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Filed Pursuant to Rule 424(b)(3)
File No. 333-78009
PROXY STATEMENT/PROSPECTUS
BIOMETRIC SECURITY CORP.
SUITE 1940 -- 400 BURRARD STREET
VANCOUVER, BRITISH COLUMBIA
CANADA V6C 3A6
Biometric Security Corp. is issuing this proxy statement/prospectus in
connection with its annual general meeting of shareholders. At this meeting, the
shareholders will vote on the following:
1. Fixing the number of directors at five;
2. Electing five members of the board of directors to hold office until
our annual general meeting next year;
3. Approving our appointment of KPMG LLP as our independent auditors for
1999;
4. Authorizing us to grant incentive stock options to our directors,
officers and employees;
5. Authorizing us to consolidate our issued shares, also known as a
reverse stock split, so that one new common share would be issued for every five
existing shares;
6. Authorizing us to transfer our governing jurisdiction from the State of
Wyoming to the Province of British Columbia;
7. Authorizing us, if we transfer to British Columbia, to reduce our
authorized share capital to one hundred million common shares without par value
and adopt new corporate governance documents;
8. Authorizing us to change our name to "Safeguard Biometric Corp." if we
complete the reverse stock split; and
9. Other business that may properly come before the meeting.
For more information about these proposed changes, see "Information
Circular for the Annual General Meeting," on page 31.
Our common stock is listed on the Vancouver Stock Exchange under the
symbols "BMS" and "BMS.S" and is also traded from time to time on the
over-the-counter market in the United States under the symbol BMSX.
THERE ARE CERTAIN RISKS THAT YOU SHOULD CONSIDER IN CONNECTION WITH THE
STOCK CONSOLIDATION AND THE TRANSFER TO BRITISH COLUMBIA. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
THIS PROXY STATEMENT/PROSPECTUS HAS NOT BEEN APPROVED BY THE SEC OR ANY
STATE SECURITIES COMMISSION, NOR HAVE THESE ORGANIZATIONS DETERMINED THAT THIS
PROXY STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. IT'S ILLEGAL FOR ANYONE TO
TELL YOU OTHERWISE.
We are first mailing this proxy statement/prospectus to our stockholders on
or about October 1, 1999.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY..................................................... 1
Biometric Security Corp. .............................. 1
Matters to be Voted on................................. 1
Summary of Reverse Stock Split, Transfer from Wyoming
to British Columbia, Reduction of Authorized Capital
and Name Change....................................... 2
Biometric Common Stock................................. 4
Historical Per Share Information....................... 4
RISK FACTORS................................................ 5
THE ANNUAL GENERAL MEETING.................................. 11
BIOMETRIC SECURITY CORP. ................................... 13
DESCRIPTION OF PROPERTY..................................... 23
LEGAL PROCEEDINGS........................................... 23
SELECTED FINANCIAL DATA..................................... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 25
LEGAL MATTERS............................................... 30
EXPERTS..................................................... 30
WHERE YOU CAN FIND MORE INFORMATION......................... 30
INFORMATION CIRCULAR FOR THE ANNUAL GENERAL MEETING OF
SHAREHOLDERS.............................................. 31
PERSONS MAKING THE SOLICITATION............................. 31
APPOINTMENT AND REVOCATION OF PROXIES....................... 31
EXERCISE OF DISCRETION...................................... 31
VOTING SECURITIES AND PRINCIPAL HOLDERS OF VOTING
SECURITIES................................................ 32
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS................ 33
EXECUTIVE COMPENSATION...................................... 33
INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS............... 36
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON..... 38
NUMBER OF DIRECTORS......................................... 38
ELECTION OF DIRECTORS....................................... 38
INDEBTEDNESS OF DIRECTORS, EXECUTIVE AND SENIOR OFFICERS.... 40
APPOINTMENT AND REMUNERATION OF AUDITOR..................... 40
SPECIAL BUSINESS............................................ 41
INCENTIVE STOCK OPTIONS................................ 41
CONSOLIDATION (REVERSE STOCK SPLIT) OF SHARE CAPITAL... 41
TRANSFER OF DOMICILE TO BRITISH COLUMBIA............... 42
CHANGE OF AUTHORIZED CAPITAL........................... 50
CHANGE OF NAME......................................... 50
OTHER BUSINESS.............................................. 51
INDEX TO FINANCIAL STATEMENTS OF BIOMETRIC SECURITY CORP.
AND BIOMETRIC IDENTIFICATION, INC......................... F-1
APPENDIX I -- SPECIAL AND ORDINARY RESOLUTIONS.............. I-1
</TABLE>
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SUMMARY
In this summary, we highlight selected information from this document, but
we haven't included all of the information that is important to you. So that you
can better understand the proposals we're asking you to vote on, and how they
would affect your interest in Biometric, you should read carefully this entire
document and the documents to which we refer you. We have included page
references to direct you to more complete descriptions of the topics presented
in this summary. In this document, the plain "$" refers to Canadian dollars, and
"US$" refers to United States dollars.
BIOMETRIC SECURITY CORP. (PAGE 13)
Our principal business is our investment in Biometric Identification, Inc.,
a company based in California. Biometric Identification is controlled by Arete
Associates, a research and development contractor also based in California and
privately held. Biometric Identification designs, manufactures and markets
devices for fingerprint identification using technology based on "biometrics,"
which is the science of identifying individuals through their own unique
physical characteristics such as fingerprints and hand shape. Biometric
Identification acquired its technology under a license from Arete.
In June 1998, we agreed with Arete that we could invest up to US$ 5,000,000
in debentures, which are debt securities, to be issued by Biometric
Identification. We can convert these debentures into Biometric Identification
common stock. As of July 23, 1999, Biometric had acquired all US$ 5,000,000 of
the Biometric Identification debentures. If we convert all of them into
Biometric Identification common stock, we will hold approximately 45% of its
common stock. Biometric is currently evaluating whether to convert its
debentures into Biometric Identification common stock. We have not yet made a
decision about this.
Before we invested in Biometric Identification, we were in the mineral
exploration business. We still own several properties in Argentina. Since we do
not think the precious metals markets will soon recover from slumping demand, we
decided to get out of the mineral exploration business. We have ended all of our
Argentinean operations and recently reached a preliminary agreement to sell
these properties. When they are sold, we will have essentially left our former
business.
Please see "Where You Can Find More Information" on page 30 for additional
information about Biometric.
Our main office is located at Suite 1940, 400 Burrard Street, Vancouver,
British Columbia, Canada V6C 3A6, and our telephone number is (604) 687-4144.
MATTERS TO BE VOTED ON:
- Fixing the number of directors at five
- Election of five directors
- Approval of our appointment of independent auditors
- Authorization of incentive stock option grants to directors, officers
and employees
- Authorization of reverse stock split
- Authorization of transfer from Wyoming to British Columbia
- Authorization of our reducing our authorized share capital if we
transfer to British Columbia
- Authorization of corporate name change if we complete the reverse
stock split
We will need a simple majority of shares voted to pass each of these
proposals except for the transfer to British Columbia, which must pass by a
two-thirds majority. On September 10, 1999, our directors and officers together
held 6.9% of Biometric's outstanding common stock.
We are providing summary information below about four of these matters: the
reverse stock split; the transfer to British Columbia; the reduction in
authorized share capital; and the name change, because these are unusual
corporate matters.
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SUMMARY OF REVERSE STOCK SPLIT, TRANSFER FROM WYOMING TO BRITISH COLUMBIA,
REDUCTION OF AUTHORIZED CAPITAL AND NAME CHANGE
We are asking you to vote in person or by proxy to approve the following
four transactions:
1. POTENTIAL REVERSE STOCK SPLIT (PAGE 41).
The share consolidation, sometimes referred to as a reverse stock
split, that we propose for our common stock would result in your
getting one share of common stock for every five shares you now own.
Your percent ownership of Biometric would not change. Instead, you
would have one-fifth the number of shares you had before.
We would like to complete this reverse stock split to increase the
average trading price of our shares by five times, although the
price may not eventually trade by that much.
2. POTENTIAL TRANSFER FROM WYOMING TO BRITISH COLUMBIA (PAGE 42).
If completed, the transfer to British Columbia will not change our
business, management or financial condition. Your shareholdings will
not change as a result of the transfer.
We may want to return to British Columbia so that we can be governed
by the law of British Columbia, where our main stock trading market,
The Vancouver Stock Exchange, is located. This should make it
simpler and less costly for us to comply with securities laws, since
we and our main stock trading market will both be governed by the
law of British Columbia.
Please see page 43 for a discussion of other differences between the
corporation laws of British Columbia and Wyoming.
3. REDUCTION OF AUTHORIZED CAPITAL (PAGE 50).
If we do transfer to British Columbia, we will have to follow the laws
that apply to British Columbia corporations rather than Wyoming
corporations. We'll change our corporate governing documents only to
conform to British Columbia requirements. For example, we'll reduce
the number of common shares we can issue. Wyoming lets us issue an
unlimited number of common shares, but British Columbia requires us
to have an upper limit, which we would like to set at 100 million
common shares.
4. NAME CHANGE (PAGE 50).
The Vancouver Stock Exchange requires a company that does a reverse
stock split to change its name. If the reverse stock split is
completed, we are asking you to authorize us to change our name to
"Safeguard Biometric Corp.," or another name that would be
acceptable to the VSE, the Registrar of Companies for British
Columbia or the Wyoming Secretary of State, as necessary.
Material Federal Income Tax Consequences to Shareholders
Tax matters are often complicated and the tax consequences to you from
these proposed transactions will depend in part on the facts of your own
situation. You should consult your tax advisors, as you think appropriate, for a
full understanding of the tax consequences to you of these proposed
transactions.
1. REVERSE STOCK SPLIT (PAGE 42).
The reverse stock split should have no federal income tax consequences
for you.
2. TRANSFER FROM WYOMING TO BRITISH COLUMBIA (PAGE 47).
Tax Consequences for Biometric. The transfer would be treated for
U.S. federal tax purposes as though we had transferred our assets
from a U.S. corporation to a British Columbia corporation. We would
be subject to U.S. federal tax upon our transfer to the extent that
the fair market value of our property exceeds the historic basis,
for U.S. tax purposes, in the property. After we become a Canadian
corporation, we will be subject to U.S. withholding tax on any
dividends paid by a U.S. corporation, as well as a 10% withholding
tax on interest we get from our investments in U.S. debt securities.
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Tax Consequences for Shareholders. The transfer will have different
tax consequences for U.S. and Canadian shareholders.
U.S. SHAREHOLDERS -- If you are a U.S. resident shareholder, you
would be subject to tax on any increase in share value over your
basis in the shares. "Basis" is essentially the amount you originally
paid for the shares plus some other amounts, such as any gain you
recognized on the shares when we transferred from British Columbia to
Wyoming. After we transfer back into British Columbia, Canada will
impose a 15% withholding tax on any dividends paid to U.S. resident
individual shareholders.
CANADIAN SHAREHOLDERS -- If you are a Canadian resident
shareholder, the tax consequences to you will be based on adjustments
that we will have to make to our own financial statements under
Canadian law. These adjustments, in turn, will affect the tax
treatment of any money we distribute to you. We haven't yet
determined the amount of these adjustments. However, based on
preliminary calculations, we think that you may see a reduction in
the amount of your share investment which can be returned to you on a
tax-free basis.
Please see "Material Tax Consequences of the Consolidation (Reverse Stock
Split)," at page 42, and "Material Tax Consequences of the Transfer to British
Columbia," at page 47, for further discussion about the tax consequences of
these transactions.
No Dissenters Rights of Appraisal
Under both British Columbia and Wyoming corporate law, shareholders who
dissent from some unusual corporate actions, such as mergers and major asset
sales, have the right to have the value of their shares appraised, and be paid
cash for them. However, you don't have these appraisal rights in connection with
any of the proposed transactions because the proposed transactions are not
considered to be unusual in the sense that shareholder protection, in the form
of appraisal rights, is needed.
Regulatory Approvals
We will have to comply with Wyoming and British Columbia regulatory
requirements in order to complete the transfer to British Columbia.
Under Wyoming law, we will have to:
- post a US$ 50,000 bond, or deposit that amount in an appropriate
Wyoming depository for six months;
- send our audited financial statements to the Wyoming Secretary of
State;
- publish a public notice in Wyoming about our transfer to British
Columbia; and
- pay a special toll charge to the Wyoming Secretary of State based on
our net asset value.
In British Columbia, we will have to file our new corporate governing
documents with the British Columbia Registrar of Companies. These will replace
our Wyoming corporate governing documents.
Our transfer to British Columbia would become effective when:
- the Wyoming Secretary of State issues a Certificate of Transfer
transferring us to British Columbia; and
- the British Columbia Registrar of Companies issues us a Certificate
of Continuance.
Disclosure Obligations (page 46)
Even if we transfer to British Columbia, we will still have to comply with
reporting requirements under United States securities law. However, these
requirements would be reduced because we would no longer be a U.S. company.
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Whether or not we transfer to British Columbia, we will remain subject to
British Columbia disclosure requirements including:
- publishing news releases;
- filing information about major changes for Biometric;
- sending you quarterly and annual financial statements; and
- filing reports about trading in our shares by our officers, directors
and major shareholders.
Accounting Treatment
These transactions will have no effect on our financial statements, but
after our transfer to British Columbia, we would expect to return to using
Canadian "Generally Accepted Accounting Principles" to prepare our financial
statements.
BIOMETRIC COMMON STOCK
At September 10, 1999, we had 57,684,208 outstanding shares of common
stock. We do not have any other kind of stock.
HISTORICAL PER SHARE INFORMATION (CANADIAN DOLLARS)
The following table shows historical earnings, dividend and book value per
share data for Biometric. The information is only a summary and you should read
it along with the following sections of this document for information about
Biometric's financial condition and results of operations: "Selected Financial
Data" on page 24; our audited financial statements and notes, beginning on page
F-1; and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 25.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Book Value per Share......................... $ 0.12 $ 0.48 $ 0.89 $ 0.35 $ 0.37
Net Income (Loss) per Share...................... $(0.38) $(0.13) $(0.14) $(0.20) $(0.10)
Cash Dividends per Share......................... 0 0 0 0 0
</TABLE>
Market Price Information
Biometric's common shares are traded on the Vancouver Stock Exchange under
the symbol "BMS," and are also traded from time to time on the over-the-counter
market in the United States under the symbol "BMSX." Biometric's securities
issued in offshore transactions under Regulation S of the Securities Act are
traded in offshore resales governed by Rule 904 of Regulation S under the symbol
"BMS. S" on the VSE.
On May 6, 1999, the date before Biometric filed a registration statement
with the SEC concerning our proposed reverse stock split, proposed transfer to
British Columbia and other matters discussed in this proxy statement/prospectus,
the closing price of our stock on the VSE was $0.35, and the closing price of
our stock on the over-the-counter market was US$ 0.25.
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RISK FACTORS
You should read the first two risk factors in deciding whether to approve
our reverse stock split and transfer back to British Columbia. You may also find
it helpful to read the subsequent risk factors so you understand more clearly
the risks of our investment in Biometric Identification.
This proxy statement/prospectus contains statements that plan for or
anticipate the future. We believe that some of these statements are
"forward-looking" statements. Forward-looking statements include statements
about the future of the biometric identity verification industry, statements
about future business plans and strategies, and most other statements that are
not historical in nature. In this proxy statement/prospectus, forward-looking
statements use words like "anticipate," "plan," "believe," "expect," and
"estimate." However, because forward-looking statements involve future risks and
uncertainties, there are factors, including those discussed below, that could
cause actual results to differ materially from those expressed or implied. We
have attempted to identify the major factors that could cause differences
between actual and planned or expected results, but we may not have identified
all of those factors. You therefore shouldn't place undue reliance on
forward-looking statements. Also, we have no obligation to publicly update
forward-looking statements we make in this proxy statement/prospectus.
RISK OF APPROVING REVERSE STOCK SPLIT
OUR STOCK PRICE MAY DECLINE AFTER THE REVERSE STOCK SPLIT IF INSTITUTIONAL
INVESTORS AREN'T ATTRACTED TO THE STOCK. Even though our shares may begin
trading at five times the pre-reverse-stock-split price, the stock price may
trend down afterwards, despite our management's belief that a reverse stock
split may improve investors' perception of Biometric stock. That could happen,
for example, if the market is skeptical that the 5-fold increase in trading
price makes our company more attractive to institutional investors. We can't
know exactly how much of our stock is owned by institutions, since many
stockholders typically don't own stock in their own names. However, based on
what we know about the buyers in our recent stock issuances, we believe that a
significant portion of them were institutional investors. This means that if
institutional investors lose interest in our stock, we'll lose a large part of
our buying base and market price support.
RISKS RELATED TO OUR RETURN TO BRITISH COLUMBIA
OUR STOCK PRICE MAY DECLINE IF U.S. INVESTORS BECOME LESS INTERESTED IN US
WHEN WE NO LONGER HAVE TO FILE AS MUCH INFORMATION WITH THE SEC AS WE DID BEFORE
THE TRANSFER. Our return to British Columbia could make us a less desirable
investment opportunity for U.S. and other investors. This is because the
frequency and amount of reporting we will make to the U.S. Securities and
Exchange Commission will decrease after we leave Wyoming, as the requirements
for non-U.S. companies registered with the SEC are less demanding than those for
U.S. companies.
RISKS RELATED TO OUR INVESTMENT IN BIOMETRIC IDENTIFICATION
FINANCING AND INVESTMENT RISKS
OUR ONLY MAJOR ASSET IS OUR INVESTMENT IN BIOMETRIC IDENTIFICATION
DEBENTURES. WE HAVE NO OTHER INVESTMENTS THAT COULD OFFSET POOR RESULTS OF
BIOMETRIC IDENTIFICATION, WHICH HAS A HISTORY OF NET LOSSES. IF BIOMETRIC
IDENTIFICATION CONTINUES TO LOSE MONEY, IT COULD LOSE INVESTMENT VALUE, WHICH IN
TURN COULD CAUSE YOUR INVESTMENT IN BIOMETRIC TO LOSE VALUE. Right now, our
success depends entirely on the future of Biometric Identification. In turn,
your investment in us is subject to that risk. Biometric Identification has a
history of losses, mainly due to the required accounting treatment of research
and development outlays which Biometric Identification has to expense in the
year incurred. For the year ended December 31, 1998, Biometric Identification
had a net loss of US$ 3,934,609, and for the year ended December 31, 1997,
Biometric Identification had a net loss of US$ 1,337,446. For the four months
ended April 30, 1999, Biometric Identification had a net loss of US$ 1,958,168.
We are leaving the natural resource industry sector in order to enter the
technology industry. But we have only identified one company, namely Biometric
Identification, in
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which to invest in the short term. We don't have any other investments that
might offset Biometric Identification's recent net losses.
WE MAY HAVE VIOLATED SECURITIES LAWS GOVERNING INVESTMENT COMPANIES BECAUSE
OUR INVESTMENT IN BIOMETRIC IDENTIFICATION AND LACK OF SUBSTANTIAL
NON-INVESTMENT-TYPE ASSETS COULD RESULT IN OUR BEING TREATED AS AN UNREGISTERED
INVESTMENT COMPANY. OUR SHAREHOLDERS COULD SUE US ON THE BASIS OF A CLAIMED
VIOLATION. Our purchase of the Biometric Identification securities and sale of
our mining properties may mean we have assets that could result in our
technically qualifying as an investment company under federal securities law
even if that is not our goal. Because investment companies are required to
register under the federal securities law and we did not do so, we may have
violated federal securities law. Management has been reviewing and continues to
analyze methods to avoid inadvertent treatment as an investment company, and may
consider registering as an investment company, but has made no decision as to
the latter. Biometric may not be able to avoid investment company classification
as rapidly as desired, even though we might try, for example, to get approval of
an exemption application, change our mix of assets or qualify for a statutory
exemption, because of the demanding legal standards that must be met.
Accordingly, our shareholders could sue us for an alleged violation of the
federal investment company law.
BIOMETRIC DOESN'T CONTROL BIOMETRIC IDENTIFICATION. SINCE BIOMETRIC DOESN'T
YET OWN ANY SHARES IN BIOMETRIC IDENTIFICATION, BIOMETRIC DOESN'T HAVE
SHAREHOLDERS' RIGHTS SUCH AS THE RIGHT TO ELECT BIOMETRIC IDENTIFICATION
DIRECTORS, SO WE MAY NOT BE ABLE TO CAUSE BIOMETRIC IDENTIFICATION TO TAKE
ACTIONS THAT WE THINK MAKE GOOD BUSINESS OR FINANCIAL SENSE. Our investment in
Biometric Identification consists only of its convertible debentures that don't
have voting rights, so we currently have little to no control over Biometric
Identification management policies. Until we exercise our rights to convert
these debentures to common stock of Biometric Identification, we will not have
the voting and other rights provided to the shareholders of Biometric
Identification through their shareholdings. Although Biometric's new President,
Robert Kamm, is also President of Biometric Identification, we don't have any
control over Biometric Identification's shareholders or board of directors. We
might not always be able to cause Biometric Identification to take actions that
we think make good business or financial sense.
BIOMETRIC IDENTIFICATION HAS A LARGE AMOUNT OF DEBT FOR A COMPANY ITS SIZE
AND COULD DEFAULT IN ITS PAYMENT OF OBLIGATIONS. IF BIOMETRIC IDENTIFICATION
CAN'T MAKE ITS DEBT PAYMENTS, BIOMETRIC COULD LOSE ITS INVESTMENT IN BIOMETRIC
IDENTIFICATION. Our Biometric Identification convertible debentures are
unsecured and do not provide for regular payments of principal to us. If
Biometric Identification can't generate enough cash to pay our principal and
interest payments when due, it may default on our debentures and, if that
happens, we could be forced to begin collection efforts or lose all of our
investment. Biometric Identification currently has a large amount of debt. At
December 31, 1998, Biometric Identification had outstanding convertible debt
totaling US$ 2,709,000, compared to total assets of US$ 769,974. At April 30,
1999, Biometric Identification had outstanding convertible debt totaling US$
4,422,500, compared to total assets of US$ 1,167,040.
NEITHER BIOMETRIC NOR BIOMETRIC IDENTIFICATION IS PROFITABLE YET, AND
NEITHER COMPANY CAN BE SURE OF RAISING ENOUGH MONEY FROM OUTSIDE SOURCES, SO WE
MAY NOT BE ABLE TO GROW OUR BUSINESSES OR EVEN RAISE ENOUGH FUNDS NECESSARY TO
CONTINUE OPERATING OUR BUSINESSES. Biometric Identification is a relatively new
business, incorporated in 1995. In addition, our own business has recently
completely changed its direction. As new and growing businesses, both we and
Biometric Identification don't yet generate profits from our operations to cover
our day-to-day operating costs and to make investments, such as buying expensive
new equipment, that we need to grow our businesses. Therefore, we need money
from outside sources and if we can't raise enough money, we and Biometric
Identification may not be able to keep operating our businesses. In the past,
both we and Biometric Identification have had to sell stock in our companies,
and also borrow money, to meet our large and ongoing needs for capital. If we
can't continue to raise enough money from these sources, neither we nor
Biometric Identification will be able to grow our businesses and we may not even
be able to cover our own day-to-day operating needs. We have invested money in
Biometric Identification, but that won't be enough to keep Biometric
Identification solvent. Further, if we can't provide more money to Biometric
Identification, and they have to sell more stock to other people, our ownership
interest in Biometric Identification could be lessened.
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RISKS RELATING TO BIOMETRIC IDENTIFICATION'S BUSINESS AND OPERATIONS
BIOMETRIC IDENTIFICATION MAY NOT BE ABLE TO DEVELOP A LARGE ENOUGH MARKET
FOR ITS BIOMETRIC IDENTITY VERIFICATION PRODUCTS; THESE PRODUCTS AREN'T YET IN
WIDE USE. UNLESS THIS MARKET GROWS, BIOMETRIC IDENTIFICATION MIGHT NOT BE ABLE
TO SUCCEED. If biometric identity verification products don't become generally
accepted in the marketplace, Biometric Identification could become one of
several competitors in a small market, and might not be able to generate enough
revenues and profits to grow beyond its current size. Its major products, namely
biometric identity verification products and biometric imaging products, have
not experienced widespread commercial acceptance. In part, this is because
biometric identity verification products are a new approach to identity
verification and they have not been widely used.
Factors that could affect whether Biometric Identification can develop a
large market for biometric identity verification products include:
- whether their cost, performance and reliability compare favorably to
competitive products
- whether customers come to understand their benefits
- whether the public will be "put off" by the intrusiveness of the
products and how companies collect and use fingerprint information
NOTE: Some groups have objected to biometric identity verification
products on civil liberties grounds, as an invasion of privacy, and
legislation has been proposed to regulate the use of biometric
identity verification products to prevent such abuse
- whether the public trusts that companies will not abuse the
confidentiality of personal information created from using biometric
identity verification products
- whether institutional purchasers such as banks and retailers will
install the infrastructure in automatic teller machines and
point-of-sale equipment to use biometric identity verification
products
- whether Biometric Identification can develop an international market
for its products and
- whether Biometric Identification successfully markets and promotes
its products
BECAUSE BIOMETRIC IDENTIFICATION IS MUCH SMALLER THAN MANY OF ITS
COMPETITORS, IT MAY LACK THE RESOURCES TO CAPTURE AN INCREASED MARKET SHARE.
ALSO, BIOMETRIC IDENTIFICATION'S LOW-TECH COMPETITORS CAN DEVOTE LESS RESOURCES
TO PRODUCT DEVELOPMENT AND MORE RESOURCES TO MARKETING WHICH COULD ALSO REDUCE
BIOMETRIC IDENTIFICATION'S MARKET SHARE. Biometric Identification is a small
company with a history of net losses. It may not be able to compete for market
share equally with some of the larger companies in the fingerprint
identification industry which, unlike Biometric Identification, can generate
large amounts of funds for use in product development and marketing. Further, in
addition to competing with other providers of sophisticated biometric imaging
systems, Biometric Identification also competes with providers who use
traditional "low-tech" identification and security systems, e.g., key card,
surveillance systems and passwords. Biometric Identification could lose market
share to these low-tech companies as well, since they may be able to concentrate
more resources on marketing rather than product development. A number of
start-up and established companies develop and market software and hardware for
fingerprint biometric security applications that could compete directly with
Biometric Identification's products. It is also possible that other biometric
identification technologies of which we and Biometric Identification are aware,
could ultimately be more widely adopted. These technologies could reduce demand
for Biometric Identification's products even if they were demonstrably superior.
For example, a well-financed company with a large customer base and established
distribution channels for its less sophisticated products might marginalize
Biometric Identification's possibly superior products.
IF BIOMETRIC IDENTIFICATION IS UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL
CHANGE ITS PRODUCTS COULD BECOME OBSOLETE, OR OTHER COMPANIES COULD EXPLOIT
MARKET OPPORTUNITIES FASTER, POSSIBLY CAUSING BIOMETRIC IDENTIFICATION TO LOSE
MARKET SHARE. Unless Biometric Identification's products keep up with the
demand for sophisticated technology, they could become obsolete. The markets for
biometric identity verification products and biometric imaging systems rapidly
change in response to newer, more advanced products. Even if Biometric
Identification can keep pace, it could fail to predict where the market is going
and thus develop
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technology that customers do not want to buy. Or Biometric Identification might
develop desirable products but too slowly and be surpassed by a competitor.
BIOMETRIC IDENTIFICATION DEPENDS ON STRATEGIC RELATIONSHIPS FOR PRODUCT
DISTRIBUTION. IF THESE RELATIONSHIPS DON'T WORK OUT, OR IF THE OTHER COMPANIES
DON'T DO ENOUGH TO MARKET BIOMETRIC IDENTIFICATION PRODUCTS, BIOMETRIC
IDENTIFICATION COULD LOSE SALES. Biometric Identification's business plan
depends on establishing strategic relationships with marketing partners, such as
equipment manufacturers, systems integrators and resellers, to distribute some
of its products. It may be difficult for Biometric Identification to identify
and establish relationships to assure the successful marketing of its products.
Even if Biometric Identification identifies partners, negotiating deal terms can
be a laborious process. Once an agreement is reached, it could be terminable
with little notice, or disputes could arise as to interpretation. It's also
difficult to control the resources and effort that a partner will devote to the
marketing of Biometric Identification's products.
IF BIOMETRIC IDENTIFICATION'S PRODUCTS ARE DEFECTIVE OR FAIL TO MEET
PERFORMANCE CRITERIA, THIS COULD REQUIRE BIOMETRIC IDENTIFICATION TO DIVERT
RESOURCES AND INCUR COSTS TO CORRECT THE PROBLEM, WHICH WOULD REDUCE PROFITS.
ALSO, PRODUCT MALFUNCTIONS COULD ALIENATE CUSTOMERS, POSSIBLY RESULTING IN LOSS
OF CUSTOMERS OR NEGATIVE PUBLICITY. Despite careful quality control in design
and production, newly-introduced complex products often have undetected defects,
such as software "bugs," or they do not initially meet customer performance
specifications. This could require Biometric Identification to divert resources
from product development and marketing and concentrate instead on correcting the
problems, possibly incurring additional costs as well, which could result in
reduced sales and profits. Even if the defects are ultimately corrected,
Biometric Identification could:
- lose customers
- be forced to divert its employees and resources in order to work with the
dissatisfied customers
- make refunds
- cover breaches in product warranties, or
- conduct a product recall
Because Biometric Identification's products are designed to improve
security, malfunction could hurt Biometric Identification's customers. Examples
of the impact of product failure include:
- unauthorized persons gaining access to dangerous or sensitive physical
facilities
- the alteration or theft of customer database information, or
- fraudulent financial transactions
These failures could result in loss of customers or negative publicity.
Even if defects are minor and readily corrected, Biometric Identification's
efforts at correction could reduce or even eliminate profits from sales.
Biometric Identification may not be able to maintain product liability insurance
to adequately cover such risks.
BIOMETRIC IDENTIFICATION HAS ONLY A LICENSE TO USE, RATHER THAN OUTRIGHT
OWNERSHIP OF, ITS BIOMETRIC IDENTITY VERIFICATION TECHNOLOGY. IF ARETE, THE
OWNER OF THE INTELLECTUAL PROPERTY RELATING TO THE BIOMETRIC IDENTIFICATION
TECHNOLOGY, DOES NOT ADEQUATELY PROTECT THE RIGHTS IT LICENCES TO BIOMETRIC
IDENTIFICATION, BIOMETRIC IDENTIFICATION WOULD BE AT A SIGNIFICANT COMPETITIVE
DISADVANTAGE THAT WOULD ADVERSELY AFFECT ITS BUSINESS OPERATIONS AND FINANCIAL
CONDITION. Biometric Identification licenses its technology from Arete under an
exclusive world-wide license. The license has no expiration date, although Arete
can terminate the license if Biometric Identification materially breaches the
license agreement. Biometric Identification has not yet accrued or paid any
significant royalties to Arete. Only after Biometric Identification has paid US$
1,250,000 of royalties will Arete transfer ownership of the intellectual
property outright to Biometric Identification. Until then, Biometric
Identification is dependent on Arete's maintaining its ownership and right to
exploit the technology. Biometric Identification doesn't control Arete's efforts
to protect its rights to these technologies. If Arete doesn't do enough to
protect the technologies, Biometric Identification would be put at a significant
competitive disadvantage since much of Biometric Identification's market
advantage stems from its use of technology that's currently unique to Arete.
8
<PAGE> 11
BIOMETRIC IDENTIFICATION'S PROPRIETARY TECHNOLOGY MAY BE IMPOSSIBLE TO
PROTECT OR MAY INFRINGE ON OTHER TECHNOLOGIES. IF BIOMETRIC IDENTIFICATION CAN'T
ESTABLISH OR MAINTAIN OWNERSHIP AND CONTROL OF THESE TECHNOLOGIES, COMPETITORS
COULD EXPLOIT THE TECHNOLOGIES AND ENCROACH ON BIOMETRIC IDENTIFICATION'S MARKET
SHARE. IT IS ALSO POSSIBLE THAT OTHERS MAY CLAIM RIGHTS IN THE TECHNOLOGIES AND
SUCCESSFULLY SUE BIOMETRIC IDENTIFICATION FOR INFRINGEMENT OF PROPRIETARY
TECHNOLOGY RIGHTS. Subject to its license from Arete, Biometric
Identification's competitive advantage depends on owning and controlling the
right to exploit its technology, such as its unique fingerprint identification
technology that images the entire fingerprint, in contrast with typical
fingerprint identification methods that image only several points on the
fingerprint. If Biometric Identification is unable to fully exploit the rights
to technologies such as its fingerprint identification technology, competitors
could gain rights to the same or similar technologies and exploit those rights
to the detriment of Biometric Identification's market share. It is also possible
that a competitor may challenge Biometric Identification's rights in some of its
technologies, and if that happens, it could be costly for Biometric
Identification to defend its rights. It might even ultimately lose its rights to
those technologies if the competitor's challenge succeeds. The usual means to
protect proprietary rights in technology are through patent, copyright, trade
secret and contract law. Arete holds, and Biometric Identification expects
eventually to hold, United States and foreign patents covering certain of
Biometric Identification's products and technologies. Patent protection,
however, does not eliminate all risks. For example:
- the claimed inventions in Arete's patents may not be broad enough to
cover the technology contained in Biometric Identification's products
- Arete or Biometric Identification may have their patent applications
denied, or
- another person may challenge the validity of the patents or claim they do
not cover a similar invention which that person intends to commercialize
Biometric Identification also depends on its employees, consultants and
other persons to keep confidential Biometric Identification's trade secrets and
other proprietary information. If any of these persons reveals this confidential
information, Biometric Identification could lose major competitive advantages.
BIOMETRIC IDENTIFICATION DEPENDS ON ITS KEY TECHNOLOGY PERSONNEL TO DEVELOP
ITS PRODUCTS AND MANUFACTURING AND MARKETING STRATEGY, AND DEPENDS ON ITS
RELATIONSHIP WITH ARETE FOR ENGINEERING SERVICES. IF BIOMETRIC IDENTIFICATION
WERE TO LOSE KEY TECHNOLOGY PERSONNEL, ITS PRODUCT DEVELOPMENT COULD SLOW DOWN
AND CUSTOMERS THAT INTEGRATE ITS PRODUCTS WITH THEIRS MIGHT PERMANENTLY REPLACE
BIOMETRIC IDENTIFICATION AS A SUPPLIER. THIS WOULD HURT SALES AND PROFITS.
SIMILARLY, IF ARETE WERE NOT ABLE TO SUPPLY ENGINEERING SERVICES, THIS COULD
ALSO HURT PRODUCT DEVELOPMENT AND SALES, SINCE BIOMETRIC IDENTIFICATION DEPENDS
IN PART ON THESE SERVICES TO HELP DEVELOP ITS PRODUCTS AND MANUFACTURING
METHODS. Biometric Identification's competitive position depends on its ability
to find and keep employees who have special knowledge about designing,
manufacturing and marketing biometric identity verification products. Loss of
any of these key personnel could slow down product development, potentially
hurting Biometric Identification's ability to compete and maintain its customer
base. For example, Biometric Identification's products are often specifically
developed for incorporation into its customers' products, and its personnel have
developed an in-depth understanding of the customers' product and market needs.
Loss of these people could cause Biometric Identification to lose customers,
perhaps permanently. This would significantly hurt sales.
Biometric Identification's senior management has many years of experience
in the biometric identity verification field. For example:
- Dr. Stephen Lubard, founder and Chairman of Biometric Identification, is
an engineer with over 20 years of experience in managing highly technical
projects and developing software and computer systems for solving complex
image processing problems
- Robert Kamm, Chief Executive Officer, is an experienced technology
entrepreneur and has started two previous technology companies
It would be very difficult and time-consuming for Biometric Identification
to locate personnel with the combination of skills and attributes required to
carry out its strategy.
9
<PAGE> 12
Biometric Identification also depends on the engineering assistance it
receives from its parent, Arete. For example, Arete has agreed to provide
engineering services for Biometric Identification, in exchange for payments from
Biometric Identification. Under this agreement, Arete provides Biometric
Identification with the equivalent of services of four full-time engineers, and
Arete will use its best efforts to supply additional engineering assistance as
needed. If Arete can't provide enough engineering assistance, Biometric
Identification could lose access to technology that would enable it to compete
in the marketplace, which could also hurt sales.
POSSIBLE FAILURES BY THIRD PARTIES TO COMPLY WITH Y2K ISSUES COULD
COMPROMISE THEIR OWN PRODUCT SALES AND, TO THE EXTENT THEIR PRODUCTS INCLUDE
BIOMETRIC IDENTIFICATION PRODUCTS, COULD HURT SALES OF THOSE PRODUCTS AS
WELL. Biometric Identification's business involves integrating its products
with those of original equipment manufacturers and value added resellers. If any
of those companies is not Year 2000 compliant, their product sales, and
consequently Biometric Identification's sales, could drop. The Year 2000 issue
refers to possible negative impacts on business systems that could be caused by
the arrival of the new millennium. Best known is the possible inability of
computer software to recognize the year 2000 as a date. Unless the software is
fixed, date-sensitive systems may begin to fail prior to January 1, 2000.
Failures may range from relatively minor processing inaccuracies to catastrophic
system malfunctions. Failures may affect not only systems used to process
everyday business information, but also the imbedded computers that control
plant machinery, robotics, office equipment, elevators and building climate and
security systems.
Biometric does not expect to experience significant Year 2000 issues,
because we use standard commercial programs and systems that have been designed
or upgraded to comply with requirements imposed by the transition into the next
millennium. We are contacting our main suppliers to make sure that they are also
Year 2000 compliant, a process we expect to complete by the third quarter of
1999.
Biometric Identification has evaluated the products and services that it
offers, as well as its information technology infrastructure, and has determined
that they are Year 2000 compliant.
However, even though we and Biometric Identification believe that we are
Year 2000 compliant, we can't control Year 2000 compliance by third parties. To
the extent those parties are not Year 2000 compliant, that could hurt Biometric
Identification's sales and therefore its investment value.
OUR STOCK IS LOW-PRICED STOCK SUBJECT TO "PENNY STOCK" RULES;
BROKER-DEALERS MAY BE LESS WILLING TO DEAL IN PENNY STOCKS SUCH AS OURS IF THEY
FIND THE NEW "PENNY STOCK" LAWS TOO BURDENSOME. THIS COULD CAUSE THE MARKET FOR
BIOMETRIC STOCK TO BE LESS ACTIVE, WHICH IN TURN COULD MAKE IT HARDER FOR YOU TO
SELL YOUR BIOMETRIC STOCK WHEN YOU WANT AND AT A SATISFACTORY PRICE. Our common
stock would be classified as "penny stock" under United States securities laws.
These laws impose special rules on broker-dealers trading in penny stocks that
are not applicable to other stocks. If broker-dealers find these requirements
too burdensome and therefore are less willing to deal in penny stocks, this
might limit market activity for all penny stocks, including Biometric's common
stock. This could limit your ability to sell your stock when you want and at a
satisfactory price.
The laws relating to penny stocks were changed in 1990 because of alleged
abuses in the penny stock market. The new laws require broker-dealers who sell
penny stocks to meet potentially burdensome requirements. For example, a
broker-dealer selling a penny stock must:
- give the customer written information about the market for penny stocks
including a discussion of how those stocks are traded, and the risks of
the penny stock market. This information must also describe the
broker-dealer's duties to the customer and let the customer know about
his or her rights and remedies if the broker-dealer violates these
duties.
- give penny stock customers written monthly account statements that list
their holdings and estimated market values.
If broker-dealers find these requirements too burdensome, that might limit their
willingness to deal in penny stocks such as ours, possibly resulting in a less
active market which could lower the value of your investment in our common
stock.
10
<PAGE> 13
THE ANNUAL GENERAL MEETING
This proxy statement/prospectus is being furnished in connection with the
solicitation of proxies by Biometric's management from Biometric's shareholders
to be voted at the annual general meeting of Biometric's shareholders. Our board
of directors has determined that the proposed transactions are in the best
interests of our shareholders and unanimously recommends that you elect the
director nominees and that you vote "for" each of the other proposals to be
presented at the meeting. Please see the information circular for the annual
general meeting, at page 31.
The annual general meeting will be held at Biometric's principal office
located at Suite 1940 - 400 Burrard Street, Vancouver, British Columbia, Canada,
on Friday, October 29, 1999, at 10:00 a.m. (local time in Vancouver, B.C.). At
this meeting, we will ask you to:
- fix the number of directors at five
- elect five directors
- approve our appointment of independent auditors
- authorize us to grant incentive stock options
- authorize us to undertake the reverse stock split
- authorize us to transfer to British Columbia
- approve the reduction of Biometric's authorized share capital if we
transfer to British Columbia and
- approve the change in the Biometric's name if we complete the reverse
stock split.
If you wish to present a shareholder proposal at our annual general meeting
in 2000, your proposal must be received by March 15, 2000, in order to be
considered for inclusion in our proxy statement and form of proxy relating to
that meeting. Please direct your proposals to the Corporate Secretary, at our
address shown above.
VOTING SECURITIES; RECORD DATE (PAGE 32)
You are entitled to vote at the annual general meeting if you owned shares
of Biometric's common stock as of the close of business on August 31, 1999.
On August 31, 1999, there were outstanding 57,684,208 shares of Biometric's
common stock, and no other types of stock. You will have one vote for each share
of Biometric's common stock you owned at that date.
VOTES REQUIRED
Biometric will need the following percentages of favorable votes to approve
the proposals:
- At least a majority of shares voted at a meeting, whether in person
or by proxy, at which a quorum is present, must fix the number of
directors at five, elect each of the director nominees and approve
the appointment of the independent auditor, the granting of incentive
stock options, the reverse stock split, the reduction in Biometric's
authorized share capital upon the transfer to British Columbia, and
the change in Biometric's name.
- At least two-thirds of the shares present at a meeting, whether in
person or by proxy, at which a quorum is present, must approve the
transfer to British Columbia.
On September 10, 1999, Biometric's directors and officers together held
6.9% of Biometric's outstanding common stock.
APPOINTMENT AND REVOCATION OF PROXIES (PAGE 31)
The persons named in the accompanying proxy form are either an officer or
director of Biometric. However, if you wish to appoint an alternate proxy, you
may appoint any person you choose, including someone who is not a Biometric
shareholder.
11
<PAGE> 14
A PROXY WILL NOT BE VALID UNLESS THE COMPLETED, DATED AND SIGNED FORM OF
PROXY IS DELIVERED TO EITHER:
- Pacific Corporate Trust Corporation, Suite 830, 625 Howe Street,
Vancouver, British Columbia, Canada V6C 3B8 not less than 48 hours,
excluding Saturdays, Sundays and holidays, before the time for holding
the annual general meeting, or
- the Chair of the meeting before the start of the annual general meeting.
If you provide your properly executed proxy before the annual general
meeting, and you do not revoke the proxy, your proxy will be voted in accordance
with the instructions indicated in your proxy. If you provide no voting
instructions, your proxy will be voted "for" Biometric's director nominees and
"for" approval and adoption of the above proposals.
YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO ITS USE BY SIGNING A
REVOCATION NOTICE AND DELIVERING IT TO EITHER:
- BIOMETRIC'S REGISTERED OFFICE, AT SUITE 1100, 1055 WEST HASTINGS STREET,
VANCOUVER, BRITISH COLUMBIA, CANADA V6E 2E9 OR
- THE CHAIR OF THE MEETING ON THE DAY OF THE ANNUAL GENERAL MEETING OR ANY
ADJOURNMENT OF IT AND VOTING IN PERSON.
Biometric will pay for all costs of this proxy solicitation.
12
<PAGE> 15
BIOMETRIC SECURITY CORP.
DESCRIPTION OF BUSINESS
Structure of Biometric Security Corp.
Biometric Security Corp. 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." Its name was changed to "Sonoma
Resource Corp." on January 5, 1990. Sonoma adopted a new set of Articles
effective as of July 19, 1996.
On November 10, 1998 Sonoma transferred its domicile from British Columbia
to the State of Wyoming, changed its name from "Sonoma Resource Corp." to
"Biometric Security Corp." and adopted Articles of Continuance governed by
Wyoming law but unchanged from its prior charter except so as to conform to
requirements of the Wyoming corporations statute. On November 12, 1998,
Biometric increased its authorized capital to an unlimited number of common
shares.
Biometric's executive offices are located at Suite 1940, 400 Burrard
Street, Vancouver, British Columbia, Canada, V6C 3A6. Its 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. Biometric'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.
On December 31, 1998 Biometric owned six subsidiaries, detailed in the
chart below, which are related to its mineral exploration activities in
Argentina. See "Business of Biometric Security Corp. -- Historical Operations:
Mineral Exploration in Argentina" for more information about these activities.
Except for Sonoma Resource de Argentina S.A., further described below, none of
the subsidiaries has any material assets and Biometric plans dissolve them as
soon as possible.
<TABLE>
<CAPTION>
DATE OF JURISDICTION OF PERCENTAGE
NAME OF SUBSIDIARY INCORPORATION INCORPORATION OWNERSHIP(1)
------------------ ------------- --------------- ------------
<S> <C> <C> <C>
Sonoma Resource de Argentina S.A. November 30, 1995 Argentina 100%
Castano S.A. August 7, 1996 Argentina 100%
Castano Mining (Barbados) Ltd. June 6, 1996 Barbados 100%
Cerro Toro S.A. August 5, 1996 Argentina 100%
Cerro Toro Mining (Barbados) Ltd. June 6, 1996 Barbados 100%
Sonoma Resource (Bermuda) Ltd. June 5, 1996 Bermuda 100%
</TABLE>
- ---------------
(1) Represents the percentage of voting securities held. None of the
subsidiaries has any non-voting securities outstanding.
Business of Biometric Security Corp.
Historical Operations: Mineral Exploration in Argentina
Until mid-1998 Biometric's business was exclusively mineral exploration. In
light of the state of the markets for gold and other precious metals, Biometric
made a strategic decision to leave the resource sector and began disposing of
its mineral exploration assets. Biometric made this change because management
believes that the price of gold will remain depressed into the foreseeable
future. That means that Biometric, in common with other precious metal
exploration companies, would have trouble financing its exploration operations,
since this financing is based on cash flow estimates of future production from
mineral properties. With low metals prices, even if mines are put into
production, the cash flows based on those prices may not be high enough to
justify exploration financing.
On December 31, 1998, Biometric's mineral exploration assets were held
indirectly through its wholly-owned subsidiary Sonoma Resource de Argentina S.A.
This subsidiary owned 100% of the Cerro Toro Project
13
<PAGE> 16
located in the San Juan Province of Argentina and the Apeleg Claim Block located
in the Chubut Province of Argentina, which included 9 properties comprising
93,709 hectares. These limited Argentina operations were what remained following
cutbacks made by Biometric earlier in 1998, when Biometric had significantly
reduced its staff and overhead in Argentina and had substantially cut back on
its exploration activities.
In November 1998, Biometric through its subsidiary reached an agreement to
sell up to 100% of its Argentinean properties to Inlet Resources Ltd., a
corporation organized under British Columbia law with executive offices in
Vancouver. In order to grant Inlet an option to acquire 90% of the properties,
Inlet and Biometric entered into a written agreement for the purchase on January
21, 1999, which was approved on February 15, 1999 by the Canadian regulatory
authorities. Under the agreement, Inlet must pay US$ 750,000 and issue 300,000
of its shares to Biometric over a three year period and also complete a work
commitment requiring expenditure of US$ 2,150,000. Under this work commitment,
Inlet must spend a total of US$ 2,150,000 on exploration work over three years,
on the optioned Argentinean properties. If Inlet fails to meet this commitment,
it will lose the right to exercise its option to acquire the properties. Inlet
may acquire the remaining 10% by the payment of US$ 2,000,000 to Biometric. By
March 1, 1999, Biometric had received US$ 150,000 and 100,000 common shares of
Inlet.
Inlet is a public company whose stock is traded on the Vancouver Stock
Exchange. The closing price for Inlet's stock on June 9, 1999, was $0.07. Inlet
is engaged in the acquisition, exploration, development and subsequent
production relating to mining properties. Biometric had acquired 100,000 shares
of Inlet common stock and has since sold the shares for $11,078. Biometric holds
no Inlet shares at this time. At December 31, 1998, Inlet had 20,174,875 shares
outstanding. If Biometric receives 200,000 shares of Inlet stock, Biometric's
ownership percentage would be approximately 1%.
When Inlet has met all its obligations under the agreement, Biometric will
have completed its departure from the natural resource sector. It has no plans
to return to this industry.
Current Activity: Investment in U.S. Fingerprint Technology Company
On June 12, 1998, Biometric entered into an agreement to acquire up to US$
5,000,000 of convertible debentures to be issued by Biometric Identification,
Inc., a California corporation which is engaged in development of fingerprint
identification technology and related products. Biometric now has no other
activity than its investment in Biometric Identification but, as further
discussed below, is contemplating entering into the same business as Biometric
Identification.
Biometric Identification is controlled by Arete Associates, a California
corporation having its executive offices in Los Angeles. Arete owns
approximately 80% of the issued and outstanding shares of Biometric
Identification. Employees of Biometric Identification and Arete hold the
remaining shares of Biometric Identification.
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 fingerprint identification technology now being further developed
and commercialized by Biometric Identification. Arete has obtained the
recognition of the technical community through an integration of scientific
knowledge and advanced sensor systems expertise.
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<PAGE> 17
Terms of Investment in Biometric Identification Inc.
Under the Biometric Identification debenture purchase agreement, Biometric
agreed to invest in Biometric Identification by purchasing in a series of
tranches up to US$ 5,000,000 of convertible debentures issuable by Biometric
Identification. The Biometric Identification debentures bear interest at the
lowest "applicable federal rate" required to avoid imputation of interest under
U.S. tax law and, unless converted, will mature and be payable on June 12, 2003,
the fifth anniversary after the closing date of the first three tranches. As of
July 23, 1999, Biometric had purchased all US$ 5,000,000 of the debentures as
shown in the following table:
<TABLE>
<CAPTION>
DESIGNATION PRINCIPAL AMOUNT OUTSIDE PURCHASE DATE
----------- ---------------- -----------------------------
<S> <C> <C>
Tranche A & B US$ 350,000 Advanced before June 12, 1998
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 16, 1999
Tranche F US$ 500,000 April 16, 1999
Tranche G US$ 1,500,000 Completed July 23, 1999
Total: US$ 5,000,000
</TABLE>
Biometric may convert the Biometric Identification debentures at any time
into shares of Biometric Identification common stock. The debentures will be
automatically converted on an initial public offering by Biometric
Identification. As shown in the following table, if Biometric were to
immediately convert all of its Biometric Identification debentures without
Biometric Identification having issued any additional dilutive securities,
Biometric would hold 45% of Biometric Identification's common stock. That
percentage, however, is subject to dilution resulting from share issuances
resulting from exercise of stock options granted or to be granted under
Biometric Identification's incentive stock option plan as well as any subsequent
equity financings undertaken by Biometric Identification in which Biometric does
not participate.
<TABLE>
<CAPTION>
PERCENT UPON
CONVERSION OF
DESIGNATION ENTIRE TRANCHE CUMULATIVE PERCENTAGE
----------- -------------- ---------------------
<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>
Biometric has not made a decision whether to exercise its right to convert
the Biometric Identification debentures.
The Biometric Identification debenture purchase agreement includes
acknowledgements by Biometric and Biometric Identification that they intend to
merge if they determine it is in their interests following analysis of their
mutual business objectives and whether a merger could be advantageously
structured following consideration of tax, securities and other legal matters.
The Biometric Identification debenture purchase agreement has no legally binding
provision requiring the parties to merge, and the parties are not currently
conducting any merger negotiations.
Rand Edgar Capital Corp., a private British Columbia corporation with
executive offices in Vancouver, British Columbia, arranged for Biometric's
purchase of the Biometric Identification debentures. Rand Edgar Capital is owned
and controlled by two persons, one of whom is the wife of Mr. William Rand, a
director of Biometric.
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<PAGE> 18
Rand Edgar Capital originally entered into a memorandum of understanding
with Biometric Identification and with Arete dated March 18, 1998, amended and
replaced May 20, 1998. Rand Edgar Capital assigned its interest in the
memorandum to Biometric on May 21, 1998 upon payment of US$ 145,000 plus
reimbursement of its expenses. On June 12, 1998, Rand Edgar Capital elected that
its fee could be paid in the form of 715,575 common shares of Biometric at $0.30
per share. These shares were issued in pro rata tranches with the closing of
tranches of Biometric's purchase of Biometric Identification debentures. Finders
fee shares issued to date have actually been in the form of special warrants,
each exercisable for one share of Biometric's common stock at $0.30 per share.
As of December 31, 1998, Biometric had issued 250,450 shares to Rand Edgar
Capital in connection with the finder's fee. In addition, as of August 11, 1999,
Biometric issued 465,125 shares to Rand Edgar Capital in respect of the
Biometric Identification debentures that Biometric purchased on November 13 and
25, 1998, December 18, 1998, January 29, 1999, April 16, 1999 and July 23, 1999.
This completes the issuance of all the shares Biometric agreed to issue to Rand
Edgar Capital in connection with the finder's fee.
BUSINESS OF BIOMETRIC IDENTIFICATION INC.
Overview
Biometric Identification was incorporated in 1995 as a subsidiary of Arete.
Arete granted Biometric Identification an exclusive world-wide license for all
uses of Arete's fingerprint identification technology, to the full extent of
Arete's rights in the technology. The license agreement provides that Biometric
Identification will pay Arete a license fee of US$ 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, Arete will transfer ownership of the
licensed intellectual property outright to Biometric Identification. Although
the license has no expiration date, Arete can terminate the license on 30 days'
notice if Biometric Identification materially breaches the license agreement.
Biometric Identification has continued to develop the Arete technology and
undertake its commercialization. Biometric Identification's products use
patented software for positive personal identification. The technology provides
a higher level of security and ease of use compared to traditional older methods
of identification such as personal identification numbers and passwords. The
advantage of Biometric Identification fingerprint identification technology
relative to competitive products derives from its greater accuracy because it
images the entire fingerprint and the rapidity with which it can be integrated
into customer identification systems.
Biometric Technologies
Biometrics is the science of identifying an individual through his or her
own unique physical characteristics. The biometrics industry is based upon the
premise that there are substantial commercial markets for positive personal
identification based on the widespread need of employers, governmental agencies,
service companies, among others, for accurate, rapid, cost-efficient and
user-acceptable identification of persons. The existence of passwords for data
access, PINs for ATM and account access, identification cards, photos and
signatures on credit cards provides evidence of this need.
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<PAGE> 19
There are six primary forms of biometric technology, as listed below.
Biometric Identification is focusing on fingerprint identification technology.
- Fingerprint Scanning -- mainly used for retail point of sale and credit
card transactions, e-commerce and Internet/intranet security
- Face Recognition -- mainly used for governmental applications such as
welfare agencies and departments of motor vehicles
- Hand Geometry -- mainly used for time and attendance monitoring
- Iris/Retina Scanning -- mainly used for high security applications such
as nuclear power plants
- Voice Recognition -- mainly used for remote access applications such as
remote banking
- Signature Recognition -- mainly used for document processing in financial
and insurance industries and in government applications
Technology and Products
Biometric Identification's products use a patented fingerprint verification
software. The system registers the entire fingerprint of an individual, saves a
template of it, and then at a later time verifies the individual's identity by
retrieving the template and comparing it with a newly obtained fingerprint
image. Biometric Identification's line of biometric fingerprint identification
products includes those which can be used in stand-alone mode or as part of a
larger application. These products can be integrated into a broad range of
existing applications that require user authentication such as access to
personal computers, computer networks, ATMs, credit card readers and physical
access control systems.
Competitive Features of Biometric Identification's Fingerprint Identification
Technology
Verification software is the essential component of fingerprint
identification biometrics. Biometric Identification's software presents
improvements in accuracy of verification and integration with other software and
hardware. Biometric Identification's products are small, versatile and
inexpensive. During 1998, Biometric Identification spent US$ 1,500,000 on
product research and development. Biometric Identification plans to spend
approximately US$ 2 million in 1999.
Biometric Identification's products are unique among fingerprint
identification systems for three major reasons:
- - Accuracy and Long-Term Reliability of Identification.
Many fingerprint verification software techniques involve making
identification based on certain features of the fingerprint, known as "minutia",
but not the entire fingerprint. These minutia-based programs can be fooled by
temporary alterations such as changes to the finger due to cuts or swelling. In
contrast, the Biometric Identification technique images the entire two
dimensional ridge structure of the fingerprint so as to create a template for
comparison purposes. The software's comparison technique compensates for image
distortion, dislocation, rotation, sensor noise, finger swelling and scarring.
It is only after performance of these compensatory techniques, and the process
then indicates that the two print images still do not match, that the candidate
print is declared dissimilar to the template.
Minutia-based systems often have difficulty compensating for distortion and
other factors so that over time they become less reliable in identifying stored
fingerprints. This can require individuals to re-enroll, i.e., create new
templates, and increases the probability of a false rejection.
Test results confirm that Biometric Identification's identification system
is highly accurate. Less than one usage in a thousand results in a false
positive, i.e., incorrect identity confirmation, or false negative, i.e.,
failure to confirm identity. The system permits enrollment of new users through
one touch in a process completed within less than five seconds. Response time in
usage is usually less than one second. Biometric Identification tests the
accuracy of its fingerprint identification systems using various software
programs that test the
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<PAGE> 20
products throughout the manufacturing process. The tests include general checks
of systems and circuitry, and tests for tolerance of image quality.
- - Flexibility and Rapidity of Integration into Products.
Another unique feature of Biometric Identification's products is that the
software, rather than being a permanent, unchangeable part of a computer chip,
is programmable and therefore more flexible for various uses. This means that
the software can be more easily integrated into products developed by original
equipment manufacturers or value added resellers which are sold to the ultimate
user. By comparison, most competitive products rely on so-called "application
specific integrated circuit" technology, sometimes referred to as "software
frozen into silicon," which does not lend itself so readily to customization
because the software is a permanent part of the chip in that technology, and
cannot be changed.
Biometric Identification has also developed an application software
development kit to assist, for example, value added resellers in integrating
their software with Biometric Identification products. Biometric
Identification's software is compatible with Windows 95 and Windows NT and is
provided in the form of a "dynamic link library" which means that Biometric
Identification's software can link, or communicate, with the user's. This allows
a user to customize the products for purposes of meeting the user specific needs
and enabling capability with its computer environment.
- - Small and Inexpensive Products.
Biometric Identification's products use silicon sensor technology to take a
picture of the fingerprint. Silicon sensor technology is smaller than a quarter
coin, which allows Biometric Identification to embed it in very small devices.
Biometric Identification is the first company to complete the integration of its
software into a self-contained system the size of a business card, as included
in its Veriprint 1100 product, discussed below. Biometric Identification's
products require only microprocessors to run their software. This makes them
less expensive than competitors' products, which have to be run on PCs since
their software requires other PC components such as hard drive and memory cards,
rather than the PC's microprocessor alone.
Biometric Identification's Products
Biometric Identification has developed three main products. The first is
Biometric Identification's core software technology and the next two represent
customer-ready applications. Biometric Identification'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. Biometric
Identification does not manufacture its own products but instead "outsources"
its manufacturing so as to control costs.
Currently, Biometric Identification's major outside manufacturer is
PrimeTech Electronics, Inc. This relationship is not exclusive for either
Biometric Identification or PrimeTech, and Biometric Identification believes
that it can readily find other outside manufacturers if PrimeTech were to be
unavailable to manufacture Biometric Identification products. Biometric
Identification purchases silicon sensors, its primary manufacturing component,
either directly from the large silicon sensor companies such as Infineon
Corporation (formerly a division of Siemens), Harris, ST Micro, Veridicom and
Thomson CSF Semiconducteurs Specifiques, or through PrimeTech. Biometric
Identification purchases its board parts, meaning the collection of printed or
soldered circuitry on which the sensors are placed, from PrimeTech. Biometric
Identification has not entered into written purchasing or supply contracts with
any of these companies.
Biometric Identification's existing product line is summarized below. All
of these products are available for retail sale:
1. BIOMETRIC IDENTIFICATION FINGERPRINT IDENTIFICATION
SOFTWARE -- The core software which is the "engine" of Biometric
Identification's product applications and features the following:
- Biometric Identification's patented fingerprint verification
software that, as discussed above, focuses on fingerprint ridge
patterns rather than minutia
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<PAGE> 21
- detection of latex/rubber fake fingers used to "fool" less
sophisticated identification systems
- performs both matching (one-to-one) and searching (one-to-many)
in a database
2. VERIPRINT 2100 OPTICAL TERMINAL -- Complete biometric terminal
with case, keypad and small liquid crystal display. This product
is presently an "optically based sensor" product, meaning that it
uses light or optics to sense or "see" the fingerprint. Each unit
sells for US$ 800 to US$ 900. The product has been available since
1997 and there are now approximately 3,500 units being used in
connection with time and attendance and access control
applications.
Biometric Identification hopes during the first half of 2000 to
achieve "silicon sensor" integration which is superior to an
optically based sensor product because use of silicon enables the
product to become much smaller without loss of performance.
3. VERIPRINT 1100 SILICON SENSOR, INTEGRATION COMPONENT -- Introduced
in 1998, this is the first ever use of "silicon sensor" technology
in a self-contained programmable fingerprint system including
template storage for up to 4,000 persons. The product is smaller
than a business card and no thicker than a half dollar, so that it
can be easily integrated into equipment manufacturer products such
as readers and keyboards. Biometric Identification sells this to
equipment manufacturers for approximately US$ 200-400 per unit,
depending on volume. Applications include safeguarding Internet
access, electronic commerce and other sensitive data applications.
In addition to its existing products, Biometric Identification is also
working on a new product, the Veriprint 2200, which Biometric Identification
expects to begin marketing in 2000. This product is to be a hybrid of the
Veriprint 1100 and the Veriprint 2100 in that it will incorporate the silicon
sensor technology of the Veriprint 1100, and will include a case, keypad and
screen display similar to the Veriprint 2100. The Veriprint 2200 will contain a
limited amount of storage for the fingerprint templates.
Biometric Identification's plans for additional future revenue include
licensing its proprietary fingerprint identification software to large original
equipment manufacturers in such areas as smart card technology, electronic
commerce, and computer equipment. Biometric Identification does not currently
license its technology to any equipment manufacturers, but its software is
currently being tested by several equipment manufacturers in anticipation of
forming a licensing relationship in the future.
Product Integration
Biometric Identification has integrated its products with newly-introduced
silicon sensor-based technology and is working with five vendors of the
integrated system: Veridicom, Inc., ST Micro Electronics, Thomson CSF
Semiconducteurs Specifiques, Infineon Corporation (formerly a division of
Siemens) and AuthenTec Inc. Biometric Identification has also completed product
integration with several other manufacturers such as Radionics, Inc.,
Westinghouse Security Electronics, Inc., Chubb Security, Simplex, Northern
Computer and Apollo Computer. The integration process is time-consuming and
expensive because it generally involves two levels of integration: first, the
hardware must be designed to accommodate the company's products; then the
software must be integrated with the hardware.
Biometric Identification has not entered into written supply, production or
distribution contracts with any of the companies that integrate Biometric
Identification's products with theirs. Biometric Identification typically enters
into non-disclosure agreements with these companies, and provides other
documents concerning the product integration process such as product
specifications and integration timetables.
Market for Products
Market Overview
The biometrics 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.
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<PAGE> 22
Biometric Identification believes that the fingerprint identification
segment is a large and widely accepted method of biometric identification. New
technologies, such as Biometric Identification's products, are overcoming the
historical problems of inaccuracy, false rejections and user nonacceptance that
have limited the use of this tool for biometric identification and have held
back long term market growth. With advances in computer technology, including
cost reduction, miniaturization, and growing familiarity of the public with
computer-based solutions, there is much greater potential for commercial
investment in this area, particularly as prices further decline following
ongoing technology development and increasingly widespread commercial
implementation.
Biometric Identification's Market Focus
There are many applications for electronic fingerprint devices, including:
- point-of-sale devices
- electronic commerce
- access control, and
- computer security.
Although Biometric Identification's technology can be used in almost any
environment requiring highly accurate and rapid identification of persons, it
would be much more expensive and time consuming to focus initially on
applications in so-called open systems, which involve large numbers of ever
changing users and sites. Examples of open systems include the credit card and
electronic commerce industries. Because there is extensive demand for
application in closed systems, which are less time-intensive and expensive to
implement, Biometric Identification has decided to focus its efforts on these in
the short term. Examples of closed systems include access control for company
personnel, time and attendance records for employees, and access and usage
security for computer networks.
Time and Attendance Records
There is high demand for closed system identification controls. Many
industries, such as manufacturing, retail, and service, with large numbers of
wage workers desire to reduce the fraud associated with "buddy punching," which
refers to clocking in and out for an absent co-worker. Buddy punching is
relatively easy because cards and personal identification numbers are not
intrinsically linked to the card holder.
Biometric Identification currently provides its time and attendance
products to companies such as Stromberg Corporation, Control Module, Inc. and
Synel Corporation.
Building Access Control
Another promising closed system for Biometric Identification products is in
controlling entry of persons to buildings and office suites. The need is growing
in the large U.S. service economy involving large numbers of office workers who
are highly concentrated in urban areas with a strong perceived need to prevent
extremely costly vandalism and theft or alteration of records. Large
corporations, sensitive government locations, law and other professional firms,
hospitals, banks, correctional institutions, airports and educational
institutions are all examples of institutions with large office security
requirements.
The introduction of biometric devices in this market has been limited,
despite the considerable size of this marketplace, likely due to cost and system
integration impediments. The electronic access control market is dominated by
card and proximity reader devices placed on entries to control and limit access.
Biometric Identification's discussions at trade shows and with access control
companies demonstrate that if biometric solutions could approach the cost level
of card and proximity reader devices, then a biometric solution could become the
primary application. Biometric Identification has designed its Veriprint 1100
product line to meet these cost levels. Also, Biometric Identification's product
require less customer administrative oversight than for a card reader system
because there is no longer any need to record and physically control
identification cards.
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<PAGE> 23
Biometric Identification has completed or is nearing completion of
integrating its product with those of large card identification companies such
as Westinghouse Security Electronics Inc. and Radionics, Inc. For example,
Westinghouse and Radionics have integrated Biometric Identification's V2100
product with their access control systems.
Biometric Identification is presently working with Radionics, Inc., one of
the largest home security companies in the U.S., in order to integrate Biometric
Identification biometrics into their access control and intrusion systems.
Computer Security
As corporations and other organizations have decentralized their computer
operations by widely installing PCs, the points of access to networked systems
and sensitive databases have greatly increased. Although PCs may substantially
improve employee productivity, their proliferation presents a far larger
security risk because access points are now so numerous. Networked PC systems
are expected to grow as computer-based management of information increases
worldwide. The rapid expansion of PC networked systems provides an important
area of market growth for biometric products. Organizations now have concerns
about a range of computer security issues such as protection of privacy of
personnel and customer data, prevention of theft of competitively advantageous
information including trade secrets, and prevention of deliberate damage to and
corruption of data and systems.
Biometric Identification expects the commercial and governmental network
security market to be one of the largest sources of demand for its biometric
products. There may be also be a developing market of home users who would be
willing to purchase inexpensive and compact security devices such as those of
Biometric Identification.
Identification of Government Service Recipients
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.
Biometric Identification believes that there is interest in this area from
governments due to concerns about fraud.
Biometric Identification also provides products for non-U.S. governments.
For example, Biometric Identification's Veriprint 2100 system 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.
Marketing and Distribution Channels
The favorable performance of Biometric Identification products, combined
with aggressive pricing, has enabled Biometric Identification to secure
relationships with several large companies. Biometric Identification desires
that once integration is completed with each equipment manufacturer's products,
the equipment manufacturer will then introduce Biometric Identification products
into their distribution channels.
Biometric Identification has been executing its sales strategy through its
sales team and has been actively marketing its product since September 1997.
Since then, Biometric Identification has developed a list of alliances with key
customers including Westinghouse, Radionics, Thomson CSF, Gemplus and Keysource.
Biometric Identification has no customer that accounts for 10% or more of its
revenues where the loss of that customer would significantly hurt Biometric
Identification.
Biometric Identification is targeting both large and small companies.
Although the larger companies offer long term sales potential, the innovative
smaller value added resellers and equipment manufacturers are more often the
first to adopt new technologies and create early stage demand from consumers.
Early users sometimes divert business from industry leaders which creates
incentive for the big companies to follow suit. Biometric Identification is also
going to target systems integrators and large consulting firms that thrive on
introducing new technologies to their customers.
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<PAGE> 24
To date, Biometric Identification has focused on the time and attendance
and access control markets. During 1999, it intends to 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.
Biometric Identification has retained a small marketing company located in
the United Kingdom as a representative for Biometric Identification in the
European market area. Biometric Identification wishes to secure several sales
representatives to assist Biometric Identification in introducing its products
into the European and Asian marketplaces.
Competition
Biometric Identification competes with other providers of biometric
identification services to the commercial markets it serves in time and
attendance monitors, access control and computer security. In addition,
Biometric Identification competes with providers of non-biometric identification
services. Biometric Identification believes that the principal methods of
competition in the identification verification industry are providing function,
ease of integration and an affordable price. Many of Biometric Identification's
actual and potential competitors have greater financial, marketing and other
resources than Biometric Identification possesses.
Patents, Trademarks, and Copyrights
Arete has provided an exclusive license to Biometric Identification for its
five pending patents in fingerprint sensing systems and methods. 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 was issued in the United States.
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<PAGE> 25
DESCRIPTION OF PROPERTY
Biometric 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 Biometric employees operate out of its
Vancouver office.
Biometric Identification occupies one administration office in California
and sales offices in Dayton, Ohio and London, England.
Biometric Identification's California offices occupy a total of
approximately 4,200 square feet and are located at 5000 Van Nuys Blvd., Sherman
Oaks, California.
LEGAL PROCEEDINGS
Other than as disclosed below, no material legal proceedings are pending to
which Biometric 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), Biometric
transferred its domicile into the State of Wyoming, where it is now governed by
the Wyoming Business Corporation Act. Biometric's management has subsequently
considered that Biometric might transfer its domicile back to British Columbia.
In order to solicit shareholder approval for this transfer, Biometric filed on
March 5, 1999, as required by the Securities Exchange Act of 1934, a preliminary
proxy statement with the SEC which was reviewed by the SEC staff. Based on its
review, the staff informally advised Biometric that the staff believes that
Biometric's transfer to Wyoming was an event that would have required the filing
of a registration statement with the SEC, under the Securities Act of 1933.
In response to the SEC's advice, on May 7, 1999, Biometric filed a
registration statement under the Securities Act on Form S-4 for a repurchase
offer with respect to the shares deemed to have been offered in connection with
the transfer to Wyoming. Repurchase offerees may be able to sue Biometric for a
possible violation of the registration requirement under the Securities Act.
Biometric's exposure in that event is difficult to quantify because its
shareholders were provided their statutory right of dissent under the Company
Act (British Columbia) to be paid the fair market value of their shares if they
dissented from the transfer to Wyoming. No shareholder exercised that dissent
right.
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<PAGE> 26
SELECTED FINANCIAL DATA
The selected consolidated financial data shown below with respect to
Biometric'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, and with respect to Biometric's
consolidated statements of operations for each of the six months ended June 30,
1999 and 1998, and with respect to the consolidated balance sheets at June 30,
1999 and 1998, are derived from Biometric's audited consolidated financial
statements as of December 31, 1998 and unaudited interim consolidated financial
statements as of June 30, 1999, included on pages F-1 - F-30. 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
Biometric's audited consolidated financial statements that are not included in
this proxy statement/prospectus. These financial statements, which included a
note reconciling differences between U.S. and Canadian GAAP, were filed with
Biometric's Annual Reports on Form 20-F.
You should read the following selected financial consolidated financial
data in conjunction with Biometric's consolidated financial statements and the
notes on pages F-1 - F-30. Historical operating results are not necessarily
indicative of the results in any future period.
As a result of Biometric's transfer into Wyoming, Biometric adopted U.S.
GAAP and restated prior years figures to be in accordance with U.S. GAAP. Since
Biometric's functional currency is Canadian dollars, all amounts are in Canadian
dollars.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE FISCAL YEARS ENDED DEC. 31,
--------------------- ----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- -------- -------- -------- -------
(STATED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................ $ 4 $ 66 $ 79 $ 175 $ 102 $ 211 $ 36
Net income (loss)...... $ (2,416) $ (5,317) $ (7,125) $ (2,200) $ (1,259) $ (1,142) $ (406)
Net income (loss) per
share................ $ (0.07) $ (0.31) $ (0.38) $ (0.13) $ (0.14) $ (0.20) $ (0.10)
Cash dividends declared
per share............ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Working capital........ $ 76 $ 1,280 $ 10 $ 3,072 $ 6,369 $ 1,936 $ 1,846
Total assets........... $ 3,147 $ 3,640 $ 2,567 $ 8,274 $ 10,451 $ 2,721 $ 2,010
Total liabilities...... $ 907 $ 405 $ 299 $ 283 $ 571 $ 91 $ 143
Share capital.......... $ 16,177 $ 12,948 $ 13,789 $ 12,388 $ 12,077 $ 3,567 $ 1,662
Retained earnings
(deficit)............ $ (13,938) $ (9,713) $ (11,521) $ (4,397) $ (2,197) $ (937) $ 204
</TABLE>
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<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTE: WE USE THE NAME "BIOMETRIC" FOR DISCUSSIONS OF ALL PERIODS IN THIS
SECTION, EVEN THOUGH BIOMETRIC ASSUMED ITS CURRENT NAME ONLY IN NOVEMBER
1998.
Current Capital Resources and Liquidity
Since inception, Biometric's capital resources have been limited. Since
cash generated from operations has been nominal, Biometric has had to rely upon
the sale of equity and debt securities for cash required for investments and
operations, among other things. In 1998, Biometric acquired the right to invest
up to US$ 5,000,000 into Biometric Identification by way of the acquisition of
convertible debentures. See "Biometric Security Corp. -- Business of Biometric
Security Corp." for a discussion of the terms of this investment. Biometric
completed its purchase of the US$ 5,000,000 of Biometric Identification
debentures on July 23, 1999. Biometric's working capital or cash flows are not
sufficient to fund ongoing operations and other commitments. The ability of
Biometric to settle its liabilities as they come due and to fund its commitments
and ongoing operations is dependent upon the ability of Biometric to obtain
additional equity or debt financing. If Biometric cannot raise the necessary
financing directly by way of debt, equity or other means, the lack of capital
may force it to curtail its operating activities and potential investment
activities. There is no assurance that Biometric will obtain any such financing.
Biometric does not currently have any commitments for material capital
expenditures over the near or long term, and none are presently contemplated
over normal operating requirements.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Results of Operations
For the six-month period ended June 30, 1999 Biometric incurred a net loss
of $2,416,248 resulting in a loss per share of $0.07. The loss for the six-month
period ended June 30, 1999 resulted from cash and short term investment earnings
of $4,239 less expenses of $1,014,967. In addition, Biometric realized mineral
property recoveries of $164,855 and an equity loss in the operations of BII of
$1,570,375. The equity loss in the operations of Biometric Identification
resulted from Biometric's portion of Biometric Identification's loss from
operations for the six months ended June 30, 1999 and amortization of the excess
of Biometric's investment over its share of Biometric Identification's net
assets. During the six months ended June 30, 1999 Biometric Identification
incurred a loss of US$ 3,235,938. This loss resulted from sales of US$ 946,545,
interest income of US$ 476 and a tax recovery of US$ 1,744 less cost of sales of
US$ 776,169 and selling, general and administration costs of US$ 1,683,970 and
research and development expenditures totaling US$ 1,724,564.
Biometric's six-month net loss is compared to a net loss for the six-month
period ended June 30, 1998 of $5,316,647 and a loss per share of $0.31. The loss
for the six-month period ended June 30, 1998 resulted from cash and short term
investment earnings of $65,603 less expenses of $549,186 and losses on the
disposal of equipment of $27,587. In addition, Biometric wrote-off mineral
property costs totaling $4,805,477 which increased the loss for the six-month
period ended June 30, 1998.
At March 1, 1999, Biometric had received US$ 150,000 and 100,000 common
shares of Inlet. Biometric has since sold these shares for $11,078, or
approximately $0.11 per share, which was the quoted market price for Inlet
shares on the date of sale. As Biometric had previously written off the mineral
property costs, the cash and shares originally received from Inlet, net of
expenses incurred, has been reflected in the statement of operations.
Administrative costs in the six-month period ended June 30, 1999 increased
85% over 1998 primarily as a result of Biometric incurring increased
professional fees, consulting fees and finders fees.
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<PAGE> 28
Liquidity and Capital Resources
During the six-month period ended June 30, 1999 Biometric realized a net
increase in cash from operations, financing and investments of $32,221. The loss
for the period was $2,416,248.
During the six-month period ended June 30, 1999 Biometric completed private
placements totaling 23,333,331 units. These private placements were for
proceeds, before costs, of $3,500,000, of which $660,592 had been advanced to
Biometric prior to December 31, 1998. In addition, Biometric received $477,833
on the exercise of warrants. During the first quarter, Biometric repaid a
short-term $150,775 loan payable that was outstanding at December 31, 1998.
During the six-month period ended June 30, 1999 Biometric invested an
additional $2,129,062 (US$ 1,425,000) in convertible debentures of Biometric
Identification.
Balance Sheets
Total cash and short-term investments at June 30, 1999 were $227,403 as
compared to $245,182 at December 31, 1998, and working capital increased to
$76,288 as at June 30, 1999 compared to $10,478 as at December 31, 1998. The
increase in cash and working capital is largely attributable to Biometric's
completing three private placements that raised gross cash proceeds of
$3,500,000 less $660,592 received by Biometric before December 31, 1998 and the
related costs of completing the financing.
At June 30, 1999 a total of $5,600,417 (US$ 3,750,000) has been invested in
convertible debentures of Biometric Identification. This is compared to
$3,471,375 (US$ 2,325,000), that had been invested at December 31, 1998, less
$1,275,020, which represents Biometric's share of Biometric Identification's
losses to December 31, 1998 and the amortized portion of the excess of
Biometric's investment over its share of Biometric Identification's net assets.
Effective June 1999, Biometric's investment in the Biometric Identification
convertible debentures has been accounted for by the equity method, as Biometric
has determined that it can exert significant influence over Biometric
Identification. Accordingly, Biometric has reduced its investment by $2,845,375,
which is its share of Biometric Identification's losses to June 30, 1999 and the
amortized portion of the excess of Biometric's investment over its share of
Biometric Identification's net assets. The excess of the cost of Biometric's
investment over its share of net assets is being amortized on a straight-line
basis over five years.
At June 30, 1999 Biometric had no loans payable and had repaid the $150,775
short term loan that was outstanding at December 31, 1998.
At June 30, 1999 Biometric had received $nil in share subscriptions and had
completed the private placement it had received $660,592 for prior to December
31, 1998.
In May 1999 Biometric filed a registration statement with the SEC offering
U.S. persons who owned Biometric common stock at the time Biometric transferred
its corporate domicile to Wyoming, the right to have their shares repurchased by
Biometric at their fair market value on the date of the shareholder vote
concerning Biometric's transfer to Wyoming. A provision of $657,052 for this
contingent liability has been recorded in Biometric's accounts as of June 30,
1999, as a reduction of share capital. Any amount not repurchased by Biometric
on expiry of the repurchase offer will be reclassified to share capital. See
"Legal Proceedings" for further discussion of the repurchase offer.
Subsequent Events
- Biometric completed a $2,000,000 private placement on July 22, 1999. 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 consists 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 a maximum of
26
<PAGE> 29
1,500,000 shares of Biometric. The broker's warrants are exercisable at a
price of $0.20 per share in the first year and $0.23 per share in the
second year.
- Biometric invested an additional US$ 1,250,000 in Biometric
Identification debentures.
- Biometric announced an annual general meeting of the shareholders, at
which time the shareholders will be asked to vote on Biometric's proposal
to transfer its domicile to British Columbia and to consolidate
Biometric's share capital on the basis of one post-consolidated share for
each five pre-consolidated shares.
FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
Results of Operations
A $0.38 loss per share in the fiscal year ended December 31, 1998 resulted
from cash and short-term investment earnings of $79,129 less expenses of
$1,287,586, mineral property write-offs of $4,592,237 and an equity loss in the
operations of BII of $1,275,000. The equity loss in the operations of Biometric
Identification resulted from Biometric's portion of Biometric Identification's
loss from operations since acquisition and amortization of the excess of
Biometric's investment over its share of Biometric Identification's net assets.
During 1998 Biometric Identification incurred a loss of US$ 3,934,609. This loss
resulted from sales of US$ 1,129,273, interest income of US$ 4,453 and a tax
recovery of US$ 370,000 less cost of sales of US$ 1,510,869 and selling, general
and administration costs of US$ 2,357,085 and research and development
expenditures totaling US$ 1,570,381.
Biometric's 1998 net loss 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 79% over 1997, primarily as a result
of Biometric incurring increased professional fees and finders fees.
Liquidity and Capital Resources
During 1998 Biometric had a reduction in cash from operations, financing
and investments of $3,084,928. The loss for the year was $7,124,561, which
consisted largely of the write-down of mineral properties and an equity loss in
BII.
During 1998, Biometric 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, Biometric raised $23,000 from the exercise of
100,000 stock options. Biometric also issued 250,450 common shares at a deemed
value of $75,135 for finders fees in connection with the Biometric
Identification debentures.
During 1998, Biometric invested $3,471,355, in Biometric Identification
convertible debentures, disposed of equipment used in Argentina for proceeds of
$151,512 and recovered $185,335 of security deposits.
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.
The decrease in cash and working capital is largely attributable to Biometric's
investment of $3,471,355 in convertible debentures of Biometric Identification
during the year.
At December 31, 1998 a total of $3,471,355 (US$ 2,325,000) had been
invested in convertible debentures of Biometric Identification. Effective June
1999, Biometric determined that it had the ability to exercise significant
influence over the activities of Biometric Identification, and in accordance
with Accounting Principles Board Opinion No. 18, Biometric's financial
statements for 1998 have been restated to reflect this change. Accordingly,
Biometric's investment in the Biometric Identification convertible debentures
has been accounted for by the equity method and Biometric has reduced its
investment by $1,275,000, which is its
27
<PAGE> 30
share of Biometric Identification's losses to December 31, 1998 and the
amortized portion of the excess of Biometric's investment over its share of
Biometric Identification's net assets. The excess of Biometric's investment over
its share of net assets is being amortized on a straight-line basis over five
years.
Equipment and leasehold improvements totaled $60,758 at December 31, 1998
as compared to $248,213 at December 31, 1997. The decrease is a result of
Biometric selling off equipment in 1998.
Mineral properties totaled nil at December 31, 1998 as compared to
$4,670,516 at December 31, 1997. The decrease is a result of writing off the
deferred costs in June 1998, when it was determined there was little prospect of
further work being carried out on the properties and Biometric changed its
business from mineral exploration to its investment in Biometric Identification.
In November 1998, subsequent to writing off the deferred costs, Biometric
granted Inlet Resources Ltd. an option to purchase up to a 100% interest in
Biometric's Argentine mineral properties.
Share capital totaled $13,128,263 at December 31, 1998 as compared to
$12,387,691 at December 31, 1997. The increase is a result of Biometric issuing
shares for cash proceeds of $628,250 and shares for services having a value of
$112,322.
Shares subscribed totaled $660,592 at December 31, 1998 as compared to nil
at December 31, 1997 as investors had advanced Biometric $660,592 as funds
advanced for a private placement that was completed after the year-end.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Results of Operations
A $0.13 loss per share in the fiscal year ended December 31, 1997 resulted
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
Biometric cutting back promotional, travel, consultants and other costs.
Liquidity and Capital Resources
During the year ended December 31, 1997, Biometric had an increase in cash
of $1,587,977 primarily as a result of its financing activities. The loss for
the year was $2,199,895, which consisted largely of the write-down of mineral
properties. During 1997, Biometric 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. Biometric raised $184,000 from the exercise of 200,000
warrants, and $126,400 from the exercise of 120,000 options.
During 1997 Biometric incurred expenditures on mineral properties totaling
$3,033,103 and purchased equipment and leasehold improvements of $79,658.
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. Working capital decreased to $3,072,259 as at December 31, 1997
compared to $6,369,429 as at December 31, 1996. Share capital increased
primarily as a result of the closing of the 5,000,000 unit special warrant
offering announced in October 1996. Advances on share subscriptions decreased
from $5,106,645 to nil as a result of the completion of the 5,000,000 unit
special warrant financing.
Biometric expended a total of $3,171,103 of mineral property costs in
Argentina that was initially capitalized during 1997.
28
<PAGE> 31
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 in 1996 increased 36.4% over 1995 as a result of
Biometric's move to new office premises, the hiring of additional personnel,
advertising, promotional, exploration and travel costs incurred to support
Biometric's mineral projects.
Liquidity and Capital Resources
During the year ended December 31, 1996, Biometric increased its cash by
$99,492 primarily as a result of its financing activities which raised
$3,403,506 by private placements and the exercise of warrants and options.
The loss for the year was $1,259,315, which included a $534,853 write-off
of mineral properties.
On October 22, 1996, Biometric announced 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. Each whole
warrant entitled the holder to purchase one additional share at $1.30 per share
for a two year period. At December 31, 1996, Biometric held in escrow the
proceeds from the sale of special warrants of $5,106,645, net of commissions and
other offering costs, pending completion of a prospectus qualifying the common
shares and share purchase warrants for distribution.
Biometric 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 was 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, Biometric issued the 5,000,000 shares and 5,000,000
one-half share purchase warrants upon exercise of the 5,000,000 special
warrants. Biometric also issued 250,000 compensation options 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 Biometric.
Biometric received additional financing during 1996 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.
During 1996 Biometric incurred expenditures on mineral properties totaling
$2,998,643, purchased equipment and leasehold improvements totaling $223,643.
Also during 1996, Biometric sold marketable securities for proceeds of $193,527
and paid a security deposit of $138,000.
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. 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.
29
<PAGE> 32
During 1996 Biometric expended $223,643 on equipment and leasehold
improvements giving it a total of $257,743 in equipment net of depreciation at
December 31, 1996. This compares to $42,600 for equipment and leaseholds at
December 31, 1995.
At December 31, 1996 Biometric had $138,000 in a security deposit related
to a mineral property it was exploring in 1996.
At December 31, 1996 Biometric had accounts payable of $570,752 largely
related to the exploration work it was carrying out in South America.
YEAR 2000 COMPLIANCE
The Year 2000 issue refers to possible negative impacts on business systems
that could be caused by the arrival of the new millennium. Best known is the
possible inability of computer software to recognize the year 2000 as a date.
Unless the software is fixed, date-sensitive systems may begin to fail prior to
January 1, 2000.
Biometric does not expect to experience significant Year 2000 issues,
because it uses standard commercial programs and systems that have been designed
or upgraded to comply with requirements imposed by the transition into the next
millennium. Biometric is contacting its main suppliers to make sure that they
are also Year 2000 compliant, a process Biometric expects to complete by the
third quarter of 1999.
Biometric Identification has evaluated the products and services that it
offers, as well as its information technology infrastructure, and has determined
that they are Year 2000 compliant. Biometric Identification's business involves
integrating its products with those of original equipment managers and value
added resellers. If any of those companies is not Year 2000 compliant, their
product sales, and consequently Biometric Identification's sales, could drop.
Biometric Identification is contacting these companies to determine the state of
their Year 2000 compliance. Biometric Identification expects to complete this
process by the third quarter of 1999.
LEGAL MATTERS
The validity of the shares of Biometric common stock issued as of
Biometric's proposed transfer from Wyoming to British Columbia will be passed
upon for Biometric by Catalyst Corporate Finance Lawyers, Vancouver, British
Columbia, Canada.
EXPERTS
Biometric's consolidated financial statements as of December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998
included in this proxy statement/prospectus, have been so included in reliance
on the report of KPMG LLP, independent chartered accountants, given on the
authority of that firm as experts in accounting and auditing. Biometric
Identification's financial statements as of December 31, 1998, and for the year
then ended, included in this proxy statement/prospectus, have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
Biometric has filed with the SEC a registration statement on Form S-4,
including amendments, under the Securities Act with respect to its common stock
as discussed herein. This proxy statement/prospectus does not contain all of the
information set forth in the registration statement and its exhibits and
schedules. For further information about Biometric and its common stock, please
see the registration statement and the exhibits and schedules filed with it.
Statements contained in this proxy statement/prospectus as to the contents of
any contract or any other document referred to are not necessarily complete. In
each instance, we refer you to the copy of the contract or document filed as an
exhibit to the registration statement for further details.
Biometric files annual, quarterly and special reports and other information
with the SEC. You may read and copy any document filed by Biometric, including
the registration statement and its exhibits and schedules, at the SEC's public
reference room, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information about its public reference room.
These SEC filings are also available to the public at the SEC's web site at
"www.sec.gov."
30
<PAGE> 33
INFORMATION CIRCULAR
BIOMETRIC SECURITY CORP.
SUITE 1940 - 400 BURRARD STREET
VANCOUVER, BRITISH COLUMBIA
CANADA V6C 3A6
All information is as of September 10, 1999 unless otherwise noted.
PERSONS MAKING THE SOLICITATION
BIOMETRIC IS DELIVERING THIS INFORMATION CIRCULAR SO THAT ITS MANAGEMENT
MAY SOLICIT PROXIES OF SHAREHOLDERS FOR USE AT THE ANNUAL GENERAL MEETING OF
BIOMETRIC'S SHAREHOLDERS TO BE HELD ON FRIDAY, OCTOBER 29, 1999, AT THE TIME AND
PLACE AND FOR THE PURPOSES SET FORTH IN THE ACCOMPANYING NOTICE OF MEETING.
While Biometric expects that the solicitation will be made primarily by mail,
proxies may be solicited personally or by telephone by Biometric directors,
officers and employees.
Biometric is paying for all costs of this solicitation.
APPOINTMENT AND REVOCATION OF PROXIES
The individuals named in the accompanying form of proxy are directors or
officers of Biometric. A SHAREHOLDER WISHING TO APPOINT SOME OTHER PERSON, WHO
NEED NOT BE A SHAREHOLDER, TO ATTEND AND ACT ON THE SHAREHOLDER'S BEHALF AT THE
MEETING HAS THE RIGHT TO DO SO, EITHER BY INSERTING THE PERSON'S NAME IN THE
BLANK SPACE IN THE PROXY AND STRIKING OUT THE TWO PRINTED NAMES, OR BY
COMPLETING ANOTHER PROXY. A proxy will not be valid unless it is completed,
dated, signed and delivered to Pacific Corporate Trust Company, Suite 830 - 625
Howe Street, Vancouver, British Columbia, Canada V6C 3B8 no later than 48 hours,
excluding Saturdays, Sundays and holidays, before the meeting, or is delivered
to the Chair of the meeting prior to the meeting.
A shareholder who has given a proxy may revoke it either:
- in a writing signed by the shareholder or by the shareholder's attorney
authorized in writing, or
- if the shareholder is a corporation, by a duly authorized officer or
attorney of the corporation.
The shareholder must deliver the revoked proxy either to:
- Biometric's registered office, Suite 1100, 1055 West Hastings Street,
Vancouver, British Columbia, Canada V6E 2E9, at any time up to and
including the last business day before the day of the meeting, or
- to the Chair of the meeting on the day of the meeting.
A revocation of a proxy does not affect any matter on which a vote has been
taken prior to the revocation.
EXERCISE OF DISCRETION
If the instructions in a proxy are certain, the shares represented by the
proxy will be voted on any poll by the person(s) named in the proxy. If the
proxy specifies a choice with respect to any matter to be acted upon, the shares
will be voted or withheld from voting in accordance with those specifications.
IF A SHAREHOLDER NEGLECTS TO SPECIFY A CHOICE IN THE PROXY, HIS SHARES WILL
BE VOTED IN ACCORDANCE WITH THE NOTES TO THE PROXY.
The enclosed proxy, when completed and delivered and not revoked, gives
discretionary authority to vote on any amendments or variations of matters
identified in the Notice of meeting and on other matters that may come before
the meeting. At the time of this information circular, Biometric's management
does not know of any amendment, variation or other matter that may be presented
to the meeting.
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<PAGE> 34
VOTING SECURITIES AND PRINCIPAL HOLDERS OF VOTING SECURITIES
As at September 10, 1999, Biometric has issued and outstanding 57,684,208
fully paid and non-assessable common shares without par value, each share
carrying the right to one vote. BIOMETRIC HAS NO OTHER CLASSES OF VOTING
SECURITIES.
Any shareholder of record at the close of business on August 31, 1999 who
either personally attends the meeting or who has completed and delivered a proxy
as described in "Appointment and Revocation of Proxies" on the previous page,
shall be entitled to vote or to have his shares voted at the meeting.
To the knowledge of Biometric's management, as of September 10, 1999, no
person beneficially owns more than five percent of any class of Biometric's
voting securities other than as set forth below. The following table shows the
total amount of any class of Biometric's voting securities owned by each of its
executive officers and directors and by its executive officers and directors, as
a group, as of September 10, 1999.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE
NAME AND ADDRESS(1) OWNERSHIP(2) OF CLASS
------------------- ------------ ----------
<S> <C> <C>
Patrick McCleery(3)......................................... 4,079,958 6.8%
EXECUTIVE OFFICERS AND DIRECTORS
Robert M. Kamm.............................................. 0 0%
Robert F. Chase............................................. 540,000(4) 1.0%
Chester Idziszek............................................ 335,000(5) *
William A. Rand............................................. 2,679,364(6) 4.5%
Wayne Johnstone............................................. 479,700(7) 1.0%
Saundra J. Zimmer........................................... 95,000(8) *
All executive officers and directors as a group (6
persons)............................................... 4,129,064(2) 6.9%(2)
</TABLE>
- ---------------
* Less than one percent.
(1) The address for each of these persons other than Mr. McCleery is Suite
1940, 400 Burrard Street, Vancouver, British Columbia, Canada V6C 3A6. The
address for Mr. McCleery is 4510 Beverly Crescent, Vancouver, British
Columbia, Canada V6J 4E6.
(2) Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares owned by a person and the percentage
ownership of that person, shares of common stock subject to options and
warrants held by that person that are currently exercisable or exercisable
within 60 days of September 10, 1999, are deemed outstanding. These shares,
however, are not deemed outstanding for the purposes of computing the
percentage ownership of any other person. Biometric does not know whether
any of these options or warrants will be exercised. Biometric relies on
information furnished by each of these persons as to their beneficial
ownership.
(3) Includes currently exercisable options and warrants, and options and
warrants exercisable within sixty days of the date of this proxy
statement/prospectus to purchase an aggregate of 1,420,000 shares as to Mr.
McCleery and 750,000 shares as to Mrs. McCleery, with respect to which Mr.
McCleery disclaims any beneficial ownership. They also include 750,000
shares beneficially owned by Mrs. McCleery, with respect to which Mr.
McCleery disclaims any beneficial ownership. Biometric does not know
whether any of these options or warrants will be exercised.
(4) Includes 250,000 shares and, in addition, warrants currently exercisable to
purchase 250,000 shares, owned by Mrs. Chase, with respect to which Mr.
Chase disclaims any beneficial ownership. Biometric does not know whether
any of these warrants will be exercised.
(5) Includes currently exercisable options and options exercisable within sixty
days of the date of this proxy statement/prospectus to purchase a total of
285,000 shares. Biometric does not know whether any of these options will
be exercised.
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<PAGE> 35
(6) Includes currently exercisable options and options exercisable within sixty
days of the date of this proxy statement/prospectus to purchase a total of
285,000 shares. Also includes 901,950 shares and, in addition, warrants
currently exercisable to purchase 1,432,864 shares, beneficially owned 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 was a
director, with respect to which Mr. Rand disclaims any beneficial
ownership. Biometric does not know whether any of these options or warrants
will be exercised.
(7) Includes currently exercisable options and warrants, and options and
warrants exercisable within sixty days of the date of this proxy
statement/prospectus to purchase a total of 291,050 shares. Also includes
10,000 shares owned by Mrs. Johnstone, with respect to which Mr. Johnstone
disclaims any beneficial ownership. Biometric does not know whether any of
these options or warrants will be exercised.
(8) Includes currently exercisable options and options exercisable within sixty
days of the date of this proxy statement/prospectus to purchase a total of
95,000 shares. Ms. Zimmer does not own any shares of Biometric's common
stock. Biometric does not know whether any of these options will be
exercised.
To the knowledge of Biometric's management, there are no arrangements whose
operation may at a subsequent date result in a change of control of Biometric.
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
If you want to present a proposal at the annual general meeting of
shareholders in 2000, we must receive your proposal by March 15, 2000, so we can
consider it for inclusion in Biometric's proxy statement and form of proxy
relating to that meeting. Please send your proposals to Biometric's Corporate
Secretary, at Biometric's address: Suite 1940, 400 Burrard Street, Vancouver,
British Columbia, Canada V6C 3A6.
EXECUTIVE COMPENSATION
We are required to set out particulars of compensation paid to the
following persons:
(a) Biometric's chief executive officer during the most recently completed
fiscal year;
(b) each of Biometric's four most highly compensated executive officers
who were serving as executive officers at the end of the most recently
completed fiscal year and whose total salary and bonus exceeds US$
100,000 per year; and
(c) any additional individuals for whom disclosure would have been
provided under (b) except that the individual was not serving as an
executive officer of Biometric at the end of the most recently
completed fiscal year.
During the fiscal year ended December 31, 1998, Biometric employed only one
person meeting any of those requirements, namely, Patrick W. McCleery, then the
Chairman of the Board, President and a director of Biometric. Accordingly, the
only person treated in the following charts is Mr. McCleery.
33
<PAGE> 36
SUMMARY OF COMPENSATION
The following table is a summary of compensation paid to Mr. McCleery
during Biometric's last three fiscal years.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
AWARDS PAYOUTS
RESTRICTED
SHARES
SECURITIES OR
FISCAL OTHER ANNUAL UNDER RESTRICTED
NAME AND YEAR COMPENSATION OPTIONS SHARE LTIP ALL OTHER
POSITION OF PRINCIPAL ENDING SALARY BONUS (CDN. $)(1) GRANTED UNITS PAYOUTS COMPENSATION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PATRICK W. MCCLEERY 1998 0 0 $120,059 420,000 0 N/A 0
Chairman of the Board and 1997 0 0 $127,122 0 0 N/A 0
President 1996 0 0 $117,196 359,761 0 N/A 0
</TABLE>
(1) Other annual compensation included consulting fees in connection with Mr.
McCleery's managerial activities, and corporate finance advisory fees paid
to Mr. McCleery.
LONG-TERM INCENTIVE PLANS -- AWARDS IN MOST RECENTLY COMPLETED FISCAL YEAR
Biometric has no long-term incentive plan in place. A "Long-Term Incentive
Plan" is a plan under which awards are made based on performance over a period
longer than one fiscal year. It is different from a plan for options, SARs, or
stock appreciation rights, or restricted share compensation.
OPTIONS AND STOCK APPRECIATION RIGHTS GRANTED DURING THE MOST RECENTLY COMPLETED
FISCAL YEAR
During its last fiscal year Biometric granted the following incentive stock
options to Mr. McCleery. Biometric did not grant any stock appreciation rights
during this period.
<TABLE>
<CAPTION>
MARKET VALUE
OF SECURITIES
UNDERLYING
SECURITIES % OF TOTAL OPTIONS ON
UNDER EXERCISE OR OPTIONS THE DATE OF
OPTIONS BASE PRICE GRANTED TO GRANT (CDN$/
DATE OF GRANTED (CDN$/ EMPLOYEES IN SECURITY)
NAME GRANT (#) SECURITY) FISCAL YEAR (1) EXPIRATION DATE
<S> <C> <C> <C> <C> <C> <C>
PATRICK W. MCCLEERY Jan. 28, 1998 420,000 $0.23 23.5% $0.23 January 28, 2001
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
OPTION TERM
NAME 5%($) 10%($)
<S> <C> <C>
PATRICK W. MCCLEERY $9,950 $20,286
</TABLE>
(1) Calculated as the closing price of Biometric's shares on the Vancouver Stock
Exchange on the date of the grant.
AGGREGATED OPTIONS AND STOCK APPRECIATION RIGHTS EXERCISED DURING THE MOST
RECENTLY
COMPLETED FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES
The following table sets out incentive stock options exercised by Mr.
McCleery during the last fiscal year, as well as the fiscal year end value of
stock options held by him. During this period, he held no outstanding stock
appreciation rights.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SECURITIES AGGREGATE UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE FISCAL YEAR-END FISCAL YEAR-END ($)
EXERCISE REALIZED (CDN$) EXERCISABLE/UNEXERCISABLE EXERCISABLE/
NAME (#) (1) (#) UNEXERCISABLE (2)
<S> <C> <C> <C> <C>
PATRICK W. MCCLEERY 0 0 420,000/0 0/0
</TABLE>
(1) Based on the difference between the option exercise price and the closing
market price of Biometric's shares, on the date of exercise.
(2) In-the-Money Options are those where the market value of the underlying
securities as at the most recent fiscal year end exceeds the option exercise
price. The closing market price of Biometric's shares on December 31, 1998
(i.e., fiscal year end) was $0.18.
34
<PAGE> 37
TERMINATION OF EMPLOYMENT, CHANGE IN RESPONSIBILITIES AND EMPLOYMENT CONTRACTS
Effective May 31, 1999, Patrick McCleery resigned as Chairman, President
and a director of Biometric. Mr. McCleery and Biometric have made an agreement,
dated May 31, 1999, that Mr. McCleery will be paid $4,000 per month as a
consultant plus severance pay of $6,000 per month, plus benefits and stock
options as determined by the board of directors. This agreement expires on June
30, 2001. There are no employment contracts between Biometric and any of its
officers. Effective July 29, 1999, Biometric appointed Robert Chase as Chief
Financial Officer, at a remuneration of $10,000 per month payable to Lexacal
Investment Corp., of which Mr. Chase is President, Chief Executive Officer and a
director. Biometric has no defined benefit or actuarial plans.
COMPENSATION OF DIRECTORS
Mr. McCleery's compensation was disclosed above. Biometric did not pay any
cash compensation to any other Biometric director for his services as a director
during the fiscal year ended December 31, 1998.
Biometric has no standard arrangement to compensate directors for their
services in their capacity as directors except for the granting from time to
time of incentive stock options in accordance with the policies of the Vancouver
Stock Exchange. During the last fiscal year, Biometric granted its directors,
other than Mr. McCleery, incentive stock options to purchase a total of 665,000
Biometric common shares. It granted 285,000 to William Rand, 285,000 to Chester
Idziszek, and 95,000 to Wayne Johnstone. These options are exercisable up to the
close of business on January 28, 2001.
All of the existing stock options are non-transferable and terminate on the
earlier of the expiration date or the 30th day after the date on which the
director, officer or employee, as the case may be, terminates his position at
Biometric. If a director is forced to resign or is removed by special
resolution, or if a senior officer or other employee is fired for cause, his
options expire on the day of removal or firing.
The outstanding options will be adjusted if Biometric consolidates,
subdivides or similarly changes its share capital.
During the fiscal year ended December 31, 1998 Biometric paid a total of
$56,561 to Rand Edgar Investment Corp. and Wayne Johnstone for consulting fees.
Rand Edgar Investment Corp. is owned equally by William A. Rand, a director of
Biometric, and Brian Edgar.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Biometric has no committee that performs the function of a compensation
committee. None of Biometric's officers or directors serves on a committee
making compensation decisions of any other entity. directors generally
participate in compensation-related matters.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Biometric currently has no compensation committee, nor is any compensation
program in place for Biometric's executive officers.
Biometric's President determines the compensation paid to the Corporate
Secretary. The board of directors determines the President's compensation.
35
<PAGE> 38
PERFORMANCE GRAPH
The graph below compares the five-year cumulative total return (assuming
$100 invested on December 31, 1993) of Biometric's common stock to the Vancouver
Stock Exchange Index.
<TABLE>
<CAPTION>
BIOMETRIC SECURITY VSE COMPOSITE PMT
------------------ -----------------
<S> <C> <C>
12/31/1993 100.00 100.00
12/30/1994 150.00 72.00
12/29/1995 200.00 75.00
12/31/1996 293.00 112.00
12/31/1997 45.00 58.00
12/31/1998 28.00 37.00
</TABLE>
INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS
Except as disclosed below, since the start of the last completed fiscal
year, no insider of Biometric, or any associate or affiliate of an insider, had
any material interest, direct or indirect, in any transaction or any proposed
transaction which has materially affected or would materially affect Biometric.
Effective July 29, 1999, Biometric appointed Robert Chase as Chief
Financial Officer, at a remuneration of $10,000 per month payable to Lexacal
Investment Corp., of which Mr. Chase is President, Chief Executive Officer and a
director.
Effective May 31, 1999, Patrick McCleery resigned as Chairman, President
and a director of Biometric. Mr. McCleery and Biometric have made an agreement,
dated May 31, 1999, that Mr. McCleery will be paid $4,000 per month as a
consultant plus severance pay of $6,000 per month, plus benefits and stock
options as determined by the board of directors. This agreement expires on June
30, 2001.
Also effective May 31, 1999, Robert M. Kamm succeeded Patrick McCleery as
President of Biometric, and became a director of Biometric. Mr. Kamm is Chief
Executive Officer of Biometric Identification. From June 1998 through July 1999,
Biometric has invested a total of US$5,000,000 in convertible debentures of
Biometric Identification. These debentures are convertible into the common stock
of Biometric Identification. Based on the current number of Biometric
Identification shares outstanding, if Biometric converted all of its debentures,
it would own 45% of the outstanding common stock of Biometric Identification.
For a discussion of this investment and the terms of the debentures, please see
"Biometric Security Corp. -- Description of Business of Biometric Security
Corp.," above.
In June 1998, Biometric agreed to acquire an interest in Biometric
Identification, Inc., a private California corporation. The Biometric
Identification acquisition was arranged by Rand Edgar Capital Corp., a private
company controlled by the spouses of Brian Edgar and William Rand. Mr. Rand is a
director of Biometric. Rand Edgar Capital originally entered into a memorandum
of understanding with Biometric Identification and with Arete Associates, a
private California company, dated March 18, 1998, amended and replaced May 20,
1998.
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<PAGE> 39
Rand Edgar Capital assigned its interest in the amended memorandum to Biometric
on May 21, 1998 in exchange for a fee of US$145,000, plus reimbursement of its
expenses. As of June 12, 1998, Rand Edgar Capital elected to take its fee in the
form of 715,575 common shares of Biometric to be issued at a price of $0.30 per
share for a total value of US$145,000. Biometric's closing stock price on the
VSE on June 12, 1998, was $0.28. These shares were to be issued in pro rata
tranches in accordance with the tranche advances being made by Biometric to
Biometric Identification. 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 Biometric. Rand Edgar Capital elected to take shares valued
at US$145,000 instead of cash in order to help Biometric conserve its cash.
"Special warrants" can be converted to shares at the holder's option. As at
December 31, 1998, Biometric had issued 250,450 shares to Rand Edgar Capital
under the terms of this agreement. As of August 11, 1999, Biometric issued the
remaining 465,125 shares to Rand Edgar Capital under the terms of this
agreement. For further information about this acquisition, please see "Biometric
Security Corp. -- Business of Biometric Security Corp.," above.
During 1998, Rand Edgar Capital loaned Biometric a total of $250,000. The
loan is unsecured 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 after December 31, 1998. As of August 11, 1999, Biometric also 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. The value
of these shares was based on Biometric's closing stock price on the VSE on
November 25, 1998, the date the loan was made, which was $0.19.
As part of a private placement completed on July 22, 1999, Barbara Chase,
the wife of Robert Chase, Chief Financial Officer and a director of Biometric,
and Wendy McCleery, the wife of Patrick McCleery, formerly Chairman, President
and a director of Biometric, participated in an offering of units at $0.20 per
unit. Each unit consisted of one common share and one non-transferable share
purchase warrant, and each warrant was exercisable for a period of two years at
a price of $0.20 in the first year and $0.23 in the second year. Mrs. Chase and
Mrs. McCleery each subscribed for 250,000 units. Biometric's closing stock price
on the VSE on July 22, 1999, was $0.20.
As part of a private placement completed on April 15, 1999, Patrick
McCleery and Wendy McCleery participated in an offering of units at $0.15 per
unit. Each unit consisted of one common share and one non-transferable share
purchase warrant, and each warrant was exercisable for a period of two years at
a price of $0.15 in the first year and $0.17 in the second year. Mr. McCleery
subscribed for 500,000 units and Mrs. McCleery for 500,000 units. Biometric's
closing stock price on the VSE on April 15, 1999, was $0.25.
As part of a private placement completed on January 29, 1999. Patrick
McCleery and Wayne Johnstone and Rand Edgar Capital and Wendy McCleery
participated in the offering of units at $0.15 per unit. Each unit consisted of
one common share and one non-transferable share purchase warrant, and each
warrant was exercisable for a period of two years at a price of $0.15 in the
first year and $0.17 in the second year. Mr. McCleery subscribed for 500,000
units, Mr. Johnstone for 96,050 units, Mrs. McCleery for 823,000 units and Rand
Edgar Capital for 661,500 units. Biometric's closing stock price on the VSE on
January 29, 1999, was $0.20.
As part of a private placement completed on May 15, 1998, Wendy McCleery,
Wayne Johnstone and Rand Edgar Capital participated in an offering of special
warrants at a price of $ 0.15 per special warrant. Each warrant was
exchangeable, at no additional cost, into one common share and one
non-transferable share purchase warrant that was exercisable for a period of two
years at a price of $0.15 in the first year and $0.17 in the second year. Mrs.
McCleery subscribed for 1,000,000 special warrants, Rand Edgar Capital
subscribed for 300,000 special warrants and Mr. Johnstone subscribed for 100,000
special warrants. Biometric's closing stock price on the VSE on May 15, 1998,
was $0.22.
During the fiscal year ended December 31, 1998, Biometric paid a total of
$56,561 to Rand Edgar Investment Corp. and Wayne Johnstone for consulting fees.
Rand Edgar Investment Corp. is owned equally by William A. Rand, a director of
Biometric, and Brian Edgar. Also during that fiscal year, Biometric paid
$120,059 in consulting fees to Patrick McCleery. Please see "Executive
Compensation -- Summary of Compensation" for more information about Mr.
McCleery's compensation when he was Chairman of Biometric. The terms of these
consulting arrangements were as fair to Biometric as those that Biometric could
have obtained from unrelated third parties and arm's-length negotiation.
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<PAGE> 40
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
No person has any material interest, direct or indirect, by way of
beneficial ownership of securities or otherwise, in matters to be acted upon at
the meeting. The term "person" includes each person:
- who has been a director, senior officer or insider of Biometric at any
time during and after Biometric's last fiscal year;
- who is a proposed nominee for election as a director of Biometric; or
- who is an associate or affiliate of a person specified above.
NUMBER OF DIRECTORS
Management of Biometric is seeking shareholder approval of a resolution
fixing the number of directors of Biometric at five for the ensuing year.
Approval of this resolution requires the vote of a majority of the shareholders
entitled to vote at the meeting.
ELECTION OF DIRECTORS
The term of office of each of the present directors expires at the meeting.
BIOMETRIC'S MANAGEMENT WILL PRESENT THE PERSONS NAMED BELOW AS THE NOMINEES FOR
ELECTION AT THE MEETING. Management believes that each of these nominees will be
able to serve as a director. Each director elected will hold office until
Biometric's next annual general meeting or until his successor is elected or
appointed, unless his office is vacated earlier in accordance with Biometric's
corporate governing documents or with the provisions of the Wyoming Business
Corporation Act.
The following table contains useful information about the nominees.
<TABLE>
<CAPTION>
COMMON SHARES
HELD (DOES NOT
NAME, AGE, OCCUPATION(1), PRESENT POSITION(S) DATE(S) SERVED INCLUDE OPTIONS
RESIDENT COUNTRY(2) WITH BIOMETRIC AS A DIRECTOR OR WARRANTS)(2)
<S> <C> <C> <C>
Robert M. Kamm, 42(3) President and Director Since May 31, 1999 None
Business Executive
U.S.A.
Robert F. Chase, 56 Chief Financial Since July 29, 1999 40,000
Business Executive Officer and Director
Canada
Chester Idziszek, 51 Director Since March 1, 1995 50,000
Business Executive
Canada
William A. Rand, 57(3) Director Since November 1, 1995 901,950(4)
Business Executive
Canada
Wayne Johnstone, 45(3) Director Since June 30, 1998 188,650
Chartered Accountant
Canada
</TABLE>
(1) Each nominee not elected at the last annual general meeting has held the
principal occupation or employment for at least five years.
(2) Biometric relies on the nominees for information as to country of residence,
principal occupation and number of shares beneficially owned by the nominees
directly or indirectly, or over which control or direction is exercised.
(3) Members of Biometric's Audit Committee.
(4) These shares are held by Rand Edgar Capital Corp., a private British
Columbia company of which Mr. Rand had been a director, but is not a
shareholder.
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<PAGE> 41
The employees and consultants forming Biometric's management team and
directors and their resumes are described briefly below.
Robert Kamm, President and Director
Mr. Kamm, age 42, has been President of Biometric since May 31, 1999 and a
director since that date. He is also Chief Executive Officer and a director of
Biometric Identification. He has served Biometric Identification in those
capacities since March 1998. Mr. Kamm is an experienced technology entrepreneur
and has started two previous technology companies. From May 1997 to March 1998,
Mr. Kamm was Chief Operating Officer and Chief Financial Officer of VideoActive
Corp. From January 1996 to May 1997, he was Senior Vice President of Monument
Mortgage, and from June 1994 to June 1995 he was President of Online Mortgage
Documents. Prior to obtaining his M.B.A., Mr. Kamm was employed by General
Motors Corporation's fuel systems division in manufacturing engineering
management. In this role, Mr. Kamm was responsible for divisional investment
planning and was also integrally involved in the development of GM's fuel
injection product line. Mr. Kamm received a B.S. degree in Economics and
Marketing from Alfred University in 1979, and received an M.B.A. in Finance from
the University of California (Los Angeles) in 1985.
Robert Chase, Chief Financial Officer and Director
Mr. Chase, age 56, has been Chief Financial Officer of Biometric since July
29, 1999 and a director since that date. In addition, he has been a director and
Chief Financial Officer of Biometric Identification since July 1999. Since 1998,
he has served as a director of Citation Resources Inc. and was its President
from September 1998 to July 1999. He is also President, Chief Executive Officer
and a director of Lexacal Investment Corp., having served in those capacities
since 1995. Since 1998, he has also served as President and a director of
Citation Resources Inc. He is also a director of Pacific Northern Gas Ltd. From
1989 to 1994, Mr. Chase was Senior Vice-President, Finance and Chief Financial
Officer of Westar Group Ltd. He received his Chartered Accountant designation
from the University of Manitoba in 1970.
Chester Idziszek, Director
Mr. Idziszek, age 51, is a director of Biometric. Mr. Idziszek devotes
approximately 10% of his time to Biometric. Mr. Idziszek has served Biometric in
this capacity since March 1, 1995. Mr. Idziszek is also the President and CEO
and a director of Adrian Resources Ltd., and a director of: Oromin Explorations
Ltd., Braddick Resources Ltd., Cross Lake Minerals Ltd. and Fresco Developments
Ltd. He is also President and a director of Madison Enterprises Corporation,
Buffalo Diamonds Ltd., Hyperion Resources Corp. and Maracote International
Resources Inc., formerly Cherry Lane Fashion Group. He was a director of
Arequipa Resources Ltd. between July 1993 and August 1996. 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 and Waseco Resources Inc. Of these
companies, Adrian Resources Ltd., Madison Enterprises Corporation and Maracote
International Resources Inc. each have a class of securities registered under
Section 12 of the Securities Exchange Act of 1934. Mr. Idziszek has a B.Sc.
(Geology) degree from University of Waterloo (1971) and an M.Sc. (Appl. Min.
Expl.) degree from the University of Waterloo.
William A. Rand, Director
Mr. Rand, age 57, is a director of Biometric. Mr. Rand devotes
approximately 10% of his time to Biometric. Mr. Rand has served Biometric 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 Biometric. 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 mineral resource companies. These companies include
39
<PAGE> 42
Consolidated Team Resources Corp., Dome Ventures, Inc., Broadlands Resources
Corp., International Curator Resources Ltd., International Uranium Corp.,
Lexacal Investment Corp., Lundin Oil AB, Red Sea Oil Corporation, Santa Catalina
Mining Corp., South Atlantic Resources Corp., Tanganyika Oil Co. Ltd., and Tenke
Mining Corp. Of the companies for which Mr. Rand is a director, Broadlands
Resources Ltd., International Curator Resources Ltd., International Uranium
Corp., Lundin Oil AB and Tenke Mining Corp. each have a class of securities
registered under Section 12 of the Exchange Act. 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, age 45, is a director of Biometric. Mr. Johnstone devotes
approximately 70% of his time to Biometric. Mr. Johnstone has served Biometric
in this capacity since June 30, 1998 and was a director of Biometric's
predecessor, Sonoma Resource Corp., from August 1989 to November 1995. He has
served as Corporate Secretary of Alantra Venture Corp. since June 1999. 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 Columbia
company. Mr. Johnstone has a B.Comm. degree from The University of British
Columbia (1978).
Saundra Zimmer, Secretary
Ms. Zimmer, age 36, is the Secretary of Biometric and is employed by
Biometric on essentially a full time basis. Ms. Zimmer devotes approximately 75%
of her time to Biometric. Ms. Zimmer has served Biometric as Secretary since
June 21, 1995 and was previously Secretary of Biometric from August 1989 and May
1993. Ms. Zimmer has been the Administrative Assistant of Biometric 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. She has been a director of
Alantra Venture Corp. since March 1998, and Corporate Secretary of Kaieteur
Resource Corporation since November 1, 1995.
INDEBTEDNESS OF DIRECTORS, EXECUTIVE AND SENIOR OFFICERS
Since the beginning of Biometric's last completed fiscal year, no director,
executive officer, senior officer or nominee for director of Biometric or any of
their associates has been indebted to Biometric or any of its subsidiaries. Also
during that time, none of these individuals was indebted to another entity,
where Biometric or a subsidiary either guaranteed that debt or otherwise
provided debt support by agreement, letter of credit or other similar
arrangement or understanding.
APPOINTMENT AND REMUNERATION OF AUDITOR
Shareholders will be asked to approve the appointment of KPMG LLP,
Chartered Accountants, as Biometric's auditor to hold office until the next
annual general meeting of the shareholders at a remuneration to be fixed by the
directors. KPMG was first appointed auditor of Biometric on June 12, 1984.
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<PAGE> 43
SPECIAL BUSINESS
INCENTIVE STOCK OPTIONS
Director, officer and employee stock options, commonly referred to as
incentive stock options, are a means of rewarding future services provided to
Biometric and are not intended as a substitute for salaries or wages or as a
means of compensation for past services rendered. The term "incentive stock
option" as used in this information circular may have a broader meaning than it
has under U.S. tax law, where the term may refer to options that meet U.S. tax
law requirements that enable those options to qualify for favorable treatment
under U.S. tax law.
Management proposes to present to the shareholders at the meeting a
resolution to grant to Biometric's directors, officers, employees and
consultants incentive stock options to purchase Biometric common shares, for
such periods, in such amounts and at such prices per share as the board of
directors may agree upon, all in accordance with the regulatory bodies and stock
exchanges having jurisdiction over Biometric. Approval of this resolution
requires a majority vote of the shareholders entitled to vote at the meeting.
The Vancouver Stock Exchange requires that a company receive the approval of its
shareholders before its insiders exercise their incentive stock options.
For the form of resolution being proposed for the grant of incentive stock
options, see Appendix I attached to this information circular.
CONSOLIDATION (REVERSE STOCK SPLIT) OF SHARE CAPITAL
GENERAL
At the meeting, Biometric's management will ask the shareholders to approve
a resolution to permit us to consolidate Biometric's share capital as described
below. Approval of this resolution requires a majority vote of the shareholders
entitled to vote at the meeting. Management would also like the consent of the
shareholders to not proceed with the consolidation, even if the resolution is
passed, if management subsequently concludes that it would not be in the best
interests of Biometric to proceed with the consolidation. If the shareholders
approve the resolution, that will authorize Biometric to consolidate its issued
share capital on the basis of one new common share without par value for every
existing five common shares without par value. Thus, the principal effect of the
consolidation will be to decrease to one-fifth the number of issued and
outstanding shares. As the consolidation only affects Biometric's issued share
capital, it will have no effect on Biometric's authorized share capital.
Management believes that a reverse stock split, and resulting share price
increase, may improve investors' perception of Biometric stock. Biometric's
stock currently trades in the $0.15 - $0.25 range, and this may be a
disincentive for investors, particularly institutional investors, to purchase
the stock since these investors typically focus on higher-priced stocks.
Institutional shareholders are an important part of Biometric's shareholder
base. Biometric does not know exactly how much Biometric stock is owned by
institutions, since many stockholders typically do not hold stock in their own
names. However, based on management's knowledge of the buyers in Biometric's
recent stock issuances, management believes that a significant portion of the
purchasers were institutional investors.
On September 10, 1999, the total number of Biometric's issued and
outstanding shares is 57,684,208. Since there are currently 40,562,780 stock
options and warrants outstanding, the total of Biometric's issued and
outstanding shares at the date of the consolidation may be different than the
total on the date of this information circular. The shares of Biometric subject
to outstanding options and warrants at the date of the approval of the
consolidation will also be proportionately reduced.
On September 10, 1999, the closing price of Biometric's common shares
trading on the Vancouver Stock Exchange under the symbol "BMS" was $0.17 per
share. After the consolidation the market will adjust the market price of the
shares. Theoretically, the share price should increase by five times. However,
experience shows that the share price usually settles at some price less than
the consolidation multiple times the then current market price.
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<PAGE> 44
For the form of resolution being proposed for the reverse stock split, see
Appendix I attached to this information circular.
MATERIAL TAX CONSEQUENCES OF THE CONSOLIDATION (REVERSE STOCK SPLIT)
The following is a summary of the United States federal income tax
consequences of the reverse stock split based on current law, including the
United States Internal Revenue Code of 1986, and is for general information
only. The tax treatment of a shareholder may vary depending upon his particular
facts and circumstances. Some shareholders, such as insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, non-resident
aliens, foreign corporations and persons who do not hold common shares of
Biometric as a capital asset, may be subject to special rules not discussed
below.
THIS SUMMARY OF U.S. TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND
IT IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE
TO ANY HOLDER OR PROSPECTIVE HOLDER OF BIOMETRIC'S COMMON SHARES. ACCORDINGLY,
HOLDERS AND PROSPECTIVE HOLDERS OF BIOMETRIC'S COMMON SHARES SHOULD CONSULT
THEIR OWN TAX ADVISORS ABOUT THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX
CONSEQUENCES OF THE CONSOLIDATION.
The receipt of new common shares, excluding fractional shares, in the
reverse stock split should be a non-taxable transaction under the Code for
federal income tax purposes. Consequently, a shareholder receiving new common
shares should not realize either gain or loss, or any other type of income as a
result of the reverse stock split. In addition, the aggregate tax basis of the
shareholder's common shares prior to the reverse stock split will carry over in
computing the tax basis of the shareholder's new common shares. Each shareholder
must allocate his cost basis in his common shares ratably among the aggregate of
- the total number of new common shares owned following the reverse stock
split and
- any fractional share.
TRANSFER OF DOMICILE TO BRITISH COLUMBIA
INTRODUCTION
Biometric was incorporated under the British Columbia Company Act. On
November 10, 1998, it transferred its domicile to the State of Wyoming, U.S.A.,
changed its name to Biometric Security Corp. and adopted Wyoming Articles of
Continuance. On November 12, 1998, Biometric increased its authorized capital to
an unlimited number of common shares.
Management is considering transferring Biometric out of Wyoming into
British Columbia. The result of that transfer would be that Biometric will no
longer be governed by the provisions of the Wyoming Business Corporation Act but
instead will be governed by the provisions of the British Columbia Company Act.
The transfer is subject to regulatory approval.
To effect the transfer under Wyoming law, Biometric's shareholders must
adopt a resolution approved by two-thirds or more of the shareholders entitled
to vote at the meeting. In addition, Biometric must:
- post a US$ 50,000 surety bond or must deposit that amount in an
appropriate Wyoming depository for six months
- furnish the Wyoming Secretary of State with audited financial statements
certified by an independent certified public accountant with an office in
the United States
- publish a public notice in Wyoming about the proposed transfer, for the
protection of creditors and minority stockholders, and
- pay a special toll charge to the Wyoming Secretary of State based on the
net value of Biometric's assets.
To effect the continuation under the laws in British Columbia, Biometric
will file an instrument of continuation with the British Columbia Registrar of
Companies. The instrument of continuation includes the Memorandum and Articles
which will become Biometric's new charter documents, the equivalent of which
under Wyoming law are Articles and By-Laws. If the transfer is completed, it
will be effective on the date the Wyoming Secretary of State issues a
certificate of transfer transferring Biometric to British Columbia and the
British Columbia Registrar of Companies issues a Certificate of Continuance.
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<PAGE> 45
As part of the resolution to transfer Biometric's corporate domicile from
Wyoming to British Columbia, management would be authorized to not proceed with
the transfer, even if the resolution is passed, if management subsequently
concludes that it would not be in the best interests of Biometric to proceed
with such matters.
For the form of resolution being proposed for the transfer, see Appendix I
attached to this information circular.
A copy of the instrument of continuation, which includes a copy of the
proposed new British Columbia Memorandum and Articles, may be reviewed at the
offices of Biometric's solicitors, Catalyst Corporate Finance Lawyers, 1100 -
1055 West Hastings Street, Vancouver, British Columbia, V6E 2E9. A copy may also
be obtained from Biometric upon request.
If completed, the transfer to British Columbia will not result in any
change of Biometric's business, assets, liabilities, net worth or management,
nor will it impair the rights of any creditors of Biometric. A particular
shareholder's holdings will not change. The transfer is not, in itself, a
reorganization, amalgamation or merger.
The major purpose of Biometric's proposal to transfer its domicile of
incorporation from Wyoming to British Columbia is to enable Biometric to have
its affairs governed by the law of the jurisdiction in which its principal
trading market is located. Biometric's shareholders are primarily located in
Canada, and Biometric expects that most of its financing efforts will be based
in Canada as well as other non-U.S. jurisdictions. At Biometric's present stage
of development, the costs outweigh the benefits of access to U.S. capital
markets. The transfer to British Columbia will therefore provide Biometric with
greater ease in raising funds.
Moreover, upon reconsideration of Biometric's recent transfer to Wyoming,
management believes that dual compliance with Canadian and U.S. securities laws
is expensive. Since Biometric has no present intention to terminate its
Vancouver Stock Exchange listing, management wants to be able to reduce costs by
transferring its domicile from the U.S. to Canada.
If completed, following its transfer to Canada, Biometric will still have
to comply with reporting requirements under U.S. securities laws, although these
requirements will be reduced because we will no longer be a U.S. company. For
example, we will still have to file with the SEC an annual report as well as
reports of events material to Biometric that we have publicly announced.
THE PROVISIONS OF THE BRITISH COLUMBIA COMPANY ACT AND THE WYOMING BUSINESS
CORPORATION ACT
If completed, on the completion of the transfer Biometric will be a British
Columbia corporation subject to the provisions of the British Columbia Company
Act. The following is a discussion of the material provisions of the British
Columbia Company Act, as well as a discussion of the material provisions of
Biometric's new British Columbia Articles. This discussion includes a summary of
differences between the British Columbia Company Act and the Wyoming Business
Corporation Act that are relevant to Biometric shareholders. The summary focuses
primarily on shareholder rights and safeguards. NOTHING THAT FOLLOWS SHOULD BE
CONSTRUED AS LEGAL ADVICE TO ANY PARTICULAR SHAREHOLDER OF BIOMETRIC AND
SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN LEGAL ADVISORS ABOUT ALL OF THE
IMPLICATIONS OF THE TRANSFER TO BRITISH COLUMBIA.
CORPORATE GOVERNANCE DOCUMENTS
Under the Wyoming Business Corporation Act, a Wyoming corporation is
required to have governance documents made up of Articles and By-Laws. Under the
British Columbia Company Act, a British Columbia corporation is required to have
governance documents made up of a Memorandum and Articles. Biometric's existing
Articles set forth its name and authorized share capital and will be replaced by
Biometric's new Memorandum. The new Articles will prescribe the corporate
governance procedures such as how directors' and shareholders' meetings are
held, how the books and records must be maintained, and how Biometric must
conduct its corporate affairs.
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AMENDMENTS TO CORPORATE GOVERNANCE DOCUMENTS
Both the British Columbia Company Act and the Wyoming Business Corporation
Act require shareholders to approve substantive changes to the governance
documents of a corporation. However, the required majority of votes necessary to
approve substantive changes to the governance documents under the British
Columbia Company Act is 75% of the votes cast whereas under the Wyoming Business
Corporation Act a simple majority of shareholders entitled to vote on the
proposed resolution is required. In the case of some fundamental changes, such
as the alteration of special rights and restrictions attached to issued shares
or a proposed merger, or transfer to another jurisdiction, a resolution
similarly approved by each class of shares is also required.
SHARE CAPITAL
When Biometric completes the transfer and the adoption of the proposed new
Memorandum and Articles, its authorized share capital will consist of one
hundred million common shares without par value. Biometric will continue to have
only one kind and class of shares and there will be no changes to the current
rights or restrictions attached to these shares. All of the current issued and
outstanding common shares of Biometric will be retained without any further
action by the shareholders.
All of the common shares of Biometric will rank equally as to voting rights
and entitlement to dividends. The holders of the common shares will be entitled
to receive notice of all meetings of shareholders and to attend and vote the
shares at the meetings. Each common share continues to carry with it the right
to one vote.
In the event of the liquidation, dissolution or winding-up of Biometric or
other distribution of its assets, the holders of the common shares will be
entitled to receive, on a pro rata basis, all of the assets remaining after
Biometric has paid out its liabilities. Distribution in the form of dividends,
if any, will be set by the board of directors.
Provisions for modification, amendment or variation of the rights attached
to the common shares of Biometric will be contained in Biometric's new Articles
and the British Columbia Company Act. Generally speaking, substantive changes to
the share capital, such as increasing the number of authorized shares, require
the approval of the shareholders by a resolution adopted by at least 75% of the
votes cast.
APPOINTMENT OF DIRECTORS
Under the British Columbia Company Act and Biometric's proposed new
Articles, the directors of Biometric will be 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 new Articles will
permit the directors to appoint directors to fill any vacancies that may occur
on the board. The Articles will 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 30% of the number of directors
appointed at the last annual general meeting. Individuals appointed as directors
to fill vacancies on the board or added as additional directors hold office like
any other director until the next annual general meeting at which time they may
be re-elected or replaced. A director may be removed between annual meetings by
way of a resolution adopted by at least 75% of the votes cast at a meeting of
the shareholders called for that purpose.
MANAGEMENT
The board of directors are responsible for the overall management of
Biometric. However, they are permitted to delegate much of their responsibility
to Biometric's officers and employees and to committees formed by the board.
Under the British Columbia Company Act, Biometric must have, at a minimum, a
President and a Secretary who must not be the same individual. As a "reporting
issuer" under the securities laws of British Columbia, Biometric must continue
to have an audit committee.
The directors and senior officers are required, under the British Columbia
Company Act, to act honestly, in good faith and with a view to the best
interests of Biometric. The directors have a fiduciary responsibility to
Biometric and they are required to disclose conflicts of interests.
44
<PAGE> 47
RIGHTS OF SHAREHOLDERS
In addition to the voting, dividend and liquidation rights attached to the
common shares as described under "Share Capital" above, the British Columbia
Company Act gives shareholders some other rights such as the right to call a
shareholders' meeting and to review the minute books of a corporation.
Under the British Columbia Company Act, a shareholder or a director may,
with court approval, start a legal action, called a "derivative action," on
behalf of a corporation. A derivative action may be brought to enforce a right,
duty or obligation owed to the corporation by another person or to obtain
damages for any breach of that right, duty or obligation.
The Wyoming Business Corporation Act also provides that a shareholder or a
director may start or defend a derivative action. A shareholder is entitled to
start a derivative action if:
- The shareholder was a shareholder of the corporation at the time of the
act or omission complained of, or became a shareholder through transfer
by operation of law from one who was a shareholder at the time; and
- The shareholder fairly and adequately represents the interests of the
corporation in enforcing the rights of the corporation.
Court approval is also required to discontinue, settle or dismiss any
action brought under any of these provisions.
The British Columbia Company Act provides a shareholder of a corporation
the right to apply to a court on the grounds that the corporation is acting or
proposes to act in a way that is prejudicial to the shareholder. This is known
as an "oppression action." When an oppression action is filed, the court may
make any order it sees fit, including an order to prohibit any act proposed by
the corporation. The Wyoming Business Corporation Act does not contain a
comparable provision.
Under the British Columbia Company Act, a shareholder or director of a
corporation may also defend any action brought against the corporation, provided
court approval is obtained. Court approval is also required to discontinue,
settle or dismiss any action brought under any of these provisions.
DISSENT RIGHTS UNDER THE WYOMING BUSINESS CORPORATION ACT
The Wyoming Business Corporation Act provides that shareholders of a
Wyoming corporation are entitled to dissent from some actions proposed to be
taken by the corporation.
Some of these corporate actions include:
- merging or consolidating with another entity if:
- shareholder approval is required for the merger or the consolidation
by the Wyoming Business Corporation Act or the articles of
incorporation, and the shareholder is entitled to vote on the merger
or consolidation; or
- the corporation is a subsidiary that is merged with its parent under
the Wyoming Business Corporation Act;
- agreeing to a plan of share exchange in which the corporation's shares
will be acquired, if the shareholder is entitled to vote on the plan;
- selling or exchanging all, or most, of the property of the corporation
other than in the ordinary course of business, if the shareholder is
entitled to vote on the sale or exchange. This includes a sale in
dissolution, but not a court-ordered sale or a sale for cash under a
plan by which all or most of the sale proceeds will be distributed to
the shareholders within one year after the sale;
45
<PAGE> 48
- amending the articles of the corporation in a way that materially and
adversely affects the shareholders' rights because it:
- alters or abolishes a preferential right of the shares;
- creates, alters or abolishes a right relating to redemption or
repurchase of the shares;
- alters or abolishes a pre-emptive right of the holder of the shares to
acquire shares or other securities;
- excludes or limits shareholders' voting rights, other than a reduction
in shareholder voting power due to issuance of additional shares or
other securities with similar voting rights; or
- reduces the number of shares owned by the shareholder to a fraction of
a share if that fractional share is to be acquired for cash under the
Wyoming Business Corporation Act; and
- any corporate action taken because of a shareholder vote to the extent
the articles of incorporation, by-laws, or a resolution of the board of
directors, provides for shareholder dissent rights.
A shareholder who exercises a right of dissent is entitled to be paid the
fair value of his or her shares as determined by agreement of the parties or by
order of the court, if the parties cannot reach agreement.
DISSENT RIGHTS UNDER THE BRITISH COLUMBIA COMPANY ACT
The British Columbia Company Act provides that shareholders are entitled to
dissent from certain actions proposed to be taken by a British Columbia
corporation, if the corporation proposes to:
- amend its articles to add, change or remove any provisions restricting
or limiting the issue, transfer or ownership of shares;
- amend its articles to add, change or remove any restrictions on the
business the corporation may carry on;
- merge with another corporation other than its parent or wholly-owned
subsidiary;
- transfer out of the jurisdiction of the British Columbia Company Act;
- sell, lease or exchange all or most of its property;
- lend money, either:
- to enable the borrower to purchase the corporation's shares or
convertible debt or
- where the loan is secured by the borrower's shares of the corporation,
or
- in any other case, unless there are reasonable grounds for believing
that, or the directors believe that, making the loan is in the best
interests of the corporation;
- convert from a specially limited corporation, as defined in the British
Columbia Company Act; and
- wind up, and in the process transfer or sell all or part of its business
or property to another corporation, where the acquiring corporation in
exchange issues shares, debentures or other securities to the
shareholders of the corporation being wound up.
A shareholder may exercise a right of dissent and is entitled to be paid
the fair value of his shares as determined by agreement of the parties or by
order of the court, if the parties cannot reach agreement.
DISCLOSURE OBLIGATIONS
Following the transfer to British Columbia, Biometric will remain a
"reporting issuer" in British Columbia and will therefore remain obliged to:
- prepare and issue news releases in British Columbia
- file material change reports with the British Columbia Securities
Commission
- prepare, file and provide to shareholders unaudited quarterly and audited
annual financial statements, and
46
<PAGE> 49
- otherwise comply with the British Columbia Securities Act.
Biometric's insiders, both existing and future, will continue to be subject to
the insider trading and reporting requirements of the British Columbia
Securities Act.
Similarly, following the transfer, Biometric, while it continues to qualify
as "foreign private issuer", as that term is defined under the Securities
Exchange Act of 1934 (U.S.), will remain a "reporting issuer" in the United
States subject to the requirements of the Exchange Act. Accordingly, it will
have to file with the SEC:
- an annual report on Form 20-F within six months after the close of each
fiscal year, and
- reports on Form 6-K about events material to Biometric, promptly after
Biometric publicly announces the event.
Biometric will no longer be subject to the Exchange Act requirements imposed on
"U.S. reporting issuers" such as quarterly reports on Form 10-Q, annual reports
on Form 10-K, and compliance with the proxy solicitation and insider trading
reporting rules.
MATERIAL TAX CONSEQUENCES OF THE TRANSFER TO BRITISH COLUMBIA
UNITED STATES INCOME TAX CONSEQUENCES OF THE TRANSFER TO BRITISH COLUMBIA
The following is a summary of United States federal income tax consequences
generally applicable to a U.S. holder of Biometric's common shares with respect
to the transfer. Please refer to "Canadian Income Tax Consequences of the
Transfer to British Columbia" below for a discussion of certain Canadian income
tax consequences. This summary does not address all potentially relevant United
States federal income tax matters and does not take into account or anticipate
any state, local or foreign tax considerations.
The following summary is based upon the sections of the Internal Revenue
Code of 1986, U.S. Treasury Regulations, published Internal Revenue Service
rulings, published administrative positions of the IRS and court decisions that
are currently applicable, any or all of which could be materially and adversely
changed, possibly on a retroactive basis, at any time.
This commentary is generally applicable to a holder of Biometric's common
shares who is a U.S. citizen or U.S. resident individual, a U.S. domestic
corporation or partnership, or a U.S. trust or estate. This summary does not
address the tax consequences to persons subject to highly specialized provisions
of United States federal income tax law. This summary is applicable to
shareholders of Biometric who hold their Biometric shares as capital property
and who deal at arm's length with Biometric.
THIS SUMMARY OF U.S. TAX CONSEQUENCES IS NOT INTENDED TO BE LEGAL OR TAX
ADVICE TO ANY HOLDER OR PROSPECTIVE HOLDER OF BIOMETRIC'S COMMON SHARES.
ACCORDINGLY, HOLDERS AND PROSPECTIVE HOLDERS OF BIOMETRIC'S COMMON SHARES SHOULD
CONSULT THEIR OWN TAX ADVISORS ABOUT THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX
CONSEQUENCES OF THE TRANSFER.
Discussion
A. Consequences to Biometric
General
Biometric's transfer to Canada from the United States would be treated, for
tax purposes only, as a transfer by Biometric of all of its property to a
fictional, newly incorporated wholly-owned British Columbia subsidiary in
exchange for the subsidiary's shares. Immediately following that exchange, there
would be a deemed distribution of the subsidiary's shares to the Biometric
shareholders and an exchange by them of their shares of Biometric for the
subsidiary's shares. The final result would be that the subsidiary would have
all the assets and liabilities of Biometric and the same shareholders as
Biometric but would, for U.S. tax purposes, be a Canadian corporation rather
than a U.S. corporation.
Generally, the exchange of property by a corporation solely for stock or
securities in another corporation would not require the recognition of gain or
loss to the exchanging corporation, pursuant to the U.S. tax code. However, the
tax code renders the exchange of assets of Biometric for the shares of this
fictional subsidiary taxable in the U.S. because the subsidiary is a foreign
corporation. As a result, Biometric would be taxable on
47
<PAGE> 50
the disposition of its property to the extent that the fair market value of the
property exceeds Biometric's historic basis, for U.S. tax purposes, in the
property.
There are no exceptions from the U.S. emigration tax which apply to a U.S.
corporation emigrating from the United States. Consequently, Biometric would be
taxable in the U.S. on its emigration to the extent that the fair market value
of its property exceeds its basis, for U.S. tax purposes, in the property.
Biometric would pay tax on the amount of any gain at regular U.S. corporate tax
rates.
Dividend and Interest Withholding Tax
After Biometric emigrates from the United States and becomes a Canadian
corporation it would be subject to a U.S. withholding tax on any dividends paid
to it by another U.S. corporation. The withholding tax of 15% is reduced to 5%
if Biometric holds 10% or more of the voting shares of the corporation paying
the dividend. In addition, a 10% U.S. withholding tax would apply to interest
received from Biometric's investments in U.S. debentures.
U.S. State Tax
Biometric has not researched the U.S. state tax consequences of the
transfer to Canada.
B. Consequences to Shareholders
U.S. Resident Shareholders
As discussed above, Biometric's transfer to Canada from the United States
would be treated for tax purposes as if Biometric had transferred all of its
property to a fictional, wholly-owned British Columbia subsidiary. Biometric's
shareholders would be considered to have exchanged their shares for the shares
of that fictional subsidiary. This fictional exchange would be considered a
taxable disposition by the U.S. resident shareholders of their Biometric shares.
The gain to the U.S. resident shareholders from the deemed disposition would be
equal to the fair market value of the subsidiary's shares received over the
basis of the disposed shares. The fair market value of the subsidiary's shares
should equal the fair market value of property transferred to the subsidiary,
net of liabilities. To the extent that this fair market value amount exceeds the
U.S. shareholders' basis in their Biometric shares, a capital gain would result.
The U.S. shareholders' basis in their Biometric shares would have been increased
by any gain recognized on the earlier immigration of Biometric to the United
States from Canada. Any capital gain on the Biometric shares would be taxable to
the U.S. resident individual shareholders at personal capital gains tax rates,
or a 20% tax rate for shares held longer than 12 months. U.S. corporate
shareholders would be taxable in the U.S. at regular U.S. corporate tax rates.
Dividend Withholding Tax
After Biometric emigrates from the United States, any dividends paid to
U.S. resident individual shareholders would be subject to 15% Canadian
withholding tax.
Canadian Resident Shareholders
Under the 1980 Canada-U.S. Income Tax Convention and the U.S. tax code, the
Canadian resident shareholders would only be taxable in the U.S. on the
disposition of the Biometric shares if Biometric was a "U.S. real property
interest" for U.S. tax purposes. In general, a U.S. real property interest is
defined to mean a private corporation, 50% of whose value is derived from U.S.
real property. As 50% or more of Biometric's value is not derived from U.S. real
property and Biometric is a public corporation, the Canadian resident
shareholders would not be subject to U.S. tax on the emigration of Biometric to
Canada.
CANADIAN INCOME TAX CONSEQUENCES OF THE TRANSFER TO BRITISH COLUMBIA
This commentary summarizes the Canadian income tax consequences, for both
shareholders and Biometric, of the transfer to British Columbia.
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<PAGE> 51
This summary is based on the current provisions of the Canadian Income Tax
Act, the regulations to the Tax Act and any proposed amendments to it publicly
announced before the date of this information circular. It is assumed that any
proposed amendments will be enacted in their present form and that no other
relevant amendments will come into force. However, there can be no certainty in
this regard.
The summary does not take into account or anticipate any other changes in
law, whether by judicial, governmental or legislative decision or action, nor
does it take into account the tax legislation of any province, state or other
local jurisdiction. Tax law and regulations, the judicial interpretation of them
and the administrative practices of tax authorities are constantly changing, and
some of these could be changed in a manner that will fundamentally alter the tax
consequences to Biometric or to any particular shareholder.
The tax summary is generally applicable to Biometric shareholders who are
individuals, except where expressly noted otherwise, who hold their Biometric
shares as capital property and who deal at arm's length with Biometric. This
summary generally does not address the tax consequences of entities subject to
specific provisions of Canadian income tax law.
NO ADVANCE TAX RULING OR INTERPRETATION HAS BEEN SOUGHT FROM ANY TAX
AUTHORITY WITH RESPECT TO ANY OF THE TRANSACTIONS DISCUSSED BELOW.
THIS SUMMARY IS NOT INTENDED TO CONSTITUTE ADVICE TO ANY PARTICULAR
SHAREHOLDER. EACH SHAREHOLDER SHOULD SEEK INDEPENDENT ADVICE BASED UPON THE
PARTICULAR CIRCUMSTANCES OF THAT SHAREHOLDER.
Summary
Several rules in Canadian tax legislation affecting corporations
immigrating to Canada are in the process of being changed. Several of these
changes will affect Biometric and the effect of the proposed rules has been
incorporated in the discussion below as if they had the effect of law.
The Tax Act requires a corporation to have a deemed year end occurring
immediately before immigrating to Canada and a new year beginning immediately
thereafter. Therefore, Biometric will have a year end immediately before
immigrating and a new taxation period beginning immediately thereafter.
Biometric will be able to choose any year end it desires as long as the year
does not exceed 53 weeks.
The Tax Act requires that at the year end noted above, the immigrating
company is deemed to dispose of all its property at fair market value on the day
of the immigration. Accordingly, Biometric will be deemed to have disposed of
all its assets at the fair value at the day of immigration; however, management
expects that Biometric will not be subject to significant gains because the cost
amount of its assets, namely the convertible debentures in Biometric
Identification, will have a fair value close to its cost amount. If a gain
exists, the gain will not be taxable in Canada except in circumstances
including, for example, the disposition of taxable Canadian property and assets
used in a business in Canada. Based on a review of Biometric's balance sheet as
at September 30, 1998 it does not appear that Biometric owns any assets that
would fall into these circumstances.
The Tax Act states that a corporation is deemed to reacquire, at fair
market value, the assets deemed disposed as noted above. Therefore, Biometric
will reacquire, at fair market value, all its assets owned at the date of
immigration. The cost amounts of these assets to Biometric will equal the fair
market value at the date of immigration.
Biometric is not currently a foreign affiliate of any resident of Canada.
That is, no shareholder owns outright, without including unexercised options and
warrants, either individually or as part of a related group, 10% or more of the
shares of Biometric. Based on this, the rules in the Tax Act relating to foreign
affiliates will not apply to Biometric.
Paid-up Capital
On immigrating to Canada, the Tax Act requires that the paid-up capital of
a corporation be reviewed in order to determine whether or not it will need to
be adjusted for income tax purposes. The adjustment is required when there is a
difference between the paid-up capital and the net of the assets and liabilities
of the
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<PAGE> 52
company. The adjustment is calculated by taking the deemed fair market value on
the deemed disposition reduced by all the debts owing by the corporation,
referred to as the "net book value", and subtracting from the net book value the
paid-up capital. When this amount is negative, indicating that the net book
value is less than the paid-up capital, the Tax Act requires that the paid-up
capital be reduced by the negative amount. This will reduce the amount of
capital that an immigrating company can return tax-free to its shareholders.
If the calculated amount is positive, indicating that the net book value
exceeds the paid-up capital, the Tax Act allows a corporation to elect to
increase the paid-up capital by the positive amount. Where a corporation chooses
to increase its paid-up capital, it must do so by notifying the Minister of its
intentions by electing within 90 days of immigrating. Where a corporation makes
this election, the shareholders of a corporation will be deemed to have received
a dividend equal to the positive amount. Depending on the particular taxpayer,
this deemed dividend may be taxable in Canada.
In Biometric's case, a preliminary review of the balance sheet as at
September 30, 1998 indicates that the net book value minus the paid-up capital
would result in a negative adjustment of approximately $10 million. This would
have the effect of reducing Biometric's paid-up capital from approximately $12
million to $2 million, thereby reducing the amount of capital that can be
returned to the shareholders on a tax-free basis by approximately $10 million.
In order to determine the actual adjustment required, it will be necessary to
review financial information at the date of immigration. A review by legal
counsel of the paid-up capital otherwise calculated may also be required.
Transferred Corporation
The Tax Act states that where a corporation has incorporated in one
jurisdiction and has been granted articles of continuance in another
jurisdiction the corporation is treated legally as if it were incorporated in
the new jurisdiction rather than in the old jurisdiction. This rule allows
foreign companies that have been granted articles of continuance into Canada the
ability to access tax-free rollovers, wind-ups and mergers afforded to residents
of Canada. This provision will result in Biometric being treated as if it had
been incorporated in Canada and not in Wyoming for the purposes of the Tax Act.
Consequently, Biometric will, for tax purposes, qualify as a Canadian
corporation. However, Biometric may not need to rely on this provision because
it was incorporated in Canada prior to acquiring articles of continuance to
Wyoming. Biometric may be in the position where its original incorporation in
Canada results in its being treated as a resident in any event.
CHANGE OF AUTHORIZED CAPITAL
The Wyoming Business Corporation Act permits Wyoming corporations to have
an authorized share capital consisting of an unlimited number of shares. The
British Columbia Company Act requires a corporation to have a stated authorized
share capital. Therefore, in order to effect the transfer to British Columbia,
in the event it occurs, management is also asking the shareholders to approve by
ordinary resolution the change in its authorized capital to one hundred million
common shares without par value.
As part of the resolution to change the authorized capital of Biometric,
management would be authorized to not proceed with the change in the authorized
share capital, even if the resolution is passed, if management subsequently
concludes that it would not be in the best interests of Biometric to proceed
with these matters.
For the form of resolution being proposed for the change of authorized
capital, see Appendix I attached to this information circular.
CHANGE OF NAME
Pursuant to the policies of the Vancouver Stock Exchange, the exchange on
which Biometric's shares are listed for trading, a corporation must change its
name when it consolidates its issued share capital. Therefore, Biometric
proposes to change its name as required by the stock exchange policy. Management
is asking shareholders to approve the change of name from "Biometric" to
"Safeguard Biometric Corp." upon the transfer of Biometric into the Province of
British Columbia or, if the transfer to British Columbia does not occur, to
amend its articles of incorporation to make that name change. To effect this
change, Biometric's
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shareholders must adopt a resolution approved by at least a majority vote of the
shareholders entitled to vote at the meeting.
As part of the resolution to change Biometric's name, management would be
authorized to not proceed with the name change, even if the resolution is
passed, if management subsequently concludes that it would not be in the best
interests of Biometric to proceed with the change of name.
For the form of resolution being proposed for the name change, see Appendix
I attached to this information circular.
OTHER BUSINESS
Management is not aware of any matters to come before the meeting other
than those set forth in the notice of meeting. If any other matter properly
comes before the meeting, the persons named in the proxy intend to vote the
shares represented by the proxy in accordance with their best judgment on that
matter.
ON BEHALF OF THE BOARD
"Robert M. Kamm"
--------------------------------
ROBERT M. KAMM
President
51
<PAGE> 54
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BIOMETRIC SECURITY CORP.
Audited Consolidated Financial Statements as of December
31, 1998
Auditors' Report to the Shareholders................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997.................................................. F-3
Consolidated Statements of Operations and Deficit for
the years ended
December 31, 1998, 1997 and 1996..................... F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1998,
1997 and 1996........................................ F-5
Notes to Consolidated Financial Statements............. F-6
Unaudited Interim Consolidated Financial Statements as of
June 30, 1999
Unaudited Interim Consolidated Balance Sheets as of
June 30, 1999,
December 31, 1998, and June 30, 1998................. F-22
Unaudited Interim Consolidated Statements of Operations
and Deficit for
the six months ended June 30, 1999 and 1998.......... F-23
Unaudited Interim Consolidated Statements of Cash Flows
for the six
months ended June 30, 1999 and 1998.................. F-24
Notes to Unaudited Interim Consolidated Financial
Statements............................................ F-25
BIOMETRIC IDENTIFICATION, INC.
Audited Financial Statements as of December 31, 1998
Report of Independent Accountants...................... F-31
Balance Sheet as of December 31, 1998.................. F-32
Statement of Operations for the year ended December 31,
1998.................................................. F-33
Statement of Cash Flows for the year ended December 31,
1998.................................................. F-34
Statement of Stockholders' Deficit for the year ended
December 31, 1998..................................... F-35
Notes to Financial Statements.......................... F-36
Unaudited Financial Statements as of December 31, 1997
Balance Sheet as of December 31, 1997.................. F-41
Statement of Operations for the year ended December 31,
1997.................................................. F-42
Statement of Stockholders' Deficit for the year ended
December 31, 1997..................................... F-43
Statement of Cash Flows for the year ended December 31,
1997.................................................. F-44
Notes to Financial Statements.......................... F-45
Unaudited Financial Statements as of December 31, 1996*
</TABLE>
- ---------------
* Financial Statements for the year ended December 31, 1996 have been excluded,
as the assets and results of operations for Biometric Identification, Inc.,
were immaterial for that year.
F-1
<PAGE> 55
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.
As discussed in notes 2(e) and 5, during 1999, the Company changed the
method of accounting for its investment in convertible debentures of Biometric
Identification Inc. from the fair value method, as an available-for-sale
investment, to the equity method. In accordance with Accounting Principles Board
Opinion No. 18, the consolidated financial statements for 1998 have been
restated to reflect the Company's share of the losses of Biometric
Identification Inc. since acquisition, and to eliminate the foreign exchange
translation gains and intercorporate interest income related thereto.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
February 23, 1999, except as to notes 2(e),
5 and 15(c), which are as of September 7, 1999
F-2
<PAGE> 56
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ----------
(RESTATED --
NOTE 5)
<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)......................................... 2,196,355 --
----------- ----------
$ 2,566,628 $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................................................ (11,521,264) (4,396,703)
----------- ----------
2,267,591 7,990,988
Continuing operations (note 1)
Commitments and contingencies (notes 5 and 13)
Subsequent events (notes 5, 6, 7 and 14)
----------- ----------
$ 2,566,628 $8,274,093
=========== ==========
</TABLE>
On behalf of the Board:
, Director
, Director
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 57
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
------------ ----------- -----------
(RESTATED --
NOTE 5)
<S> <C> <C> <C>
Revenue:
Interest and other income......................... $ 79,129 $ 175,185 $ 62,670
Gain on disposal of marketable securities......... -- -- 39,477
------------ ----------- -----------
79,129 175,185 102,147
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 loss (gain)...................... 5,834 (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
------------ ----------- -----------
1,287,586 720,699 826,609
------------ ----------- -----------
(1,208,457) (545,514) (724,462)
Other expenses:
Write-off of mineral properties (note 4).......... 4,592,237 1,615,898 534,853
Share of loss of Biometric Identification Inc.
(note 5)........................................ 1,275,000 -- --
Mineral exploration............................... -- 16,395 --
Loss on disposal of equipment..................... 48,867 22,088 --
------------ ----------- -----------
5,916,104 1,654,381 534,853
------------ ----------- -----------
Loss for the year...................................... (7,124,561) (2,199,895) (1,259,315)
Deficit, beginning of year............................. (4,396,703) (2,196,808) (937,493)
------------ ----------- -----------
Deficit, end of year................................... $(11,521,264) $(4,396,703) $(2,196,808)
============ =========== ===========
Loss per share......................................... $ (0.38) $ (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.
F-4
<PAGE> 58
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
------------ ----------- -----------
(RESTATED --
NOTE 5)
<S> <C> <C> <C>
Cash flows from operating activities:
Loss for the year..................................... $(7,124,561) $(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
Share of loss of Biometric Identification Inc.... 1,275,000 -- --
Loss on disposal of equipment.................... 48,867 22,088 --
Depreciation and depletion....................... 9,858 67,100 8,500
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................... (1,260,200) (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............................................ (3,471,355) -- --
----------- ----------- -----------
Net cash used in investing activities................... (3,264,345) (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.
F-5
<PAGE> 59
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 Resource 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.
(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
F-6
<PAGE> 60
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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:
At December 31, 1998, the investment in convertible debentures of BII (note
5) was classified by the Company as an available-for-sale investment, although
the Company intends to hold these debt securities until conversion or maturity.
Available-for-sale investments are carried at fair value, with any unrealized
holding gain or loss excluded from earnings and reported as a net amount in a
separate component of shareholders equity until realized. Interest income is
recognized in earnings when earned.
In mid-1999, the Company determined that it had the ability to exercise
significant influence over the operating, financing and investing activities of
BII due to a number of factors, including the President of BII becoming the
President and a director of the Company. 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 June 1999. In accordance with Accounting Principles Board ("APB")
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 $1,275,000 as its share of the loss of BII during the
period ended December 31, 1998. In addition, previously reported foreign
exchange translation gains of $85,875 relating to this investment have been
reversed, and accrued interest income of $79,989 has been eliminated in
connection with this change. The overall result of this change was to reduce the
investment as at December 31, 1998 by $1,440,864, increase the loss for the year
ended December 31, 1998 by $1,440,864, or $0.08 per share, and increase the
deficit as at December 31, 1998 by $1,440,864.
(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.
F-7
<PAGE> 61
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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>
F-8
<PAGE> 62
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
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
CERRO 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
transportation............. 3,271 -- 389 -- 3,660
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>
F-9
<PAGE> 63
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<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
transportation............... 77,563 -- 15,021 364 92,948
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.
In June 1998, the Company determined there was little prospect of further
work being carried out on the properties. Accordingly, all deferred expenditures
relating to the Cerro Toro Properties were written off at that time.
(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.
F-10
<PAGE> 64
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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 November 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>
1998
------------
(RESTATED --
SEE BELOW)
<S> <C>
Investment, at cost......................................... $3,471,355
Share of losses of BII...................................... 1,275,000
----------
$2,196,355
==========
</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.
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.
F-11
<PAGE> 65
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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>
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>
At December 31, 1998, the fair value of the Company's investment in
debentures of BII is estimated to approximate its carrying value.
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, and the May 12, 1999 scheduled acquisition was deferred
until July 23, 1999. All of the remaining scheduled acquisitions were made.
As discussed in note 2(e), during 1999, the Company changed the method of
accounting for its investment in BII to the equity method, and in accordance
with APB No. 18, has restated the consolidated financial statements for 1998 to
reflect the Company's share of losses of BII since acquisition, to reverse
previously reported foreign exchange translation gains related to the
investment, and to eliminate intercorporate interest income, as if the Company
had always accounted for its investment in BII using the equity method.
Summarized financial information for BII, adjusted to capitalize the
convertible debentures payable to the Company to equity, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
Working capital............................................. U.S. $ 2,615
Capital assets.............................................. 41,920
Convertible debentures payable to others.................... (332,500)
---------------
Net assets (deficiency)..................................... U.S. $ (287,965)
===============
Company's share of net assets (deficiency) (28.2%).......... $ (121,809)
Excess purchase price, net of amortization.................. 2,318,164
---------------
Investment in BII........................................... $ 2,196,355
===============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Revenues and other income.................................. U.S. $ 1,133,726
Expenses................................................... (5,068,335)
----------------
Loss for the year.......................................... U.S. $(3,934,609)
================
Company's share of loss for the period..................... $ 1,035,000
Amortization of excess purchase price...................... 240,000
----------------
$ 1,275,000
================
</TABLE>
F-12
<PAGE> 66
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
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.
F-13
<PAGE> 67
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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
========= ========= === ========== =========
</TABLE>
The continuity of share purchase warrants during 1997 is as follows:
<TABLE>
<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>
F-14
<PAGE> 68
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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
========= ========= ======== ========== =========
</TABLE>
- ---------------
(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:
<TABLE>
<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.
F-15
<PAGE> 69
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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>
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
------------ ----------- -----------
(RESTATED --
NOTE 5)
<S> <C> <C> <C>
Loss for the year:
As reported............................ $(7,124,561) $(2,199,895) $(1,259,315)
Compensation expense under FAS 123..... 286,558 152,888 458,384
----------- ----------- -----------
Pro forma loss for the year................. $ 7,411,119 $(2,352,783) $(1,717,699)
=========== =========== ===========
Pro forma loss per share.................... $ (0.39) $ (0.15) $ (0.19)
=========== =========== ===========
</TABLE>
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.
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.
F-16
<PAGE> 70
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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
- ---- --------------- ------------ ------------
(RESTATED -- (RESTATED --
NOTE 5) NOTE 5)
<S> <C> <C> <C>
Revenue............................................ $ -- $ 79,129 $ 79,129
General and administrative expenses................ -- 1,287,586 1,287,586
Other expenses..................................... 4,592,237 1,323,867 5,916,104
----------- ----------- -----------
Loss for the year.................................. $(4,592,237) $(2,532,324) $(7,124,561)
=========== =========== ===========
Capital expenditures (recovered)................... $ (78,279) $ 3,342,624 $ 3,264,345
=========== =========== ===========
Identifiable assets................................ $ -- $ 2,566,628 $ 2,566,628
=========== =========== ===========
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 share of
losses, 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.
F-17
<PAGE> 71
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
(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.
F-18
<PAGE> 72
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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.
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) Equity method of accounting for investments
Under Canadian GAAP, an investor changing from the cost to the equity
method of accounting for investments would record its share of the earnings or
losses of the investee only from the time the investor obtained the ability to
exercise significant influence over the investee. The investor's share of
earnings or losses of the investee prior to this time would not be recorded in
the accounts of the investor under Canadian GAAP. United States GAAP requires an
investor to restate prior period's financial statements to record the investor's
share of the earnings or losses of the investee, as if the investor had always
accounted for its investment in the investee using the equity method.
Accordingly, under Canadian GAAP, the $1,275,000 share of loss of BII recorded
for 1998 would not be recorded, and the intercorporate interest for 1998 of
$79,989 would not have been eliminated.
(d) 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
F-19
<PAGE> 73
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
sheet date adjustment being deferred and amortized over the remaining life of
the item. Under Canadian GAAP, the Company's investment in convertible
debentures of BII, prior to the change to the equity method of accounting for
such investments, would have been translated in this manner. United States GAAP
requires such gains or losses to be included in operations in the period.
Canadian and United States GAAP for foreign currency translation of investments
accounted for by the equity method are comparable. Accordingly, the foreign
exchange gain of $85,875 relating to the revaluation of the investment that was
previously reported under Canadian GAAP at December 31, 1998, would be retained
in the investment balance, but the effect would be recorded as a deferred credit
on the consolidated balance sheet and amortization of $9,551 would be recorded
for the 1998 fiscal year, under Canadian GAAP.
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
------------ ----------
(RESTATED --
NOTE 5)
<S> <C> <C>
Total assets under United States GAAP....................... $2,566,628 $8,274,093
Adjustments to increase investment to reverse share of
losses of BII............................................. 1,275,000 --
---------- ----------
To record foreign exchange translation gain................. 85,875 --
To reverse intercorporate interest eliminated............... 79,989 --
----------
Total assets under Canadian GAAP............................ $4,007,492 $8,274,093
========== ==========
</TABLE>
<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>
<TABLE>
<CAPTION>
1998 1997
------------ ----------
(RESTATED --
NOTE 5)
<S> <C> <C>
Shareholders' equity under United States GAAP............... $2,267,591 $7,990,988
Adjustments:
Reverse intercorporate interest eliminated............. 77,989 --
Amortization of deferred foreign exchange gain......... 9,551 --
Reverse share of losses of BII......................... 1,275,000 --
---------- ----------
1,364,540 --
---------- ----------
Shareholders' equity under Canadian GAAP.................... $3,632,131 $7,990,988
========== ==========
</TABLE>
F-20
<PAGE> 74
BIOMETRIC SECURITY CORP.
(FORMERLY SONOMA RESOURCE CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
(RESTATED --
NOTE 5)
<S> <C> <C> <C>
Loss for the year under United States
GAAP..................................... $ (7,124,561) $(2,199,895) $(1,259,315)
Adjustments:
Reverse intercorporate interest
eliminated.......................... 79,987 -- --
Amortization of deferred foreign
exchange gain....................... 9,551 -- --
Realized gain on disposal of trading
securities.......................... -- -- 32,923
Reverse share of losses of BII........ 1,275,000 -- --
------------ ----------- -----------
1,364,540 -- 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>
F-21
<PAGE> 75
BIOMETRIC SECURITY CORP.
CONSOLIDATED BALANCE SHEET
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1999 1998 1998
------------ ------------ ----------
(RESTATED -- (RESTATED --
NOTE 4) NOTE 4)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash.............................................. $ 277,403 $ 245,182 $1,655,323
Accounts receivable............................... 43,265 55,076 17,062
Prepaid expenses and deposits..................... 5,976 9,257 13,406
------------ ----------- ----------
326,644 309,515 1,685,791
Equipment and leasehold improvements................ 65,046 60,758 116,262
Investment (Note 4)................................. 2,755,042 2,196,355 1,837,500
------------ ----------- ----------
$ 3,146,732 $ 2,566,628 $3,639,553
============ =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................. $ 250,356 $ 148,262 $ 405,294
Loan payable...................................... -- 150,775 --
------------ ----------- ----------
250,356 299,037 405,294
CONTINGENT LIABILITY
(Notes 1 and 7(b))................................ 657,052 -- --
SHAREHOLDERS' EQUITY
Share capital (Note 1)............................ 16,176,836 13,128,263 12,947,609
Shares subscribed................................. -- 660,592 --
Deficit............................................. (13,937,512) (11,521,264) (9,713,350)
------------ ----------- ----------
2,239,324 2,267,591 3,234,259
------------ ----------- ----------
$ 3,146,732 $ 2,566,628 $3,639,553
============ =========== ==========
</TABLE>
On Behalf of the Board of Directors
<TABLE>
<S> <C>
/s/ ROBERT M. KAMM /s/ WAYNE JOHNSTONE
- -------------------------------------------- --------------------------------------------
Director Director
</TABLE>
F-22
<PAGE> 76
BIOMETRIC SECURITY CORP.
CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
1999 1998
------------ ------------
(RESTATED --
NOTE 4)
<S> <C> <C>
REVENUE
Interest (Note 4)......................................... $ 4,239 $ 65,603
------------ -----------
EXPENSES
Professional fees and registration costs.................. 532,268 246,113
Business consultants...................................... 97,394 23,600
Amortization.............................................. 4,902 9,427
Finder's fee (Note 4)..................................... 61,183 53,668
Foreign exchange.......................................... 1,246 (12,354)
Interest and bank charges................................. 1,195 687
Management fees........................................... 64,200 60,000
Offices expenses.......................................... 68,604 36,734
Listing costs............................................. 42,334 35,570
Salaries, wages and administration........................ 49,326 37,671
Travel and accommodation.................................. 92,315 58,070
------------ -----------
1,014,967 549,186
------------ -----------
(1,010,728) (483,583)
SHARE OF LOSS OF BII........................................ (1,570,375) --
RECOVERY (WRITE-OFF) OF MINERAL PROPERTIES.................. 164,855 (4,805,477)
LOSS ON DISPOSAL OF ASSETS.................................. -- (27,587)
------------ -----------
LOSS FOR THE PERIOD......................................... (2,416,248) (5,316,647)
DEFICIT, BEGINNING OF PERIOD
As previously reported.................................... (10,080,400) (4,396,703)
Adjustment for 1998 share of losses of BII (note 4)....... (1,440,864) --
------------ -----------
As restated............................................... (11,521,264) (4,396,703)
------------ -----------
DEFICIT, END OF PERIOD...................................... $(13,937,512) $(9,713,350)
============ ===========
LOSS PER SHARE.............................................. $ (0.07) $ (0.31)
============ ===========
</TABLE>
F-23
<PAGE> 77
BIOMETRIC SECURITY CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(RESTATED --
NOTE 4)
<S> <C> <C>
OPERATIONS
Loss for the period....................................... $(2,416,248) $(5,316,647)
Items not involving cash:
Share of losses of BII................................. 1,570,375 --
Depreciation........................................... 4,902 9,427
Loss on disposal of assets............................. -- 27,587
(Recovery) Write-off of mineral properties............. (164,855) 4,805,477
Changes in non-cash working capital items.............. 117,186 116,975
Non-cash fees.......................................... 61,183 53,668
----------- -----------
(827,457) (303,513)
----------- -----------
FINANCING
Issue of common shares, net............................... 2,983,850 506,250
Repayment of loan......................................... (150,775) --
----------- -----------
2,833,075 506,250
----------- -----------
INVESTMENTS
Capital assets............................................ (9,190) (13,054)
Mineral properties........................................ 164,855 (134,961)
Proceeds on disposal of fixed assets...................... -- 107,991
Increase in investment (Note 4)........................... (2,129,062) (1,837,500)
----------- -----------
(1,973,397) (1,877,524)
----------- -----------
CHANGE IN CASH.............................................. 32,221 (1,674,787)
CASH, BEGINNING OF PERIOD................................... 245,182 3,330,110
----------- -----------
CASH, END OF PERIOD......................................... $ 277,403 $ 1,655,323
=========== ===========
</TABLE>
F-24
<PAGE> 78
BIOMETRIC SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
1. 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 4)........................ 82,292 24,687
Carrying charges (Note 5).................... 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........................... 23,333,331 3,500,000
Exercise of warrants......................... 2,985,551 477,833
---------- -----------
47,301,375 17,106,096
Allotted during the period for:
Finder's fee (Note 4)........................ 203,941 61,183
Less: share issue costs........................ (333,391)
---------- -----------
47,505,316 16,833,888
Less: Contingent Liability (Note 7(b))......... (3,285,260) (657,052)
---------- -----------
Balance, June 30, 1999......................... 44,220,056 $16,176,836
========== ===========
</TABLE>
c) 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 10% commission totalling
$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.
d) Private Placement:
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 10%
commission, 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.
F-25
<PAGE> 79
BIOMETRIC SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
e) At June 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>
Warrants:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICE EXPIRY DATE
- ---------------- -------------- -----------
<S> <C> <C>
1,775,000 $0.17 March 31, 2000
660,000 $0.15 September 10, 1999
$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
----------
26,982,780
==========
</TABLE>
2. RELATED PARTY TRANSACTIONS
Fees of $138,750 (1998 -- $72,500; 1997 -- $142,228) were charged by
directors or companies affiliated with them for management, consulting and
administrative services.
3. DIRECTORS
Mr. R. Kamm
Mr. W. Rand
Mr. C. Idziszek
Mr. W. Johnstone
4. INVESTMENT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(RESTATED -- (RESTATED --
SEE BELOW) SEE BELOW)
<S> <C> <C>
Investment, at cost............................. $5,600,417 $3,471,355
Share of losses of BII.......................... (2,845,375) (1,275,000)
---------- ----------
$2,755,042 $2,196,355
========== ==========
</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 US
$5,000,000 of convertible
F-26
<PAGE> 80
BIOMETRIC SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
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.
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
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 June 30, 1999 the Company had acquired debentures of BII totalling US
$3,750,000 in accordance with the terms of the agreement and had issued 250,450
shares and allotted 286,233 shares at a total value of Cdn $161,005, 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 AMOUNT (US $) SHARES
----- ------------- -------
<S> <C> <C>
July 23, 1999.................................... 1,250,000 178,892
</TABLE>
Subsequent to June 30, 1999 the debenture acquisition scheduled to be made on
July 23, 1999 was made.
During 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 June 1999. In
accordance with 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 $1,570,375 as its share of the loss of BII for the six
months ended June 30, 1999, and $1,275,000 as its share of the loss of BII for
the period ended December 31, 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 relating 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, 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 increase deficit as at June 30, 1999 by
$2,889,092 and as at December 31, 1998 by $1,440,864.
5. 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,
1999, and the balance of the loan of $150,775 was repaid subsequent to December
31, 1998.
F-27
<PAGE> 81
BIOMETRIC SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
The Company 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.
6. MINERAL PROPERTIES
During June 1998, the Company changed its principal business activity from
mineral exploration to the development of fingerprint identification systems. As
the Company had determined there was little prospect of further work being
carried out on the properties, it wrote-off the deferred mineral exploration
expenditures at that time.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
ACQUISITION COSTS......................... $ -- $ -- $ 80,321
----------- ----------- -----------
EXPLORATION AND DEVELOPMENT EXPENDITURES
Access costs............................ -- 772 17,929
Assays.................................. -- 2,882 31,690
Communication........................... -- 332 15,802
Contract drilling, excavation and
trenching............................ -- -- 1,203,872
Contract labour and supervision......... -- 3,289 105,178
Data acquisition and analysis........... -- 1,537 44,367
Equipment and field supplies............ -- 5,417 168,674
Field administration.................... -- 16,895 73,192
Field car rental and transportation..... -- 3,499 58,966
Geological and geophysical.............. -- 69,281 311,192
Insurance............................... -- 5,762 18,523
Legal and other......................... -- 23,936 52,871
Travel and accommodation................ -- 1,359 74,553
----------- ----------- -----------
-- 134,961 2,176,809
----------- ----------- -----------
-- 134,961 2,257,130
----------- ----------- -----------
MINERAL PROPERTIES, BEGINNING OF PERIOD... -- 4,670,516 3,115,311
----------- ----------- -----------
-- 4,805,477 5,372,441
LESS: AMOUNTS WRITTEN-OFF................. -- (4,805,477) (1,002,218)
----------- ----------- -----------
MINERAL PROPERTIES, END OF PERIOD......... $ -- $ -- $ 4,370,223
=========== =========== ===========
</TABLE>
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
F-28
<PAGE> 82
BIOMETRIC SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
complete work commitments totalling US $1,500,000 to earn an additional 40%
interest in the properties. To June 30, 1999 the Company had received US
$150,000 and 100,000 shares relating to the option agreement.
7. 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.
8. SUBSEQUENT EVENTS
a) Corporate Continuance:
During the period 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 were to 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 was subsequently postponed
and has been scheduled for October 8, 1999.
b) Private Placement:
Subsequent to June 30, 1999 the Company completed a brokered private
placement of 10,000,000 units at $0.20 per unit for gross proceeds of
$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
F-29
<PAGE> 83
BIOMETRIC SECURITY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
share in the second year. The agent was paid a $186,000 commission, 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.
9. 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:
During 1999, the Company's principal operating segment is the
corporate segment, which includes holding investments, based on the way
management organizes and manages its business. In 1998, the Company
operated in both the mineral exploration and development segment and the
corporate segment, and accordingly, has included information on both
segments for 1999.
<TABLE>
<CAPTION>
MINERAL
EXPLORATION AND
DEVELOPMENT CORPORATE TOTAL
--------------- ----------- -----------
(RESTATED (RESTATED
-NOTE 4) -NOTE 4)
<S> <C> <C> <C>
1999
Revenue.................................. $ -- $ 4,239 $ 4,239
General and administrative............... -- 1,014,967 1,014,967
Recovery of mineral properties........... 164,855 -- 164,855
Share of losses of BII................... -- 1,570,375 1,570,375
----------- ----------- -----------
(Loss) Gain for the period............... $ 164,855 $(2,581,103) $(2,416,248)
=========== =========== ===========
Capital expenditures..................... $ (164,855) $ 2,138,252 $ 1,973,397
=========== =========== ===========
Identifiable assets...................... $ -- $ 3,146,732 $ 3,146,732
=========== =========== ===========
1998
Revenue.................................. $ -- $ 65,603 $ 65,603
General and administrative............... -- 549,186 549,186
Write-off of resource properties......... (4,805,477) -- (4,805,477)
Loss on sale of assets................... -- (27,587) (27,587)
----------- ----------- -----------
(Loss) Gain for the period............... $(4,805,477) $ (511,170) $(5,316,647)
=========== =========== ===========
Capital expenditures (recoveries)........ $ 134,961 $ 1,742,563 $ 1,877,524
=========== =========== ===========
Identifiable assets...................... $ -- $ 3,639,553 $ 3,639,553
=========== =========== ===========
</TABLE>
b) Geographic Information:
All of the Company's mineral exploration and development activities
during 1997 through 1999 were in Argentina.
Except for the Company's investment in BII and related share of
losses, substantially all of the Company's corporate activities during 1997
through 1999 were in Canada.
F-30
<PAGE> 84
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Biometric Identification, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, stockholders' deficit and cash flows present fairly, in all
material respects, the financial position of Biometric Identification, Inc. (the
"Company") at December 31, 1998, and the results of operations and cash flows
for the year then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/S/ PRICEWATERHOUSECOOPERS LLP
Woodland Hills, California
March 24, 1999
F-31
<PAGE> 85
BIOMETRIC IDENTIFICATION, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash................................................... $ 58,169
Accounts receivable, net of allowance of $40,000....... 380,183
Inventory.............................................. 231,807
Deferred taxes......................................... 49,332
Other current assets................................... 8,563
-----------
Total current assets.............................. 728,054
-----------
Property and equipment...................................... 49,129
Less: Accumulated depreciation and amortization............. (10,349)
-----------
Net property and equipment........................ 38,780
Other assets................................................ 3,140
-----------
Total assets...................................... $ 769,974
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable....................................... $ 556,252
Intercompany payable................................... 131,575
Payroll taxes payable and other accrued expenses....... 37,612
-----------
Total current liabilities......................... 725,439
Long-term debt:
Convertible notes...................................... 2,420,000
Convertible note payable to related parties............ 237,500
Interest payable....................................... 52,266
-----------
Total liabilities................................. 3,435,205
Commitments and contingencies (Note 8)
Stockholders' deficit:
Preferred stock, no par value, 30,000,000 shares
authorized; 14,155,629 shares issued at December 31,
1998.................................................. 2,784,167
Common stock, Class A, no par value, 90,000,000 shares
authorized; 1,000 shares issued at December 31,
1998.................................................. 280
Common stock, Class B, no par value, 10,000,000 shares
authorized; 830,625 shares issued at December 31,
1998.................................................. 58,144
Accumulated deficit.................................... (5,507,822)
-----------
Total stockholders' deficit....................... (2,665,231)
-----------
Total liabilities and stockholders' deficit....... $ 769,974
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 86
BIOMETRIC IDENTIFICATION, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Sales....................................................... $ 1,129,273
Cost of sales............................................... 1,510,869
-----------
Gross loss............................................. (381,596)
Sales, general and administrative expenses.................. 3,927,466
Other income................................................ (4,453)
-----------
Loss before income taxes.................................... (4,304,609)
Income tax benefit.......................................... (370,000)
-----------
Net loss............................................... $(3,934,609)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 87
BIOMETRIC IDENTIFICATION, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flow from operating activities:
Net loss.................................................. $(3,934,609)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 8,815
Tax benefit transferred to parent...................... (370,000)
Changes in assets and liabilities:
Accounts receivable.................................. (256,580)
Inventory............................................ (3,585)
Prepaid expenses and other assets.................... 3,840
Accounts payable..................................... 412,069
Accrued payroll and other accrued expenses........... 32,982
Interest payable..................................... 52,266
-----------
Net cash used in operating activities............. (4,054,802)
-----------
Cash flows from investing activities:
Purchase of property and equipment........................ (38,391)
-----------
Net cash used in investing activities............. (38,391)
-----------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 58,266
Proceeds from issuance of convertible debt................ 2,325,000
Proceeds from Parent Company.............................. 2,027,781
Repayments to Parent Company.............................. (275,000)
-----------
Net cash used in financing activities............. 4,136,047
-----------
Net increase in cash.............................. 42,854
Cash, at beginning of year.................................. 15,315
-----------
Cash, at end of year........................................ $ 58,169
===========
Cash payments made for:
Interest.................................................. $ 25,861
===========
Non-cash financing activities:
Conversion of third-party notes payable to preferred
stock.................................................. $ 192,500
===========
Conversion of related-party payables to preferred stock... $ 2,321,000
===========
Conversion of Class A to Class B common stock............. $ 58,144
===========
Conversion of common stock to preferred stock............. $ 270,677
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 88
BIOMETRIC IDENTIFICATION, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
PREFERRED STOCK CLASS A CLASS B
----------------------- ---------------------- -------------------
NUMBER OF NUMBER OF NUMBER OF ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
---------- ---------- ---------- --------- --------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997....................... -- -- 7,137,800 $ 270,825 -- -- $(1,573,213) $(1,302,388)
Stock sales................ -- -- 831,625 58,266 -- -- -- 58,266
Conversion of common stock
to preferred stock....... 7,137,800 $ 270,667 (7,137,800) (270,667) -- -- -- --
Conversion of common stock,
Class A to common stock
Class B.................. -- -- (830,625) (58,144) 830,625 $58,144 -- --
Conversion of notes payable
into preferred stock..... 7,017,829 2,513,500 -- -- -- -- -- 2,513,500
Net loss................... -- -- -- -- -- -- (3,934,609) (3,934,609)
---------- ---------- ---------- --------- ------- ------- ----------- -----------
Balance at December 31,
1998....................... 14,155,629 $2,784,167 1,000 $ 280 830,625 $58,144 $(5,507,822) $(2,665,231)
========== ========== ========== ========= ======= ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 89
BIOMETRIC IDENTIFICATION, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Biometric Identification, Inc. was incorporated in the State of California
on July 21, 1995. The principal business purpose of the Company is to develop
and market security applications for a fingerprint identification system. The
Company is a majority owned subsidiary of Arete Associates (the "Parent
Company").
In November 1997, the Company declared a 100 to one stock split of its
common stock.
2. MANAGEMENT'S PLANS:
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. During 1998, the Company incurred
a loss of $3,934,609 and has accumulated a deficit at December 31, 1998 of
$5,507,822. The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis and to obtain additional financing or refinancing as may be required to
ultimately attain profitability. In current commitments, the Company expects to
receive in cash approximately $2,675,000 from the agreement with Biometric
Security Corp. The Company is also actively pursuing other equity financing
commitments through discussion with potential investors. As of March 24, 1999,
the Company has received commitments worth $527,500 from outside investors and
an amount not to exceed $200,000 from the Parent Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
Revenues from product sales are recognized upon shipment and customer
acceptance.
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. Actual results could differ from those estimates.
Concentration Of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents
and trade receivables. The Company limits its credit risk with respect to cash
by maintaining cash balances with major financial institutions. At times during
the year cash and cash balances exceeded FDIC limits. The Company performs
assessments of the credit worthiness of its customers to minimize credit risk
with respect to trade receivables.
One customer accounted for approximately 30% of the Company's accounts
receivable at December 31, 1998 and approximately 38% of the Company's revenues
during the year ended December 31, 1998.
One vendor accounted for approximately 77% of inventory purchases during
the year ended December 31, 1998. At December 31, 1998 amounts payable to the
vendor were approximately 64% of accounts payable.
Cash And Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
F-36
<PAGE> 90
BIOMETRIC IDENTIFICATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventory
Inventory is stated at lower of cost (first-in, first-out method) or
market.
Property And Equipment
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided for on the straight-line method over the estimated
useful lives of the assets.
The estimated useful lives for asset classifications are as follows:
<TABLE>
<S> <C>
Furniture and fixtures...................................... 7 years
Office equipment............................................ 5 years
Telephone equipment......................................... 5 years
</TABLE>
Expenditures for repairs are expensed as incurred and additions, renewals
and betterments are capitalized.
Income Taxes
The Company provides for deferred income taxes on an asset and liability
method, whereby deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The Company files its income tax return on a consolidated basis with its
parent company. All provisions for federal and state income taxes, excluding
provisions for deferred income taxes, are provided for through notes
payable/receivable with related parties. The Company's current year income tax
benefit represents its parent's utilization of the net operating loss generated
in 1998 that could be carried back to prior years.
Fair Value Of Financial Instruments
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses, the
carrying amounts approximate fair value due to the short maturity of these
instruments. The carrying value of the line of credit and convertible notes
approximate fair value at December 31, 1998.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." The standard establishes guidelines for the reporting and
display of comprehensive income and its components in financial statements. The
Company has adopted the provisions of SFAS No. 130 during the year ended
December 31, 1998. The Company has no other comprehensive income components and
accordingly net income equals comprehensive income.
F-37
<PAGE> 91
BIOMETRIC IDENTIFICATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation Awards
SFAS No. 123, "Accounting for Awards of Stock-Based Compensation to
Employees," encourages, but does not require, companies to record compensation
cost for stock-based compensation plans at fair value. The Company has adopted
the disclosure requirements of SFAS No. 123, which involves pro forma disclosure
of net income under the provisions of SFAS No. 123, but has chosen to continue
accounting for stock-based employee compensation awards in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."
4. RELATED-PARTY TRANSACTIONS:
At December 31, 1998, notes payable totaling $237,500 were outstanding to
various officers of Arete Associates. The notes are unsecured and convertible
into common stock of the Company at a rate of $0.28 per share. The notes bear
interest at 8% per annum and mature in December 2002.
For the year ended December 31, 1998, debt due to the Parent Company
totaling $2,321,000 was converted into 6,330,329 shares of common stock.
The Company leases office space from the Parent Company. Rent expense paid
to the Parent Company amounted to $47,672 for the year ended December 31, 1998.
5. INVENTORY:
At December 31, 1998, inventory consisted of the following:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Raw materials............................................... $ 33,963
Finished goods.............................................. 197,844
--------
$231,807
========
</TABLE>
6. CONVERTIBLE NOTES:
In June 1998, BII entered into a $5,000,000 convertible debenture purchase
agreement (the "Purchase Agreement") with Biometric Security Corp. ("BSC"). The
Purchase Agreement provides for BSC to make tranche payments, as defined, which
bear interest equal to the lowest interest rate imputed under the Internal
Revenue Code of 1986, payable annually in arrears. The debentures may be
converted at the option of BSC at any time, into Series A preferred stock at a
specified conversion rate, as defined in the Purchase Agreement. The debentures
become convertible upon an initial public offering of BII. The debentures expire
in June 2003. The Purchase Agreement also requires the Company to maintain
certain non-financial covenants. At December 31, 1998, the holder had made
tranche payments to BII totalling $2,325,000.
At December 31, 1998, the Company had notes payable outstanding of $332,500
payable to various individuals (of which $237,500 are payable to related parties
[see Note 4]). The notes bear interest at 8% per annum and are convertible into
common stock at a rate of $0.28 per share. The notes mature December 2002.
F-38
<PAGE> 92
BIOMETRIC IDENTIFICATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
The income tax benefit for the year ended December 31, 1998 is as follows:
<TABLE>
<S> <C>
Current:
Federal................................................ $(364,507)
State.................................................. (5,493)
---------
(370,000)
Deferred:
Federal................................................ --
State.................................................. --
---------
--
---------
Income tax benefit.......................................... $(370,000)
=========
</TABLE>
The types of temporary differences between the tax bases of assets and
liabilities that give rise to the net deferred tax balance at December 31, 1997
and their approximate tax effects, are as follows:
<TABLE>
<S> <C>
Assets:
Allowance for doubtful accounts........................ $ 16,000
Accrued warranty....................................... 10,000
Accrued vacation....................................... 5,325
Net operating loss carryforwards....................... 1,047,060
Inventory reserve...................................... 6,257
State taxes and other.................................. 23,085
-----------
Gross deferred tax assets......................... 1,107,727
Less valuation allowance.................................... (1,058,395)
-----------
Deferred tax assets......................................... $ 49,332
===========
</TABLE>
At December 31, 1998, the net deferred tax assets are all current. The
Company has provided a valuation allowance against a portion of the deferred tax
assets based on management's current assessment of recoverability.
The portion of the Federal net operating loss carryforwards attributable to
the Company amounted to $2,977,662 at December 31, 1998 expiring in 2013. The
Company has various state net operating loss carryovers totaling approximately
$1,152,165 expiring in the years 2002 through 2018. The Company's ability to
utilize the net operating loss carryforwards may be limited in the event that a
change of control occurs in the future.
8. COMMITMENTS AND CONTINGENCIES:
The Company rents its facilities and certain equipment under various
operating leases agreements. The Company leases one facility which includes an
escalation clause based primarily on increases in the Consumer Price Index.
Minimum commitments under the various operating lease agreements are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C>
1999...................................................... $33,564
2000...................................................... 19,579
-------
Total minimum lease payments........................... $53,143
=======
</TABLE>
F-39
<PAGE> 93
BIOMETRIC IDENTIFICATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As further discussed in Note 4, the Company also leases certain space on a
month-to-month basis from the Parent. Rent expense for the year ended December
31, 1998 was $95,778, including amount paid to the Parent.
9. STOCKHOLDERS' DEFICIT:
The Company is authorized to issue two classes of common stock, which have
identical rights except that Class A common stock has exclusive voting rights.
Class B common stock is automatically convertible into Class A common stock upon
the closing of an initial public offering ("IPO").
The Company is also authorized to issue Preferred Stock. The preferred
stock has the following rights and preferences: the holders of the preferred
stock shall be entitled, when and as declared by the Board of Directors to a
dividend equal to $0.06 per share of preferred stock, payable in preference and
priority to any payment of dividend on the common stock; liquidation preference
in the event of a voluntary or involuntary liquidation, dissolution or winding
up of the Company; voting rights rank equally with Class A common stock; and
covenants restricting (a) authorization of additional shares, (b) merger or
consolidation of the Company with another corporation; (c) disposal of all or
substantially all of the property of the Company.
The Preferred Stock is convertible into one share of Class A common stock
at the option of the holder, at any time after the date of issuance. The
Preferred Stock will automatically convert to shares of common stock on the
closing of an IPO.
10. STOCK OPTION PLAN:
During 1998, the Company has formed the Stock Option Plan (the "Plan"). The
Plan provides employees, officers, directors and consultants options granted as
either "incentive" or "nonqualified" stock options. The Plan allows for option
grants for a maximum of 5,325,000 common shares. Incentive options are granted
at an exercise price no less than 100% of the fair value of the common stock on
the date of grant. Nonqualified options can be granted at an exercise price not
less than 85% of the fair value of the common stock on the date of grant. The
fair value at the date of grant is determined by the board of directors or the
committee that administers the Plan. Each option has a term of not more than ten
years and vests at a rate of 20% per year over five years from the date of
grant. At December 31, 1998, no options were granted.
F-40
<PAGE> 94
BIOMETRIC IDENTIFICATION, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED -- PREPARED BY MANAGEMENT)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets
Cash................................................... $ 15,315
Accounts receivable, net of allowance of $40,000 (Note
2).................................................... 123,603
Inventory (Note 3)..................................... 228,222
Deferred taxes (Note 6)................................ 49,332
Other current assets................................... 13,766
-----------
Total current assets.............................. 430,238
-----------
Property and equipment...................................... 10,738
Less accumulated depreciation and amortization.............. (1,534)
-----------
9,204
Other assets................................................ 1,777
-----------
$ 441,219
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable....................................... $ 144,183
Accrued payroll and pension expense.................... 4,636
Payroll taxes payable and other accrued expenses....... 31,055
-----------
Total current liabilities......................... 179,874
Long-term debt
Bank line of credit (Note 4)........................... 500,000
Convertible notes (Note 5)............................. 287,500
Notes payable to related parties (Note 2).............. 776,239
-----------
Total liabilities................................. 1,743,613
-----------
Commitments and contingencies (Note 7)
Stockholders' deficit (Note 8)
Common stock, no par value............................. 270,825
Accumulated deficit.................................... (1,573,219)
-----------
Total stockholders' deficit....................... (1,302,394)
-----------
$ 441,219
===========
</TABLE>
F-41
<PAGE> 95
BIOMETRIC IDENTIFICATION, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED -- PREPARED BY MANAGEMENT)
<TABLE>
<S> <C>
Sales....................................................... $ 493,756
Cost of Sales............................................... 1,032,042
-----------
Gross Loss.................................................. (538,287)
Sales, general and administrative expenses.................. 1,657,866
-----------
Loss before income taxes.................................... (2,196,152)
Benefit for income taxes (Note 6)........................... 858,706
-----------
Net income.................................................. $(1,337,446)
===========
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-42
<PAGE> 96
BIOMETRIC IDENTIFICATION, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED -- PREPARED BY MANAGEMENT)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996.................... 3,750,000 $ 12,499 $ (235,773) $ (223,274)
Issuance of common stock for cash............... 2,495,000 8,342 -- 8,342
Issuance of common stock for repayment of
debt.......................................... 892,800 249,984 -- 249,984
Net loss for the year........................... -- -- (1,337,446) (1,337,446)
--------- -------- ----------- -----------
Balance at December 31, 1997.................... 7,137,800 $270,825 $(1,573,219) $(1,302,394)
========= ======== =========== ===========
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-43
<PAGE> 97
BIOMETRIC IDENTIFICATION, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED -- PREPARED BY MANAGEMENT)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities
Net loss.................................................. $(1,337,446)
Adjustments to reconcile net loss to net cash used by
operating activities:
Provision for doubtful accounts........................ 40,000
Depreciation........................................... 1,534
Changes in assets and liabilities:
Accounts receivable.................................. (163,602)
Inventory............................................ (216,222)
Other current assets................................. (13,766)
Deferred income taxes................................ (49,332)
Other assets......................................... 1,386
Accounts payable..................................... 144,183
Accrued payroll and pension expense.................. 4,636
Payroll taxes payable and other accrued expenses..... 29,255
-----------
Net cash used by operating activities....................... (1,559,374)
-----------
Cash flows from investing activities
Purchase of property and equipment........................ (10,738)
-----------
Net cash used in investing activities....................... (10,738)
-----------
Cash flows from financing activities
Proceeds from issuance of common stock.................... 258,326
Proceeds from bank line of credit......................... 500,000
Proceeds form issuance of convertible debt................ 525,000
Proceeds from Parent Company.............................. 288,250
-----------
Net cash used in financing activities....................... 1,571,576
Net increase (decrease) in cash............................. 1,464
Cash, at beginning of year.................................. 13,851
Cash, at end of year........................................ $ 15,315
===========
Cash payments made for:
Interest.................................................. $ 37,984
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-44
<PAGE> 98
BIOMETRIC IDENTIFICATION, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED -- PREPARED BY MANAGEMENT)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of Business
Biometric Identification, Inc. is a Corporation which was incorporated in
the State of California on July 21, 1995. The principal business purpose of the
Company is to manufacture and sell fingerprint identification systems
internationally. The Company is a majority owned subsidiary of Arete Associates.
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. Actual results could differ from those estimates.
Inventory
Inventory is stated at the lower of cost first-in, first-out method, or
market.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided for on the straight-line method over the estimated
useful lives of the assets.
The estimated useful lives for asset classifications, are as follows:
Office furniture and equipment 7 Years
Organization Costs
As of December 31, 1997, organization costs consist primarily of
professional fees and costs incurred in the formation of the Company. These
costs are being amortized ratably over a fifteen year period.
Income Taxes
The Company provides for deferred income taxes on an asset and liability
method, whereby deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The Company files its income tax return on a consolidated basis with its
parent company. All provisions for federal and state income taxes, excluding
provisions for deferred income taxes, are provided for through notes
payable/receivable with related parties. The Company's current year income tax
benefit represents its parent's utilization of the 1997 loss.
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses, the
carrying amounts approximate fair value due to the short maturity of these
instruments. The carrying value of the line of credit and convertible notes
approximate fair value at December 31, 1997 since these notes substantially bear
interest at rates which approximate bank prime. The fair value of notes payable
to and convertible debt to stockholders cannot be estimated due to their related
party nature.
F-45
<PAGE> 99
BIOMETRIC IDENTIFICATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED -- PREPARED BY MANAGEMENT)
2. RELATED PARTY TRANSACTIONS
Notes Payable to Related Parties
At December 31, 1997, notes payable to related parties consist of the
following:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
8% notes payable to various officers of Arete Associates,
due in full December, 2002; unsecured. The notes are
convertible to common stock of the Company effective
January 1, 1998, and this option to convert expires
December 31, 1998, at a rate of $0.28 per share........... $237,500
Line of credit payable to Arete Associates, interest at the
yield rate of the Star Treasury Account at Star Bank, due
in full January 1, 1999; unsecured........................ 538,739
--------
$776,239
========
</TABLE>
Subsequent to December 31, 1997, the Company intends to convert $400,000 of
the line of credit payable to Arete Associates to common stock.
Accounts Receivable from Related Parties
At December 31, 1997, the Company has $25,160 in accounts receivable due
from related parties.
3. INVENTORY
At December 31, 1997, inventory consisted of the following:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Raw material................................................ $177,527
Work in progress............................................ 104,499
Finished goods.............................................. 21,839
--------
243,865
Less: allowance for obsolete inventory...................... (15,643)
--------
$228,222
========
</TABLE>
4. BANK LINE OF CREDIT
The Company has a line of credit secured by Arete Associates with a bank
totaling $500,000. Borrowings under the line of credit bear interest at 8.5% at
December 31, 1997. The line expires July 1, 1998.
On behalf of the Company and subsequent to year-end, Arete Associates paid
down the $500,000 line of credit. This payable to Arete Associates will be
converted into common stock of the Company.
5. CONVERTIBLE NOTES PAYABLE
At December 31, 1997, notes payable of $287,500 consist of 8% notes payable
to various individuals, due in full December, 2002; unsecured. The notes are
convertible to common stock of the Company effective January 1, 1998, and this
option to convert expires December 31, 1998, at a rate of $0.28 per share.
F-46
<PAGE> 100
BIOMETRIC IDENTIFICATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED -- PREPARED BY MANAGEMENT)
6. INCOME TAXES
The benefit for income taxes for the year ended December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Current:
Federal................................................ $712,562
State.................................................. 96,812
--------
809,374
--------
Deferred:
Federal................................................ 29,944
State.................................................. 19,388
--------
49,332
--------
Benefit for income taxes............................... $858,706
========
</TABLE>
The types of temporary differences between the tax bases of assets and
liabilities that give rise to the net deferred tax balance at December 31, 1997
and their approximate tax effects, are as follows:
<TABLE>
<S> <C>
ASSETS
Allowance for doubtful accounts........................ $16,000
Accrued warranty....................................... 10,000
Accrued vacation....................................... 2,662
Net operating loss..................................... 14,150
Inventory reserve...................................... 6,257
Other.................................................. 283
-------
Deferred tax assets......................................... $49,332
=======
</TABLE>
The Company has various state net operating loss carryovers totaling
approximately $295,000 expiring in the years 2002 through 2017.
7. COMMITMENTS
The Company currently leases office space under a non-cancellable operating
lease agreement which expires in October, 1998. Under the terms of the lease,
the Company pays monthly rent of $2,278. For the year ended December 31, 1997,
rent expense under the aforementioned non-cancellable operating lease agreement
was $25,179.
As of December 31, 1997, the future minimum lease payment for the year
ending December 31, 1998 is $23,395.
8. STOCKHOLDERS' DEFICIT
In November 1997, the Company declared a one hundred for one (100-1) split
of its common stock. The accompanying statement of stockholders' deficit gives
retroactive effect to the stock split.
9. STATEMENT OF CASH FLOWS
Non-Cash Investing Financing Activities
During the year ended December 31, 1997, the Company recognized the
following non-cash investing and financing activities that affected assets and
liabilities:
Accrued interest of $16,787 was added to the principal portion of
notes payable.
F-47
<PAGE> 101
BIOMETRIC IDENTIFICATION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED -- PREPARED BY MANAGEMENT)
Expenses in the amount of $555,819 were paid directly by the parent
company.
A tax benefit in the amount of $809,374 was utilized by the parent
company, and was offset against the payable to the parent company.
Issuance of stock in the amount of $249,984 for repayment of debt.
10. CONCENTRATIONS
Significant Customer
For the year ended December 31, 1997, the Company had a customer that
represented approximately 21% of total revenues. At December 31, 1997, the
amount due from this customer included in accounts receivable was $71,736.
Significant Vendor
For the year ended December 31, 1997, the Company had a vendor that
represented approximately 32% of total inventory purchases. At December 31,
1997, the amount due to this vendor included in accounts payable was $3,806.
F-48
<PAGE> 102
APPENDIX I
TEXT OF SPECIAL AND ORDINARY RESOLUTIONS
APPROVAL OF INCENTIVE STOCK OPTIONS
The following resolution, if approved by a majority of the shareholders
entitled to vote at the meeting ("Ordinary Resolution"), authorizes Biometric
to, in the absolute discretion of the directors, implement a stock option plan
and to grant incentive stock options to Biometric insiders, either individually
or under a stock option plan.
"WHEREAS the Company wishes to implement a stock option plan and grant to
directors, officers, employees and consultants of the Company, who may be
insiders of the Company (as that term is defined in the Securities Act (British
Columbia) ("Insiders")), incentive stock options, either individually or under a
stock option plan;
RESOLVED, as Ordinary Resolutions that:
1. the directors are authorized in their absolute discretion to implement a
stock option plan and to grant to directors, officers, employees and
consultants of the Company, who may be Insiders of the Company, incentive
stock options, either individually or under a stock option plan,
exercisable into an aggregate number of common shares of the Company, not
to exceed the prescribed number of the outstanding capital of the Company,
from time to time, within the policy of the Vancouver Stock Exchange;
2. incentive stock options previously granted to Insiders of the Company be
ratified, approved and confirmed;
3. the directors be authorized to amend incentive stock options held by
Insiders of the Company during the ensuing year; and
4. no further shareholder approval will be required prior to the exercising of
these options or amended options by Insiders for the ensuing year."
APPROVAL OF CONSOLIDATION OF SHARE CAPITAL (REVERSE STOCK SPLIT)
The following Ordinary Resolution authorizes Biometric to consolidate its
issued share capital (sometimes referred to as a reverse stock split) on the
basis of one new common share without par value for every existing five common
shares without par value (the "Consolidation").
Management would like the consent of the shareholders to not proceed with
the Consolidation in the event that the Ordinary Resolution respecting the
consolidation of the Biometric's share capital is passed by the shareholders at
the meeting and management subsequently concludes that it would not be in the
best interests of Biometric to proceed with the Consolidation. In this regard,
management will ask the shareholders to approve the following Ordinary
Resolution:
"WHEREAS Management proposes that the Company consolidate its issued share
capital on the basis of one new common share without par value for every five
existing common shares without par value (the "Consolidation");
AND WHEREAS management proposes to present an Ordinary Resolution to the
shareholders at the meeting with respect to the Consolidation and may
subsequently decide that it is not in the best interests of the Company to
proceed with such matters;
RESOLVED, as Ordinary Resolutions, that:
1. all of the issued common shares without par value be consolidated on the
basis of one new common share without par value for every five existing
common shares without par value;
2. the directors of the Company be hereby authorized, in their discretion, to
abandon the Consolidation without further approval of the shareholders; and
I-1
<PAGE> 103
3. the directors and officers of the Company, or any one of them, be hereby
authorized and directed to perform all such acts, deeds and things and
execute, under the seal of the Company or otherwise, all such documents,
agreements and other writings as may be required to give effect to the true
intent of this resolution."
APPROVAL OF CONTINUATION
The following resolution, if approved by two-thirds (2/3) or more of the
shareholders entitled to vote at the meeting ("Special Resolution"), authorizes
Biometric to complete the transfer of Biometric out of Wyoming and the
continuation of Biometric into British Columbia (the "Continuation").
"WHEREAS the Company proposes to transfer out of the State of Wyoming under
the jurisdiction of the Wyoming Business Corporations Act ("Wyoming Business
Corporation Act") and continue into British Columbia (the "Continuation") under
the jurisdiction of the British Columbia Company Act (the "British Columbia
Company Act");
AND WHEREAS the management proposes to present a Special Resolution to the
shareholders at the meeting with respect to the Continuation and may
subsequently decide that it is not in the best interests of the Company to
proceed with such matters;
RESOLVED, as Special Resolutions, that:
1. the Company be hereby authorized to make application to the Wyoming
Secretary of State (the "Wyoming Secretary") for approval of the proposed
transfer of the Company out of Wyoming and to the B.C. Registrar of
Companies (the "B.C. Registrar") for approval of the proposed continuation
of the Company into British Columbia continuing the Company as if it had
been incorporated under the British Columbia Company Act;
2. the Company approve and, upon the Continuation, adopt the Memorandum (the
"British Columbia Memorandum") in the form approved by the directors of the
Company, the British Columbia Memorandum to come into effect when the B.C.
Registrar issues a Certificate of Continuation continuing the Company as if
it had been incorporated under the British Columbia Company Act and the
Wyoming Secretary issues a Certificate of Transfer to transfer the Company
out of the State of Wyoming;
3. the Company approve and, upon the Continuation, adopt the Articles (the
"British Columbia Articles") in the form approved by the directors of the
Company, the British Columbia Articles to come into effect when the B.C.
Registrar issues a Certificate of Continuation continuing the Company as if
it had been incorporated under British Columbia Company Act and the Wyoming
Secretary issues a Certificate of Transfer to transfer the Company out of
the State of Wyoming;
4. the directors of the Company be hereby authorized, in their discretion, to
abandon or amend the application for continuation of the Company under the
British Columbia Company Act without further approval of the shareholders;
and
5. the directors and officers of the Company, or any one of them, be hereby
authorized and directed to perform all such acts, deeds and things and
execute, under the seal of the Company or otherwise, all such documents,
agreements and other writings as may be required to give effect to the true
intent of this resolution."
APPROVAL OF CHANGE OF AUTHORIZED CAPITAL
Pursuant to the proposed continuation, management proposes to change
Biometric's authorized capital and, accordingly, the following Ordinary
Resolution will be presented to shareholders at the meeting for approval.
"WHEREAS the Company wishes to change its authorized capital upon
continuation into the Province of British Columbia (the "Continuation");
RESOLVED, as Ordinary Resolutions, that:
1. the Company change its authorized capital upon continuation of the Company
into British Columbia;
I-2
<PAGE> 104
2. the Company approve and, upon the Continuation, adopt the Memorandum (the
"British Columbia Memorandum") in the form approved by the directors of the
Company having the effect, among other things, of reducing the authorized
capital of the Company to one hundred million (100,000,000) common shares
without par value, in substitution for the existing Articles of
Incorporation of the Company and its existing authorized capital, the
change of authorized capital to come into effect when the British Columbia
Memorandum is submitted to the B.C. Registrar and the B.C. Registrar issues
a Certificate of Continuation continuing the Company as if it had been
incorporated under the British Columbia Company Act and the Wyoming
Secretary of State releases a Certificate of Transfer to transfer the
Company out of the State of Wyoming;
3. the directors of the Company be hereby authorized, in their discretion, to
abandon the change of the Company's authorized capital without further
approval of the shareholders; and
4. the directors and officers of the Company, or any one of them, be hereby
authorized and directed to perform all such acts, deeds and things and
execute, under the seal of the Company or otherwise, all such documents,
agreements and other writings as may be required to give effect to the true
intent of this resolution."
APPROVAL OF NAME CHANGE
Management proposes to change the name of the Company and, accordingly, the
following Ordinary Resolution will be presented to shareholders at the meeting
for approval.
"WHEREAS the Company wishes to change its name to "Safeguard Biometric
Corp." upon continuation into the Province of British Columbia (the
"Continuation") or, if the Continuation does not occur, to amend its articles of
incorporation to make that name change;
RESOLVED, as Ordinary Resolutions, that:
1. the Company change its name upon continuation of the Company into British
Columbia, to "Safeguard Biometric Corp." or such other name as may be
resolved by the board of directors of the Company in their absolute
discretion, and which may be acceptable to the regulatory authorities;
2. the Company approve and, upon the Continuation, adopt the Memorandum (the
"British Columbia Memorandum") in the form approved by the directors of the
Company having the effect, among other things, of changing the name of the
Company to "Safeguard Biometric Corp.", or such other name as may be
approved by the B.C. Registrar of Companies (the "B.C. Registrar"), in
substitution for the existing Articles of Incorporation of the Company and
its existing name, the change of name to come into effect when the British
Columbia Memorandum is submitted to the B.C. Registrar and the B.C.
Registrar issues a Certificate of Continuation continuing the Company as if
it had been incorporated under the British Columbia Company Act and the
Wyoming Secretary of State releases a Certificate of Transfer to transfer
the Company out of the State of Wyoming;
3. if the Continuation does not occur, the Company amend its articles of
incorporation to change the name of the company to "Safeguard Biometric
Corp." or such other name as may be resolved by the board of directors of
the Company in their absolute discretion and which may be acceptable to the
regulatory authorities, and that articles of amendment to the articles of
incorporation be filed with the Wyoming Secretary of State to effect the
change of the Company's name;
4. the directors of the Company be hereby authorized, in their discretion, to
abandon the change of the Company's name without further approval of the
shareholders; and
5. the directors and officers of the Company, or any one of them, be hereby
authorized and directed to perform all such acts, deeds and things and
execute, under the seal of the Company or otherwise, all such documents,
agreements and other writings as may be required to give effect to the true
intent of this resolution."
I-3
<PAGE> 105
PROXY
THIS PROXY IS SOLICITED BY MANAGEMENT OF BIOMETRIC SECURITY CORP. (THE
"COMPANY") FOR USE AT THE ANNUAL GENERAL MEETING OF THE SHAREHOLDERS (THE
"MEETING") TO BE HELD ON FRIDAY, OCTOBER 29, 1999 AT 10:00 A.M. (LOCAL TIME IN
VANCOUVER, B.C.) AND ANY ADJOURNMENT THEREOF.
The undersigned shareholder of the Company hereby appoints ROBERT M. KAMM,
President of the Company, or failing this person, SAUNDRA ZIMMER, the Secretary
of the Company, or in the place of both of the foregoing,
- ------------------------------------ (PLEASE PRINT NAME), as proxyholder for and
on behalf of the undersigned, with power of substitution, to attend, act and
vote for and in the name of the undersigned at the meeting and at every
adjournment thereof, with respect to all or
- ------------------ of the common shares of the Company registered in the name of
the undersigned. Unless otherwise expressly stated herein by the undersigned,
receipt of this proxy duly executed and dated, revokes any former proxy given to
attend and vote at the meeting and at any adjournment thereof. UNLESS THE
UNDERSIGNED DIRECTS OTHERWISE, THE NOMINEE IS HEREBY INSTRUCTED TO VOTE THE
COMMON SHARES OF THE COMPANY HELD BY THE UNDERSIGNED AS FOLLOWS:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----- -------- -------
<C> <S> <C> <C> <C> <C>
<CAPTION>
FOR AGAINST ABSTAIN
----- ------- -------
<C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<C> <S> <C> <C> <C>
1. To fix the number of directors at five [ ] [ ] [ ]
FOR WITHHOLD
----- --------
2. To elect Robert M. Kamm, Chester Idziszek,
William A. Rand, Robert F. Chase and Wayne Johnstone
directors of the Company [ ] [ ]
3. To approve the appointment of KPMG LLP as independent
auditors for the year 1999 [ ] [ ]
FOR AGAINST ABSTAIN
----- -------- -------
4. To approve granting to the directors, officers,
employees and consultants of the Company of incentive
stock options to purchase common shares of the Company [ ] [ ] [ ]
5. 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
6. To authorize the continuation (transfer)
of the Company into the Province of British Columbia [ ] [ ] [ ]
7. 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 [ ] [ ] [ ]
8. To authorize a change of the name of the Company [ ] [ ] [ ]
9. To approve the transaction of other business [ ] [ ] [ ]
</TABLE>
THE UNDERSIGNED SHAREHOLDER HEREBY REVOKES ANY PROXY PREVIOUSLY GIVEN TO
ATTEND AND VOTE AT THE MEETING.
SIGNATURE:
------------------------------------------------------------ DATE:
------------------------------------------------------------
(PROXY MUST BE SIGNED AND DATED)
------------------------------------------------------------
(PRINT NAME)
If someone other than the named shareholder signs this Proxy on behalf of
the named shareholder, documentation acceptable to the Chairman of the
meeting must be deposited with this Proxy granting signing authority to
the person signing the proxy.
To be used at the meeting, this Proxy must be received at the offices of
PACIFIC CORPORATE TRUST COMPANY by mail or by fax not less than 48 hours
(excluding Saturdays, Sundays and holidays) prior to the meeting or
delivered to the Chairman of the meeting on the day of the meeting prior
to its commencement. The mailing address of PACIFIC CORPORATE TRUST
COMPANY, IS SUITE 830 - 625 HOWE STREET, VANCOUVER, BRITISH COLUMBIA, V6C
3B8 and its fax number is (604) 689-8144.
<PAGE> 106
1. IF THE SHAREHOLDER'S SECURITIES ARE HELD BY AN INTERMEDIARY (E.G. A BROKER)
AND THE SHAREHOLDER WISHES TO ATTEND THE MEETING TO VOTE ON THE RESOLUTIONS,
please insert the shareholder's name in the blank space provided, do not
indicate a voting choice by any resolution, sign and date and return the
Proxy in accordance with the instructions provided by the intermediary.
Please contact the intermediary if there are any questions. At the meeting a
vote will be taken on each of the resolutions as set out on this Proxy and
the shareholder's vote will be counted at that time.
2. IF THE SHAREHOLDER CANNOT ATTEND THE MEETING BUT WISHES TO vote on the
resolutions, the shareholder can APPOINT ANOTHER PERSON, who need not be a
shareholder of the Company, to vote according to the shareholder's
instructions. To appoint someone other than the nominees named by management,
please insert your appointed proxyholder's name in the space provided, sign
and date and return the Proxy. Where no choice on a resolution is specified
by the shareholder, this Proxy confers discretionary authority upon the
shareholder's appointed proxyholder to vote for or against or withhold vote
with respect to that resolution, provided that with respect to a resolution
relating to a director nominee or auditor, the proxyholder only has the
discretion to vote or not vote for such nominee.
3. IF THE SHAREHOLDER CANNOT ATTEND THE MEETING BUT WISHES TO vote on the
resolutions and to APPOINT ONE OF THE NOMINEES NAMED BY MANAGEMENT as
proxyholder, please leave the wording appointing a nominee as shown, sign and
date and return the Proxy. Where no choice is specified by a shareholder on a
resolution shown on the Proxy, a nominee of management acting as proxyholder
will vote the securities as if the shareholder had specified an affirmative
vote.
4. The securities represented by this Proxy will be voted or withheld from
voting in accordance with the instructions of the shareholder on any ballot
of a resolution that may be called for and, if the shareholder specifies a
choice with respect to any matter to be acted upon, the securities will be
voted accordingly. With respect to any amendments or variations in any of
the resolutions shown on the Proxy, or matters which may properly come
before the meeting, the securities will be voted by the nominee appointed as
the proxyholder, in its sole discretion, sees fit.
5. If the shareholder votes by completing and returning the Proxy, the
shareholder may still attend the meeting and vote in person should the
shareholder later decide to do so. To vote in person at the meeting, the
shareholder must revoke the Proxy in writing as set forth in the Information
Circular.
6. This Proxy is not valid unless it is dated and signed by the shareholder or
by the shareholder's attorney duly authorized by the shareholder in writing,
or, in the case of a corporation, by its duly authorized officer or attorney
for the corporation. If the Proxy is executed by an attorney for an
individual shareholder or joint shareholders or by an officer or an attorney
of a corporate shareholder, the instrument so empowering the officer or the
attorney, as the case may be, or a notarial copy thereof, must accompany the
Proxy.
7. To be valid, this Proxy, duly dated and signed, must arrive at the office of
the Registrar and Transfer Agent of the Company not less than 48 hours
(excluding Saturdays, Sundays and holidays) prior to the time for holding
the meeting, or delivered to the Chairman of the meeting prior to the
commencement of the meeting.
---
---
---
---
<PAGE> 107
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL GENERAL MEETING OF SHAREHOLDERS
- --------------------------------------------------------------------------------
Notice is hereby given that the annual general meeting (the "Meeting") of
the shareholders of Biometric Security Corp. (the "Company") will be held on
Friday, October 29, 1999, at Suite 1940 - 400 Burrard Street, Vancouver, British
Columbia, Canada, at the hour of 10:00 a.m. (local time in Vancouver, B.C.) for
the following purposes:
1. To pass a resolution adopted by a majority (greater than 50%) of the shares
entitled to vote at the Meeting (an "Ordinary Resolution") to fix the
number of directors at five;
2. To pass an Ordinary Resolution to elect five members of the Board of
Directors to hold office until the annual general meeting of shareholders
in 2000;
3. To pass an Ordinary Resolution to act upon the ratification of the
appointment of KPMG LLP as independent auditors for the year 1999;
4. To pass an Ordinary Resolution to approve the granting to the directors,
officers and employees of the Company of incentive stock options to
purchase common shares of the Company;
5. To pass an Ordinary Resolution authorizing the consolidation of the issued
share capital of the Company on the basis of one new common share without
par value for every five existing common shares without par value;
6. To pass a resolution adopted by two-thirds or more of the shares entitled
to vote at the Meeting (a "Special Resolution") authorizing the Company to
change its jurisdiction of incorporation from the State of Wyoming to the
Province of British Columbia by way of filing an Instrument of Continuance
and adopting a Memorandum and Articles prepared in accordance with the
British Columbia Company Act;
7. To pass an Ordinary Resolution authorizing the Company to reduce its
authorized share capital to one hundred million common shares without par
value if the Company continues into British Columbia;
8. To pass an Ordinary Resolution authorizing the Company to change the
Company's name to "Safeguard Biometric Corp." if the Company completes the
consolidation of its issued share capital; and
9. To approve the transaction of such other business as may properly come
before the Meeting.
ACCOMPANYING THIS NOTICE IS A PROXY STATEMENT/PROSPECTUS CONTAINING AN
INFORMATION CIRCULAR AND A FORM OF PROXY.
Shareholders unable to attend the Meeting in person should read the notes
to the enclosed Proxy and complete and return the Proxy to the Company's
Registrar and Transfer Agent, Pacific Corporate Trust Company, Suite 830, 625
Howe Street, Vancouver, B.C., Canada V6C 3B8, not less than 48 hours (excluding
Saturdays, Sundays and holidays) before the Meeting or to the Chair of the
Meeting prior to the commencement of the Meeting.
The enclosed proxy is solicited by management of the Company and you may
amend it, if you wish, by inserting in the space provided the name of the person
you wish to represent you as proxyholder at the Meeting.
DATED at Vancouver, British Columbia, this 30th day of September, 1999.
BY ORDER OF THE BOARD
"Robert M. Kamm"
--------------------------------
ROBERT M. KAMM
President
<PAGE> 108
SUPPLEMENTAL MAILING LIST RETURN CARD
(NATIONAL POLICY 41)
NOTICE TO SHAREHOLDERS OF BIOMETRIC SECURITY CORP.
In accordance with National Policy Statement No. 41/Shareholder
Communication (the "Policy"), and pursuant to the British Columbia Securities
Act and Rules:
a) a registered shareholder may elect annually to have his or her name added
to an issuer's supplemental mailing list in order to receive quarterly reports
for the issuer's first, second and third fiscal quarters. Registered
shareholders will automatically receive a quarterly report for an issuer's
fourth fiscal quarter; and
b) a non-registered shareholder may elect annually to have his or her name
added to an issuer's supplemental mailing list in order to receive quarterly
reports for the issuer's first, second and third fiscal quarters. Non-registered
shareholders entitled to receive an issuer's audited annual financial
statements, pursuant to the Policy, will receive a quarterly report for an
issuer's fourth fiscal quarter.
In anticipation of the ability to use electronic methods for communication
between issuers and their shareholders, we are requesting that you provide us
with your fax number and/or e-mail address. Please also indicate your preferred
method of communication.
- --------------------------------------------------------------------------------
BIOMETRIC SECURITY CORP.
The undersigned certifies that he/she is the owner of securities (other than
debt instruments) of the company, and requests that he/she be placed on the
company's Supplemental Mailing List in respect of its quarterly financial
statements.
- --------------------------------------------------------------------------------
NAME - PLEASE PRINT
- --------------------------------------------------------------------------------
ADDRESS
- --------------------------------------------------------------------------------
CITY/PROVINCE OR STATE/POSTAL OR ZIP CODE
- --------------------------------------------------------------------------------
SIGNATURE DATED
- --------------------------------------------------------------------------------
FAX E-MAIL ADDRESS
Method of Communication: ____ Fax ____ E-mail ____ Mail
Please complete and return this card to:
Pacific Corporate Trust Company
830 - 625 Howe Street Vancouver, BC V6C 3B8
E-mail: [email protected] Fax: (604) 689-8144
