for the purposes aforesaid.
22.2 Where no record date is so fixed for the determination of members as
provided in the preceding Article the date on which the notice is mailed or on
which the resolution declaring the dividend is passed, as the case may be, shall
be the record date for such determination.
PART 23 - DOCUMENTS, RECORDS AND FINANCIAL STATEMENTS
-----------------------------------------------------
23.1 The Company shall keep at its records office or at such other place as
the Company Act may permit, the documents, copies, registers, minutes, and
records which the Company is required by the Company Act to keep at its records
office or such other place, as the case may be.
23.2 The Company shall cause to be kept proper books of account and
accounting records in respect of all financial and other transactions of the
Company in order properly to record the financial affairs and condition of the
Company and to comply with the Company Act.
23.3 Unless the Directors determine otherwise or unless otherwise
determined by an ordinary resolution, no member of the Company shall be entitled
to inspect the accounting records of the Company.
23.4 The Directors shall from time to time at the expense of the Company
cause to be prepared and laid before the Company in general meeting such
financial statements and reports as are required by the Company Act.
23.5 Every member shall be entitled to be furnished once gratis on demand
with a copy of the latest annual financial statement of the Company and, if so
required by the Company Act, a copy of each such annual financial statement and
interim financial statement shall be mailed to each member.
<PAGE> 30
PART 24 - NOTICES
-----------------
24.1 A notice, statement or report may be given or delivered by the Company
to any member either by delivery to him personally or by sending it by mail to
him to his address as recorded in the register of members. Where a notice,
statement or report is sent by mail, service or delivery of the notice,
statement or report shall be deemed to be effected by properly addressing and
mailing the notice, statement or report and to have been given on the day,
Saturdays, Sundays and holidays excepted, following the date of mailing. A
certificate signed by the Secretary or other officer of the Company or of any
other corporation acting in that behalf for the Company that the letter,
envelope or wrapper containing the notice, statement or report was so addressed
and mailed shall be conclusive evidence thereof.
24.2 A notice, statement or report may be given or delivered by the Company
to the joint holders of a share by giving or delivering it to the joint holder
first named in the register of members in respect of that share.
24.3 A notice, statement or report may be given or delivered by the Company
to the persons entitled to a share in consequence of the death, bankruptcy or
incapacity of a member by sending it through the mail addressed to them by name
or by the title of representatives of the deceased or incapacitated person or
trustee of the bankrupt, or by any like description, at the address, if any,
supplied to the Company for the purpose by the persons claiming to be so
entitled or, until such address has been so supplied, by giving it in a manner
in which the same might have been given if the death, bankruptcy or incapacity
had not occurred.
24.4 Notice of every general meeting or meeting of members holding shares
of a class or series shall be given in a manner hereinbefore authorized to every
member holding at the time of the issue of the notice or the date fixed for
determining the members entitled to such notice, whichever is the earlier,
shares which confer the right to notice of and to attend and vote at any such
meeting. No other person except the auditor of the Company and the Directors of
the Company shall be entitled to receive notices of any such meeting.
PART 25 - SEAL
--------------
25.1 The Directors may provide a seal for the Company and, if they do so,
shall provide for the safe custody and use of the seal which shall not be
affixed to any instrument except in the presence of, or attested by the
signatures of, the following persons, namely:
(a) any two Directors, or
(b) any one of the Chairman of the Board, the President, the Managing
Director, a Director and a Vice-President together with any one of the
Secretary, the Treasurer, the Secretary-Treasurer, an Assistant
Secretary, an Assistant Treasurer and an
Assistant-Secretary-Treasurer,
or
<PAGE> 31
(c) if the Company shall have only one member, the President or the
Secretary, or
(d) such person or persons as the Directors may from time to time by
resolution appoint, and any such resolution may be general in its
nature,
and the said Directors, officers, person or persons in whose presence the seal
is so affixed to an instrument shall sign such instrument. For the purpose of
certifying under seal true copies of any document or resolution the seal may be
affixed in the presence of any one of the foregoing persons.
25.2 To enable the seal of the Company to be affixed to any bonds,
debentures, share certificates, or other securities of the Company, whether in
definitive or interim form, on which facsimiles of any of the signatures of the
Directors or officers of the Company are, in accordance with the Company Act or
these Articles, printed or otherwise mechanically reproduced there may be
delivered to the firm or company employed to engrave, lithograph or print such
definitive or interim bonds, debentures, share certificates or other securities
one or more unmounted dies reproducing the Company's seal and the Chairman of
the Board, the President, the Managing Director or a Vice-President and the
Secretary, Treasurer, Secretary-Treasurer, an Assistant Secretary, an Assistant
Treasurer or an Assistant Secretary-Treasurer may be a document authorize such
firm or company to cause the Company's seal to be affixed to such definitive or
interim bonds, debentures, share certificates or other securities by the use of
such dies. Bonds, debentures, share certificates or other securities to which
the Company's seal has been so affixed shall for all purposes be deemed to be
under and to bear the Company's seal lawfully affixed thereto.
PART 26 - PROHIBITIONS
----------------------
26.1 If the Company is, or becomes, a company which is not a reporting
company, the number of persons who beneficially own designated securities of the
Company (counting any two or more joint registered owners as one beneficial
owner) shall be limited to 50, excluding persons that:
(a) are employed by the Company or an affiliate of it, or
(b) beneficially owned, directly or indirectly, designated securities of
the Company while employed by it or by an affiliate of it and, at all
times since ceasing to be so employed, have continued to beneficially
own, directly or indirectly, at least one designated security of the
Company.
26.2 If the Company is, or becomes, a company which is not a reporting
company, no designated securities of the Company, and no securities that are
convertible into or exchangeable for designated securities of the Company, shall
be:
(a) offered for sale to the public; or
<PAGE> 32
(b) transferred without the previous consent of the Directors expressed by
a resolution of the Board and the Directors shall not be required to
give any reason for refusing to consent to any such proposed transfer.
<PAGE> 1
ARTICLES OF AMENDMENT
TO
ARTICLES OF CONTINUANCE OF
BIOMETRIC SECURITY CORP.
Pursuant to Wyo. Stat. ss. 17-16-1001 through 1009 of the Wyoming
Business Corporation Act, the undersigned hereby submits the following Articles
of Amendment:
1. The name of the corporation is BIOMETRIC SECURITY CORP. (the
"Corporation").
2. Article 7 of the Articles of Continuance is amended to provide that
the number of shares of common stock that the Corporation has the authority to
issue is amended from 100,000,000 shares with no par value, to an unlimited
number of shares with no par value. Accordingly, Article 7 of the Articles of
Continuance shall read as follows:
The aggregate number of shares or other ownership units which the
Corporation has the authority to issue, itemized by classes, par value
of shares, shares without par value, and series, if any, within a class
is:
NUMBER OF PAR VALUE
SHARES CLASS SERIES PER SHARE
--------- ----- ------ ---------
Unlimited Common n/a no par value
3. The amendment was adopted on October 9, 1998, by the shareholders.
4. The designation, number of outstanding shares, number of votes
entitled to be cast by each voting group entitled to vote separately on the
amendment, and the number of votes of each voting group indisputably represented
at the meeting.
NUMBER OF VOTES
NUMBER OF REPRESENTED AT THE
DESIGNATION OUTSTANDING SHARES MEETING
- ----------- ------------------ ------------------
Common 19,923,962 4,858,568
------------------ ------------------
5. The total number of undisputed votes cast for the amendment was
4,833,862 . The number cast for the amendment by each voting group was
- ---------
sufficient for approval by that voting group.
-1-
<PAGE> 2
6. This amendment does not provide for an exchange, reclassification,
or cancellation of any issued shares of the Corporation.
DATED this 10th day of November, 1998.
BIOMETRIC SECURITY CORP.
By: /s/ Wayne Johnstone
-----------------------------
Wayne Johnstone
Title: Director
PROVINCE OF B.C. )
) ss
CITY OF VANCOUVER )
I, Pamela J. Egger, Notary Public, do hereby certify that on this 10th
day of November, 1998, before me personally appeared Wayne Johnstone, who being
by me first duly sworn, declared that he signed the foregoing document as
director of the corporation, and that the statements therein are true.
In witness whereof, I have hereunto set my hand and seal this 10th day
of November, 1998.
/s/ Pamela J. Egger
----------------------------
Pamela J. Egger
Notary Public
-2-
<PAGE> 1
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
among
BIOMETRIC IDENTIFICATION, INC.,
a California corporation,
ARETE ASSOCIATES, INC.,
a California corporation
AND
SONOMA RESOURCE CORP.,
a corporation organized under the laws of
British Columbia, Canada
$5,000,000 Convertible Debentures Due 2003
June 11, 1998
<PAGE> 2
TABLE OF CONTENTS
-----------------
PAGE
----
1 Definitions
2 Sale of Purchase and of Debentures
2.1 Authorization and Issuance of Debentures
2.2 Purchase and Sale of Debentures
2.3 Closing
2.4 Transfer Restrictions
3 Payment of Debentures
3.1 Payment Terms
3.2 Allocation of Payments
3.3 Taxes
4A. Representations and Warranties of Obligor
4A.1 Corporate Existence and Power
4A.2 Corporate Authority
4A.3 Binding Effect
4A.4 Capital Stock
4A.5 No Conflict
4A.6 Consents
4A.7 Assets and Properties
4A.8 Taxes
4A.9 Broker's or Finder's Commissions
4A.10 Labor Matters
4A.11 Environmental Matters
4A.12 Compliance with Applicable Law; Permits, Licenses and Authorizations
4A.13 Employee Matters; Compliance with ERISA
4A.14 Material Contracts
4A.15 Insurance
4A.16 Intellectual Property
4A.17 Customers and Suppliers
4A.18 Certain Transactions
4A.19 Business Operations and Other Information; Financial Condition
4A.20 Disclosure
4A.21 Offering of Securities
4A.22 Financial Projections
4A.23 Manpower and Tax Sharing Agreement
4A.24 Sole Business
4A.25 Transaction Documents
4A.26 No Litigation
4B. Representations and Warranties of Arete
4B.1 Corporate Existence and Power
4B.2 Corporate Authority
4B.3 Binding Effect
4B.4 No Conflict
4B.5 Consents
4B.6 Assets and Properties
4B.7 Taxes
4B.8 Labor Matters
4B.9 Environmental Matters
4B.10 Compliance with Applicable Law; Permits, Licenses and Authorizations
<PAGE> 3
4B.11 Employee Matters; Compliance with ERISA
4B.12 Intellectual Property
4B.13 Customers and Suppliers
4B.14 Business Operations and Other Information; Financial Condition
4B.15 Disclosure
4B.16 Offering of Securities
4B.17 Manpower and Tax Sharing Agreement
4B.18 Sole Business
4B.19 Transaction Documents
4B.20 No Litigation
5 Representations and Warranties of Purchaser
5.1 Investment Intent
5.2 Corporate Existence and Power
5.3 Corporate Authority
5.4 Binding Effect
5.5 Financing
5.6 No Conflict
5.7 Consents
5.8 No Litigation
5.9 Transaction Documents
5.10 Broker's or Finder's Commissions
5.11 Access
6A Conditions to Purchaser's Obligation to Close
6A.1 Proceedings Satisfactory
6A.2 Opinions of Counsel for Obligor and Arete
6A.3 Representations and Warranties True
6A.4 Absence of Material Adverse Change, Etc.
6A.5 Consents and Approvals
6A.6 Absence of Litigation, Orders, Etc.
6A.7 Recapitalization
6A.8 License
6A.9 Manpower and Tax Sharing Agreement
6A.10 Agreements of Certain Persons
6A.11 Export Permits
6B. Conditions of Obligor's Obligation to Close
6B.1 Representations and Warranties True
6B.2 Absence of Litigation, Orders, Etc.
7 Affirmative Covenants
7.1 Use of Proceeds
7.2 Payment of Obligations
7.3 Payment of Taxes and Claims
7.4 Maintenance of Properties and Books
7.5 Inspection of Properties and Books
7.6 Initial Public Offering; Additional Financing
7.7 Registration Rights
7.8 Events of Default
7.9 Non-Competition
7.10 Further Assurances
8 Negative and Maintenance Covenants
8.1 Restrictions on Liens
8.2 Limitation on Sale and Leasebacks
8.3 Mergers, Consolidations and Sales of Assets; Acquisitions;
Subsidiaries
<PAGE> 4
8.4 Conduct of Business
8.5 Transactions with Affiliates
8.6 Amendments of Charter, By-Laws and Certain Documents
9 Financial Statements and Information
10 Events of Default
10.1 Events of Default; Remedies
10.2 Suits for Enforcement; Remedies
10.3 Remedies Cumulative
10.4 Remedies Not Waived
11 Conversion of Debentures
11.1 Conversion of Debentures
11.2 Conversion Price
11.3 Exercise of Conversion Privilege
11.4 No Dilution or Impairment
11.5 Issuance of Additional Shares
11.6 Fractional Shares
11.7 Notices of Certain Events
12 Deliveries
13 Termination
14 Registration, Exchange, and Transfer of Debentures
15 Lost, Stolen, Damaged and Destroyed Debentures
16 Board Constitution; Representation and Action
17 Prior Advance
18 Miscellaneous
18.1 Amendment and Waiver
18.2 Expenses
18.3 Survival of Representations and Warranties
18.4 Successors and Assigns
18.5 Administrative Agent
18.6 Notices
18.7 Certain Acknowledgments
18.8 Public Announcements
18.9 No Fiduciary Relationship
18.10 Integration and Severability
18.11 Counterparts
18.12 Governing Law
<PAGE> 5
INDEX OF SCHEDULE REFERENCES
Schedule 1.72
Schedule 2.2
Schedule 4A.4
Schedule 4A.4(b)
Schedule 4A.7
Schedule 4A.13
Schedule 4A.14
Schedule 4A.16(a)
Schedule 4A.16(b)
Schedule 4A.16(e)
Schedule 4A.16(f)
Schedule 4A.16(h)
Schedule 4A.18
Schedule 4A.26
Schedule 4B.6
Schedule 4B.9
Schedule 5.7
Schedule 11.2
LIST OF EXHIBITS
EXHIBIT A
EXHIBIT B
EXHIBIT C
EXHIBIT E
EXHIBIT F
EXHIBIT G
EXHIBIT H
<PAGE> 6
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
This CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (this "Agreement") is
made and entered into as of June 11, 1998, by and among BIOMETRIC
IDENTIFICATION, INC., a California corporation ("Obligor"), ARETE ASSOCIATES, a
California corporation ("Arete"), and SONOMA RESOURCE CORP., a corporation
organized under the laws of British Columbia, Canada ("Purchaser").
NOW, THEREFORE, the parties agree as follows:
SECTION 1 DEFINITIONS. Unless the context otherwise requires, the terms defined
in this Section I shall have the meanings specified below.
1.1 "Additional Capital Stock" has the meaning set forth in Section
11.5.
1.2 "Administaff" means Administaff Companies, Inc., a Delaware
corporation, and any successor or assignee thereof.
1.3 "Affiliate" means any Person which directly or indirectly
controls, is controlled by, or is under common control with, the indicated
Person.
1.4 "Agreement" means this Convertible Debenture Purchase Agreement,
as such agreement may be amended from time to time, together with all Exhibits
and Schedules hereto.
1.5 "Amended and Restated Articles" means the Amended and Restated
Articles of Obligor to be filed with the California Secretary of State pursuant
to Section 6A. 7a, in the form of Exhibit A.
1.6 "Amended and Restated Memorandum of Agreement " means that
certain Amended and Restated Memorandum of Agreement dated May 20, 1998, among
Obligor, Arete and RECC.
1.7 "Arete Financial Statements" means the audited Balance Sheet and
Income Statement for Arete for each of the years ended December 31, 1997, 1996
and 1995 as of such date and Arete's Unaudited Balance Sheet and Income
Statement for the three month period ended March 31, 1998, copies of which are
attached hereto as Exhibit B.
1.8 "Arete's Knowledge " means the actual knowledge, after reasonable
investigation, of Steve Lubard.
1.9 "Balance Sheet Date" means the date of Obligor's most recently
audited Balance Sheet.
1.10 "Bankruptcy Code" means 11 U.S.C. Sec. 101 et seq., as from time
to time hereafter amended, and any successor or similar statute.
1.11 "Business" means the development, manufacture, marketing,
distribution and sale of technology and devices that recognize fingerprints, and
the licensing of computer software and technology related thereto.
1.12 "Capital Stock" means and includes any and all shares, interests,
participations or other equivalents of or interests in (however designated)
corporate stock, including, without limitation, shares of preferred stock and
any warrant, option or other right to acquire the same.
1.13 "Change of Control" means any of the following: (i) completion of
a tender offer or exchange offer for 50% or more of the outstanding shares of
any Capital Stock of Obligor or securities of Obligor issued in substitution
therefor after the date hereof (other than a tender offer or exchange offer made
by Obligor); (ii) merger, consolidation or other transaction as a result of
<PAGE> 7
which less than 50% of the outstanding Voting Stock (or securities issued in
substitution therefor) of the surviving or resulting entity shall be owned in
the aggregate, directly or indirectly, by the stockholders of Obligor as the
same shall have existed immediately prior to such transaction; (iii) liquidation
or dissolution of Obligor; or (iv) sale or exchange or other disposition of all
or any material part of the Technology or the Intellectual Property or all or
substantially all of the assets of Obligor.
1.14 "Closing Date" has the meaning set forth in Section 2.2.
1.15 "Code" means the Internal Revenue Code of 1986, as amended, or
any similar federal statute then in effect, together with the rules and
regulations promulgated thereunder.
1.16 "Commission" means the United States Securities and Exchange
Commission or any successor agency.
1.17 "Common Stock" means the common stock, without par value, of
Obligor.
1.18 "Conversion Stock" means stock into which the Debentures are
converted, directly or indirectly, including Series A Preferred Stock and Common
Stock.
1.19 "Copyright Rights" means all rights in and to all copyrights
associated with the Technology, together with all registrations (if any) and all
goodwill associated therewith.
1.20 "Currier Matter" has the meaning set forth in Section 4A.10.
1.21 "Debenture" and "Debentures" mean the debentures that are issued
pursuant to this Agreement, as well as any debenture issued in exchange therefor
or in substitution or replacement thereof, convertible into shares of Series A
Preferred Stock, such Debenture evidenced by one or more certificates
substantially in the form of Exhibit C.
1.22 "Debenture Purchase Request" has the meaning set forth in Section
2.2.
1.23 "Default" means any event or condition which, with due notice or
lapse of time or both, would become an Event of Default.
1.24 "Default Rate" means (i) 5% over the Imputed Rate or (ii) the
highest rate permitted by law, whichever is less.
1.25 "Dollars" shall mean United States dollars, unless otherwise
specifically delineated as Canadian dollars.
1.26 "Effective Date" means the date the last of all of the following
have occurred: (a) the execution of the Amended and Restated Memorandum of
Agreement, (b) the delivery by Obligor to Purchaser of an unaudited balance
sheet with full notes as of April 30, 1998, and an audited income statement for
the year ended December 31, 1997, and an unaudited internal BII income statement
for the four month period ended January 1, 1998 to April 30, 1998, (c) the
delivery by Obligor to Purchaser of a pro forma balance sheet reflecting the
recapitalization of Obligor, (d) the completion of a manpower plan between
Obligor and Arete, (e) the execution of a technology license agreement between
Obligor and Arete, (f) the finalization of Obligor's Stock Incentive Plan, (g)
the filing of BII's Amended and Restated Articles with the California Secretary
of State and (h) the execution and delivery of such other documents as may
reasonably be requested by the parties.
1.27 "Environmental Laws" means any and all statutes, Orders, permits,
concessions, grants, franchises, licenses, agreements or governmental
restrictions relating to pollution, the protection of the environment or the
generation, treatment, storage, use, maintenance, recycling, transportation,
release or disposal of Hazardous Materials.
<PAGE> 8
1.28 "Environmental Matter" means any claim, investigation,
information request, litigation, administrative proceeding or Order, relating to
any Environmental Law or Hazardous Materials, in each case, against Arete or
Obligor or affecting any operations or any properties owned, licensed, leased,
occupied or operated by either of them.
1.29 "ERISA" means the Employee Retirement Income Security Act of
1974, as from time to time amended.
1.30 "ERISA Affiliate" means any Person which is a member of the same
controlled group (within the meaning of Section 414(b) of the Code) as Obligor,
Arete or Administaff or which is under common control (within the meaning of
Section 414(c) of the Code) with Obligor, Arete or Administaff or any Person
which is a member of an affiliated service group (within the meaning of Section
414(m) of the Code) with Obligor, Arete or Administaff or any corporation or
other Person which is required to be aggregated with Obligor, Arete or
Administaff pursuant to Section 414(o) of the Code or the regulations
promulgated thereunder.
1.31 "Essential Material Contract" means a Material Contract the
termination of which, prior to its scheduled expiration date, would have a
Material Adverse Effect.
1.32 "Exchange Act" means the Securities Exchange Act of 1934, as
amended or any similar federal statute then in effect, together with the rules
and regulations promulgated thereunder.
1.33 "GAAP" means generally accepted accounting principles as in
effect from time to time in the United States of America, consistently applied,
1.34 "Guarantee" means any guarantee, suretyship or other contingent
liability, whether direct or indirect, with respect to any obligations of
another Person.
1.35 "Hazardous Material" means any substance, or form of energy or
pathogenic agent that is subject to any past or present requirement of any
Governmental Body imposing obligations, liability, or standards of conduct
concerning the protection of human health, plant life, animal life, natural
resources, property or the reasonable enjoyment of life or property from the
presence in the environment of any solid, liquid, gas, odor, pathogen or form of
energy, from whatever source.
1.36 "Holder" of any security means the registered holder of such
security. A Holder of any Debentures or Conversion Stock shall be treated as the
Holder of the stock underlying such Debentures or Conversion Stock except,
however, such Holder shall not have voting rights until such Holder actually
acquires Conversion Stock.
1.37 "Imputed Rate" means the rate per annum equal to the lowest
interest rate imputed under the Code, determined as of the last day of each
month for the month then ending and adjusted monthly.
1.38 Intentionally deleted.
1.39 "Indebtedness" with respect to any Person means, without
duplication, (i) all indebtedness of such Person for borrowed money, (ii) any
obligation incurred for all or any part of the purchase price of property or
services, other than accounts payable and accrued expenses included in current
liabilities in accordance with GAAP and incurred in respect of property or
services purchased in the ordinary course of business, (iii) indebtedness or
obligations evidenced by bonds, notes or similar written instruments, (iv) all
reimbursement obligations of such Person (whether contingent or otherwise) in
respect of letters of credit, bankers' acceptances, surety or other bonds and
similar instruments, (v) any obligation (whether or not such Person has assumed
or become liable for the payment of such obligation) secured by a Lien on any
property of such Person,(vi) capitalized lease obligations of such Person, (vii)
all obligations, contingent or otherwise, of such Person with respect to any
interest rate protection agreement (e.g., swap, cap or collar agreement), (viii)
all obligations, contingent or otherwise, of such Person under any foreign
<PAGE> 9
exchange contract, currency swap agreement or other similar agreement or
arrangement designed to protect such Person against fluctuations in currency
values, and (ix) all Guarantees.
1.40 "Initial Advance" has the meaning set forth in Section 17.
1.41 "Initial Public Offering " shall mean the closing of underwritten
public offering of the Series A Preferred Stock or Common Stock of Obligor
pursuant to an effective registration statement under the Securities Act
pursuant to which Obligor receives net proceeds of not less than five million
dollars ($5,000,000.00).
1.42 "Intellectual Property" shall mean the Patent Rights, the
Trademark Rights, the Copyright Rights, the Technology, all mask works, all
trade secrets and confidential information, and all other intellectual property
and proprietary rights whatsoever pertaining to any of the foregoing in any way
related to the Business now or in the future.
1.43 "Internal Revenue Service" means the United States Internal
Revenue Service and any successor agency.
1.44 "License Agreement" means the Technology License Agreement to be
entered into by Arete and Obligor in the form attached hereto as Exhibit D.
1.45 "Lien" means any security interest, mortgage, pledge, lien,
claim, charge, encumbrance, conditional sale or title retention agreement,
reservation of rights, lessor's interest under a capitalized lease or analogous
instrument.
1.46 "Majority Holders" means the Person or Persons other than Obligor
or Arete who are the Holders of more than 50% of the then outstanding principal
amount of the Debentures, and, for all purposes hereunder, if all or any part of
the Debentures have been converted at the applicable time, the Holders of the
Series A Preferred Stock issued on the conversion of such Debentures (or Common
Stock issued upon conversion of such Series A Preferred Stock) will be deemed to
be holding Debentures in the principal amounts so converted, in addition to any
unconverted Debentures still held by them.
1.47 "Mandatory Conversion" has the meaning set forth in Section
11.1.
1.48 "Manpower and Tax Sharing Agreement" means the Manpower and Tax
Sharing Agreement to be entered into by Arete and Obligor in the form of Exhibit
E.
1.49 "Material Adverse Effect" means any change or effect that
individually or in the aggregate is reasonably likely to be materially adverse
to (i) the assets, business, operations, income, prospects or condition
(financial or otherwise) of Obligor, as applicable, (ii) the legality, validity
or enforceability of any Transaction Document, (iii) the ability of Arete or
Obligor, as applicable, to fulfill their obligations under any Transaction
Document or (iv) the Business.
1.50 "Material Contracts" means all supply agreements, license
agreements, contracts commitments, documents, instruments and understandings, in
each case whether written or oral, material to the Business, financial
condition, results of operation or prospects of Obligor which shall be deemed to
include without limitation: all contracts, or commitments, documents and
instruments: (a) having a value or cost in the aggregate of $50,000 or more or
having a term longer than one year; (b) relating directly or indirectly to the
Intellectual Property, or the manufacture or supply of any products or
components used in the Business; (c) relating directly or indirectly to the
chain of title of the Intellectual Property; (d) with employees or contractors
who have participated in the development of the Technology or any other
Intellectual Property or the products of the Business; (e) containing
confidentiality agreements with any Person to whom any Intellectual Property or
confidential information relating to the Business has been disclosed; (f)
continuing Guarantees to which Obligor is a party, or by which the assets of
either are bound; (g) between Obligor and Arete or between Obligor and any other
shareholder, Affiliate, officer or director or employee of Obligor or Arete; (h)
evidencing Indebtedness of Obligor greater than $50,000; (i)
<PAGE> 10
containing leases of real property at which any aspect of the Business is
conducted; o) containing leases of equipment used in or related to the Business;
and (k) containing security agreements to which Obligor is a party or by which
they or any of their assets are bound (or to which Arete is a party and by which
any of the Intellectual Property is bound).
1.51 "Maturity Date" of a Debenture means the date that is the fifth
anniversary of the date of issuance of such Debenture.
1.52 "Multiemployer Plan " means a multiemployer plan as defined in
Section 3(37) or Section 4001(a)(3) of ERISA or Section 414(f) of the Code
contributed to by Arete, Obligor, Administaff or ERISA Affiliates of any of
them.
1.53 "Number of Fully Diluted Shares Outstanding" shall mean the
number of shares of Common Stock outstanding on the relevant date, including,
without limitation, any shares of Common Stock then issued and any shares of
Common Stock which are then or might, with the passage of time or on the
occurrence of any event, become issuable (x) on the exercise of any outstanding
option or warrant, (y) on the exercise of any option or warrant which Obligor
has agreed to issue, or (z) pursuant to any other agreement, right of conversion
or exchange or other obligation, and: (a) for the purpose of Section 1.72
includes any shares which are issued or issuable pursuant to the Stock Incentive
Plan or any security issued thereunder exercisable for or convertible into
shares of Common Stock and any shares issued as part of the additional debt or
equity financing to be raised by Obligor prior to or following the purchase of
all Debentures by Purchaser hereunder or any security issued therein exercisable
for or convertible into shares of Common Stock; (b) for the purpose of Section
11.2 will exclude any shares which are issued or issuable pursuant to the Stock
Incentive Plan or any security issued thereunder exercisable for or convertible
into shares of Common Stock and will exclude any shares issued as part of any
equity or convertible debt financing raised by the Obligor after the timely
completion of the $5,000,000 financing as more particularly described in Section
7.6. All Capital Stock shall be deemed Common Stock for the purpose of this
definition. For the purpose of calculating the number of shares which may be
issued pursuant to the Stock Incentive Plan, and for the purpose of calculating
the Number of Fully Diluted Shares Outstanding, the share issuances described on
Schedule 1.72 will be deemed to be shares issued under the Stock Incentive Plan.
1.54 "Obligor Financial Statements" means the audited Balance Sheet
and Income Statement for Obligor for the year ended December 31, 1997 as of such
date and Obligor's unaudited Balance Sheet (with full notes) as of April 30,
1998 and unaudited internal B11 Income Statement for the four month period of
January 1, 1998 to April 30, 1998, copies of which are attached hereto as
Exhibit B.
1.55 "Obligor's Knowledge" means the actual knowledge, after
reasonable investigation, of Steve Lubard, Robert Kamm or, as to Section 4A. 16
only, Peter Lippman.
1.56 "Order" means any order, writ, injunction, decree, judgment,
award, determination or written direction or demand of any court, arbitrator or
governmental body.
1.57 "Other Taxes" has the meaning set forth in Section 3.3.
1.58 "Outside Purchase Date" has the meaning set forth in Section 2.2.
1.59 "Patent Rights" means all rights in and to those patents and
patent applications described in Schedule 4A. 16(a), as such applications may be
amended, and all patents issued pursuant to such applications as they might be
amended, together with all rights in and to the underlying inventions.
1.60 "PBGC" means the Pension Benefit Guaranty Corporation.
<PAGE> 11
1.61 "Pension Plan" means an employee pension benefit plan, as defined
in Section 3(2) of ERISA, excluding any Multiemployer Plans, maintained by or
contributed to by Obligor, Arete, Administaff or any ERISA Affiliate of any of
them.
1.62 "Person" means and includes any actual person, partnership, joint
venture, association, limited liability company, corporation, trust,
unincorporated organization and other entity and any government department,
agency or instrumentality or political subdivision thereof.
1.63 "Plan" and "Plans" means any employee benefit plan as defined in
Section 3(3) of ERISA, excluding a Multiemployer Plan, established or maintained
for the benefit of employees of Obligor, Arete, Administaff or any ERISA
Affiliate of any of them.
1.64 "RECC" means Rand Edgar Capital Corp. and its permitted
successors and assigns.
1.65 "Recapitalization" means the recapitalization of BII in
accordance with the Recapitalization Plan in the form of Exhibit G.
1.66 "Registrable Securities" means the common stock issued or
issuable upon conversion of the Debentures and Series A Preferred Stock sold
pursuant to the Convertible Debenture Purchase Agreement, whether owned by
Purchaser or not, and any securities issued or issuable with respect to the
common stock referred to above by way of a stock dividend or stock split or in
connection with a combination of shares, reclassification, recapitalization,
merger or consolidation or reorganization; provided, however, that such shares
of common stock shall only be treated as Registrable Securities if and so long
as they have not been (i) sold to or through a broker or dealer or underwriter
in a public distribution or a public securities transaction, or (ii) sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act under Section 4(l) thereof so that all transfer restrictions
and restrictive legends with respect to such common stock are removed upon the
consummation of such sale and the seller and purchaser of such common stock
receive an opinion of counsel for Seller which shall be in form and content
reasonably satisfactory to Obligor, to the effect that such common stock in the
hands of the purchaser is freely transferable without restriction or
registration under the Securities Act in any public or private transaction.
1.67 "Remaining Advance" has the meaning set forth in Section 17.
1.68 "Reportable Event" has the meaning set forth in Section 4A.13(c).
1.69 "Securities Act" means as of any date the Securities Act of 1933,
as amended, and or any similar federal statute then in effect, together with the
rules and regulations promulgated thereunder.
1.70 "Series A Preferred Stock" means Obligor's Series A Preferred
Stock.
1.71 "Sonoma" means Sonoma Resource Corp. and its permitted successors
and assigns.
1.72 "Stock Incentive Plan" means the equity incentive plan in the
form of Exhibit F hereto, pursuant to which Obligor may issue to directors,
officers, employees and consultants of Obligor or Arete an aggregate of up to 15
% of the Number of Fully Diluted Shares Outstanding as of the date hereof and
after giving effect to the Recapitalization and the issuance and conversion of
all Debentures issuable hereunder and the issuance and conversion of all Series
A Preferred Stock into which such Debentures may be converted, including without
limitation the options to purchase Capital Stock of Obligor listed on Schedule
4A.4. For the purpose of calculating the number of shares which may be issued
pursuant to the Stock Incentive Plan, and for the purpose of calculating the
Number of Fully Diluted Shares Outstanding, the share issuances described on
Schedule 1.72 will be deemed to be shares issued under the Stock Incentive Plan.
<PAGE> 12
1.73 "Taxes" has the meaning set forth in Section 3.3.
1.74 "Technology" shall mean all technology, inventions, information,
developments or any method or process relating directly to, or necessary or
commercially desirable for, Obligor to conduct and engage in the Business
including, without limitation, all software code, algorithms, documentation,
trade secrets, engineering, scientific and practical information and formulas,
research data, design and manufacturing procedures, know-how, raw material data,
specifications.
1.75 "Termination Event" has the meaning set forth in Section 2.2.
1.76 "Trademark Rights" means all rights in and to the names
"Biometric Identification," "BII" and "Veriprint," including all trademark
registrations and applications therefor and all renewal rights, and all goodwill
in each of the foregoing.
1.77 "Tranche C Effective Date" means the date on which the Tranche C
Debenture (as so designated on Schedule 2.2 hereto) is purchased pursuant
hereto, which date shall be the later of (a) June 11, 1998 , or (b) the date on
which the last of all of the following have occurred (unless waived by Purchaser
in writing): (i) this Agreement and all Transaction Documents shall have been
executed by all par-ties thereto and become effective; (ii) the Obligor
Financial Statements shall have been delivered to Purchaser, including a pro
forma balance sheet reflecting the Recapitalization; (iii) the finalization of
Obligor's Stock Incentive Plan in the form of Exhibit F hereto; and (iv) the
filing of Obligor's Amended and Restated Articles of Incorporation.
1.78 "Transaction Documents" means, collectively, the Amended and
Restated Memorandum of Agreement, the Agreement, the Debenture, the
Recapitalization Plan, the Manpower and Tax Sharing Agreement, the License
Agreement, the Amended and Restated Articles and such other agreements and
instruments as the parties may deem necessary or appropriate to effectuate the
Transactions.
1.79 "Transactions" means, collectively, (i) the Recapitalization in
accordance with the Recapitalization Plan, (ii) the licensing by Arete to
Obligor of all the Technology on an exclusive basis and otherwise in accordance
with the License Agreement, (iii) the provision of the services of certain Arete
employees and independent contractors and contribution to Obligor by Arete of
certain tax benefits, all in accordance with the Manpower and Tax Sharing
Agreement, (iv) the issuance, sale and conversion of the Debentures and the
issuance and conversion of the Series A Preferred Stock into which the
Debentures may be converted, in each case pursuant to the Transaction Documents,
and (v) the other transactions contemplated by the Transaction Documents.
1.80 "Voting Stock Capital Stock of any class or classes, the holders
of which are ordinarily, in the absence of contingencies, entitled to vote for
the election of members of the Board of Directors (or Persons performing similar
functions).
SECTION 2 SALE AND PURCHASE OF DEBENTURES.
2.1 Authorization and Issuance of Debentures. Obligor has duly
authorized the issuance, sale and delivery of Debentures in the aggregate
principal amount of $5,000,000 having the terms set forth herein and in the
certificate evidencing the Debentures. The Debentures shall bear simple interest
(computed on the basis of a 360-day year and actual days elapsed) from the date
of issuance thereof at the Imputed Rate, payable annually in arrears, and, so
long as any Default or Event of Default has occurred and is continuing, shall
bear interest (so computed) at the Default Rate (compounded annually), on the
unpaid balance thereof, including any overdue principal or interest, if any,
and, to the extent permitted by applicable law, on any overdue interest, until
the same shall be paid, to mature on June 11, 2003 (the "Maturity Date").
2.2 Purchase and Sale of Debentures. Upon the terms and conditions of
this Agreement, Obligor will issue and sell to Purchaser and Purchaser will
purchase from Obligor, one or more Debentures in the aggregate principal amount
set forth in each "Debenture Purchase Request" (as hereinafter defined),
registered in the name of Purchaser or Purchaser's designee.
<PAGE> 13
Each issuance and sale of Debentures hereunder shall be made upon written notice
by Purchaser to Obligor (each such notice a "Debenture Purchase Request")
delivered no later than 11:00 A.M. (Los Angeles time) on the fifth business day
prior to the date such sale is to be effected. Such notice shall specify (a) the
requested date of sale which date shall not be later than the "Outside Purchase
Date' set forth on Schedule 2.2 (each a "Closing Date ") and (b) the aggregate
principal dollar amount of Debentures to be sold and purchased on such Closing
Date. Notwithstanding anything in any Transaction Document suggesting otherwise,
(i) at no time shall Purchaser be obligated to deliver a Debenture Purchase
Request to Obligor (or purchase any Debenture other than pursuant to a Debenture
Purchase Request), and (ii) if, as of the close of business on any Outside
Purchase Date on Schedule 2.2, Purchaser or its designee shall not have
purchased the indicated aggregate principal amount of Debentures corresponding
to such date other than as a result of the failure of the conditions set forth
in Section 6A hereof to be satisfied as of such date (the failure of such
conditions on such date, a "Termination Event") or an event of force majeure,
then Obligor shall be under no further obligation to issue and sell to Purchaser
or Purchaser's designee any Debenture not yet issued and outstanding as of the
close of business on such date.
2.3 Closing. The closing of each sale of Debentures shall take place
at 10:00 A.M. (Los Angeles time) at the office of Citron & Deutsch, A Law
Corporation, located at 10866 Wilshire Boulevard, Suite 970, Los Angeles,
California 90024, or at such other date, time and place as Obligor and Purchaser
may agree. The representations and warranties set forth in Sections 4A, 4B and 5
shall be deemed made on and as of the date hereof, the Tranche C Effective Date
and each Effective Date and, except for those representations and warranties
that specifically refer only to the Tranche C Effective Date or Effective Date
on each Closing Date. On the Closing Date, Purchaser or Purchaser's designee
shall pay to Obligor in immediately available funds by wire transfer or business
check, the principal amount of the Debentures then being purchased.
2.4 Transfer Restrictions. The Debentures and the Conversion Stock
shall not be transferable except in compliance with the Securities Act. The
Holder of any Debentures and Conversion Stock, by acceptance thereof, agrees,
prior to any transfer of the Debentures or any Conversion Stock, to give written
notice to Obligor of such Holder's intention to transfer such securities. Each
such notice shall describe the manner and circumstances of the proposed transfer
and shall be accompanied by the written opinion of counsel of such Holder,
stating that in the opinion of such counsel such proposed transfer does not
involve a transaction requiring registration or qualification of the securities
under the Securities Act or any applicable "blue sky" laws of any state of the
United States or any applicable Canadian law. The provisions imposed by this
Section 2.4 upon the transferability of the Debentures and the Conversion Stock
shall cease and terminate when (i) such securities are sold or otherwise
disposed of pursuant to an effective registration statement under the Securities
Act, or (ii) the Holder of the securities has met the requirements for transfer
pursuant to subparagraph (k) of Rule 144 (or any successor statute) and all
applicable Canadian statutes. Each Debenture and each certificate for any
Conversion Shares shall (unless otherwise permitted by Section 2.4) be stamped
with a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. IN ADDITION, THESE SECURITIES ARE SUBJECT TO THE
TERMS AND CONDITIONS, INCLUDING RESTRICTIONS ON TRANSFER, SET FORTH IN
THE CONVERTIBLE DEBENTURE PURCHASE AGREEMENT DATED AS OF JUNE 11, 1998,
AMONG THE COMPANY, ARETe ASSOCIATES AND SONOMA RESOURCE CORP. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT."
SECTION 3 PAYMENT OF DEBENTURES.
3.1 Payment Terms. Obligor shall repay all principal and accrued
interest and other fees, costs and expenses on the Debentures as and when due in
accordance with this Agreement
<PAGE> 14
and the Debentures. Each payment shall be made in United States Dollars by wire
transfer or other immediately available funds, without deduction, set-off or
counterclaim, to each Holder entitled to receive such payment at such address or
bank account as shall be specified by such Holder from time to time by written
notice to Obligor, not later than 9:00 A.M. (Los Angeles time) on the date on
which such payment shall become due (each such payment made after such time on
such due date to be deemed to have been made on the next succeeding business
day). If the Holder does not provide Obligor with an address or bank account to
make payment, Obligor shall deposit the payment into an interest-bearing escrow
account established by Obligor for such purpose. Whenever any payment hereunder
or under the Debentures shall be stated to be due on a day other than a United
States business day, that payment shall be made on the next succeeding United
States business day. Obligor may not prepay all or any part of the principal
amount of the Debentures without the Holders' prior written consent. Obligor may
prepay accrued interest on the Debentures without penalty or premium.
3.2 Allocation of Payments. If any payment of less than the entire
outstanding principal balance of the Debentures is made in accordance with the
terms hereof, without limiting any other rights or remedies available to them
such payments shall be allocated among the Holders on a pro rata basis in
respect of the unpaid principal amounts of the Debentures held by the Holders.
All payments shall be applied first, to the payment of all obligations other
than unpaid principal and interest; second, to the payment of accrued unpaid
interest; third, to the repayment of principal.
3.3 Taxes. All payments by Obligor to any Holder shall be made free
and clear of and without deduction for any taxes, levies, imposts, deductions,
charges or withholdings other than, net income or franchise taxes properly
imposed on such Holder's net income and taxes required to be withheld under
applicable United States law (less such non-excluded items "Taxes"). Obligor
shall pay any stamp or documentary taxes or any other excise or property taxes,
charges or similar levies that arise from any payment made under any Transaction
Document or from the execution, delivery, enforcement or registration of, or
otherwise with respect to any Transaction Document, other than any transfer
taxes payable in connection with a change in the registered Holder of any
Debentures ("Other Taxes").
SECTION 4A. REPRESENTATIONS AND WARRANTIES OF OBLIGOR. Obligor represents and
warrants to, and covenants with, Purchaser and all Holders that:
4A.1 Corporate Existence and Power. Obligor is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Obligor is duly qualified to do business in each jurisdiction where
the failure to so qualify could have a Material Adverse Effect. Obligor has all
requisite corporate power to own its properties and to carry on the Business and
all other business as now being conducted and as proposed to be conducted by it
according to the Biometric Identification, Inc. Business Plan distributed to
Purchaser on or about March 23, 1998, and to execute, deliver and perform its
obligations under each Transaction Document to which it is a party.
4A.2 Corporate Authority. The execution, delivery and performance by
Obligor of each Transaction Document to which it is a party are within its
corporate powers and have been duly authorized by all necessary corporate action
on the part of its Board of Directors and stockholders.
4A.3 Binding Effect. Each of the Transaction Documents which
contemplates that Obligor is to be a party has been duly executed and delivered
by Obligor, and constitutes legal, valid and binding obligations of Obligor,
enforceable against Obligor in accordance with its terms, except the
enforceability of Transaction Documents may be subject to or limited by
bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws
relating to or affecting the rights of creditors generally, (b) general
principles of equity, regardless of whether such enforceability is considered in
a proceeding in law or in equity and (c) the effect of those provisions and
principles of California law which provide that a Court may refuse to enforce or
may limit the application of a contract or any clause thereof which the court
finds as a matter of law to have been unconscionable at the time it was made.
<PAGE> 15
4A.4 Capital Stock. (a) Schedule 4A.4 sets forth the authorized and
issued shares of Capital Stock of Obligor at each of the following points in
time (i) as of date of this Agreement prior to giving effect to the
Transactions, (ii) after giving effect to the Recapitalization but before giving
effect to the other Transactions, (iii) after giving effect to all of the
Transactions assuming that all Debentures are purchased and converted into
Series A Preferred Stock. All of the issued and outstanding shares of Capital
Stock of Obligor are validly issued, fully paid and non-assessable. Except as
set forth on Schedule 4A.4, except for the Debentures being purchased pursuant
hereto, and except for the stock portion of the finders fee described in Section
4A.9, there are no securities outstanding that directly or indirectly are
convertible into or exchangeable for any shares of Capital Stock of Obligor, nor
are there outstanding any rights to subscribe for or purchase, or any options or
warrants for the purchase of, or any agreements (contingent or otherwise)
providing for the issuance of, or any calls, commitments or claims of any
character relating to, any shares of Capital Stock of Obligor or any securities
directly or indirectly convertible into or exchangeable for any such shares.
(b) Except set forth in Schedule 4A.4(b), Obligor is not
subject to any obligation (contingent or otherwise) to repurchase, retain,
acquire or retire (i) any of its Capital Stock, (ii) any securities directly or
indirectly convertible into or exchangeable for any of its Capital Stock (except
for the Debentures), or (iii) any options, warrants or other rights to subscribe
for, purchase or acquire any of its Capital Stock (except for the Debentures).
(c) The Conversion Stock is duly authorized and has been
reserved for issuance upon conversion of the Debentures and upon conversion of
the Series A Preferred Stock and, when issued upon conversion will be duly
authorized, validly issued, fully paid and non-assessable, free and clear of all
Liens and. restrictions, other than Liens that might have been created by
Holders (other than Obligor or Arete) or arise under the Transaction Documents
and restrictions imposed by the Securities Act.
4A.5 No Conflict. Neither the execution and delivery by Obligor of any
Transaction Document to which it is a party, nor the offering, issuance or sale
of the Debentures or the Conversion Stock by Obligor, nor the fulfillment by
Obligor of, or compliance by Obligor with, the terms and provisions of the
Transaction Documents, will conflict with, or result in a breach or violation of
the terms of or constitute a default under, or result in the creation of any
Lien on any properties of Obligor, the Articles of Incorporation, Amended and
Restated Articles of Incorporation, or by-laws of Obligor or, any contract,
agreement, mortgage, indenture, lease or instrument to which Obligor is a party
or by which Obligor or its assets are bound or, to Obligor's Knowledge, violate
any treaty, law, regulation or Order to which Obligor or any of its assets are
subject.
4A.6 Consents. No consent, approval or authorization of or
declaration, registration or filing with any governmental authority of the
United States or any subdivision thereof is required in connection with the
execution or delivery by Obligor of the Transaction Documents, or the
performance by Obligor of its obligations thereunder, or as a condition to the
legality, validity or enforceability of any of the Transaction Documents.
4A.7 Assets and Properties. Obligor does not own any real property.
True and complete copies of all leases of real property to which Obligor is a
party, together with all amendments, modifications and supplements thereto to
the date of this Agreement, have been delivered to Purchaser or its
representatives. No assets or other properties, including any of the Technology
and including any other Intellectual Property used in the Business is subject to
any Lien of any kind except Permitted Liens. The assets owned by, leased to,
licensed to, or used by Obligor are in good operating condition and repair,
ordinary wear and tear excepted, and serve the function for which they are
intended. No Transaction Document nor any of the Transactions will materially
adversely affect any right, title or interest of Obligor in and to any of the
assets or properties owned, leased or used by Obligor. Except as disclosed in
Schedule 4A.7, Obligor owns or leases all equipment (technical, computer, office
or other), furniture and other goods and chattels used by Obligor, Arete or any
other Person in the Business.
<PAGE> 16
4A.8 Taxes. Obligor has filed all tax returns and informational
returns which are required to have been filed, and has paid all taxes shown to
be due and payable on such returns and all other taxes and assessments payable
by it, except to the extent that any such tax liability is being diligently
contested in good faith and Obligor has adequately reserved against such tax
liability on its books and financial statements in accordance with GAAP. No
material tax liens have been filed and no material claims are being asserted
with respect to any such taxes as of the date hereof. To Obligor's Knowledge, no
material tax assessment against Obligor has been proposed, and all of its tax
liabilities are adequately provided for on its respective books and financial
statements in accordance with GAAP.
4A.9 Broker's or Finder's Commissions. Except for a finders fee
payable to Peter Cowan and Richard Citron in the aggregate amount of 2% of the
principal amount of Debentures purchased by Purchaser hereunder and an aggregate
of 816,000 shares of Series B Common stock to be issued to Peter Cowan and
Richard Citron, no broker's or finder's fee or commission will be payable by any
Person with respect to the issuance and sale of the Debentures or any of the
Transactions.
4A.10 Labor Matters. There has been no strike, work stoppage, slowdown
or other labor dispute or grievance involving Obligor or Persons employed by, or
providing services for the benefit of, Obligor, nor to Obligor's Knowledge is
any such action, dispute or grievance pending or threatened. Obligor is not a
party to any collective bargaining agreement, and, to Obligor's Knowledge, there
is no pending or threatened organizational effort. There are no pending
retaliatory or wrongful discharge claims or employment discrimination charges or
complaints or administrative or judicial complaints pending against Obligor, or
against any Person employed by, or providing services for the benefit of,
Obligor before any governmental body, nor, to Obligor's Knowledge, are there any
threats of such charges or complaints, except for the matter described in that
confidential memorandum from Charmagne N. Sheamill to Stephen Lubard dated June
7, 1997 (the "Currier Matter") and except for the claim of Alan Johnson
previously disclosed to Purchaser. Such memorandum accurately and completely
describes the circumstances and facts surrounding the Currier Matter.
4A.11 Environmental Matters. (i) There is no pending Environmental
Matter, nor, to Obligor's Knowledge, are there any facts that could reasonably
be expected to result in any Environmental Matter, and Obligor has not assumed
any liability of any other Person for cleanup, compliance, or required capital
expenditures in connection with any Environmental Matter; (ii) to Obligor's
Knowledge, all properties used, owned, leased, operated, managed or controlled
by Obligor are free of contamination from Hazardous Materials and are free of
any other potentially harmful chemical or physical conditions that could have a
Material Adverse Effect; (iii) to Obligor's Knowledge, Obligor is in compliance
with all applicable Environmental Laws and has not received any notice of
violation of any Environmental Law or of any potential liability for cleanup of
Hazardous Materials, and Obligor has not generated, manufactured, refined,
recycled, discharged, emitted, released, buried, processed, produced, reclaimed,
stored, treated, transported, or disposed of any Hazardous Materials in
violation of any treaty, law, regulation or Order; (iv) no real property used,
leased or controlled by Obligor is listed or proposed for listing on the
National Priorities List under CERCLA or listed in the Comprehensive
Environmental Response, Compensation, Liability Information System List
promulgated pursuant to CERCLA, or on any comparable list maintained by any
governmental body; and (v) to Obligor's Knowledge, Obligor has no liabilities,
absolute or contingent on the date hereof with respect to Hazardous Materials.
4A.12 Compliance with Applicable Law. Permits, Licenses and
Authorizations. To Obligor's Knowledge, Obligor is not violating nor has Obligor
violated any treaty, law, regulation or Order. Obligor holds, and is in material
compliance with, all governmental permits, licenses, and authorizations
necessary to operate the Business. To the best of Obligor's knowledge, (a)
export permits are required under the laws of the United States for the
Veriprint 1000 product, but the Obligor understands that such export permits
will be routinely granted (except for exports to approximately seven countries,
including Libya and Iran); (b) export permits are required under the laws of the
United States for the other products of the Obligor.
<PAGE> 17
4A.13 Employee Matters, Compliance with ERISA. (a) Obligor has
furnished Purchaser with a true and complete list of all Persons rendering
services to or on behalf of Obligor on a full-time or part-time basis and has
separately identified to Purchaser, in the case of items (i), (ii) and as to
oral agreements (iii), with respect to each such person, that person's (i) age,
(ii) date his or her services commenced, (iii) status (e.g., employee of
Administaff or Obligor, independent contractor, etc.), (iv) salary, (v) benefits
and (vi) other oral or written agreements to which they are a party relating to
the provision of such services in each case both in respect to before and after
the implementation of the Manpower and Tax Sharing Agreement. Schedule 4A. 13
sets forth a true and complete list of all persons who are key personnel in the
Business.
(b) To Obligor's Knowledge, no Pension Plan which is subject to
Part 3 of Subtitle B of Title I of ERISA or Section 412 of the Code has or had
an accumulated funding deficiency (as such term is defined in Section 302 of
ERISA or Section 412 of the Code), whether or not waived, as of the last day of
the most recent fiscal year of such Pension Plan heretofore ended;
(c) To Obligor's Knowledge, no liability to PBGC (other than
required insurance premiums, of which all that are required to have been paid on
or before the date hereof have been paid) has been incurred and is outstanding
with respect to any Pension Plan, and there has not been any "Reportable Event"
(within the meaning of Section 4043(b) of ERISA or the regulations promulgated
thereunder), or any other event or condition, which presents a risk of
involuntary termination of any Pension Plan by the PBGC.
(d) To Obligor's Knowledge, neither Obligor, Administaff, any
Multiemployer Plan or Plan nor any trust created thereunder, nor any trustee or
administrator thereof, has engaged in a prohibited transaction (as such term is
defined in Section 4975 of the Code or described in Section 406 of ERISA) that
could subject Obligor or the assets of Obligor or used by Obligor in the
Business to any tax or penalty on prohibited transactions imposed under said
Section 4975 or Section 502(i) of ERISA.
(e) To Obligor's Knowledge no liability has been incurred and is
outstanding with respect to any Multiemployer Plan as a result of the complete
or partial withdrawal by Obligor, Administaff or any ERISA Affiliate from such
Multiemployer Plan under Title IV of ERISA, nor has any of Obligor, Administaff
or any ERISA Affiliate been notified by any Multiemployer Plan that such
Multiemployer Plan is currently in reorganization or insolvency under and within
the meaning of Section 4241 or 4245 of ERISA or that such Multiemployer Plan
intends to terminate or has been terminated under Section 4041A of ERISA.
(f) To Obligor's Knowledge, Obligor Administaff the ERISA
Affiliates, and all Plans and Multiemployer Plans are in compliance with all
applicable provisions of ERISA and the Code and with the applicable law and
administrative requirements of any relevant jurisdiction and the regulations and
published interpretations thereunder.
(g) To Obligor's Knowledge, the actuarial present value of all
benefit liabilities (as defined in Section 4001(a)(16) of ERISA) under each
Pension Plan that is subject to Title IV of ERISA does not exceed the fair
market value of the assets allocable to such liabilities, determined as if such
Plan were terminated as of the date hereof, and by using such Plan's actuarial
assumptions as set forth in the most recent actuarial report pertaining to such
Plan.
(h) To Obligor's Knowledge, no Multiemployer Plan has any
unfunded vested benefits within the meaning of Section 4213(c) of ERISA.
(i) To Obligor's Knowledge, no event has occurred with respect to
any Plan or with respect to any other employee benefit pension plan (as defined
in Section 3(2) of ERISA) established or maintained at any time during the
five-year period immediately preceding the date hereof for the benefit of
employees of, or rendering services for the benefit of, Obligor, or any ERISA
Affiliate, which presents a risk of liability of any of such Persons under
Section 4069 of ERISA.
<PAGE> 18
(j) To Obligor's Knowledge, there are no liabilities under the
Plans that are employee welfare benefit plans (as defined in Section 3(l) of
ERISA) providing for medical, health, life or other welfare benefits that are
not insured by fully paid non-assessable insurance policies, and no such Plan
provides for continued medical, health, life or other welfare benefits for
employees after they leave the employment of Obligor, Administaff or any ERISA
Affiliate (other than any such welfare benefits required to be provided under
the Consolidated Omnibus Budget Reconciliation Act of 1985 or other similar
law).
(k) To Obligor's Knowledge, neither Obligor, nor any ERISA
Affiliate of Obligor is a party in interest (as defined in Section 3(14) of
ERISA) with respect to any employee benefit plan (as defined in Section 3(3) of
ERISA), other than the Plans.
(1) To Obligor's Knowledge, neither Obligor nor Administaff nor
any ERISA Affiliate of Obligor has breached or violated any of the
responsibilities, obligations or duties imposed upon any of such Persons by the
Code or ERISA or any other statute, regulation, or governmental order which
breach or violation has given rise, or could give rise in the future to, any
material liability of, or obligation to pay money by, Arete or Obligor.
(m) To Obligor's Knowledge, there are no actions, suits or
claims, pending, asserted or, threatened against any Plan, Obligor, Administaff,
any ERISA Affiliate, or any Person for which Arete or Obligor may be directly or
indirectly liable through indemnification arrangement or otherwise, other than
routine claims for benefits.
(n) To Obligor's Knowledge, all required reports and descriptions
of the Plans of Obligor Administaff or ERISA Affiliates (including but not
limited to Form 5500 Annual Reports, Summary Annual Reports and Summary Plan
Descriptions) have been timely filed and distributed, and any notices required
by ERISA or the Code or any other applicable law, ruling or regulation.
(o) No proceeding has been instituted or, to Obligor's Knowledge,
is reasonably expected to be instituted under Section 515 of ERISA to collect
delinquent contributions to a Plan.
4A.14 Material Contracts. Schedule 4A.14 sets for a true and correct
list of all Material Contracts other than those having a value of less than
$50,000. Obligor has furnished or made available to Purchaser or its
representatives true and complete copies of each of the Material Contracts, with
all amendments, modifications and supplements thereto to the date hereof. To
Obligor's Knowledge, each Material Contract is valid, subsisting and in full
force and effect and enforceable by Obligor in accordance with its terms. No
Material Contract has been assigned, pledged, hypothecated or otherwise
transferred to any Person other than Obligor. Except as set forth on Schedule
4A. 14, Obligor is not in breach or violation of any Material Contract; nor to
Obligor's Knowledge, has there been any breach of a Material Contract by a third
party.
4A.15 Insurance. Obligor has delivered to Purchaser or its
representative true and complete copies of all insurance policies of Obligor.
Each of these policies is in full force and effect, and Obligor has not received
notice of cancellation with respect to any such policy. All premiums payable
with respect to such policies have been or will, by the date due, have been
paid.
4A.16 Intellectual Property. (a) Schedule 4A. 16(a) sets a true and
complete list of all (i) Intellectual Property owned by Obligor specifying with
respect to each patent, patent application, registered trademark and registered
copyright, the registration or application number thereof, the jurisdiction by
or in which such item has been issued or registered or in which an application
therefor has been filed, if any, the date of such issuance, registration or
application, (ii) Intellectual Property licensed to Obligor other than "off the
shelf' software obtained for less than $5,000 individually which is subject to
shrink wrap licenses, specifying with respect to each such item, the owner
thereof, and expiration date, and (iii) Intellectual Property licensed by
Obligor to third parties, specifying with respect to each item, whether the
license is exclusive or non-exclusive and the subject matter, territory and term
thereof To Obligor's Knowledge, except as set forth in Schedule 4A.16(a), there
is no reason to believe that any patent applications set forth on Schedule
<PAGE> 19
4A.16(a) will not be granted, including without limitation any patent
application, whether pending on the date hereof or not.
(b) Except as set forth on Schedule 4A.16(b), Obligor owns and
has good title to, or is party to enforceable and non-revocable license
agreements permitting Obligor to use of, all items of Intellectual Property,
free from Liens and restrictions, which are currently used or necessary or
desirable for the present and, to Obligor's Knowledge, the planned future
conduct of the Business.
(c) To Obligor's Knowledge, except as set forth in Schedules 4A.
16(a) or (b), (i) none of the present or contemplated products or operations of
Obligor, or the Intellectual Property or Obligor's use thereof, infringes or
otherwise violates any intellectual property owned by any other Person, and (ii)
there is no pending or threatened claim, demand, litigation, investigation,
arbitration or other proceeding contesting Obligor's right to manufacture,
distribute or sell any such product or to engage in any such operation, or to
use or otherwise exploit any Intellectual Property.
(d) Except as set forth on Schedules 4A.16(a) or (b), all
registrations for Intellectual Property identified thereon and all applications
to register Intellectual Property have been filed with the appropriate
government authority. To Obligor's Knowledge, the Intellectual Property owned by
obligor is valid and enforceable in all material respects. Correct and complete
copies of registrations for all registered Intellectual Property identified on
Schedule 4A. 16(a) (together with any subsequent correspondence with the United
States Copyright Office, the United States Patent and Trademark Office or the
foreign equivalents thereof in each jurisdiction in which Obligor does or in
which it is reasonably foreseeable will do, business, in each case as
applicable, or filings relating to the foregoing) have been made available by
Obligor to Purchaser or its counsel.
(e) All algorithms, designs, drawings, specifications, source
code, object code, documentation, flow charts, diagrams and other Technology
material to the Business were to Obligor's Knowledge, written, developed and
created primarily by the Persons identified in Schedule 4A.16(e). Each of the
Persons listed in Schedule 4A.16(e) whose contribution to the Technology was or
is material to the Business is and, at all relevant times will be, either (i) an
employee of Obligor or Arete whose work on the Technology constitutes a work
made for hire for such party, or (ii) a third party who assigns his ownership of
his/her or its rights to Obligor pursuant to a valid and enforceable agreement.
Obligor has at all times used and will, at all relevant times, use its best
efforts to protect the confidentiality of all of their other confidential and
proprietary information and that of third parties that has been in, or comes
into, its possession.
(f) Except as set forth in Schedule 4A.16(f), each Person who in
the past rendered, is rendering, or in the future renders, significant or
substantial services to or on behalf of Obligor with access to the Technology or
other Confidential or proprietary information of Obligor has executed and
delivered, or will execute and deliver, to Obligor a Confidentiality and
Assignment Agreement substantially in the form of Exhibit H. To Obligor's
Knowledge, such confidentiality and nondisclosure agreements constitute or will
constitute valid and binding obligations of such Persons, enforceable in
accordance with their respective terms.
(g) No product liability or warranty claim (other than warranty
claims that would not be expected to have a Material Adverse Effect), has been
asserted or overtly threatened against Obligor nor, to Obligor's Knowledge, is
there a valid basis for any such claim.
(h) Except for the fees payable by Obligor pursuant to the
License Agreement and the fees payable under the Mitsubishi Patent License, no
royalty or other fees are required to be paid by Obligor to any Person in
respect of the use of any of the Intellectual Property. Except as set forth in
Schedule 4A.16(h), Obligor has the exclusive night to use all of the
Intellectual Property and Obligor has not granted any license or other right to
any other Person, directly or indirectly, in respect of any Intellectual
Property. There are no restrictions on the ability of Obligor which do or could
adversely affect the rights of Obligor to use and exploit the Intellectual
Property.
<PAGE> 20
None of the rights of Obligor in the Intellectual Property will be impaired or
affected in any way by the Transactions (except as to Arete pursuant to the
License Agreement). The conduct of Obligor, and Arete so far as it relates to
the Business of Obligor, does not include any activity which might constitute
passing off.
(i) No Person has any option or similar right to acquire or use
any right, title or interest in or to any Intellectual Property, except as set
forth in Schedule 4A.16(b), (i) other than Obligor or Arete as of the Closing
Date and (ii) other than third parties unrelated to Obligor or Arete to whom
Obligor may sub-license parts of the Technology provided that any such
sublicensor shall not compete with or permit competition with the Business.
4A.17 Customers and Suppliers. To Obligor's Knowledge, there is no
reason to believe that any significant customer (other than the government of
Venezuela) or supplier of Obligor will cease to do business with Obligor in the
same manner and at the same levels as previously conducted with or anticipated
by Obligor. No such supplier has notified Obligor of any expected or projected
increase in the cost of goods or services provided by such supplier, to Obligor.
4A.18 Certain Transactions. Except as described on Schedule 4A.18
hereto Obligor is not indebted, directly or indirectly, to. any of its officers,
directors or shareholders or to any of the respective spouses or children of any
of such persons in any amount in excess of $25,000 individually or $100,000 in
the aggregate. Except as set forth on Schedule 4A.18, none of such officers,
directors or shareholders, or any member of their immediate families, is (i)
indebted to Obligor in any amount in excess of $500 individually or $1,000 in
the aggregate, or (ii) has a financial interest in any contract or arrangement
with Obligor.
4A.19 Business Operations and Other Information; Financial Condition.
(a) As of the date of each of the balance sheets included in the Obligor
Financial Statements, Obligor had no Indebtedness or liability, absolute or
contingent, liquidated or unliquidated, except Indebtedness and liabilities
reflected or reserved against on such balance sheets or described in the notes
thereto. Since the Balance Sheet Date, no Material Adverse Effect has occurred.
(b) The Obligor Financial Statements have been prepared in
accordance with GAAP and fairly, completely and accurately present the financial
position of Obligor and the financial information presented therein for the
periods and as at the dates thereof. The notes to such Obligor Financial
Statements do not contain any misstatement of a material fact, nor do they omit
to state a material fact required to make any statement contained therein true.
(c) There are no material liabilities of Obligor, contingent or
otherwise, existing on the date hereof or which will exist on the Tranche C
Effective Date in respect of which Obligor may be liable other than (i)
liabilities disclosed in, reflected in, or provided for in the Financial
Statements;
and (ii) liabilities incurred in the ordinary course of business and
attributable to the period since the Balance Sheet Date, none of which could
have a Material Adverse Effect.
(d) The books of account and financial records of Obligor have
been prepared in accordance with GAAP and fairly and correctly set out and
disclose all material respects of the financial position of Obligor.
4A.20 Disclosure. To Obligor's Knowledge, no Transaction Document or
any other document furnished to Purchaser or any Holder by or on behalf of
Obligor in connection with the Transactions, including without limitation the
Obligor Financial Statements, contained, as of its respective date, the date
hereof, the Tranche C Effective Date or any Closing Date, any untrue statement
of a material fact, or as of any such date omitted to state a material fact
necessary in order to make the statements contained herein and therein, in light
of the circumstances under which they were made, not misleading. To Obligor's
Knowledge, there are no facts that individually or in the aggregate have had a
Material Adverse Effect or, could have a Material Adverse Effect in the future.
The minute books for Obligor provided to Purchaser and its counsel for review
are
<PAGE> 21
complete and contain true and complete copies of the charter documents, by-laws
and all resolutions of directors and shareholders of Obligor and all documents
required by law to be included in such minute books.
4A.21 Offering of Securities. Assuming the truth and accuracy of
Purchaser's representations and warranties in Section 5.1, the offer, issuance
and sale of the Debentures and issuance of Series A Preferred Stock upon
conversion of the Debentures and the issuance of Common Stock upon conversion of
the Series A Preferred Stock are exempt from the registration requirements of
Section 5 of the Securities Act, and Obligor has not taken nor will it take any
action which would subject the issuance or sale of any of the Debentures or
issuance of Series A Preferred Stock upon conversion of the Debentures, or
issuance of Common Stock upon conversion of the Series A Preferred Stock to the
provisions of Section 5 of the Securities Act or violate the provisions of any
securities or Blue Sky laws of any applicable United States jurisdiction.
4A.22 Financial Projections. The financial projections contained in the
Biometric Identification, Inc. Business Plan (the "Projections") distributed to
Purchaser on or about March 23, 1998, were prepared reasonably and in good faith
on the basis of the assumptions stated therein, which assumptions (a) were to
Obligor's Knowledge reasonable in light of conditions existing at the time of
delivery of such financial projections and, (b) in all material respects,
represented Obligor's best estimate of the future financial performance (after
giving effect to the Transactions) of Obligor. To Obligor's Knowledge, there are
no facts or circumstances that are reasonably likely to result in any material
deviation from such projections.
4A.23 Manpower and Tax Sharing Agreement. The Manpower and Tax Sharing
Agreement will be prepared reasonably and in good faith. To Obligor's Knowledge,
there are no facts or circumstances that are reasonably likely to result in any
material deviation from any provisions in the Manpower and Tax Sharing
Agreement.
4A.24 Sole Business. Obligor is not engaged in any business other than
the Business.
4A.25 Transaction Documents. The representations and warranties of
Obligor contained in each Transaction Document are true and correct in all
material respects on the date hereof and will be true and correct in all
material respects on the Tranche C Effective Date, except to the extent that
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties shall be true and correct on and
as of such earlier date), and the Holders shall be entitled to rely upon such
representations and warranties with the same force and effect as if they were
made to the Holders directly.
4A.26 No Litigation. Except as set forth in Schedule 4A.26, there are
no actions, suits or proceedings pending, taken or, to Obligor's Knowledge,
threatened by any Person before any governmental body or by an elected or
appointed public official or private person in the United States or elsewhere,
whether or not having the force of law, which might otherwise relate to or
affect the Intellectual Property or which seeks to vary, terminate or otherwise
affect any of the Transaction Documents or Transactions.
SECTION 4B. REPRESENTATIONS AND WARRANTIES OF ARETE. Arete represents and
warrants to, and covenants with, Purchaser and all Holders that:
4B.1 Corporate Existence and Power. Arete is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Arete is duly qualified to do business in each jurisdiction where
the failure to so qualify could have a Material Adverse Effect. Arete has all
requisite corporate power to own its properties and to carry on all other
business as now being conducted and as proposed to be conducted by Arete, and to
execute, deliver and perform its obligations under each Transaction Document to
which it is a party.
4B.2 Corporate Authority. The execution, delivery and performance by
Arete of each Transaction Document to which it is a party are within its
corporate powers and have been duly
<PAGE> 22
authorized by all necessary corporate action on the part of its Board of
Directors. No stockholder approval is required by Arete for the Transactions.
4B.3 Binding Effect. Each of the Transaction Documents which
contemplates that Arete is to be a party has been duly executed and delivered by
Arete and constitutes legal, valid and binding obligations of Arete, enforceable
against Arete in accordance with its terms, except the enforceability of
Transaction Documents may be subject to or limited by (a) bankruptcy,
insolvency, reorganization, arrangement, moratorium or similar laws relating to
or affecting the rights of creditors generally, (b) general principles of
equity, regardless of whether such enforceability is considered in a proceeding
in law or in equity and (c) the effect of those provisions and principles of
California law which provide that a Court may refuse to enforce or may limit the
application of a contract or any clause thereof which the court finds as a
matter of law have been unconscionable at the time it was made.
4B.4 No Conflict. To Arete's Knowledge, the execution and delivery by
Arete of any Transaction Document to which it is a party will not conflict with,
or result in a breach or violation of the terms of or constitute a default
under, or result in the creation of any Lien on any properties of Arete, the
articles of incorporation or by-laws of Arete or any contract, agreement,
mortgage, indenture, lease or instrument to which Arete is a party or by which
Arete's assets are bound or, to Arete's Knowledge, violate any treaty, law,
regulation or Order to which Arete or its assets are subject.
4B.5 Consents. No consent, approval or authorization of or declaration,
registration or filing with any governmental authority of the United States or
any subdivision thereof is required in connection with the execution or delivery
by Arete of the Transaction Documents, or the performance by Arete of its
obligations thereunder, or as a condition to the legality, validity or
enforceability of any of the Transaction Documents.
4B.6 Assets and Properties. Arete owns no real property. True and
complete copies of all leases of real property to which Arete is a party with
respect to property used in the conduct of the Business, together with all
amendments, modifications and supplements thereto to the date of this Agreement,
have been delivered to Purchaser or its representatives. Arete has good and
marketable title to all properties (other than properties leased from others),
used in the Business subject to no Lien of any kind. The properties owned by,
leased to, licensed to, or used in the conduct of the Business are in good
operating condition and repair, ordinary wear and tear excepted, and serve the
function for which they are intended. No Transaction Document nor any of the
Transactions will materially adversely affect any right, title or interest of
Arete in and to any of the assets or properties owned, leased or used in the
conduct of the Business. Except as disclosed in Schedule 4B.6, neither Arete nor
any other shareholders, director, officer of affiliate of Arete owns any
equipment (technical, computer, office or other), furniture and other goods and
chattels used in connection with the Business or otherwise material to the
Business.
4B.7 Taxes. Arete has filed all tax returns and informational returns
which are required to have been filed, and has paid all taxes shown to be due
and payable on such returns and all other taxes and assessments payable by it,
except to the extent that any such tax liability is being diligently contested
in good faith and Arete has adequately reserved against such tax liability on
its books and financial statements in accordance with GAAP. No material tax
liens have been filed and no material claims are being asserted with respect to
any such taxes as of the date hereof. No material tax assessment against Arete
has been proposed, and all of their respective tax liabilities are adequately
provided for on its books and financial statements in accordance with GAAP.
4B.8 Labor Matters. There has been no strike, work stoppage, slowdown
or other labor dispute or grievance involving Persons employed by, or providing
services for the benefit of, Obligor nor to Arete's Knowledge, is any such
action, dispute or grievance pending or threatened. Arete is not a party to any
collective bargaining agreement, and to Arete's Knowledge, there is no pending
or threatened organizational effort. There are no pending retaliatory or
wrongful discharge claims or employment discrimination charges or complaints or
administrative or judicial complaints pending against any Person employed by, or
providing services for the benefit of, Obligor before
<PAGE> 23
any governmental body, nor, to Arete's Knowledge, are there any threats of such
charges or complaints, except for the Currier Matter and for the claim by Alan
Johnson, previously disclosed to Purchaser. That confidential memorandum from
Charmagne N. Shearrill to Stephen Lubard dated June 7, 1997 accurately and
completely describes the circumstances and facts surrounding the Currier Matter.
4B.9 Environmental Matters. Except as set forth in Schedule 4B.9: (i)
there is no pending Environmental Matter, nor to are there any facts that could
reasonably be expected to result in any Environmental Matter, and to Arete's
Knowledge, are there any facts that could reasonably be expected to result in
any Environmental Matter, and Arete has not assumed any liability of any other
Person for cleanup, compliance, or required capital expenditures in connection
with any Environmental Matter; (ii) to Arete's Knowledge, all properties used,
owned, leased, operated, managed or controlled by Arete or Obligor are free of
contamination from Hazardous Materials and are free of any other potentially
harmful chemical or physical conditions that could have a Material Adverse
Effect; (iii) to Arete's Knowledge each of Arete and Obligor is in compliance
with all applicable Environmental Laws and has not received any notice of
violation of any Environmental Law or of any potential liability for cleanup of
Hazardous Materials, and, to Arete's Knowledge, Arete nor Obligor has generated,
manufactured, refined, recycled, discharged, emitted, released, buried,
processed, produced, reclaimed, stored, treated, transported, or disposed of any
Hazardous Materials in violation of any treaty, law, regulation or Order; (iv)
to Arete's Knowledge no real property used, leased or controlled by Arete or
Obligor is listed or proposed for listing on the National Priorities List under
CERCLA or listed in the Comprehensive Environmental Response, Compensation,
Liability Information System List promulgated pursuant to CERCLA, or on any
comparable list maintained by any governmental body; and (v) to Arete's
Knowledge neither Arete's nor Obligor has any liabilities, absolute or
contingent on the date hereof with respect to Hazardous Materials.
4B.10 Compliance with Applicable Law Permits, Licenses and
Authorizations. To Arete's Knowledge, Arete is not violating and has not
violated any treaty, law, regulation or Order in the conduct of the Business. To
Arete's Knowledge Arete holds, and is in material compliance with, all
governmental permits, licenses, and authorizations necessary for Arete in
connection with the Business.
4B.11 Employee Matters, Compliance with ERISA. (a) To Arete's
Knowledge, Obligor has furnished Purchaser with a true and complete list of all
Persons rendering services to, or on behalf of, Obligor on a full-time or
part-time basis. Schedule 4A.13 sets forth a true and complete list of all
Persons who are key personnel in the Business.
(b) To Arete's Knowledge, no Pension Plan which is subject to
Part 3 of Subtitle B of Title I of ERISA or Section 412 of the Code has or had
an accumulated funding deficiency (as such term is defined in Section 302 of
ERISA or Section 412 of the Code), whether or not waived, as of the last day of
the most recent fiscal year of such Pension Plan heretofore ended;
(c) To Arete's Knowledge, no liability to the PBGC (other than
required insurance premiums, of which all that are required to have been paid on
or before the date hereof have been paid) has been incurred and is outstanding
with respect to any Pension Plan, and there has not been any "Reportable Event"
(within the meaning of Section 4043(b) of ERISA or the regulations promulgated
thereunder), or any other event or condition, which presents a risk of
involuntary termination of any Pension Plan by the PBGC.
(d) To Arete's Knowledge, neither Arete, Obligor, Administaff,
any Multiemployer Plan or Plan nor any trust created thereunder, nor any trustee
or administrator thereof, has engaged in a prohibited transaction (as such term
is defined in Section 4975 of the Code or described in Section 406 of ERISA)
that could subject Arete or Obligor or the assets of either to any tax or
penalty on prohibited transactions imposed under said Section 4975 or Section
502(i) of ERISA.
(e) To Arete's Knowledge, no liability has been incurred and is
outstanding with respect to any Multiemployer Plan as a result of the complete
or partial withdrawal by Arete, Obligor, Administaff or any ERISA Affiliate from
such Multiemployer Plan under Title IV of ERISA, nor has any of Arete,
<PAGE> 24
Obligor, Administaff or any ERISA Affiliate been notified by any Multiemployer
Plan that such Multiemployer Plan is currently in reorganization or insolvency
under and within the meaning of Section 4241 or 4245 of ERISA or that such
Multiemployer Plan intends to terminate or has been terminated under Section
4041 A of ERISA.
(f) To Arete's Knowledge, Arete, Obligor, Administaff the ERISA
Affiliates, and all Plans and Multiemployer Plans are in compliance with all
applicable provisions of ERISA and the Code and with the applicable law and
administrative requirements of any relevant jurisdiction and the regulations and
published interpretations thereunder.
(g) To Arete's Knowledge, the actuarial present value of all
benefit liabilities (as defined in Section 4001(a)(16) of ERISA) under each
Pension Plan that is subject to Title IV of ERISA does not exceed the fair
market value of the assets allocable to such liabilities, determined as if such
Plan were terminated as of the date hereof, and by using such Plan's actuarial
assumptions as set forth in the most recent actuarial report pertaining to such
Plan.
(h) To Arete's Knowledge, no Multiemployer Plan has any unfunded
vested benefits within the meaning of Section 4213(c) of ERISA.
(i) To Arete's Knowledge, no event has occurred with respect to
any Plan or with respect to any other employee benefit pension plan (as defined
in Section 3(2) of ERISA) established or maintained at any time during the
five-year period immediately preceding the date hereof for the benefit of
employees of Arete or Obligor, or any ERISA Affiliate, which presents a risk of
liability of any of such Persons under Section 4069 of ERISA.
(j) To Arete's Knowledge, there are no liabilities under the
Plans that are employee welfare benefit plans (as defined in Section 3(l) of
ERISA) providing for medical, health, life or other welfare benefits that are
not insured by fully paid non-assessable insurance policies, and no such Plan
provides for continued medical, health, life or other welfare benefits for
employees after they leave the employment of Arete, Obligor, Administaff or any
ERISA Affiliate (other than any such welfare benefits required to be provided
under the Consolidated Omnibus Budget Reconciliation Act of 1985 or other
similar law).
(k) To Arete's Knowledge, neither Arete or Obligor, nor any ERISA
Affiliate or Arete or Obligor is a party in interest (as defined in Section
3(14) of ERISA) with respect to any employee benefit plan (as defined in Section
3(3) of ERISA), other than the Plans.
(1) To Arete's Knowledge, neither Arete or Obligor nor
Administaff nor any ERISA Affiliate of Arete or Obligor has breached or violated
any of the responsibilities, obligations or duties imposed upon any of such
Persons by the Code or ERISA or any other statute, regulation, or governmental
order which breach or violation has given rise, or could give rise in the future
to, any material liability of, or obligation to pay money by, Arete or Arete.
(m) To Arete's Knowledge, there are no actions, suits or claims,
pending, asserted or, threatened against any Plan, Arete, Obligor, Administaff,
any ERISA Affiliate, or any Person for which Arete or Obligor may be directly or
indirectly liable through indemnification arrangement or otherwise, other than
routine claims for benefits.
(n) To Arete's Knowledge, all required reports and descriptions
of the Plans of Arete, Obligor, Administaff or ERISA Affiliates (including but
not limited to Form 5500 Annual Reports, Summary Annual Reports and Summary Plan
Descriptions) have been timely filed and distributed, and any notices required
by ERISA or the Code or any other applicable law, ruling or regulation.
(o) No proceeding is reasonably expected to be instituted or to
Arete's Knowledge no proceeding has been instituted under Section 515 of ERISA
to collect delinquent contributions to a Plan.
<PAGE> 25
4B.12 Intellectual Property. (a) Schedule 4A.16(a) sets a true and
complete list of all Intellectual Property owned by, licensed to, and licensed
by Obligor as more specifically described in Section 4A.16. To Arete's
Knowledge, except as to the matters set forth on Schedule 4A.16(b), there is no
reason to believe that any patent applications set forth on Schedule 4A.16(a)
will not be granted, including without limitation any patent application,
whether pending on the date hereof or not.
(b) Except as set forth on Schedule 4A.16(b), Obligor owns and
has good title to, or is party to enforceable and non-revocable license
agreements permitting Obligor to use all items of Intellectual Property, free
from Liens and restrictions, which are currently used or necessary or desirable
for the present and, to the best of Arete's Knowledge planned future conduct of
the Business.
(c) Except as set forth in Schedule 4A.16(a) or 4A.16(b), (i)
to Arete's Knowledge, none of the present or contemplated products or operations
of Obligor, or the Intellectual Property or Obligor's use thereof, infringes or
otherwise violates any intellectual property owned by any other Person, and (ii)
there is no pending or, to Arete's Knowledge, threatened claim, demand,
litigation, investigation, arbitration or other proceeding contesting Arete's or
Obligor's right to manufacture, distribute or sell any such product or to engage
in any such operation, or to use or otherwise exploit any Intellectual Property.
(d) Except as set forth on Schedules 4A.16(a) or (b), all
registrations for Intellectual Property identified thereon and all applications
to register Intellectual Property have been filed with the appropriate
government authorities. To the best of Arete's Knowledge, the Intellectual
Property owned by Obligor or Arete is valid and enforceable in all material
respects. Obligor or Arete has the right to bring actions for infringement or
unauthorized use of the Intellectual Property described on Schedule 4A.16(a),
and there is no valid basis for any such action.
(e) All algorithms, designs, drawings, specifications, source
code, object code, documentation, flow charts, diagrams and other Technology
were to Arete's Knowledge developed and created primarily by the Persons
identified in Schedule 4A.16(e), or otherwise disclosed to Purchaser in writing.
Each of the Persons listed in Schedule 4A.16(e) is either (i) an employee of
Obligor or Arete whose work on the Technology constitutes a work made for hire
for such party (ii) a third party who assigns his ownership of his/her or its
rights to Obligor pursuant to a valid and enforceable agreement. Arete has at
all times used, and will at all times use, its best efforts to protect the
confidentiality of all of their other confidential and proprietary information
and that of third parties that is in, or comes into, its possession.
(f) Except as set forth in Schedule 4A.16(f), each Person who is
rendering, or in the past, to Arete's Knowledge, rendered or in future renders,
significant or substantial services to Arete in respect of the Business with
access to the Technology has executed and delivered, or will execute and
deliver, to Obligor a Confidentiality and Assignment Agreement substantially in
the form of Exhibit G. To Arete's Knowledge, such confidentiality and
non-disclosure agreements constitute valid and binding obligations of such
Persons, enforceable in accordance with their respective terms.
(g) To Arete's Knowledge, no product liability or warranty claim
has been asserted or overtly threatened against Arete nor, to Arete's Knowledge,
is there a valid basis for any such claim.
(h) Except for the fees payable by Obligor pursuant to the
License Agreement, and the fees payable pursuant to the Mitsubishi Patent
License, no royalty or other fees are required to be paid by Obligor to any
Person in respect of the use of any of the Intellectual Property. Except as set
forth in Schedule 4A.16(h), Obligor has the exclusive right to use all of the
Intellectual Property and neither Arete nor Obligor has granted any license or
other right to any other Person, directly or indirectly, in respect of any
Intellectual Property. There are no restrictions which do or
<PAGE> 26
could adversely affect the rights of Obligor to use and exploit the Intellectual
Property. None of the rights of Obligor or Arete in the Intellectual Property
will be impaired or affected in any way by the Transactions (except as to Arete
pursuant to the License Agreement). The conduct of Obligor, and Arete so for as
it relates to the Business of Obligor, does not include any activity which might
constitute passing off.
(i) No Person has any option or similar right to acquire or use
any right, title or interest in or to any Intellectual Property other than Arete
or Obligor.
4B.13 Customers and Suppliers. To Arete's Knowledge, there is no reason
to believe that any significant customer (other than the government of
Venezuela) or supplier of Obligor or of Arete in connection with the Business
will cease to do business with Obligor (or Arete, as the case may be) in the
same manner and at the same levels as previously conducted with or anticipated
by Arete. No such supplier has notified Arete of any expected or projected
increase in the cost of goods or services provided by such supplier, to Obligor
or Arete, as the case may be.
4B.14 Business Operations and Other Information, Financial Condition.
(a) As of the date of each of the balance sheets included in the Arete Financial
Statements, Arete had no Indebtedness or liability, absolute or contingent,
liquidated or unliquidated, except Indebtedness and liabilities reflected or
reserved against on such balance sheets or described in the notes thereto. Since
the Balance Sheet Date, no Material Adverse Effect has occurred.
(b) The Arete Financial Statements have been prepared in
accordance with GAAP and fairly, completely and accurately present the financial
position of Arete and the financial information presented therein for the
periods and as at the date thereof The notes to such Arete Financial Statements
do not contain any misstatement of a material fact, nor do they omit to state a
material fact required to make any statement contained therein true.
(c) There are no material liabilities of Arete, contingent or
otherwise, existing on the date hereof or which will exist on the Tranche C
Effective Date in respect of which Arete may be liable other than (i)
liabilities disclosed in, reflected in, or provided for in the Arete Financial
Statements; and (ii) liabilities incurred in the ordinary course of business and
attributable to the period since the Balance Sheet Date, none of which could
have a Material Adverse Effect.
(d) The books of account and financial records of Arete have been
prepared in accordance with GAAP and fairly and correctly set out and disclose
all material respects of the financial position of Arete.
4B.15 Disclosure. No Transaction Document or any other document
furnished to Purchaser or any Holder by or on behalf of Arete in connection with
the Transactions, including without limitation the Arete Financial Statements,
contained, as of its respective date, the date hereof, the Tranche C Effective
Date or any Closing Date, any untrue statement of a material fact, or as of any
such date omitted to state a material fact necessary in order to make the
statements contained herein and therein, in light of the circumstances under
which they were made, not misleading. To Arete's Knowledge, there are no facts
that individually or in the aggregate have had a Material Adverse Effect or,
could have a Material Adverse Effect in the future.
4B.16 Offering of Securities. Assuming the truth and accuracy of
Purchaser's representations and warranties in Section 5.1, the offer, issuance
and sale of the Debentures and issuance of Series A Preferred Stock upon
conversion of the Debentures and the issuance of Common Stock upon conversion of
the Series A Preferred Stock are exempt from the registration requirements of
Section 5 of the Securities Act, and Obligor has not taken nor will it take any
action which would subject the issuance or sale of any of the Debentures or
issuance of Series A Preferred Stock upon conversion of the Debentures, or
issuance of Common Stock upon conversion of the Series A Preferred Stock to the
provisions of Section 5 of the Securities Act or violate the provisions of any
securities or Blue Sky laws of any applicable jurisdiction.
<PAGE> 27
4B.17 Manpower and Tax Sharing Agreement. The Manpower and Tax Sharing
Agreement will be prepared reasonably and in good faith. To Arete's Knowledge,
there are no facts or circumstances that are reasonably likely to result in any
material deviation from any provisions the Manpower and Tax Sharing Agreement.
4B.18 Sole Business. Obligor is not engaged in any business other than
the Business.
4B.19 Transaction Documents. (1) The representations and warranties of
Arete contained in each Transaction Document are true and correct in all
material respects on the date hereof and will be true and correct in all
material respects on the Tranche C Effective Date, except to the extent that
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties shall be true and correct on and
as of such earlier date), and the Holders shall be entitled to rely upon such
representations and warranties with the same force and effect as if they were
made to the Holders directly.
4B.20 No Litigation. There are no actions, suits or proceedings
pending, taken or, to Arete's Knowledge, threatened before or Person by any
governmental body or by an elected or appointed public official or private
person in the United States or elsewhere, whether or not having the force of
law, which might otherwise relate to or affect the Intellectual Property or
which seeks to vary, terminate or otherwise affect any of the Transaction
Documents or Transactions.
SECTION 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents. and
warrants to Arete and Obligor as follows:
5.1 Investment Intent. Purchaser is acquiring the Debentures for its
own account, for investment, and not with a view to or for sale in connection
with any distribution thereof in violation of the registration provisions of the
Securities Act or the rules and regulations promulgated thereunder or in
violation of any Canadian statutes, laws, rules or regulations.
5.2 Corporate Existence and Power. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of British
Columbia, Canada. Purchaser is duly qualified to do business in each
jurisdiction where the failure to so qualify could have a material adverse
effect on Purchaser's business. Purchaser has all requisite corporate power to
own its properties and to carry on its business and to execute, deliver and
perform its obligations under each Transaction Document to which it is a party.
5.3 Corporate Authority. The execution, delivery and performance by
Purchaser of each Transaction Document to which it is a party are within its
corporate powers and have been duly authorized by all necessary corporate action
on the part of its Board of Directors and stockholders.
5.4 Binding Effect. Each of the Transaction Documents which
contemplates that Purchaser is to be a party has been duly executed and
delivered by Purchaser and constitutes legal, valid and binding obligations of
Purchaser, enforceable against Purchaser in accordance with its terms, except
the enforceability of Transaction Documents may be subject to or limited by (a)
bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws
relating to or affecting the rights of creditors generally, (b) general
principles of equity, regardless of whether such enforceability is considered in
a proceeding in law or in equity and (c) the effect of those provisions and
principles of California law which provide that a Court may refuse to enforce or
may limit the application of a contract or any clause thereof which the court
finds as a matter of law have been unconscionable at the time it was made.
5.5 Financing. Purchaser has at least 3,000,000 Canadian Dollars in
cash or cash equivalents on the date hereof and the Closing Date.
5.6 No Conflict. Neither the execution and delivery by Purchaser of
any Transaction Document to which it is a party, nor fulfillment of or
compliance by Purchaser with the terms and provisions of its obligations under
the Transaction Documents, will conflict with, or result in a breach or
violation of the terms of or constitute a default under, or result in the
creation of any Lien
<PAGE> 28
on any properties of Purchaser, the charter or by-laws of Purchaser or any
contract, agreement, mortgage, indenture, lease or instrument to which Purchaser
is a party or by which its assets are bound or violate or, to the best knowledge
of Purchaser, any treaty, law, regulation or Order to which Purchaser or any of
its assets are subject.
5.7 Consents. Except as set forth in Schedule 5.7, no consent,
approval or authorization of or declaration, registration or filing with any
governmental authority of the United States or any subdivision thereof is
required in connection with the execution or delivery by Purchaser of the
Transaction Documents, or the performance by Purchaser of its obligations
thereunder, or as a condition to the legality, validity or enforceability of any
of the Transaction Documents, all of which shall have been obtained prior to the
date hereof and will remain in full force and effect.
5.8 No Litigation. To the best knowledge of Purchaser, there are no
actions, suits or proceedings pending, taken or threatened by any Person before
any governmental body or by an elected or appointed public official or private
person in the United States or elsewhere, whether or not having the force of
law, which might otherwise relate to or affect the Intellectual Property or
which seeks to vary, terminate or otherwise affect any of the Transaction
Documents or Transactions or which may affect the ability of Purchaser to
purchase the Debentures at the time and in the manner set forth in this
Agreement.
5.9 Transaction Documents. The representations and warranties of
Purchaser contained in each Transaction Document are true and correct in all
material respects on the date hereof and will be true and correct in all
material respects on the Tranche C Effective Date and each Closing Date, except
to the extent that such representations and warranties expressly relate to an
earlier date (in which case such representations and warranties shall be true
and correct on and as of such earlier date). This Agreement and the other
Transaction Documents constitute the only material agreements relating to the
Transactions to which Purchaser is a party.
5.10 Broker's or Finder's Commissions. Except as disclosed in Section
4A.9 above, Purchaser is not aware of any broker's or finder's fee or commission
that will be payable by any Person with respect to the issuance and sale of the
Debentures or any of the Transactions.
5.11 Access. By reason of its business and financial experience,
Purchaser has the capacity to protect its own interests in connection with the
Transactions and has been given full and adequate access to certain officers and
employees of Obligor for the purpose of conducting due diligence.
SECTION 6A CONDITIONS TO PURCHASER'S OBLIGATION TO CLOSE. Purchaser's obligation
to purchase the Debentures hereunder on the Tranche C Effective Date and any
Closing Date shall be subject to the satisfaction (or written waiver by
Purchaser), on or before such Tranche C Effective Date or Closing Date, of the
following conditions:
6A.I Proceedings Satisfactory. All corporate and other proceedings
taken or to be taken in connection with the transactions contemplated to occur
on or before such Tranche C Effective Date or such Closing Date and all related
documents shall be reasonably satisfactory in form and substance to Purchaser,
and Purchaser shall have received all such documents as they may reasonably
request, including, without limitation: (i) good standing and tax clearance
certificates for Arete and Obligor in jurisdictions where they are organized;
(ii) certified copies of Obligor's charter documents (iii) certified copies of
resolutions of the Board of Directors of Arete and Obligor authorizing the
execution and delivery of the Transaction Documents to which it is a party and
the transactions contemplated thereby, including without limitation the
reservation of the Series A Preferred Stock for issuance upon conversion of the
Debentures and reservation of Common Stock upon conversion of the Series A
Preferred Stock; (iv) certified copies of resolutions of the shareholders of
Obligor adopting, and authorizing the filing of the Amended and Restated
Articles of Obligor and Stock Option Plan; and (v) certificates as to the
incumbency and signatures of each of the officers of Arete and Obligor who shall
execute any Transaction Document or other document executed and delivered
pursuant to or in connection with this Agreement.
<PAGE> 29
6A.2 Opinions of Counsel for Obligor and Arete. Purchaser shall have
received from counsel to Arete and counsel to Obligor in connection with the
Transactions prior to the Tranche C Effective Date, a favorable legal opinion,
dated the Closing Date and addressed to Purchaser, covering such matters
relating to the Transactions as Purchaser may reasonably request.
6A.3 Representations and Warranties True. The representations and
warranties contained in Sections 4A, 4B and elsewhere in the Transaction
Documents and in any certificate delivered by or on behalf of Arete or Obligor
shall be true and correct on and as of the Tranche C Effective Date and such
Closing Date with the same effect as if such representations and warranties had
been made on and as of the Tranche C Effective Date and such Closing Date after
giving effect to the Transactions to be consummated on or prior to the Tranche C
Effective Date and such Closing Date, except to the extent that such
representations and warranties expressly relate to an earlier date (in which
case such representations and warranties shall be true and correct on and as of
such earlier date). Each of Arete and Obligor shall have performed all
agreements on its part required to be performed under this Agreement and under
any other Transaction Document on or prior to the Tranche C Effective Date and
such Closing Date, and there shall exist no Default or Event of Default on the
Effective Date and such Closing Date after giving effect to the Transactions
contemplated by this Agreement. Each of Arete and Obligor shall have delivered
to Purchaser an Officer's Certificate, dated as of the Tranche C Effective Date
and such Closing Date, to the effect of the matters stated in the foregoing
sentences of this Section 6A.3 and in Sections 6A.4, 6A.5, 6A.6, 6A.7, 6A.8,
6A.10 and 6A.11.
6A.4 Absence of Material Adverse Change, Etc. Since December 31,
1997, no Material Adverse Effect (regardless of whether it relates to Obligor or
Arete) shall have occurred, other than the losses projected in the business plan
of Obligor previously delivered to the Purchaser.
6A.5 Consents and Approvals. All necessary consents, waivers,
approvals and authorizations of, and declarations, registrations and filings
with, governmental bodies and other Persons required in order to issue and sell
the Debentures as contemplated hereby and to consummate the other Transactions
shall have been obtained or made and shall be in full force and effect.
6A.6 Absence of Litigation, Orders. Etc. Save and except for the
potential litigation involving Alan Johnson as previously disclosed to the
Purchasers, there shall not be pending or, to the knowledge of any party,
threatened, any action, suit, proceeding, governmental investigation or
arbitration against or affecting Purchaser, Arete or Obligor or the Intellectual
Property, Technology or other assets or property of either of them which seeks
to enjoin or restrain any of the Transactions or which could have a Material
Adverse Effect. No Order shall be in effect which purports to enjoin or restrain
any of the transactions contemplated herein or which has had or is reasonably
likely to have a Material Adverse Effect.
6A.7 Recapitalization. The Recapitalization shall have been
consummated in accordance with the terms the Recapitalization Plan prior to the
Tranche C Effective Date.
6A.7a Filing of Amended and Restated Articles of Obligor. Obligor shall
cause to be filed with the California Secretary of State, the Amended and
Restated Articles of Obligor, in the form of Exhibit A hereto as part of the
Recapitalization.
6A.8 License. The License Agreement shall have been duly executed and
delivered by the parties thereto, prior to the Tranche C Effective Date, and
shall be in full force and effect.
6A.9 Manpower and Tax Sharing Agreement. Arete and Obligor shall have
executed and delivered to Purchaser prior to the Tranche C Effective Date the
Manpower and Tax Sharing Agreement and such Agreement shall be in full force and
effect.
6A.10 Agreements of Certain Persons. Arete and Obligor shall have
delivered to Purchaser prior to the Tranche C Effective Date, in form and
substance satisfactory to Purchaser in its
<PAGE> 30
reasonable discretion, Confidentiality and Assignment Agreements between Obligor
or Arete and all Persons set forth on Schedule 4A.16(e), fully executed and in
full force and effect.
6A.11 Export Permits. Arete and Obligor shall have obtained and
delivered to Purchaser copies of such export pen-nits and other licenses and
documents as may be required under the laws of the United States to permit the
export of the products of Obligor and the licensing of the Technology and
Intellectual Property to persons outside of the United States.
SECTION 6B. CONDITIONS TO OBLIGOR'S OBLIGATION TO CLOSE. Obligor's obligation to
sell the Debentures hereunder on the Tranche C Effective Date and any Closing
Date shall be subject to the satisfaction (or written waiver by Obligor), on or
before such Tranche C Effective Date or Closing Date, of the following
conditions:
6B.1 Representations and Warranties True. The representations and
warranties contained in Section 5 and in any certificate delivered by or on
behalf of Purchaser shall be true correct on and as of the Tranche C Effective
Date and such Closing Date with the same effect as if such representations and
warranties had been made on and as of the Tranche C Effective Date or the
Closing Date after giving effect to the Transactions to be consummated on or
prior to such Tranche C Effective Date or Closing Date, except to the extent
that such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties shall be true and correct on and
as of such earlier date). Obligor shall have delivered to Purchaser an Officer's
Certificate, dated as of the Tranche C Effective Date and such Closing Date, to
the effect of the matters stated in the foregoing sentences of this Section 6B.1
and 6B.2.
6B.2 Absence of Litigation. Orders, Etc. There shall not be pending
or, to the knowledge of any party, threatened, any action, suit, proceeding,
governmental investigation or arbitration against or affecting Purchaser, Arete
or Obligor or the Intellectual Property, Technology or other assets or property
of either of them which seeks to enjoin or restrain any of the Transactions or
which could have a Material Adverse Effect, other than the claim of Alan
Johnson, previously disclosed. No Order shall be in effect which purports to
enjoin or restrain any of the transactions contemplated herein or which has had
or is reasonably likely to have a Material Adverse Effect.
SECTION 7 AFFIRMATIVE COVENANTS. Obligor hereby covenants and agrees that, so
long as any of the Debentures or Conversion Stock shall be and remain
outstanding:
7.1 Use of Proceeds. The use of proceeds of the issuance and sale of
the Debentures shall be used solely for working capital of Obligor for the
development of its fingerprint technology and the manufacture and sale of
related products.
7.2 Payment of Obligations. Obligor will duly and punctually pay the
principal of and interest on the Debentures in accordance with the terms of such
Debentures and this Agreement, and each of Obligor and Arete will duly and
punctually pay and perform all of their respective Obligations, covenants,
agreements and conditions contained in the other Transaction Documents.
7.3 Payment of Taxes and Claims. Obligor will pay before they become
delinquent: (i) all taxes, assessments and governmental charges or levies
imposed upon Obligor, its income or profits or upon its property, real, personal
or mixed, or upon any part thereof, (ii) all claims of landlords, warehousemen
or materialmen, for labor, materials and supplies or of any other nature which,
if unpaid, would result in the creation of a Lien upon property of Obligor, and
(iii) all claims, assessments, or levies required to be paid by Obligor, or any
ERISA Affiliate pursuant to any Pension Plan or Multiemployer Plan or any
agreement, contract, statute or Order governing or relating to any such plan;
provided, that the taxes, assessments, claims, charges and levies described
herein need not be paid while being diligently contested in good faith and by
appropriate proceedings so long as (i) adequate book reserves have been
established with respect thereto in accordance with GAAP and (ii) Obligor's
title to and right to use its property and the Intellectual Property is not
materially adversely affected by such non-payment. Obligor will timely file all
tax returns required to be filed in connection with the payment of taxes
required by this Section 7.3.
<PAGE> 31
7.4 Maintenance of Properties, Records and Corporate Existence.
Obligor will, in its reasonable business judgment: (i) diligently prosecute all
patent applications and defend all intellectual property rights relating to the
Business, (ii) maintain its properties in good condition, reasonable wear and
tear excepted, and make all necessary renewals, repairs, replacements,
additions, betterments, and improvements thereto; (iii) keep books of records
and accounts in which full and correct entries will be made of all its business
transactions and will reflect in its financial statements adequate accruals and
appropriations to reserves, all in accordance with GAAP; (iv) maintain the same
fiscal year during and after the current fiscal year ending December 31, 1998;
(v) do or cause to be done all things necessary to preserve and keep in full
force and effect its corporate existence, and its material contract rights,
powers and franchises; and (vi) comply with all material applicable laws,
regulations, Orders, franchises, authorizations, licenses and pen-nits of, any
governmental body.
7.5 Inspection of Properties and Books. Purchaser and the Holders
shall have the right during normal business hours and upon three business days'
prior notice (a) to visit and inspect any of the properties of Obligor, (b) to
examine Obligor's books of account and records and to make copies and extracts
therefrom at Holder's expense, and (c) to discuss Obligor's affairs, finances
and accounts with, and to be advised as to the same by, Obligor's officers and
employees and Obligor's independent public accountants. Purchaser and the
Holders shall be entitled to meet with the senior management of Obligor at least
once during each fiscal quarter of Obligor to discuss Obligor's financial
statements, business, assets, operations and prospects.
7.6 Initial Public Offering, Additional Financing. Arete and
Purchaser shall use their reasonable best efforts to cause the business of
Obligor to become publicly traded by way of an Initial Public Offering, ("IPO")
undertaken by Obligor, or by otherwise causing the business of Obligor to be
wholly-owned by a publicly traded company. In respect of this matter, the
parties acknowledge and agree that it is their intention, subject to there being
no adverse securities, legal or tax issues, that the business of Obligor will
become public by way of Obligor being acquired by, or merged with, the
Purchaser, rather than by undertaking an IPO on behalf of the Obligor. The
parties further acknowledge and agree that this may be effected by the Purchaser
acquiring all of the issued and outstanding shares of Obligor, and any
securities or agreements pursuant to which shares might be issued in the future,
such that Obligor becomes a wholly-owned subsidiary of the Purchaser, or by
Obligor being merged with the Purchaser, by merger, amalgamation, arrangement or
otherwise, in order to create a new corporate entity that wholly-owns the
business of Obligor. As part of that process, the parties shall use their best
efforts to cause the Series A Preferred Stock or Common Stock to become publicly
tradable within two years of the Tranche C Effective Date. If prior to the
purchase by Purchaser of all Debentures to which it is entitled hereunder (i.e.,
$5,000,000), Obligor wishes to raise additional debt or equity financing, and
provided that Purchaser has purchased all available Debentures in accordance
with the funding schedule herein (or is not in compliance for a reason other
than Obligor's or Arete's breach of any Transaction Document), Obligor shall
notify Purchaser of the type and amount of financing required, and the valuation
of Obligor for such financing, and Purchaser (or its designee) shall then have
fifteen (15) days from the date of the notice to notify Obligor if it desires to
provide the financing required on the terms of the notice, which such financing
shall be consummated within ninety (90) days of such election. If Purchaser (or
its designee) elects not to provide the financing, Obligor shall have the right
to obtain the financing on substantially the same terms set forth in the notice
from any source for a period of one hundred eighty (180) days, as long as such
financing does not dilute the shareholding interest of Purchaser. In the event
Obligor desires to raise additional debt or equity financing after full and
timely completion of the $5,000,000 financing, Purchaser (or its designee) shall
have the right of first offer set forth above, but any equity or convertible
debt financing shall dilute the shareholding interest of all shareholders,
(including Purchaser) pro rata except the shares issued under the Stock Option
Plan. The right of first offer described above shall not be applicable to any
financing by a strategic partner of Obligor, as determined by the Board of
Directors of Obligor. Obligor hereby agrees that Arete is not a strategic
partner of Obligor. The Purchaser is not permitted to designate as the
Purchaser's designee a Person which is a direct or indirect competitor of BII or
Arete in the biometric field.
7.7 Registration Rights.
<PAGE> 32
(a) Each time Obligor shall determine to file a registration
statement under the Securities Act (other than pursuant to Section 2 hereof and
other than on Form S-4, S-8 or a registration statement on Form S- I covering
solely an employee benefit plan) in connection with the proposed offer and sale
for money of any of its securities either for its own account or on behalf of
any other security holder, Obligor agrees to give prompt written notice of its
determination to all Holders of Registrable Securities. Upon the written request
of the Majority Holder given within thirty (30) days after the receipt of such
written notice from Obligor, Obligor agrees to cause all such Registrable
Securities, the Holders of which have so requested registration thereof, to be
included in such registration statement and registered under the Securities Act,
all to the extent requisite to permit the sale or other disposition by the
prospective seller or sellers of the Registrable Securities to be so registered.
(b) If the registration of which Obligor gives written notice
pursuant to Section 7.7(a) is for a public offering involving an underwriting,
Obligor agrees to so advise the Holders as a part of its written notice. In such
event the right of any Holder to registration pursuant to this Section 7.7(b)
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their Registrable
Securities through such underwriting agree to enter into (together with Obligor
and the other holders distributing their securities through such underwriting)
an underwriting agreement with the underwriter or underwriters selected for such
underwriting by Obligor, provided that such underwriting agreement is in
customary form and is reasonably acceptable to the Holders of a majority of the
shares of Registrable Securities requested to be included in such registration.
(c) Notwithstanding any other provision of this Section 7.7, if
the managing under-writer of an underwritten distribution advises Obligor and
the Holders of the Registrable Securities participating in such registration in
writing that in its good faith judgment the inclusion of all Registrable
Securities proposed to be included in such registration would interfere with
successful marketing (including pricing) of Obligor's Securities, the number of
Registrable Securities shall be reduced or eliminated in the sole discretion of
the underwriter, and such reduced number of shares shall be allocated among all
participating Holders of Registrable Securities and the holders of other
securities in proportion, as nearly as practicable, to the respective number of
shares of Registrable Securities and other securities held by such Holders and
other holders at the time of filing the registration statement. All Registrable
Securities and other securities which are excluded from the underwriting by
reason of the underwriter's marketing limitation and all other Registrable
Securities not originally requested to be so included shall not be included in
such registration and shall be withheld from the market by the Holders thereof
for such period of time as the managing underwriter reasonably determines is
necessary to effect the underwritten public offering.
(d) If and whenever Obligor is required by the provisions of this
Section 7.7 to effect the registration of Registrable Securities under the
Securities Act, Obligor, at its expense and as expeditiously as possible, shall:
(i) In accordance with the Securities Act and all
applicable rules and regulations, prepare and file with the Commission a
registration statement with respect to such securities and use its best efforts
to cause such registration statement to become and remain effective until the
securities covered by such registration statement-have been sold, and prepare
and file with the Commission such amendments and supplements to such
registration statement and the prospectus contained therein as may be necessary
to keep such registration statement effective and such registration statement
and prospectus accurate and complete until the securities covered by such
registration statement have been sold;
(ii) Furnish to the Holders of securities participating
in such registration and to the underwriters of the securities being registered
such number of copies of the registration statement and each amendment and
supplement thereto, preliminary prospectus, final prospectus
<PAGE> 33
and such other documents as such underwriters and Holders may reasonably request
in order to facilitate the public offering of such securities;
(iii) Use its best efforts to register or qualify the
securities covered by such registration statement under such state securities or
blue sky laws of such jurisdictions as such participating Holders and
underwriters may reasonably request within ten (10) days prior to the original
filing of such registration statement, except that Obligor shall not for any
purpose be required to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction where it is
not so qualified or which will subject it to general taxation;
(iv) Notify the Holders participating in such
registration, promptly after it shall receive notice thereof, of the date and
time when such registration statement and each posteffective amendment thereto
has become effective or a supplement to any prospectus forming a part of such
registration statement has been filed;
(v) Notify such Holders promptly of any request by the
Commission for the amending or supplementing of such registration statement or
prospectus or for additional information;
(vi) Prepare and file with the Commission, promptly
upon the request of any such Holders, any amendments or supplements to such
registration statement or prospectus which, in the opinion of counsel for such
Holders, is required under the Securities Act or the rules and regulations
thereunder in connection with the distribution of the Registrable Securities by
such Holders;
(vii) Prepare and file promptly with the Commission,
and promptly notify such Holders of the filing of, such amendments or
supplements to such registration statement or prospectus as may be necessary to
correct any statements or omissions if, at the time when a prospectus relating
to such securities is required to be delivered under the Securities Act, any
event has occurred as the result of which any such prospectus or any other
prospectus as then in effect would include an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading;
(viii) In case any of such Holders or any underwriter
for any such Holders is required to deliver a prospectus at a time when the
prospectus then in circulation is not in compliance with the Securities Act or
the rules and regulations of the Commission, prepare promptly upon request such
amendments or supplements to such registration statement and such prospectus as
may be necessary in order for such prospectus to comply with the requirements of
the Securities Act and such rules and regulations;
(ix) Advise such Holders, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance of any stop order by
the Commission suspending the effectiveness of such registration statement or
the initiation or threatening of any proceeding for that purpose and promptly
use its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal such stop order should be issued;
(x) Not file any registration statement or prospectus
or any amendment or supplement to such registration statement or prospectus to
which the Holders of a majority of the Registrable Securities included or to be
included in a registration have reasonably objected on the grounds that such
registration statement or prospectus or amendment or supplement thereto does not
comply in all material respects with the requirements of the Securities Act or
the rules and regulations thereunder, after having been furnished with a copy
thereof at least five (5) business days prior to the filing thereof-, provided,
however, that the failure of such Holders or their counsel to review or object
to any registration statement or prospectus or any amendment or supplement to
such registration statement or prospectus shall not affect the rights of such
Holders or their respective officers, directors, partners, legal counsel,
accountants or controlling Persons or any underwriter or any controlling Person
of such underwriter under this Section 7.7 hereof,
<PAGE> 34
(xi) Make available for inspection upon request by any
Holder of Registrable Securities covered by such registration statement, by any
managing underwriter of any distribution to be effected pursuant to such
registration statement and by any attorney, accountant or other agent retained
by any such Holder or any such underwriter, all financial and other records,
pertinent corporate documents and properties of Obligor, and cause all of
Obligor's officers, directors and employees to supply all information reasonably
requested by any such Holder, underwriter, attorney, accountant or agent in
connection with such registration statement; and
(xii) At the request of any Holder of Registrable
Securities covered by such registration statement, furnish to such Holder on the
effective date of the registration statement or, if such registration includes
an underwritten public offering, at the closing provided for in the underwriting
agreement, (i) an opinion dated such date of the counsel representing Obligor
for the purposes of such registration, addressed to the underwriters, if any,
and to the Holder or Holders making such request, covering such matters with
respect to the registration statement, the prospectus and each amendment or
supplement thereto, proceedings under state and federal securities laws, other
matters relating to Obligor, the securities being registered and the offer and
sale of such securities as are customarily the subject of opinions of issuer's
counsel provided to underwriters in underwritten public offerings, and such
opinion of counsel shall additionally cover such legal and factual matters with
respect to the registration as such requesting Holder or Holders may reasonably
request, and (ii) letters dated each of such effective date and such closing
date, from the independent certified public accountants of Obligor, addressed to
the underwriters, if any, and to the Holder or Holders making such request,
stating that they are independent certified public accountants within the
meaning of the Securities Act and dealing with such matters as the underwriters
may request, or if the offering is not underwritten that in the opinion of such
accountants the financial statements and other financial data of Obligor
included in the registration statement or the prospectus or any amendment or
supplement thereto comply in all material respects with the applicable
accounting requirements of the Securities Act, and additionally covering such
other accounting and financial matters, including information as to the period
ending not more than five (5) business days prior to the date of such letter
with respect to the registration statement and prospectus, as such requesting
Holder or Holders may reasonably request as shall be reasonably necessary to
enable them to exercise their due diligence responsibility.
Any such information which Obligor provides shall not be disclosed unless such
information is necessary to avoid or correct a misstatement or omission in the
registration statement or such information has been generally available to the
public.
(e) With respect to each registration effected pursuant to this
Section 7.7 and with respect to each inclusion of shares of Registrable
Securities in a registration statement pursuant to this Section 7.7, Obligor
agrees to bear all fees, costs and expenses of and incidental to such
registration and the public offering in connection therewith; provided, however,
that security holders participating in any such registration agree to bear their
pro rata share of the underwriting discount and commissions.
(f) In connection with any registration or Registrable Securities
under this Agreement, (i) Obligor hereby agrees to indemnify and hold harmless
each Holder of Registrable Securities which are included in a registration
statement pursuant to the provisions of this Agreement and each of such Holder's
officers, directors, partners, legal counsel and accountants, and each Person
who controls such Holder within the meaning of the Securities Act and any
underwriter (as defined in the Securities Act) for such Holder, and any Person
who controls such underwriter within the meaning of the Securities Act, from and
against, and agrees to reimburse such Holder, its officers, directors, partners,
legal counsel, accountants and controlling Persons and each such underwriter and
controlling Person of such underwriter with respect to, any and all claims,
actions (actual or threatened), demands, losses, damages, liabilities, costs and
expenses to which such Holder, its officers, directors, partners, legal counsel,
accountants or controlling Persons, or any such underwriter or controlling
Person of such underwriter may become subject under the Securities Act or
otherwise, insofar as such claims, actions, demands, losses, damages,
liabilities, costs or expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained
<PAGE> 35
therein, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however that Obligor will not be liable in any such case to the extent
that any such claim, action, demand, loss, liability, cost or expense is caused
by an untrue statement or omission so made in strict conformity with written
information furnished by such Holder, such underwriter or such controlling
Person specifically for use in the preparation thereof.
(g) Each Holder hereby agrees to indemnify and hold harmless
Obligor, Arete and each of Obligor's and Arete's officers, directors, partners,
legal counsel and accountants, and each Person who controls Obligor within the
meaning of the Securities Act and any underwriter (as defined in the Securities
Act) for Obligor, and any Person who controls such underwriter within the
meaning of the Securities Act, from and against, and agrees to reimburse
Obligor, Arete, their respective officers, directors, partners, legal counsel,
accountants and controlling Persons and each such underwriter and controlling
Person of such underwriter with respect to, any and all claims, actions (actual
or threatened), demands, losses, damages, liabilities, costs and expenses to
which Obligor, Arete, their respective officers, directors, partners, legal
counsel, accountants or controlling Persons, or any such underwriter or
controlling Person of such underwriter may become subject under the Securities
Act or otherwise, insofar as such claims, actions, demands, losses, damages,
liabilities, costs or expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
Holder will not be liable unless such claim, action, demand, loss, liability,
cost or expense is caused by an untrue statement or omission so made in strict
conformity with written information furnished by such Holder to Obligor, such
underwriter or such controlling Person specifically for use in the preparation
thereof.
(h) Except as expressly permitted by this Agreement and except
for an underwriting agreement between Obligor and one or more professional
underwriters of securities, Obligor shall not agree to register any equity
securities under the Securities Act unless such agreement specifically provides
that (i) the holder of such equity securities may not participate in any
registration requested pursuant hereto without the written consent of the
Holders of a majority of the shares of Registrable Securities included in such
registration unless ([x]) the sale of the Registrable Securities is to be
underwritten on a firm commitment basis and the managing underwriter in its good
faith judgment concludes that the public offering or sale of such equity
securities would not cause the number of shares of Registrable Securities and
such Equity Securities to exceed the number which can be sold in such offering,
and ([y]) the Holders of Registrable Securities shall have the right to
participate, to the extent that they may request, in any registration statement
initiated under a demand registration right exercised by the holder of such
equity securities, except that if the managing underwriter of a public offering
made pursuant to such a demand registration limits the number of shares of
common stock to be sold, the participation of the Holders of Registrable
Securities and the holders of all other common stock (other than the equity
securities held by such holder of equity securities) shall be pro rata based
upon the number of shares of Registrable Securities and Common Stock held at the
time of filing the registration statement, (ii) the holder of such equity
securities may not participate in any registration requested pursuant hereto if
the sale of Registrable Securities is to be underwritten unless, if the managing
underwriter limits the total number of securities to be sold, the holders of
such equity securities and the Holders of Registrable Securities are entitled to
participate in such underwritten distribution pro rata based upon the number of
shares of common stock and Registrable Securities held at the time of filing the
registration statement, and ([z]) all equity securities excluded from any
registration as a result of the foregoing limitations shall not be included in
such registration and may not be publicly offered or sold for such period as the
managing underwriter of such registered distribution may request.
7.8 Events of Default. Obligor covenants and agrees to deliver to the
Holders promptly (and in any event within 5 days) after becoming aware of the
existence of any Default or Event of
<PAGE> 36
Default, an Officer's Certificate specifying the nature and period of existence
thereof and what actions they are taking or propose to take with respect
thereto.
7.9 Non-Competition. Arete shall not knowingly, directly or
indirectly, or by action in concert with others, engage in any activity, or
invest in, or loan funds to, any Person, that is in direct or indirect
competition with Obligor and where such conduct is engaged in unknowingly, Arete
shall immediately cease such action when brought to its attention; provided,
however that Arete shall have the right to indirectly compete with Obligor by
the development, sale or license of technology, inventions, information,
developments or any method or process relating to biometric identification
systems other than fingerprint identification.
7.10 Further Assurances. Each of the parties shall use all reasonable
efforts to take all action reasonably necessary or advisable to consummate the
transactions contemplated by the Transaction Documents, including but not
limited to doing all acts, matters or things stated to be done by that party
under the Transaction Documents, to satisfy all conditions to performance set
forth in any of them and using all reasonable efforts to obtain all necessary
waivers, consents and approvals, and to effect all necessary registrations and
filings with third parties or governmental or public bodies.
SECTION 8 NEGATIVE AND MAINTENANCE COVENANTS. Obligor covenants and agrees that
so long as any Debentures shall be outstanding, unless approved by the Majority
Holders:
8.1 Restrictions on Liens. Neither Obligor nor Arete will, directly
or indirectly, create, assume or suffer to exist any Lien on any Intellectual
Property.
8.2 Limitation on Sale and Leasebacks. Neither Obligor nor Arete will
enter into any arrangement whereby Obligor nor Arete shall sell or transfer any
property owned by it and material to the Business to any Person and thereupon
Obligor or Arete shall lease or intend to lease, as lessee, the same property.
8.3 Mergers, Consolidations and Sales of Assets; Acquisitions;
Subsidiaries. Obligor will not enter into any transaction of merger,
amalgamation or consolidation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, license,
transfer or otherwise dispose of, in one transaction or a series of
transactions, all or substantially all of the assets of Obligor, or acquire by
purchase or otherwise all or substantially all of the business or property of
any Person or otherwise have any subsidiaries or acquire by purchase or
otherwise any subsidiary, or enter into any agreement, contract or understanding
providing for any of the foregoing.
8.4 Conduct of Business. Obligor will not engage in any business
other than the Business. Obligor will pursue and develop the Business in good
faith in the ordinary course thereof.
8.5 Transactions with Affiliates. Obligor will not directly or
indirectly, enter into or permit to exist any transaction (including, without
limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service) with any stockholder, director, officer or Affiliate
of Obligor or Arete, or any stockholder, director, officer or Affiliate of any
such Person, unless such transaction is not otherwise prohibited under any
Transaction Document, is in the ordinary course of Obligor's business and is on
fair and reasonable terms that are not less favorable, taken as a whole, to
Obligor, than those that would be obtainable at the time in an arms' length
transaction with a Person who does not stand in such relationship.
8.6 Amendments of Charter, By-Laws and Certain Documents. Obligor
will not effect any amendment to or modification of its charter documents or
by-laws or any Transaction Document, including without limitation any amendment
or modification that imposes any voting requirements with respect to any action
of Obligor's Board of Directors, except as provided in Section 16.
<PAGE> 37
SECTION 9 FINANCIAL STATEMENTS AND INFORMATION. Each of Obligor and Arete will
furnish to the Holders in the case of items (a), (b), (c) and (d) to each member
of the Board of Directors in the case of (e) and (f), so long as any Debentures
or Conversion Stock is outstanding:
(a) Financial Statements. (i) within thirty 30 days of the end of
each calendar month as to Obligor and each fiscal quarter as to Arete, copies of
the balance sheets of Obligor and Arete as of the end of such month and quarter,
and the related consolidated and consolidating statements of operations and cash
flows for such month and such quarter and for the portion of the fiscal year
ended with the last day of such month and such quarter; (ii) as soon as
available and in any event within ninety (90) days after the end of each fiscal
year of Obligor or Arete, as the case may be, copies of the audited consolidated
and unaudited balance sheets of Obligor and Arete, in each case as of the end of
such fiscal year, together with, in each case, the related audited and unaudited
statements of operations, stockholders' equity and cash flows for such fiscal
year, and the notes thereto, all in reasonable detail. All financial statements
furnished pursuant to the foregoing shall be prepared in accordance with GAAP.
(b) Officer's Compliance Certificates. Concurrently with the
reports or financial statements furnished pursuant to subsection (a) of this
Section, an Officer's Certificate of the Chief Financial Officer of Arete or
Obligor, as the case may be, stating that, based upon such examination or
investigation and review of this Agreement as in the opinion of the signer is
necessary to enable the signer to express an informed opinion with respect
thereto to Arete's Knowledge and Obligor's Knowledge, respectively, no Default
or Event of Default exists or has existed during such period or, if such a
Default or Event of Default shall exist or have existed, the nature and period
of existence thereof and what action Obligor or Arete, as the case may be, has
taken, is taking or proposes to take with respect thereto.
(c) Material Adverse Effect. Promptly after becoming aware of any
Material Adverse Effect with respect to which notice is not otherwise required
to be given pursuant to this Section 9, an Officer's Certificate of Obligor or
Arete, as the case may be, setting forth the details of such Material Adverse
Effect and stating what action Obligor or Arete, as the case may be, have taken
or proposes to take with respect thereto.
(d) Litigation and Proceedings. Promptly (and in any event within
15 days) after Arete or Obligor receives notice of the institution of, or threat
of, any action, suit, proceeding, governmental investigation or arbitration
against or affecting Obligor, the Intellectual Property, Technology or any other
property of Obligor, or any material development in any such action, suit,
proceeding, governmental investigation or arbitration, which, in either case, if
adversely determined, might have a Material Adverse Effect, an Officer's
Certificate of Obligor describing the nature and status of such matter in
reasonable detail. Purchaser shall notify Obligor and Arete of any litigation or
threatened litigation involving Purchaser.
(e) Annual Budget, Business Plan and Projections. Not later than
sixty (60) days prior to the commencement of each fiscal year of Obligor, a copy
of (i) a budget of Obligor for such fiscal year, which shall include at minimum
a projected balance sheet and a projected statement of operations and cash flows
for each month in such fiscal year, together with projections for the financial
performance of Obligor for such fiscal year and the basis therefor, and (ii) a
business plan for such fiscal year, provided, however, Obligor may redact those
portions (and only those portions) which contain confidential and proprietary
information.
(f) Other Information. Any other information, including financial
statements and computations, relating to the performance of obligations arising
under any Transaction Document and/or the affairs of Obligor or, in connection
with the Business, Arete that Purchaser or any Holder may from time to time
reasonably request and which is capable of being obtained, produced or generated
by Obligor or Arete without undue expense or hardship, and provided that such
Holder executes and delivers a non-disclosure agreement acceptable to Obligor
with respect to such information.
SECTION 10 EVENTS OF DEFAULT.
<PAGE> 38
10. 1 Events of Default; Remedies. If any of the following events
(herein called "EVENTS OF DEFAULT") shall have occurred and not cured within the
time allocated (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or by operation of law or otherwise and such
Event of Default shall be deemed to be continuing until waived by the Majority
Holders in accordance with the terms hereof):
(a) Obligor shall default in the due and punctual payment or
permitted prepayment of all or any part of the principal of or interest accrued
on any Debenture when and as the same shall become due and payable, whether at
stated maturity, by acceleration, by permitted notice of prepayment or otherwise
and such default shall continue for a period of fifteen (15) days after notice
in writing from Purchaser or the Majority Holders; or
(b) Obligor or Arete shall default in the performance or
observance of any of its covenants, agreements or conditions contained in
Section 8 of this Agreement and such default shall continue for a period of
fifteen (15) days after notice in writing from Purchaser or the Majority
Holders; or
(c) Obligor or Arete shall default in the performance or
observance of any of its covenants, agreements or conditions contained in this
Agreement (other than those referred to in any subsection of this Section 10.1
other than this subsection (c)), or Obligor or Arete shall default in the
performance or observance of any of its covenants, agreements or conditions
contained in any of the other Transaction Documents, and such default shall
continue for a period of fifteen (15) days after notice in writing from
Purchaser or the Majority Holders; or
(d) Arete or Obligor shall fail to pay any principal of, premium
or interest when the same becomes due and payable (whether at scheduled
maturity, or by acceleration, demand or otherwise); or any other event shall
occur or condition shall exist under any agreement or instrument relating to any
such Indebtedness if the effect of such event or condition is to permit the
acceleration of the maturity of such Indebtedness and such default shall
continue for a period of fifteen (15) days after notice in writing from
Purchaser or the Majority Holders; or
(e) Obligor shall apply for or consent to the appointment of, or
the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, became insolvent, make a
general assignment for the benefit of its creditors, commence a voluntary case
under the Bankruptcy Code or the foreign equivalent thereof, file a petition
seeking to take advantage of any other debtor relief Statute, fail to controvert
in a timely or appropriate manner, or acquiesce in writing to, any petition
filed against it in an involuntary case under the Bankruptcy Code or the foreign
equivalent thereof, admit in writing its inability to pay its debts generally as
such debts become due or become insolvent or take any action under the laws of
its jurisdiction of organization analogous to any of the foregoing; or
(f) an inventory proceeding or case shall be commenced, in any
court of competent jurisdiction, seeking the liquidation or reorganization of
Obligor or readjustment of the Indebtedness of either, the appointment of a
trustee, receiver, custodian, liquidator or the like of Obligor, or of all or
any substantial part of the assets of either of them, or similar relief in
respect of Obligor, as the case may be, under any statute providing for the
relief of debtors, and such proceeding or case shall continue undismissed, or
unstayed. and in effect, for a period of 90 days; or an order for relief shall
be entered in an involuntary case under the Bankruptcy Code, against Obligor; or
action under the laws of the jurisdiction of organization of Obligor analogous
to the foregoing shall be taken with respect to any of Obligor and shall
continue undismissed, or unstayed and in effect, for a period of sixty (60)
days; or
(g) any material representation or warranty made by or on behalf
of Arete or Obligor in any Transaction Document or Officer's Certificate or
other instrument shall be incorrect or breached in any material respect on the
date as of which made (or deemed made); or
<PAGE> 39
(h) any provision of any Transaction Document shall not be or
shall cease to be in full force and effect, due to the actions of Arete or
Obligor, or not be, or be asserted in writing by Arete or Obligor not to be
valid, binding and enforceable against any Person purported to be bound by it,
then each of Purchaser and the Majority Holders may (but shall not be
obligated to), by written notice to Obligor, declare the unpaid principal amount
of Debentures held by such Person to be, and the same shall forthwith become,
immediately due and payable, together with the interest accrued thereon.
10.2 Suits for Enforcement, Remedies. If any Event of Default shall
have occurred and be continuing, the Majority Holders may proceed to protect and
enforce the rights of Purchaser and the Holders, either by suit in equity or by
action at law, or both, whether for the specific performance of any covenant or
agreement contained in any other Transaction Document or in aid of the exercise
of any power granted in this Agreement or any other Transaction Document, and
may proceed to enforce the payment of all sums due upon the Debentures and any
other obligations, and such further amounts as shall be sufficient to cover the
costs and expenses of collection (including, without limitation, reasonable
counsel fees and disbursements), or to enforce any other legal or equitable
right of Purchaser and the Holders.
10.3 Remedies Cumulative. No remedy conferred herein or in any
Transaction Document upon Purchaser or the Holders is intended to be exclusive
of any other remedy and each and every such remedy shall be cumulative available
at law or in equity or otherwise.
10.4 Remedies Not Waived. No course of dealing between Arete or
Obligor, on the one hand, and Purchaser or any Holder, on the other hand, and no
delay or failure in exercising any rights hereunder or under any Transaction
Document shall operate as a waiver of any of the rights of Purchaser or any
Holder.
SECTION 11 CONVERSION OF DEBENTURES.
11.1 Conversion of Debentures. Any Holder of any Debenture may, at
such Holder's option, at any time and from time to time, convert such Debenture,
or any portion of the principal amount thereof, at the rate and upon the terms
hereinafter set forth. Provided that no Default or Event of Default shall have
occurred and be continuing, all outstanding Debentures shall be converted (a
"Mandatory Conversion") upon the Initial Public Offering.
11.2 Conversion Price. The Debentures shall be convertible pursuant to
Section 11. 1 into shares of Series A Preferred Stock in accordance with the
percentages set forth on Schedule 11.2 hereto. The actual number of shares into
which Debentures (or parts thereof) shall be converted will be:
(a) if Debentures representing
(i) all of Tranche A;
(ii) all of Tranches B and C;
(iii) all of Tranches D and E; or
(iv) all of Tranches F and G are
converted, the number of shares of Series A Preferred Stock into which the
Debentures shall be converted will be such number of shares of Series A
Preferred Stock so that, if such shares of Series A Preferred Stock were
converted into Common Stock, the number of such shares of Common Stock would be
equal to the percentage specified in Schedule 11.2 of the Number of Fully
Diluted Shares Outstanding as of the date of conversion (including, for clarity
and without duplication, the shares to be issued upon such conversion) and (b)
if less than all of the
<PAGE> 40
Debentures described in one of clauses (a)(i) to (iv) are so converted, the
number of shares of Series A Preferred Stock into which the Debenture (or part
thereof) shall be converted will be equal to the number which would be
determined under subsection (a) if all of the Debentures in the Tranches
described in the applicable subclause (a)(i) to (iv) were so converted,
multiplied by a fraction the numerator of which is the amount of the Debenture
(or part thereof) being converted and the denominator of which is the total
amount of all of the Debentures described in the applicable subclause.
For clarity, the position of the Holder may be diluted by shares of stock issued
under the Stock Incentive Plan, both before and after the date of conversion of
the Debentures. [Rider A]
[Rider A -- For additional purposes of clarity, and without limiting the
generality of the foregoing or any provision of this Agreement, the position of
the Holder may also be diluted by shares of stock issued in connection with any
additional financing of the Obligor (whether debt or equity) if the Purchaser
has failed to purchase debentures by the Outside Purchase Date shown on Schedule
2.2 (unless excused by virtue of Obligor's breach of this Agreement or any
Transaction Document), as provided for in this Agreement.]
11.3 Exercise of Conversion Privilege. (a)(i) To exercise the
conversion privilege set forth in Section 11.1, the Holder of any Debenture
shall surrender such Debenture, appropriately endorsed, to Obligor at its
principal office, accompanied by written notice to Obligor, (X) stating that the
Holder elects to convert such Debenture or a portion thereof, and if a portion
the amount of such portion, and (Y) setting forth the name or names (with
address) in which the certificate or certificates for shares of Conversion Stock
issuable upon such conversion shall be issued. A Debenture shall be deemed to
have been converted immediately prior to the close of business on the date of
receipt by Obligor of such Debenture and notice, even if Obligor's stock
transfer books are at that time closed, and the converting Holder shall be
treated for all purposes as the record holder of the shares of Conversion Stock
deliverable upon such conversion as of the close of business on such date.
(b) Obligor shall provide notice to each Holder of any event
pursuant to which there is a Mandatory Conversion under Section 11. 1 hereof (X)
certifying that a Mandatory Conversion has occurred and the underlying events
resulting in such conversion (Y) providing detailed instructions regarding the
procedure to be followed by the Holders to receive Conversion Stock in respect
of the amount of Debentures being converted. A Debenture shall be deemed to have
been converted in accordance with Section 11.1 hereof as set forth in the
notice required hereunder immediately prior to the close of business on the date
of issuance of such notice in accordance herewith by Obligor to the Holders,
even if Obligor's stock transfer books are at that time closed, and the
converting Holders shall be treated for all purposes as the record holder of the
shares of Conversion Stock deliverable upon such conversion as of the close of
business on such date. Prior to actual receipt of the notice required under this
Section 11.3(b), no Holder shall be charged with or deemed to possess any
knowledge of the occurrence of a Mandatory Conversion or the underlying facts
causing such conversion to occur.
(c) Promptly after the date of conversion, Obligor shall issue
and deliver to each converting Holder a certificate or certificates for the
number of shares of its Series A Preferred Stock due on such conversion upon
submission of the Debentures to be converted for cancellation or replacement (if
conversion is as to less than the full amount thereof). Interest shall accrue on
the unpaid principal amount of the Debentures converted to the date of
conversion, and Obligor shall promptly pay such interest. Upon conversion of any
Debenture which is converted in part, Obligor shall execute and deliver to the
Holder thereof, at the expense of Obligor, a new Debenture in the aggregate
principal amount equal to the unconverted portion (including accrued interest)
of such Debenture. Such new Debenture shall have the same terms and provisions,
other than the principal amount, as the Debenture or Debentures surrendered for
conversion.
(d) The issue of Conversion Stock certificates on conversion
shall be made without charge to the Holder for any tax in respect of the issue
thereof, except taxes, if any, on income of the Holder.
<PAGE> 41
11.4 No Dilution or Impairment. Obligor will not, by amendment of its
articles of incorporation or through reorganization, consolidation, merger,
dissolution, issue or sale of securities, sale of assets or any other voluntary
action or otherwise, avoid or seek to avoid the observance or performance of any
of the terms of this Section 11, but will at all times in good faith assist in
the carrying out of all such terms and of the taking of all such action as may
be necessary or appropriate in order to protect the rights of Purchaser and the
Holders of the Debentures against dilution or other impairment.
11.5 Issuance of Additional Shares. If at any time Obligor issues or
sells any Capital Stock ("Additional Capital Stock") after Purchaser has
converted some or all of the Debentures in Conversion Stock other than (i) as a
dividend or other distribution on the Series A Preferred Stock, in accordance
with the Transaction Documents; (ii) pursuant to the Stock Incentive Plan (the
shares of which shall dilute the shareholding interest of all holders of
Obligor's Securities on a pro rata basis), (iii) in connection with any
additional financing of Obligor (whether debt or equity) after completion of the
purchase of all Debentures hereunder (unless excused by virtue of Obligor's
breach of this Agreement or any Transition Document) which financing shall
dilute the shareholding interest of all Holders other than with respect to
shares issued under the Stock Incentive Plan (iv) in connection with any
additional financing of Obligor (whether debt or equity) if Purchaser has failed
to purchase Debentures by the Outside Purchase Date shown on Schedule 2.2
(unless excused by virtue of Obligor's breach of this Agreement or any
Transaction Document) which financing shall dilute the shareholding interest of
all Holders other than with respect to shares issued under the Stock Incentive
Plan, then Obligor shall issue promptly to each Holder of Conversion Stock the
number of shares of such Conversion Stock which, together with the number of
shares of such Conversion Stock theretofore held by such holder, equals the
number shares of Conversion Stock such Holder would have been entitled to
receive upon Conversion pursuant to Section 11.2 had the Additional Capital
Stock been issued immediately prior to such conversion. For the purposes of the
foregoing calculation, [x] the issuance by Obligor of Common Stock shall be
deemed the issuance of the same number of shares of Series A Preferred Stock;
[y] the issuance by Obligor of any warrant, option or other right to acquire
Capital Stock shall be deemed the issuance of the number of shares issuable
pursuant thereto; and [z] each adjustment increasing the number of shares
issuable pursuant to any warrant, option or other right to acquire Capital Stock
shall be deemed an issuance of the additional number of shares thereby
receivable upon exercise or exchange thereof.
11.6 Fractional Shares. No fractional shares of Common Stock will be
issued in connection with any conversion hereunder but in lieu of such
fractional shares, Obligor shall make a cash payment therefor equal in amount to
the product of the applicable fraction multiplied by the fair market value of
one full share at the time of such conversion as determined in good faith by the
Board of Directors of Obligor.
11.7 Notices of Certain Events. In case (i) Obligor shall determine to
pay any dividend or make any distribution to its shareholders, or offer to its
shareholders any right to purchase any securities, or to receive any other
right; or (ii) of any capital reorganization of Obligor, any reclassification of
the capital stock of Obligor (including a subdivision or combination thereof),
any consolidation or merger of Obligor with or into another Person, or any
conveyance of all or substantially all of the assets of Obligor to another
Person or entity; or (iii) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of Obligor, then, and in each such case,
Obligor shall promptly give written notice to the Purchaser and the Holders of
the Debentures of the date on which (x) the books of Obligor shall close or a
record date shall be fixed for determination of the shareholders entitled to
receive such dividend, distribution or right, and stating the amount and
character of such dividend, distribution or right, or (y) such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
winding up is to take place, and the time, if any, is to be fixed, as of which
the holders of record of Series A Preferred Stock or Common Stock (or such stock
or securities at the time receivable upon the exercise of the conversion
privilege) shall be entitled to exchange their shares for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation or winding up, as the case may be.
Such written notice shall
<PAGE> 42
be given at least 30 days prior to the action in question and not less than 30
days prior to the record date or the date on which Obligor's transfer books are
closed.
SECTION 12 DELIVERIES. At each Closing, Obligor shall deliver to Purchaser or
its designee (i) duly endorsed Debentures in the aggregate principal amount
being purchased thereat in the names of such Persons as Purchaser shall
theretofore designate in writing to Purchaser(or its designee); (ii) the
certificates referenced in Section 6A.1 and 6A.3 hereof, and (iii) such other
documents, instruments or certificates which Purchaser (or its designee) may
reasonably request. At each Closing, Purchaser (or its designee) shall deliver
to Obligor, by wire in available funds or cashiers or bank check, the amount
equal to the aggregate principal amount of Debentures being purchased at such
Closing.
SECTION 13 TERMINATION. This Agreement may be terminated; provided, however,
such termination shall not affect those provisions which, by their terms, remain
operative until a later date or indefinitely only by mutual written consent of
Obligor, Purchaser and each Holder; or by Obligor or Purchaser if the Tranche C
Effective Date shall not have occurred on or prior to June 11, 1998.
SECTION 14 REGISTRATION, EXCHANGE, AND TRANSFER OF DEBENTURES. Obligor will keep
at its principal executive office a register, in which, subject to such
reasonable regulations as it may prescribe, but at its expense (other than
transfer taxes, if any), Obligor will provide for the registration and transfer
of the Debentures. Whenever (in accordance with Section 15 below) any Debenture
is surrendered, for transfer or exchange, accompanied (if so required by
Obligor) by a written instrument of transfer in form reasonably satisfactory to
Obligor duly executed by the Holder thereof, Obligor will execute and deliver a
new Debenture in such denominations as may be requested by such Holder, of like
tenor and in the same aggregate unpaid principal amount as the aggregate unpaid
principal amount of the Debenture so surrendered. Any Debenture so issued shall
carry the rights to unpaid interest and interest to accrue which were carried by
the surrendered Debenture, and neither gain nor loss of interest shall result
from any such transfer or exchange of the surrendered Debenture. Any transfer
tax or governmental charge relating to such transaction shall be paid by the
Holder requesting transfer or exchange. Obligor and any of its agents may treat
the Person in whose name any Debenture registered as the sole and exclusive
record and beneficial holder and owner of such Debenture all other purposes.
SECTION 15 LOST, STOLEN, DAMAGED AND DESTROYED DEBENTURES. At the request of any
Holder, Obligor will issue and deliver at the Holder's expense, in replacement
of any lost, stolen, damaged or destroyed Debenture, a new Debenture in the same
aggregate unpaid principal amount, and otherwise of the same tenor, as the
replaced Debenture. Obligor may require Holder of the replacement Debenture to
provide an indemnity and/or security reasonably satisfactory to Obligor;
however, if such Holder is Purchaser, Purchaser's unsecured agreement of
indemnity shall be deemed sufficient.
SECTION 16 BOARD CONSTITUTION, REPRESENTATION AND ACTION. Obligor and Arete
shall (1) cause the Board of Directors of Obligor (the "Obligor Board") to
consist of seven members, of which, following the purchase by Purchaser or its
nominee of Debentures in an aggregate principal amount not less than $1,250,000,
and so long as such Debentures or underlying Conversion Stock is held by
Purchaser or its nominee and an Initial Public Offering has not taken place, one
(1) Board member shall be designated by Purchaser, and Purchaser shall also be
entitled to have one (1) nonvoting representative at such meeting. Obligor and
Arete shall further require, following the purchase by Purchaser or its nominee
of Debentures in an aggregate principal amount not less than $5,000,000, the
affirmative vote or not less than a majority of the members of Obligor Board,
which majority shall, following the purchase of Debentures by Purchaser or its
nominee in an aggregate principal amount of not less than $1,250,000, and so
long as such Debentures or underlying Conversion Stock is held by Purchaser or
its nominee, include Purchaser's Board designee in order for Obligor to: (i)
declare or pay, or agree to declare or pay any dividend to any stockholders of
Obligor or any Affiliate thereof; (ii) sell, lease, transfer, mortgage, pledge
or otherwise dispose of or encumber all or substantially all of Obligor's assets
or any material portions of Intellectual Property or Technology; (iii) amend the
articles of incorporation or bylaws;
<PAGE> 43
(iv) consolidate, merge or amalgamate with any other Person; or (v) enter into
any other transaction that could have a material adverse on the value of the
investment of Purchaser or its designee; provided however, that the right of
Purchaser's designee on the Board of Directors to approve the foregoing matters
shall terminate upon the earlier of an IPO or at such time as Obligor is merged
with Purchaser (as provided in Section 7.6 hereof).
SECTION 17 PRIOR ADVANCE. Obligor hereby acknowledges that Purchaser has paid to
Obligor, and Obligor has received, as an advance against the purchase of
Debentures the sum of $350,000 consisting of payments of $100,000 (the "Initial
Advance") and $250,000 (the "Remaining Advance"). If on or prior to June 11, 199
8 Purchaser has not purchased the Debentures under Tranche C pursuant to Section
2 hereof, then Purchaser may elect by written notice to Obligor, and Obligor
covenants and agrees to perform all acts required of it to accomplish the ends
of such election, either (i) to have the Initial Advance repaid in full to
Purchaser within sixty (60) days of such notice, together with interest thereon
accruing from the date of the Initial Advance to the date paid at the Imputed
Rate, or (ii) to convert the Initial Advance into the number of shares of Series
A Preferred Stock equal to 1.6% of the Number of Fully-Diluted Shares
Outstanding (after giving effect to conversion of the Advance), such percentage
to be calculated on the date of the giving of such notice by Obligor, which
shares Obligor hereby agrees to issue in such name or names as Purchaser shall
designate and which shares shall constitute "Conversion Stock" for purposes of
the Transaction Documents, and in either circumstance to have the Remaining
Advance repaid in full to the Purchaser within one hundred and eighty (180) days
of such notice, together with interest thereon accruing from the date of the
Remaining Advance to the date paid at the Imputed Rate. The provisions of this
Section 17 shall survive termination of this Agreement.
SECTION 18 MISCELLANEOUS.
18.1 Amendment and Waiver. No amendment or waiver of any Transaction
Document shall be effective unless in writing and signed by Purchaser and the
Majority Holders, and except that without the specific prior written consent of
the Holder directly affected thereby, no such amendment or waiver shall reduce
the principal of, or the rate of interest on, any of the Debentures of any
Holder, or extend the time of payment of the principal of or interest on any
Debenture of such Holder. Any such waiver or consent shall be effective only in
the specific instance and for the purpose for which given. Neither any failure
nor any delay on the part of Purchaser or any Holder in exercising any right,
power or privilege under any Transaction Document shall operate as a waiver.
Except as otherwise provided in any Transaction Document, no notice to or demand
on any Person shall entitle such Person to any other or further notice or
demand. Notwithstanding any other provision contained in this Agreement to the
contrary, Debentures which at any time are held by Obligor, Arete or any
Affiliate of Obligor or Arete (other than Purchaser if at any time it shall
become an Affiliate of Obligor or Arete) shall be deemed not to be outstanding
for purposes of any vote, consent, approval, waiver or other action required or
permitted to be taken by Holders under the provisions of this Agreement, and
neither Obligor, Arete nor an Affiliate of either of them shall be entitled to
exercise any right as a Holder with respect to any such vote, consent, approval
or waiver or to take or participate in taking any such action at any time.
18.2 Expenses. Each of the parties shall pay their own expenses
incurred by them of performance and administration connection with the
preparation, negotiation, execution, delivery the Transaction Documents, except
as otherwise agreed.
18.3 Survival of Representations and Warranties. All representations
and warranties contained herein or made in writing by or on behalf of any party
to any Transaction Document shall survive the execution and delivery of such
Transaction Document and shall continue in effect as long as any Holder may
purchase any Debentures hereunder or any Debenture or Conversion Stock is
outstanding, and be deemed to be material and to have been relied upon by Arete,
Obligor and each Holder, regardless of any investigation made by Purchaser or
such Holder or on its behalf.
18.4 Successors and Assigns. The Transaction Documents shall be
binding upon and inure to the benefit of Obligor, Purchaser and the Holders, and
their respective permitted successors and
<PAGE> 44
permitted assigns; provided, however, that (i) neither Arete nor Obligor shall
have the right to assign its rights hereunder or any interest herein or to
delegate any of its duties hereunder without the prior written consent of
Purchaser and the Majority Holders and (ii) Purchaser may not assign its rights
to any Person which is a direct or indirect competitor of Obligor without
Obligor's prior written consent. No assignment hereunder shall in any respect
relieve or release any obligation of Arete or Obligor or Purchaser hereunder.
Each Holder (the "Assignor") may at any time sell, assign, mortgage or encumber
(each an "Assignee") all or any part of its interests in any Debentures or any
Transaction Document, and each such Assignee shall assume the obligations of the
Assignor hereunder and thereunder, to the extent provided in such assignment,
and to the extent of such assumption the Assignor shall be released from its
obligations hereunder and thereunder. Upon execution and delivery of such an
instrument, such Assignee shall be a party to this Agreement and shall have the
rights and obligations of a Holder to the extent of such assignment.
18.5 Administrative Agent. Whenever outstanding Debentures and
Conversion Stock shall be held by more than one Holder, the Majority Holders may
at their option and upon written notice to Obligor designate a particular Person
to act as administrative agent on their behalf and direct that any or all
notices, and other documents or information to be sent or given to or by the
Holders under any Transaction Document be given to or by such administrative
agent on their behalf, and may further direct that, upon the written direction
of the Majority Holders, such administrative agent may take any action on behalf
of the Holders which the Majority Holders would be entitled to take under the
provisions of the Transaction Documents and Obligor shall be conclusively
entitled to rely for all purposes on the instructions of such administrative
agent.
18.6 Notices. All notices hereunder shall be in writing and shall be
conclusively deemed to have been received and shall be effective (i) on the next
business day after delivery if delivered personally or transmitted by telecopier
and confirmed by mail, or (ii) one (1) business day after the date on which the
same is delivered to an internationally recognized overnight courier service,
and shall be addressed:
(iii) in the case of Obligor, to:
Biometric Identification, Inc.
5000 Van Nuys Boulevard, Suite 300
Sherman Oaks, California 91413
Attention: President
Telecopy: 818/501-7163;
Telephone: 818/501-2880
(iv) in the case of Arete, to:
Arete Associates
5000 Van Nuys Boulevard, Suite 400
Sherman Oaks, California 91431
Attention: President
Telecopy: 818/501-2905
Telephone: 818/501-2880
with, in the case of each of (iii) and (iv), a copy to:
Citron & Deutsch
10866 Wilshire Boulevard, Suite 970
Los Angeles, California 90024
Attention: David R. Deutsch; Esq.
Telecopy: 310/475-1368
Telephone: 310/475-0321
(v) in the case of Purchaser, to:
<PAGE> 45
Sonoma Resource Corp.
# 1940, 400 Burrard Street
P.O. Box 31
Vancouver, British Columbia V6C 3A6
CANADA
Attention: Chairman of the Board
Telecopy: 604/687-4144 or 800/763-3255
Telephone: 604/669-7678
With a copy to:
Paul, Hastings, Janofsky & Walker LLP
Twenty-Third Floor
555 South Flower Street
Los Angeles, California 90071-2371
Attention: Roxanne E. Christ, Esq.
Telecopy: 213/627-0705
Telephone: 213/683-6270
and
Campney & Murphy
21100 - 1111 West Georgia Street
Vancouver, British Columbia V7X 1K9
CANADA
Attention: David J. Raffa, Esq.
Telecopier: 604/688-0829
Telephone: 604/688-8022
(vi) in the case of any other Holder, to such Holder at such
address and telecopy number and to the attention of such Person as such Holder
shall specify in writing to the parties; or in any of the foregoing cases, at
such other address and/or telecopy number and/or to the attention of such other
Person as any of such Persons shall have advised the others by notice in the
manner herein specified.
18.7 Certain Acknowledgments. Arete and Purchaser acknowledge and
agree that the issuance of any Capital Stock pursuant to the Stock Incentive
Plan will and shall dilute Arete's and Purchaser's equity interest in Obligor on
a pro rata basis with all other Holders.
18.8 Public Announcements. Arete, Obligor and Purchaser agree that
neither will issue any press release or make any other public announcement, with
regard to the Transactions without the prior approval of Obligor, Arete and
Purchaser and the Majority Holders unless otherwise required by law and except
by Purchaser in connection with the offering of securities of Purchaser in
connection with which Purchaser shall afford Obligor (and Arete, if mentioned in
the press release) twenty-four (24) hours to comment on its press release and
consider Obligor's (and Arete's, as the case may be) comments in good faith.
18.9 No Fiduciary Relationship. Purchaser shall not, and no Holder
shall, by reason of its purchase or holding of Debentures pursuant to this
Agreement, be deemed to have any fiduciary or other special relationship with
Obligor or Arete. No provision of any Transaction Document or any of the other
document executed and delivered in connection herewith shall be construed to
create a fiduciary duty on the part of Purchaser or any Holder or any trustee or
agent therefor in favor of Obligor, Arete or their respective Affiliates, or any
of their respective directors, officers, employees, agents, stockholders or
creditors.
18.10 Integration and Severability. This Agreement (including the
schedules and exhibits thereto), together with the other Transaction Documents
embodies the entire agreement and
<PAGE> 46
understanding between Purchaser, the Holders, Arete and Obligor, and supersedes
all prior agreements and understandings, relating to the subject matter hereof.
In case any one or more of the provisions contained in any Transaction Document
or other agreement, instrument or document executed in connection therewith,
shall be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions shall not be affected or
impaired and the invalid, illegal or unenforceable provisions shall be enforced
to the greatest extent legally permissible.
18.11 Counterparts. Each Transaction Document may be executed in two
or more counterparts, each of which shall be deemed an original but all of which
shall together constitute one and the same instrument.
18.12 GOVERNING LAW. EACH TRANSACTION DOCUMENT SHALL BE GOVERNED BY
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE
STATE OF CALIFORNIA WITHOUT REGARD TO THE CONFLICTS OF LAWS RULES OF CALIFORNIA.
IN WITNESS WHEREOF, Obligor, Arete and Purchaser have caused this
Agreement to be executed by their duly authorized officers as of the date first
written above.
OBLIGOR:
BIOMETRIC IDENTIFICATION, INC.,
a California Corporation
By: /s/ Robert M. Kamm
------------------------------------
Robert M. Kamm, President
ARETE:
ARETE ASSOCIATES
a California corporation
By: /s/ Stephen C. Lubard
------------------------------------
Stephen C. Lubard, President
PURCHASER:
SONOMA RESOURCE CORP.
a British Columbia corporation
By: /s/ Patrick W. McCleery
------------------------------------
Patrick W. McCleery, Director
<PAGE> 1
THIS OPTION AGREEMENT made as of the 21 day of January, 1999.
BETWEEN:
BIOMETRIC SECURITY CORP. (FORMERLY SONOMA RESOURCES CORPORATION),
a body corporate, having a head office at #1940 - 400 Burrard
Street, Vancouver, British Columbia, V6C 3A6
(hereinafter called the "Optionor")
OF THE FIRST PART
AND:
INLET RESOURCES LTD., a body corporate, having a head office at
#304 - 700 West Pender Street, Vancouver, British Columbia, V6C IG8
(hereinafter called the "Optionee")
OF THE SECOND PART
WHEREAS
A. The Optionor has represented that it is the sole recorded and beneficial
owner in and to the properties (the "Properties") described in Schedule "A"
hereto subject to the pending and granted provisions described on the said
Schedule;
B. The Optionor now wishes to grant to the Optionee the exclusive fight and
option to acquire up to an undivided 90% fight, title and interest in and to the
Properties, subject to a 10% Carried Working Interest in favour of the Optionor,
on the terms and conditions hereinafter set forth.
NOW THEREFORE THIS AGREEMENT WITNESSES THAT for and in consideration of the
mutual covenants and agreements herein contained and the sum of US $25,000 paid
by the Optionee to the Optionor, the receipt, and sufficiency whereof is hereby
acknowledged by the Optionor, the parties hereto mutually agree as follows:
1. DEFINITIONS
-----------
1.1 For the purposes of this Agreement:
(a) "EXPENDITURES ON THE PROPERTIES" means monies spent pursuant to
this Agreement on the exploration, development and related
operations conducted on or with respect to any part of the
Properties and shall include but not be limited to:
(i) keeping the Properties in good standing;
(ii) geophysical, geochemical, geological and related
operations;
(iii) drilling, development and mining;
(iv) assaying, metallurgical testing;
-1-
<PAGE> 2
(v) salaries and wages of personnel directly engaged in a
work program on the Properties together with all
employee benefits and allowances normally paid during
the option period for holiday and vacation pay,
Canada Pension Plan, pension benefit plan costs,
unemployment insurance, aviation accident insurance,
medical insurance, group term life and income
protection insurance, employer's liability insurance
and workmen's compensation as normally paid;
(vi) travelling and directly related expenses including food
and lodgings of personnel engaged in work within the
Properties;
(vii) insurance premiums to the extent applicable to the
exploration, development and related operations
conducted within the Properties;
(viii) direct supervision and direct management of the
exploration, development and related operations
conducted within the Properties;
(ix) charges with respect to equipment leased in connection
with the exploration, development and related
operations conducted within the Properties; and
(x) all charges made with respect to equipment purchased
and services rendered in connection with the
exploration, development and related operations
conducted within the Properties.
(b) "Facilities" means all mines and plants, including without
limitation, all pits, shafts, haulageways, and other underground
workings, and all buildings, plants, facilities and other
structures, fixtures and improvements, and all other Properties,
whether fixed or moveable, as the same may exist at any time in,
or on the Properties and relating to the operation of the
Properties as a mine or outside the Properties if for the
exclusive benefit of the Properties only.
(c) "Option" means the option granted by the Optionor to the Optionee
to acquire an undivided 90% right, title and interest in and to
the Properties as more particularly set forth in Section 3).
2. REPRESENTATIONS AND WARRANTIES
------------------------------
2.1 The Optionee represents and warrants to the Optionor that:
(a) it is a company duly incorporated, organized and validly
subsisting under the laws of its incorporating jurisdiction and
is qualified to do business in British Columbia;
(b) it has full power and authority to carry on its business and to
enter into this Agreement and any agreement or instrument
referred to or contemplated by this Agreement;
(c) neither the execution and delivery of this Agreement, nor any of
the agreements referred to herein or contemplated hereby, nor the
consummation of the transactions hereby contemplated conflict
with, result in the breach of or accelerate the performance
required by, any agreement to which it is a party;
(d) the execution and delivery of this Agreement and the agreements
contemplated hereby will not violate or result in the breach of
the laws of any jurisdiction applicable or pertaining thereto or
of its constating documents;
-2-
<PAGE> 3
(e) the Optionee is an "exchange issuer" listed on the VSE, in good
standing and, to the best of its knowledge, in good standing
under the B.C. Securities Act and regulations thereto and, will
remain so throughout the term of this Agreement; and
(f) the shares to be issued by the Optionee as provided for in Part
3.1 of this Agreement will be, when issued, issued as fully paid
and non-assessable common shares of the Optionee and will have a
hold period expiring no later than four (4) months from the
Closing Date and will otherwise be free and clear of all liens,
charges or encumbrances of any kind whatsoever.
2.2 The Optionor represents and warrants to the Optionee that to the best of
the Optionor's knowledge:
(a) the Properties are accurately described in Schedule "A", are in
good standing under the laws of the jurisdiction in which they
are located and are free and clear of all liens, charges and
encumbrances;
(b) the Optionor is the sole recorded and beneficial owner of the
Properties subject to the pending and granted provisions and has
the exclusive right to enter into this Agreement and all
necessary authority to dispose of an interest in the Properties
in accordance with the terms of this Agreement;
(c) no person, firm or corporation has any proprietary or possessory
interest in the Properties other than the Optionor and no person,
firm or corporation is entitled to any royalty or other payment
in the nature of rent or royalty on any minerals, ores, metals or
concentrates or any other such products removed from the
Properties.
2.3 The representations and warranties hereinbefore set out are conditions on
which the parties have relied in entering into this Agreement and shall
survive the acquisition of any interest in the Properties by the Optionee
and each of the parties will indemnify and save the other harmless from
all loss, damage, costs, actions and suits arising out of or in connection
with any breach of any representation, warranty, covenant, agreement or
condition made by them and contained in this Agreement.
3. OPTION
------
3.1 The Optionor hereby gives and grants to the Optionee the sole and
exclusive irrevocable right and option to acquire up to an undivided 90%
right, title and interest in and to the Property in accordance with the
following terms:
(a) By the Optionee paying the sum of US $125,000 and issuing to the
Optionor as fully paid and non-assessable, 100,000 common shares
of Inlet Resources Ltd. within 5 business days of the date of
regulatory acceptance ("Closing Date") of this Agreement and the
Optionee incurring Expenditures on the Property of at least US
$650,000 no later than 12 months from the Closing Date, the
Optionee will acquire an undivided 50% right, title and interest
in the Properties (the "First Option");and
(b) By the Optionee paying the additional sum of US $250,000 and
issuing to the Optionor as fully paid and non-assessable a
further 100,000 common shares of Inlet Resources Ltd. and the
Optionee incurring cumulative Expenditures on the Property of at
least US $1,400,000 and the prior filing of an engineering report
indicating the work carried out and recommending an additional
exploration program acceptable to the regulatory authorities no
later than 24 months from the Closing Date, the Optionee will
acquire a cumulative undivided 70% right (being an additional
20%), title and interest in the Properties (the "Second Option");
and
-3-
<PAGE> 4
(c) By the Optionee paying the additional sum of US $350,000 and
issuing to the Optionor as fully paid and non-assessable a
further 100,000 common shares of Inlet Resources Ltd. and the
Optionee incurring cumulative Expenditures on the Property of at
least US $2,150,000 and the prior filing of an engineering report
indicating the work carried out and recommending an additional
exploration program acceptable to the regulatory authorities no
later than 36 months from the Closing Date, the Optionee will
acquire a cumulative undivided 90% right (being an additional
20%), title and interest in the Properties (the "Third Option");
and
(d) Upon the exercise of the Third Option, the Optionor will have a
10% Carried Working Interest in the Properties and the Optionee
will hold an undivided 90% right, title and interest in the
Properties. The Optionee may acquire the 10% Carried Working
Interest from the Optionee for the sum of US $2,000,000 payable
on or before November 25, 2004.
4. RIGHT OF ENTRY
--------------
4.1 During the currency of the Option, the Optionee, its employees, agents and
independent contractors shall have the sole and exclusive right and option
to:
(a) enter upon the Properties,
(b) have exclusive and quiet possession thereof,
(c) do such prospecting, exploration, development or other mining
work thereon and thereunder as the Optionee in its sole
discretion may deem advisable;
(d) bring and erect upon the Properties such Facilities as the
Optionee may deem advisable; and
5. TERMINATION
-----------
(a) This Agreement and the Option will terminate 5 business days
after Closing Date unless on or before that date the Optionee has
paid to the Optionor the sum of US $125,000 and issued to the
Optionor as fully paid and non-assessable 100,000 shares of Inlet
Resources Ltd.; and
(b) The Agreement and the Option will terminate on the day that is 12
months after the Closing Date unless, on or before that day the
Optionee has incurred, Expenditures on the Property of at least
US $650,000; and
(c) The Second Option and Third Option will terminate on the day that
is 24 months after the Closing Date unless, on or before that day
the Optionee has incurred, cumulative Expenditures on the
Property of at least US $1,400,000 and issued to the Optionor as
fully paid and non-assessable a further 100,000 shares of Inlet
Resources Ltd.; and
(d) The Third Option will terminate on the day that is 36 months
after the Closing Date unless, on or before that day the Optionee
has incurred, cumulative Expenditures on the Property of at least
US $2,150,000 and issued to the Optionor as fully paid and
non-assessable a further 100,000 shares of Inlet Resources Ltd.
5.2 The parties hereto may extend in writing any of the deadlines set out in
subsection 5.1
-4-
<PAGE> 5
6. COVENANTS OF THE OPTIONOR
-------------------------
6.1 During the currency of this Agreement and the Option, the Optionor
covenants and agrees with the Optionee to:
(a) not do any act or thing which would prevent the Optionee from
exercising its rights in accordance with the terms and conditions
of this Agreement provided the Optionee has and continues to meet
all of its obligations hereunder;
(b) make available to the Optionee and its representatives all
records and files relating to the Properties and permit the
Optionee and its representatives at its own expense to take
abstracts therefrom and make copies thereof, and
(c) promptly provide the Optionee with any and all notices and
correspondence from Government agencies in respect of the
Properties.
7. COVENANTS OF THE OPTIONEE
-------------------------
7.1 During the currency of the Option, the Optionee covenants and agrees with
the Optionor to:
(a) keep the Properties in good standing, and free and clear of all
liens, charges and encumbrances arising from its operations
hereunder and in good standing by the doing and filing of all
necessary work and by the doing of all other acts and things and
making all other payments which may be necessary in that regard;
(b) permit the Optionor, or its representatives duly authorized by it
in writing, at their own risk and expense, access to the
Properties at all reasonable times and to all records prepared by
the Optionee in connection with work done on or with respect to
the Properties and furnish the Optionor with annual reports with
respect to the work carried out by the Optionee on or with
respect to the Properties and results obtained, together with
timely current reports and information on any material results
obtained;
(c) conduct all work on or with respect to the Properties in a
careful and minerlike manner and in compliance with all
applicable laws, rules, orders and regulations, and indemnify and
save the Optionor harmless from any and all claims, suits or
actions made or brought against it as a result of work done by
the Optionee on or with respect to the Properties;
(d) obtain and maintain, or cause any contractor engaged hereunder to
obtain and maintain, during any period in which active work is
carried out hereunder adequate insurance.
8. OBLIGATIONS OF THE OPTIONEE AFTER TERMINATION
---------------------------------------------
8.1 In the event of the termination of the Option, the Optionee will:
(a) leave the Properties in good standing for a period of at least 90
days, free and clear of all liens, charges and encumbrances
arising from its operations hereunder and in a safe and orderly
condition;
(b) deliver to the Optionor within sixty (60) days of his written
request a comprehensive report on all work carried out by the
Optionee on the Properties (limited to factual matters only)
together with copies of all maps, drill logs, assay
-5-
<PAGE> 6
results and other factual technical data compiled by the Optionee
with respect to the Properties;
(c) have the right and obligation to remove from the Properties
within six (6) months from the effective date of termination all
Facilities erected, installed or brought upon the Properties by
or at the instance of the Optionee; and
(d) notify the Escrow Holder pursuant to subparagraph 9.3(b)(i).
9. TRANSFER OF TITLE AND ESCROW HOLDER
-----------------------------------
9.1 Upon the written request of the Optionee, the Optionor will deliver or
cause to be delivered to the Optionee a duly executed transfer of the
Properties in favour of the Optionee or a wholly-owned subsidiary (the
"Optionee Transfer"). The Optionee shall be entitled to record the
Optionee Transfer with the appropriate government offices to effect
registration of title of the Properties into its own name or that of its
subsidiary, provided the Optionee shall hold the Properties subject to the
terms of this Agreement, it being understood that registration of title to
the Properties prior to the exercise of the Option is for administrative
convenience only and that beneficial ownership of the Properties shall
pass to the Optionee only upon the Optionee having exercised the Option.
9.2 Forthwith after the delivery to Mr. David A. Schwartz (the "Escrow
Holder") of the Optionee Transfer pursuant to subsection 9.1, the Optionee
or its subsidiary will execute and deliver to the Escrow Holder a duly
executed transfer in favour of the Optionor providing for the registration
of title to the Properties into the name of the Optionor (the "Optionor
Transfer").
9.3 The Escrow Holder will hold the Optionor Transfer subject to the
following:
(a) in the event the Optionee exercises the Option, the Escrow Holder
will deliver the Optionor Transfer to the Optionee and for the
purposes of this paragraph 9.3(a) will accept as conclusive
evidence of the exercise of the Option by the Optionee:
(i) a notice to that effect from the Optionor, or
(ii) a Statutory Declaration to that effect made by the
Optionee provided the Escrow Holder has delivered a copy
of the Statutory Declaration to the Optionor and the
Optionor has been in receipt of same for ten days and
the Optionor has not objected in writing to the Escrow
Holder.
(b) in the event of termination of the Option, the Escrow Holder
shall deliver the Optionor Transfer to the Optionor and for the
purposes of this paragraph 9.3(b), the Escrow Holder will accept
as conclusive evidence of the termination of the Option:
(i) a notice to that effect from the Optionee; or
(ii) a Statutory Declaration to that effect made by the
Optionor specifying full particulars of the Optionee's
default, provided the Escrow Holder has delivered a
copy of the Statutory Declaration to the Optionee and
the Optionee has been in receipt of same for ten (10)
days and the Optionee has not objected in writing to the
Escrow Holder.
9.4 The duties of the Escrow Holder will be limited to the holding of the
Optionor Transfer and the delivery thereof in accordance with the terms of
this section and in the event of any dispute between the Optionee and the
Optionor, the Escrow Holder will hold the Optionor Transfer until the said
dispute has been settled by agreement between them or by adjudication.
-6-
<PAGE> 7
9.5 The Optionor and the Optionee will indemnify and save harmless the Escrow
Holder of and from all claims, demands, suits, actions, liabilities,
costs, expenses and damages suffered, incurred or brought, by or against
the Escrow Holder, arising out of acting as Escrow Holder hereunder, save
and except any claim against the Optionor for the payment of the
reasonable fees and expenses of the Escrow Holder, and will execute such
escrow instructions as are not inconsistent with the terms of this section
and as are required by the Escrow Holder setting its duties and
responsibilities hereunder. The Optionee will pay to the Escrow Holder its
reasonable fees and expenses for so acting.
10. FURTHER ASSURANCES
------------------
10.1 The parties hereto agree that they and each of them will execute all
documents and do all acts and things within their respective powers to
carry out and implement the provisions or intent of this Agreement.
11. NOTICE
------
11.1 Any notice, direction or other instrument required or permitted to be
given under this Agreement shall be in writing and may be given by the
delivery of the same or by mailing the same by prepaid registered or
certified mail or by sending the same by telegram, telex,
telecommunication or other similar form of communication, in each case
addressed as follows:
(a) if to the Optionor at:
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCES CORPORATION)
#1940 - 400 Burrard Street
Vancouver, British Columbia
V6C 3A6
(b) if to the Optionee at:
INLET RESOURCES LTD.
#304 - 700 West Pender Street
Vancouver, British Columbia
V6C 1G8
11.2 Any notice, direction or other instrument aforesaid will, if delivered, be
deemed to have been given and received on the day it was delivered, and if
mailed, be deemed to have been given and received on the third business
day following the day of mailing, except in the event of disruption of the
postal service in which event notice will be deemed to be received only
when actually received and, if sent by telegram, telex, telecommunication
or other similar form of communication, be deemed to have been given or
received on the day it was so sent.
11.3 Any party may at any time give to the other notice in writing of any
change of address of the party giving such notice and from and after the
giving of such notice, the address or addresses therein specified will be
deemed to be the address of such party for the purposes of giving notice
hereunder.
12. ABANDONMENT
-----------
-7-
<PAGE> 8
12.1 The Optionee shall have the unfettered right at any time and for any
reason after the exercise of the Option to abandon the Properties or part
of them provided that if the Properties are so abandoned, the Optionee
shall, if requested by the Optionor, transfer the abandoned Properties to
the Optionor and have no other obligations or liabilities to the Optionor
under this Agreement whatsoever.
13. ADDITIONAL TERMINATION
----------------------
13.1 In addition to any other termination provision contained in this
Agreement, the Optionee shall have the right to terminate this Agreement
by giving thirty (30) days' notice of such termination to the Optionor,
and in the event of such termination, this Agreement, save and except for
the provisions of section 8 and 9 hereto, shall be of no further force and
effect.
14. HEADINGS
--------
14.1 The headings to the respective sections herein shall not be deemed part of
this Agreement but shall be regarded as having been used for convenience
only.
15. DEFAULT
-------
15.1 Notwithstanding anything in this Agreement to the contrary if any party (a
"Defaulting Party") is in default of any requirement herein set forth the
party affected by such default shall give written notice to the Defaulting
Party specifying the default and the Defaulting Party shall not lose any
rights under this Agreement, unless within thirty (30) days after the
giving of notice of default by the affected party the Defaulting Party
has failed to take reasonable steps to cure the default by the appropriate
performance and if the Defaulting Party fails within such period to take
reasonable steps to cure any such default, the affected party shall be
entitled to seek any remedy it may have on account of such default,
including termination of this Agreement.
16. OPTION ONLY
-----------
16.1 This is an option only and except as specifically provided otherwise,
nothing herein contained shall be construed as obligating the Optionee to
do any acts or make any payments hereunder, and any act or acts or payment
or payments as shall be made hereunder shall not be construed as
obligating the Optionee to do any further act or make any further payment
or payments.
17. ENUREMENT
---------
17.1 This Agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators,
successors and assigns.
19. FORCE MAJEURE
-------------
19.1 No party will be liable for its failure to perform any of its obligations
under this Agreement due to a cause beyond its control (except those
caused by its own lack of funds) including, but not limited to acts of
God, fire, flood, explosion, strikes, lockouts or other industrial
disturbances, laws, rules and regulations or orders of any duly
constituted governmental authority or non availability of materials or
transportation (each an "Intervening Event").
-8-
<PAGE> 9
19.2 All time limits imposed by this Agreement will be extended by a period
equivalent to the period of delay resulting from an Intervening Event
described in subsection 19.1.
19.3 A party relying on the provisions of subsection 19.1 will take all
reasonable steps to eliminate an Intervening Event and, if possible, will
perform its obligations under this Agreement as far as practical, but
nothing herein will require such party to settle or adjust any labour
dispute or to question nor to test the validity of any law, rule,
regulation or order of any duly constituted governmental authority or to
complete its obligations under this Agreement if an Intervening Event
renders completion impossible.
20. ENTIRE AGREEMENT
----------------
20.1 This Agreement constitutes the entire agreement between the parties and
replaces and supersedes all prior agreements, memoranda, correspondence,
communications, negotiations and representations, whether verbal or
written, expressed or implied, statutory or otherwise between the parties
with respect to the subject matter herein.
21. TIME OF THE ESSENCE
-------------------
21.1. Time shall be of the essence of this Agreement.
22. CONDITIONS PRECEDENT
--------------------
22.1 This Agreement is subject, no later than February 28, 1999 to:
(a) its acceptance for filing by the Vancouver Stock Exchange on
behalf of the Optionee and the Optionor, which each party
covenants to use its best efforts to obtain forthwith;
(b) approval of the boards of directors of the Optionee; and
(c) satisfactory due diligence on the Properties and the Optionor by
the Optionee.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day
and year first above written.
The CORPORATE SEAL of )
BIOMETRIC SECURITY )
CORP., the Optionor, was )
hereunto affixed in the presence of: )
)
)
)
/s/ Patrick W. McCleery )
- -------------------------- ) c/s
Authorized Signatory )
)
)
)
/s/ Wayne Johnstone )
- -------------------------- )
Authorized Signatory )
-9-
<PAGE> 10
The CORPORATE SEAL of )
INLET RESOURCES LTD., )
the Optionee, was hereunto )
affixed in the presence of: )
)
)
/s/ William Daly )
- ------------------------- ) c/s
Authorized Signatory )
)
)
)
________________________ )
Authorized Signatory )
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> .65
<CASH> 245,182
<SECURITIES> 0
<RECEIVABLES> 64,333
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 309,515
<PP&E> 86,897<F1>
<DEPRECIATION> (26,139)
<TOTAL-ASSETS> 4,007,492
<CURRENT-LIABILITIES> 299,037
<BONDS> 0
0
0
<COMMON> 13,788,855
<OTHER-SE> (10,080,400)
<TOTAL-LIABILITY-AND-EQUITY> 3,708,455
<SALES> 0
<TOTAL-REVENUES> 159,118
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,828,366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,449
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,683,697)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> 0
<FN>
<F1>NON-CURRENT INVESTMENT IN DEBENTURES RECEIVABLES IN THE AMOUNT OF $3,637,219
</FN>
</TABLE>
