<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1999
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.
------------------------
(Exact Name of Registrant as Specified in its Charter)
Wyoming 98-0204725
------- ----------
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)
Registrant's telephone number, including area code (604) 687-4144
--------------
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 [X] NO [_]
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
October 29, 1999 was 58,124,208
1
<PAGE>
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.
<TABLE>
<CAPTION>
Years ending December 31,
Nine
months 1998 1997 1996 1995
ended --------- --------- --------- --------
9/30/99
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate at end of Period $0.6805 $0.6504 $0.6999 $0.7301 $0.7323
- ----------------------------------------------------------------------------------
Average Rate During Period $0.6710 0.6740 0.7197 0.7333 0.7285
- ----------------------------------------------------------------------------------
High Rate $0.6891 0.7105 0.7487 0.7513 0.7527
- ----------------------------------------------------------------------------------
Low Rate $0.6535 0.6341 0.6945 0.7245 0.7023
- ----------------------------------------------------------------------------------
</TABLE>
On November 2, 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 $0.6807 U.S. = $1.00 Canadian.
Forward-Looking Statements
--------------------------
Certain of the information contained in this Form 10-Q 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 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.
2
<PAGE>
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as at September 30, 1999, December 31, 1998
and September 30, 1998
Consolidated Statements of Operations and Deficit for the Three Month
and Nine Month periods ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows for Nine Month period ended
September 30, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures
3
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BIOMETRIC SECURITY CORP.
CONSOLIDATED BALANCE SHEET
(Expressed in Canadian Dollars)
(unaudited)
<TABLE>
<CAPTION>
===========================================================================================================
<S> <C> <C> <C>
September 30, December 31, September 30,
1999 1998 1998
Restated Restated
(Note 5) (Note 5)
===========================================================================================================
ASSETS
CURRENT ASSETS
Cash $ 65,563 $ 245,182 $ 362,198
Accounts receivable 20,228 55,076 178,743
Prepaid expenses and deposits 11,782 9,257 5,906
- -----------------------------------------------------------------------------------------------------------
97,573 309,515 546,847
Equipment and leasehold improvements 68,216 60,758 71,422
Investment (Note 5) 3,206,491 2,196,355 2,282,731
- -----------------------------------------------------------------------------------------------------------
$ 3,372,280 $ 2,566,628 $ 2,901,000
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 592,117 $ 148,262 $ 167,661
Loan payable - 150,775 -
----------------------------------------------------------------------------------------------------------
592,117 299,037 167,661
CONTINGENT LIABILITY (Notes 2 and 8(b)) 657,052 - -
SHAREHOLDERS' EQUITY
Share capital (Note 2) 18,066,406 13,128,263 12,992,076
Shares subscribed - 660,592 -
Deficit (15,943,295) (11,521,264) (10,258,737)
- -----------------------------------------------------------------------------------------------------------
2,123,111 2,267,591 2,733,339
- -----------------------------------------------------------------------------------------------------------
$ 3,372,280 $ 2,566,628 $ 2,901,000
============================================================================================================
</TABLE>
On Behalf of the Board of Directors
/s/ Robert Chase /s/ Wayne Johnstone
- ---------------------- ----------------------
Director Director
<PAGE>
BIOMETRIC SECURITY CORP.
CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
(Expressed in Canadian Dollars)
(unaudited)
<TABLE>
<CAPTION>
========================================================================================================================
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
========================================================================================================================
<S> <C> <C> <C> <C>
REVENUE
Interest (Note 5) $ 449 $ 10,253 $ 4,688 $ 75,856
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES
Professional fees and registration costs 349,150 205,251 881,418 451,364
Business consultants 66,200 28,856 163,594 52,456
Amortization 2,785 (3,029) 7,687 6,398
Finder's fee (Note 5) 53,667 21,467 114,850 75,135
Foreign exchange 20 13,233 1,266 879
Interest and bank charges 167 484 1,362 1,171
Management fees 32,100 29,009 96,300 89,009
Office expenses 15,626 62,631 84,230 99,365
Listing costs 15,929 15,770 58,263 51,340
Salaries, wages and administration 16,049 24,408 65,375 62,079
Travel and accommodation 32,188 25,890 124,503 83,960
- ------------------------------------------------------------------------------------------------------------------------
583,881 423,970 1,598,848 973,156
- ------------------------------------------------------------------------------------------------------------------------
(583,432) (413,717) (1,594,160) (897,300)
SHARE OF LOSS OF BII (1,432,699) (304,769) (3,003,074) (304,769)
RECOVERY (WRITE-OFF) OF
RESOURCE PROPERTIES 10,348 185,339 175,203 (4,620,138)
LOSS ON DISPOSAL OF ASSETS - (12,240) (39,827)
- ------------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD (2,005,783) (545,387) (4,422,031) (5,862,034)
DEFICIT, BEGINNING OF PERIOD (13,937,512) (9,713,350) (11,521,264) (4,396,703)
- ------------------------------------------------------------------------------------------------------------------------
DEFICIT, END OF PERIOD $(15,943,295) $(10,258,737) $(15,943,295) $(10,258,737)
========================================================================================================================
LOSS PER SHARE $ (0.05) $ (0.03) $ (0.10) $ (0.32)
========================================================================================================================
</TABLE>
<PAGE>
BIOMETRIC SECURITY CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in Canadian Dollars)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(unaudited)
<TABLE>
<CAPTION>
=========================================================================================================
1999 1998
=========================================================================================================
<S> <C> <C>
OPERATIONS
Loss for the period $ (4,422,031) $ (5,862,034)
Items not involving cash:
Depreciation 7,687 6,398
Loss on disposal of assets - 39,827
(Gain) Write-off of mineral properties (175,203) 4,620,138
Changes in non-cash working capital items 476,178 (274,839)
Share of losses of BII 3,003,074 304,769
Non-cash fees 114,850 75,135
- ----------------------------------------------------------------------------------------------------------
(995,445) (1,090,606)
- ----------------------------------------------------------------------------------------------------------
FINANCING
Issue of common shares, net 4,819,753 529,250
Repayment of loan (150,775) -
- ----------------------------------------------------------------------------------------------------------
4,668,978 529,250
- ----------------------------------------------------------------------------------------------------------
INVESTMENTS
Capital assets (15,145) (20,945)
Mineral properties 175,203 50,378
Proceeds on disposal of fixed assets - 151,511
Increase in investment (Note 5) (4,013,210) (2,587,500)
- ----------------------------------------------------------------------------------------------------------
(3,853,152) (2,406,556)
- ----------------------------------------------------------------------------------------------------------
CHANGE IN CASH (179,619) (2,967,912)
CASH, BEGINNING OF PERIOD 245,182 3,330,110
- ----------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 65,563 $ 362,198
==========================================================================================================
</TABLE>
<PAGE>
BIOMETRIC SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(unaudited)
================================================================================
1. CONTINUING OPERATIONS
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 September 30, 1999 the Company has a working capital
deficiency of approximately $495,000. 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. 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
fund BII or the proceeds from the disposition of the Company's interest in
BII.
2. SHARE CAPITAL
a) Authorized: Unlimited (1998 - 100,000,000) common shares without par
value.
b) Issued:
<TABLE>
<CAPTION>
Shares Amount
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, 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 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, December 31, 1998 20,982,493 13,128,263
Issued during the period for cash by way of:
Private placements 11,666,666 1,750,000
Exercise of warrants 100,000 15,000
- ---------------------------------------------------------------------------------------------
32,749,159 14,893,263
Issued during the period for cash by way of:
Private placement 11,666,665 1,750,000
Exercise of warrants 2,885,551 462,833
- ---------------------------------------------------------------------------------------------
47,301,375 17,106,096
Issued during the period for finder's fee (Note 5) 382,833 114,850
Issued during the period for cash by way of:
Private placement 10,000,000 2,000,000
Exercise of warrants 235,000 39,950
Less: share issue costs - (537,438)
- ---------------------------------------------------------------------------------------------
57,919,208 18,723,458
Less: contingent liability (Note 8) (3,285,260) (657,052)
- ---------------------------------------------------------------------------------------------
Balance, September 30, 1999 54,633,948 $18,066,406
=============================================================================================
</TABLE>
<PAGE>
BIOMETRIC SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(unaudited)
================================================================================
2. SHARE CAPITAL (continued)
c) Private Placements
During the three month period ended March 31, 1999 the Company completed
brokered and non-brokered private placements that totalled 11,666,666 units
at $0.15 per unit for gross proceeds of $1,750,000. Each unit consisted 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 for the brokered private placement was paid a
commission totaling $100,000 and 1,000,000 broker warrants exercisable at
$0.15 per share in the first year and $0.17 per share in the second year.
During the three month period ended June 30, 1999 the Company completed a
brokered private placement of 11,666,665 units at $0.15 per unit to raise
gross proceeds of up to $1,750,000. Each unit consisted 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
was paid a commission totaling $160,000, payable in cash, and 1,600,000
broker warrants exercisable at $0.15 per share in the first year and $0.17
per share in the second year.
During the three month period ended September 30, 1999 the Company
completed a brokered private placement of 10,000,000 units at $0.20 per
unit to raise gross proceeds of up to $2,000,000. Each unit consisted of
one common share and one non-transferable share purchase warrant
exercisable at $0.20 per share in the first year and $0.23 per share in the
second year. The agent was paid a commission totaling $186,000, payable in
cash, and 1,500,000 broker warrants exercisable at $0.20 per share in the
first year and $0.23 per share in the second year.
d) At September 30, 1999 the company reserved in respect of options and
warrants:
Options:
<TABLE>
<CAPTION>
Number of Shares Exercise Price Expiry Date
---------------- -------------- -----------
<S> <C> <C>
750,000 $ 0.22 April 16, 2001
1,180,000 $ 0.23 January 28, 2001
50,000 $ 0.32 July 6, 2000
100,000 $ 0.20 August 28, 2000
----------------
2,080,000
================
</TABLE>
<PAGE>
BIOMETRIC SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(unaudited)
================================================================================
Warrants:
<TABLE>
<CAPTION>
Number of Shares Exercise Price Expiry Date
---------------- -------------- -----------
<S> <C> <C>
1,745,000 $ 0.17 March 31, 2000
455,000 $ 0.17 September 10, 2000
11,281,115 $ 0.15 January 29, 2000
January 29, 2001
13,266,665 $ 0.15 April 15, 2000
$ 0.17 April 15, 2001
11,500,000 $ 0.15 July 22, 2000
$ 0.17 July 22, 2001
-----------------------
38,247,780
=======================
</TABLE>
3. RELATED PARTY TRANSACTIONS
Fees of $227,189 (1998--$117,759) were charged by directors or companies
affiliated with them for management, consulting and administrative
services.
4. DIRECTORS
Mr. R. Kamm
Mr. R. Chase
Mr. W. Rand
Mr. C. Idziszek
Mr. W. Johnstone
5. INVESTMENT
<TABLE>
<CAPTION>
September September
1999 1998
-----------------------------------
<S> <C> <C>
Investment, at cost... $ 7,484,565 $ 2,587,500
Share of losses of BII (4,278,074) (304,769)
---------------------------------------------------------------------------------------------
$ 3,206,491 $ 2,282,731
====================================================================================================
</TABLE>
During 1998 the company entered into an agreement to purchase convertible
debentures entitling the Company to acquire a 45% interest in Biometric
Identification Inc. ("BII"), subject to dilution by a 15% stock option
plan that is to be instituted by BII and subsequent financings by BII.
Financings completed after the Company acquired the US $5,000,000 of
debentures of BII would further dilute the Company's interest. BII is in
need of additional funding and is seeking significant financings from
other parties. Should BII be successful in raising the additional funds
the Company's interest in BII could be reduced to approximately 20%. BII
is a private California-based company in the business of
<PAGE>
BIOMETRIC SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(unaudited)
================================================================================
5. INVESTMENT (continued)
developing, manufacturing and marketing fingerprint recognition technology.
Under the terms of the agreement, the company had the right to acquire up
to US $5,000,000 of convertible debentures to be issued by BII. 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. During the three month period ended
September 30, 1999 the Company completed its acquisition of BII debentures
totaling US $5,000,000 in accordance with the terms of the agreement. This
investment was initiated by a related party which assigned its interest to
the Company in exchange for a fee up to US $145,000, plus reimbursement of
its expenses. The related party elected to take this fee in the form of
715,575 common shares as a deemed price of $0.30 per share. These shares
were issued in pro-rata tranches on the same basis the debentures were
purchased by the Company.
During the third quarter of 1999, the Company determined that it had the
ability to exercise significant influence over the operating, financing and
investing activities of BII. In addition, the Company determined that the
investment in convertible debentures could be considered to be similar in
nature to an equity investment in BII. As a result of these two factors,
the Company changed the method of accounting for its investment in BII from
the fair value method, as an available-for-sale investment, to the equity
method, effective in 1999. In accordance with U.S. Accounting Principles
Board Opinion No. 18 "The Equity Method of Accounting for Investments in
Common Stock", the Company's financial statements for 1998 have been
restated to reflect this change.
Under the equity method, the cost of the investment is adjusted for the
company's share of post-acquisition earnings or losses of BII, as if the
Company had converted its BII debentures into shares of BII at the time of
each acquisition. The excess of the cost of its investment over the
Company's share of the net assets of BII, which has been allocated by the
Company to BII's technology rights, is being amortized on a straight-line
basis over five years. The Company has recorded $3,003,074 as its share of
the loss of BII for the nine months ended September 30, 1999, and
$1,275,000 as its share of the loss of BII for the period ended December
31, 1998 and $304,769 as its share of the loss of BII for the period ended
September 30, 1998. In addition, previously reported foreign exchange
losses of $178,069 at June 30, 1999 and gains of $85,875 as at December 31,
1998 and $9,000 as at September 30, 1998 and a deferred exchange gain of
$81,000 as at September 30, 1998 related to this investment have been
reversed, and accrued interest income of $55,922 as at June 30, 1999 and
$79,989 as at December 31, 1998 have been eliminated in connection with
this change. The overall result of this change was to reduce investment as
at June 30, 1999 by $2,889,092 and as at December 31, 1998 by $1,440,864
and as at September 30, 1998 by $394,769, increase loss for the six months
ended June 30, 1999 by $1,448,228, or $0.04 per share and for the year
ended December 31, 1998 by $1,440,864, or $0.08 per share and for the nine
months ended September 30, 1998 by $313,769 or $0.01 per share and increase
deficit as at June 30, 1999 by $2,889,092 and as at December 31, 1998 by
$1,440,864 and as at September 30, 1998 by $313,769.
<PAGE>
BIOMETRIC SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(unaudited)
================================================================================
6. LOAN PAYABLE
During 1998, a company affiliated with a director loaned the Company a
total of $250,000. The loan was 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 issued 65,789 shares at a deemed price of
$0.19 per share as allowed for under the rules of the Vancouver Stock
Exchange, as consideration for the loan.
7. MINERAL PROPERTIES
During the year ended December 31, 1998 the Company changed its principal
business activity from mineral exploration to the development of
fingerprint identification systems and wrote-off its mineral exploration
expenditures.
<TABLE>
<CAPTION>
1999 1998
==================================================================================================
<S> <C> <C>
ACQUISITION COSTS $ - $ -
- ---------------------------------------------------------------------------------------------------
EXPLORATION AND DEVELOPMENT
EXPENDITURES
Access costs - 772
Assays - 2,882
Communication - 332
Contract drilling, excavation and trenching - -
Contract labour and supervision - 3,289
Data acquisition and analysis - 1,537
Equipment and field supplies - 5,417
Field administration - 16,895
Field car rental and transportation - 3,499
Geological and geophysical - 69,281
Insurance - 5,762
Legal and other - 23,936
Travel and accommodation - 1,359
- ---------------------------------------------------------------------------------------------------
- 134,961
- ---------------------------------------------------------------------------------------------------
- 134,961
MINERAL PROPERTIES, BEGINNING OF PERIOD - 4,670,516
- ---------------------------------------------------------------------------------------------------
- 4,805,477
LESS: AMOUNTS WRTTEN-OFF - (4,805,477)
- ---------------------------------------------------------------------------------------------------
MINERAL PROPERTIES, END OF PERIOD $ - $ -
===================================================================================================
</TABLE>
<PAGE>
BIOMETRIC SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(unaudited)
The Company continues to hold several Argentine properties and has entered
into an agreement to grant Inlet Resources Ltd. ("Inlet) an option to
purchase up to a 100% interest in these 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 US $2,000,000. During the first year the agreement required Inlet to
pay the Company US $150,000 in stages, issue the Company 100,000 shares and
complete a US $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 US $600,000 in stages, issue 200,000
shares and complete work commitments totalling US $1,500,000 to earn an
additional 40% interest in the properties. To September 30, 1999 the
Company had received US $150,000 and 100,000 shares relating to the option
agreement.
8. 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.
b) Contingent Liability
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") had 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
holders of shares of the Company, at the time of the original
continuance to Wyoming may have common law remedies under the Act. The
Company complied with applicable Canadian disclosure requirements at
the time of transfer and offered all shareholders the right to dissent
and no shareholders exercised this right.
In May 1999 the Company filed a registration statement with the SEC
offering U.S. holders of shares of the Company, at the time of
continuance, the right to have their shares repurchased by the Company
at their fair market value at the time of the original continuance.
A provision for the contingent liability has been recorded in these
accounts as a reduction of share capital. Any amount not repurchased by
the Company on expiry of the repurchase offer will be reclassified to
share capital.
<PAGE>
BIOMETRIC SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(unaudited)
===================================================================
9. SUBSEQUENT EVENTS
Subsequent to September 30, 1999 the Company held a general meeting of its
shareholders at which time the shareholders, among other things, approved
the consolidation of the Company's share capital on the basis of one post-
consolidated share for each five pre-consolidated shares.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
--------
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 has invested US $5,000,000 in
convertible debentures issued by BII. If all rights of conversion were
exercised, the Company would hold approximately 45% of the issued shares of BII.
This 45% interest is subject to dilution from shares issued under a 15% stock
option plan which would reduce BMS's interest to 38.25%. Financings completed
after the acquisition of the US $5,000,000 of debentures of BII would further
dilute BMS's interest. BII is in need of additional funding and is currently
seeking significant financings from other parties. Should BII be successful in
raising these additional funds from other parties, BMS's interest in BII could
be reduced to approximately 20%.
As of July 31, 1999, the Company had purchased US $5,000,000, of the
convertible debentures of BII pursuant to the BII Agreement.
The convertible debentures 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.
While the Company is not legally obligated to exercise its rights of
conversion, the Company's intention is, in due course, if business conditions
warrant, to exercise all of the conversion rights. If all rights of conversion
are exercised, the Company would hold 45% of the issued shares of the common
stock of BII, prior to dilution resulting from the issuance of shares on
exercise of options granted under BII's stock incentive plan and 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.
14
<PAGE>
For additional information on the Company's investment in BII, see the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, filed
with the Securities and Exchange Commission on March 31, 1999.
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. As at September 30, 1999, the Company had a
working capital deficiency of approximately $494,544.
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. 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.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Results of Operations
- ---------------------
For the three and nine month periods ended September 30, 1999 the Company
incurred net losses of $2,005,783 and $4,422,031 resulting in losses per share
of $0.05 and $0.10 respectively. The losses for the three and nine-month
periods ended September 30, 1999 result from cash and short term investment
earnings of $449 and $4,688 less expenses of $583,881 and $1,598,848 and the
Company's share of losses in the operations of Biometric Identification Inc. of
$1,432,699 and $3,003,074 respectively. In addition, the Company realized
mineral property recoveries of $10,348 and $175,203 in the three and nine-month
periods ended September 30, 1999. This is compared to net losses for the three
and nine-month periods ended September 30, 1998 of $545,387 and $5,862,034 and
losses per share of $0.03 and $0.32. The losses for the three and nine month
periods ended September 30, 1998 resulted from cash and short term investment
earnings of $10,253 and $75,856 less expenses of $423,970 and $973,156 less the
Company's share of losses in the operations of Biometric Identification Inc. of
$304,769 for the three and nine month periods and losses on the disposal of
equipment of $12,240 and $39,827 respectively. In addition, the Company wrote-
off mineral property costs totalling $4,620,138 which increased the loss for the
nine-month period ended September 30, 1998 and recovered $185,339 of resource
property costs for the three month period ended September 30, 1998.
Administrative costs in the three and nine-month periods ended September
30, 1999 increased 38% and 64% respectively over 1998 primarily as a result of
the Company incurring increased professional fees and registration costs,
finders fees and consulting costs.
Liquidity and Capital Resources
- -------------------------------
Cash flow from operations has not to date satisfied all of the Company's
operational requirements and cash commitments. With a working capital deficiency
of approximately $494,544 as at September 30, 1999, the Company must rely on
sales of debt and equity securities to meet its cash requirements to the extent
that they exceed cash
15
<PAGE>
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
operating activities. At this time, the Company is seeking but does not have
specific arrangements to obtain the additional financing. There is no assurance
that the Company will be successful in obtaining any such financing.
During the three month period ended September 30, 1999, the Company:
a) Completed a $2,000,000 Private Placement. The private placement
consisted of 10,000,000 units, brokered on a best efforts basis, at a
price of $0.20 per unit for total proceeds of $2,000,000. Each unit
consisted of one common share and one two-year non-transferable share
purchase warrant. Each warrant is exercisable at a price of $0.20 per
share in the first year and $0.23 per share in the second year.
Remuneration paid to the broker for acting as agent consisted of a
$186,000 commission payable in cash and a two year broker's warrant
exercisable into 1,500,000 shares of the Company. The broker's warrants
are exercisable at a price of $0.20 per share in the first year and
$0.23 per share in the second year.
b) Invested an additional US$1,250,000 in BII debentures.
c) Announced a general meeting of the shareholders of the Company to be
held on October 29, 1999, at which time the shareholders, among other
things, voted to consolidate the Company's share capital on the basis
of one post-consolidated share for each five pre-consolidated shares.
(see Part II Item 5).
Balance Sheets
- --------------
Total cash and short-term investments at September 30, 1999, were $65,563
as compared to $245,182 at December 31, 1998 and $362,198 at September 30, 1998,
and had a working capital deficiency of $494,544 as at September 30, 1999,
compared to working capital of $10,478 at December 31, 1998 and $379,186 at
September 30, 1998.
As at September 30, 1999, a total of $7,484,565 (US $5,000,000) had been
invested in debentures of BII.
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
16
<PAGE>
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
fourth 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not Applicable
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS--see the Company's Form 10-Q for the quarter ended
March 31, 1999 filed May 15, 1999.
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 the subject.
In October 1999, the SEC declared effective the registration statement
filed by the Company in connection with the Company's proposed offer to
repurchase the shares held by U.S. persons at the time of the Company's transfer
from British Columbia to the State of Wyoming, which took place as of November
10, 1998. The Company commenced the repurchase offer in October 1999, offering
to repurchase 3,285,260 shares of its common stock outstanding as of November
10, 1998, at a cash price of Cdn. $0.20 (US$ 0.13) per share, plus interest, for
a total repurchase amount of Cdn. $657,052 (US$ 427,084), plus interest. The
repurchase offer expired November 8, 1999 and the Company is currently reviewing
documentation submitted under the terms of the repurchase offer.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
The following transaction was effected in reliance upon the exemption from
United States securities law registration requirements provided by Regulation S
under the Securities Act because none of the securities were offered or sold in
the United States or to "US persons" other than "distributors" as those terms
are defined in Regulation S.
During the three month period ended September 30, 1999, the Company
completed a $2,000,000 Private Placement. The private placement consisted of
10,000,000 units, brokered on a best efforts basis, at a price of $0.20 per unit
for total proceeds of $2,000,000. Each unit consisted of one common share and
one two-year non-transferable share purchase warrant. Each warrant is
exercisable at a price of $0.20 per share in the first year of and $0.23 per
share in
17
<PAGE>
the second year. Remuneration paid to the broker for acting as agent consisted
of a $186,000 commission payable in cash and a two year broker's warrant
exercisable into 1,500,000 shares of the Company. The broker's warrants are
exercisable at a price of $0.20 per share in the first year and $0.23 per share
in the second year.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
See Item 5
ITEM 5 OTHER INFORMATION
The following matters were submitted to a vote of shareholders at the Company's
annual general meeting of shareholders, held on October 29, 1999.
Voters approved a proposal to fix the number of directors at five by a vote of
6,092,587 for and 3,936 against. There were also 66,838 abstentions and 0
broker non-votes.
Voters elected five incumbent directors for one-year terms. The vote tabulation
for individual directors was:
<TABLE>
<CAPTION>
Directors Shares For Shares Withheld Shares Not Voted
- --------- ---------- --------------- ----------------
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert M. Kamm 6,050,727 79,162 33,472
- ---------------------------------------------------------------------------------
Robert F. Chase 6,050,727 79,162 33,472
- ---------------------------------------------------------------------------------
Chester Idziszek 6,050,727 79,162 33,472
- ---------------------------------------------------------------------------------
William A. Rand 6,050,727 79,162 33,472
- ---------------------------------------------------------------------------------
Wayne Johnstone 6,050,727 79,162 33,472
- ---------------------------------------------------------------------------------
</TABLE>
Voters approved the appointment of KPMG LLP as the Company's independent
auditors by a vote of 6,114,759 for, 3,480 against and 10,006 withheld. There
were also 35,116 abstentions.
Voters approved a proposal to authorize the Company to undertake the
consolidation (reverse stock split) of the Company's issued share capital on the
basis of one new common share without par value for every five existing common
shares without par value by a vote of 5,741,206 for and 341,837 against. There
were also 80,318 abstentions and 0 broker non-votes.
18
<PAGE>
Voters approved a proposal to authorize the Company, if it does transfer to
British Columbia, to reduce its authorized capital to 100,000,000 common shares
without par value by a vote of 5,878,767 for and 143,251 against. There were
also 141,343 abstentions and 0 broker non-votes.
Voters approved a proposal to authorize a change of the name of the Company by a
vote of 5,963,044 for and 93,145 against. There were also 107,172 abstentions
and 0 broker non-votes.
The Company's shareholders also voted on proposals to approve granting to
the directors, officers, employees and consultants of the Company of incentive
stock options to purchase common shares of the Company; and to authorize a
continuation (transfer) of the Company from the State of Wyoming to the Province
of British Columbia. The Company is currently reviewing with its Registrar the
vote counts on each of these proposals, since initial vote results indicated a
high number of abstentions.
As disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, filed on March 31, 1999, as amended, the Company has 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 of
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 the Canadian regulatory
authorities. To September 30, 1999 the Company received US$150,000 and 100,000
common shares of Inlet in accordance with the agreement.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a. 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 Financial Data Schedule
* Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
b. No reports on Form 8-K have been filed during the quarter ended
September 30, 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on behalf of the
undersigned thereunto duly authorized.
BIOMETRIC SECURITY CORP.
/s/ Robert Chase
Date: November 9, 1999 ------------------------------
Robert Chase
Chief Financial Officer and
Duly Authorized Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BIOMETRIC
SECURITY CORP'S QUARTERLY FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 0.6805
<CASH> 65,563
<SECURITIES> 0
<RECEIVABLES> 32,010
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 97,573
<PP&E> 75,903<F1>
<DEPRECIATION> (7,687)
<TOTAL-ASSETS> 3,372,280
<CURRENT-LIABILITIES> 592,117
<BONDS> 0
0
0
<COMMON> 18,066,406<F2>
<OTHER-SE> (15,943,295)
<TOTAL-LIABILITY-AND-EQUITY> 3,372,280
<SALES> 0
<TOTAL-REVENUES> 4,688
<CGS> 0
<TOTAL-COSTS> 1,598,848<F3>
<OTHER-EXPENSES> (175,203)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,422,031)
<EPS-BASIC> 0
<EPS-DILUTED> (0.10)
<FN>
<F1>CONVERTIBLE DEBENTURES 3,206,491
<F2>CONTINGENT LIABILITY 657,052
<F3>EQUITY LOSS 3,003,074
</FN>
</TABLE>
