UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
or
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-26005
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MICROMEM TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter)
Ontario, Canada
(Jurisdiction of incorporation or organization)
150 York Street, Suite 302
Toronto, Ontario M5H-3S5, Canada
Tel: (416) 364-6513
Fax: (416) 360-4034
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section
12(b) of the Act:
None
Securities registered or to be registered pursuant to Section
12(g) of the Act:
Common Shares
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of th e close of
the period covered by the annual report.
Common Shares. . . . . . . . . 36,551,319
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes |X| No |_|
Indicate by check mark which financial statement item the Registrant
has elected to follow:
Item 17 |X| Item 18
<PAGE>
TABLE OF CONTENTS
Part I
Page
Item 1. Description of Business.............................................3
Item 2. Description of Property............................................17
Item 3. Legal Proceedings..................................................17
Item 4. Control of Registrant..............................................17
Item 5. Nature of Trading Market...........................................18
Item 6. Exchange Controls and Other Limitations Affecting Security Holde...18
Item 7. Taxation...........................................................18
Item 8. Selected Financial Data............................................19
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................23
Item 9A Quantitative and Qualitative Disclosures About Market Risk.........28
Item 10. Directors and Officers of Registrant...............................28
Item 11. Compensation of Directors and Officers ............................29
Item 12. Options to Purchase Securities from Registrant.....................30
Item 13. Interest of Management in Certain Transactions.....................30
Part II
Not Applicable
Part III
Item 15. Defaults Upon Senior Securities....................................32
Item 16. Changes in Securities, Changes in Security
For Registered Securities and Use of Proceeds......................32
Part IV
Item 17. Financial Statements...............................................32
Item 18. Financial Statements...............................................32
Item 19. Financial Statements and Exhibits..................................32
Signatures...................................................................33
<PAGE>
CURRENCY
Micromem's financial statements are all expressed in United States
dollars except for the AvantiCorp International Inc. historical audited
financial statements for the fiscal years ended October 31, 1998, 1997 and 1996,
which are expressed in Canadian dollars, the functional and reporting currency
of AvantiCorp International Inc. during those periods. All other financial data
appearing in this Registration Statement are expressed in United States dollars
("US $"), with the exception of certain limited cases in which financial data is
expressed in Canadian dollars ("CDN $"), such as when the exercise price of
certain options and warrants denominated in that currency are referred to.
Transactions that were conducted in Canadian dollars or other foreign
currencies have been converted into United States dollars at the rate of
exchange prevailing at the date of such transactions, and assets and liabilities
denominated in Canadian dollars or other foreign currencies but expressed in
this registration statement in United States dollars have been converted into
United States dollars at the rate of exchange prevailing on the date of the
applicable financial statement. See "Item 8 - Selected Financial Data - Exchange
Rate Data" for exchange rate information with respect to United States dollars
and Canadian dollars on the various financial statement dates. On April 26,
2000, the noon buying rate for cable transfers in Canadian dollars as certified
for customs by the Federal Reserve Bank of New York, expressed in the amount of
U.S. Dollars equal to one Canadian dollar, was US $1.4758 (US $1.00 = CDN
$.6776).
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This Registration Statement on Form 20-F contains certain
forward-looking statements. These forward-looking statements are based on
current expectations, estimates and projections about the business of Micromem
and the industry in which Micromem operates, management's beliefs, and
assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks" and "estimates," variations on such
words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. Micromem's actual results could differ materially from those expressed
or forecasted in these forward-looking statements as a result of certain
factors, including those set forth under "Description of Business" and elsewhere
in this Registration Statement.
RISK FACTORS
The entire business of Micromem at this time involves the development
and exploitation of a patented ferromagnetic based memory technology called
MAGRAM(TM), the attributes of which include nonvolatility and the ability to be
both read and written randomly. While the basic development work on the
technology is close to completion, no revenues from the technology have yet been
received and no revenue producing agreements have been signed. Micromem and
Micromem's investors, therefore, face a number of significant risks, which are
described below.
Micromem Currently Has No Source of Revenue.
Micromem currently has no revenues from either the sales of products or
the licensing of technology. Micromem's objective is to focus on specific market
segments for which its MAGRAM(TM) technology would be suited and then either
manufacture products adapted for use by those market segments or license the
MAGRAM(TM) technology and work with each licensee to adapt the technology to
meet that licensee's particular needs. Decisions as to which market segments
Micromem will concentrate on first and as to the approach Micromem will take
with those market segments have yet to be made.
<PAGE>
Products Using the Technology Have Not Yet Been Manufactured in Large
Quantities.
Micromem's success depends on whether the MAGRAM(TM) technology can be
manufactured in large quantities at competitive prices. Working prototypes and
samples of the technology have been produced but large scale manufacturing has
not yet been undertaken. Failure to be able to manufacture large quantities at
competitive prices could seriously hurt Micromem's ability to generate revenues.
Competition From Existing or Future Technology Could Seriously Affect
the Company.
Micromem is seeking to compete in a market currently dominated by other
strong and well-established technologies, particularly Dynamic Random Access
Memory or DRAM. Even if MAGRAM(TM) has technological advantages over those other
technologies, the inability of MAGRAM(TM) to compete on other grounds such as
price or manufacturing volume, or the saturation of the market due to large
existing inventories of the other technologies or existing long-term contracts
for such technologies, could seriously impair Micromem's ability to generate
revenues. In addition, the competitive pressures faced by Micromem could be
enhanced if, as is likely, Micromem's competitors include established companies
with greater financial or other resources and more diversified product lines
than Micromem.
Failure To Receive Continued Financing Could Cause the Business to
Suffer.
Since Micromem expects no material revenues from operations for the
near future, in order to successfully market the MAGRAM(TM) technology to
potential licensees or develop or acquire manufacturing capability to the extent
required, and in order to continue the research and development that would be
needed for further improvements, Micromem will need additional financing.
Micromem will need to obtain this financing from investors and from persons who
hold outstanding options and warrants. While Micromem has had sufficient funds
thus far to meet its requirements, there is no assurance it will be able to
continue to do so, and failure to receive sufficient funds in the future could
affect its ability to market and exploit the technology.
Because Much of Micromem's Success and Value Depends On Its Ownership
and Use of Intellectual Property, Micromem's Failure to Protect That Property
Could Adversely Affect Its Future Growth and Success.
Micromem's success will depend, in part, on its ability to protect its
intellectual property. Micromem relies primarily on patent, copyright, trademark
and trade secret laws, as well as nondisclosure agreements and other methods to
protect its proprietary technologies and processes. Despite its efforts to
protect its proprietary technologies and processes, unauthorized parties may
attempt to copy or otherwise obtain and use its products or technology without
authorization, develop similar technology independently or design around its
patents. Policing unauthorized use of Micromem's products is expensive and
difficult, and Micromem cannot be certain that the steps it has taken will
prevent misappropriation or infringement of its intellectual property.
Intellectual Property Claims Against Micromem, No Matter How
Groundless, Could Cause Its Business To Suffer.
Micromem's future success and competitive position depend in part on
its ability to retain exclusive rights to the MAGRAM(TM) technology, including
any improvements that may be made on that technology from time to time by
Micromem or on its behalf. While the MAGRAM(TM) technology is patented and
Micromem knows of no challenge that has been made either against the technology
or against Micromem's exclusive rights to it, and has no reason to believe that
any such challenge might be made or that the grounds for any such challenge
exist, if any intellectual property litigation were to be commenced against
Micromem, no matter how groundless, the result would be significant expense,
adversely affecting licensing and sales, and diverting the efforts of its
technical and management personnel and, in the event of an adverse outcome,
substantial damages and possible restrictions on the licensing and use of the
technology.
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
Micromem Technologies Inc. ("Micromem") is a corporation under the laws
of the Province of Ontario, Canada, with principal executive offices at 150 York
Street, Suite 302, Toronto, Ontario M5H-2S5. Formerly known as AvantiCorp
International Inc., Micromem changed its name to Micromem Technologies Inc. on
January 14, 1999.
Through a wholly-owned subsidiary, Pageant Technologies Incorporated,
Micromem is engaged in the development and exploitation of patented technology
known as MAGRAM(TM) which relates to high performance memory and memory
intensive logic products having the characteristics of nonvolatility, which is
the ability to retain information after power has been shut off, and random
read/write capability, which is the ability to read or write information by
going directly to the appropriate location rather than by starting at the first
location and proceeding sequentially until the appropriate location is reached.
Micromem currently has no revenues from either the sale of products or the
licensing of technology. Micromem's objective is to focus on particular market
segments for which its MAGRAM(TM) technology would be suited and then either
manufacture products adapted for use by those market segments or license the
MAGRAM(TM) technology and work with each licensee to adapt the technology to
meet that licensee's particular needs. Decisions as to which market segments
Micromem will concentrate on first and as to the approach Micromem will take
with those market segments have yet to be made.
Pageant Technologies Incorporated ("Pageant International") and its
wholly-owned subsidiary Pageant Technologies (USA) Inc. ("Pageant USA") will be
sometimes jointly referred to in this annual report as "Pageant" and Micromem,
Pageant International and Pageant USA will be sometimes collectively referred to
in this annual report as the "Company."
General History and Development of Micromem Technologies Inc.
Micromem was incorporated under the laws of the Province of Ontario,
Canada, on October 21, 1985 as Mine Lake Minerals Inc. It subsequently changed
its name to Avanti Capital Corp. on June 23, 1988 and to AvantiCorp
International Inc. on April 30, 1992 before becoming Micromem Technologies Inc.
on January 14, 1999 in connection with its acquisition of Pageant.
Micromem was formed to engage in the business of both mineral and oil
and gas exploration and development in Canada and the United States. By 1992,
Micromem's primary mining interests were held through its ownership of 605,000
common shares, representing at that time approximately 6.5%, of Ontex Resources
Limited ("Ontex"), a mineral exploration company whose shares are listed on the
Alberta Stock Exchange. Micromem's holdings in Ontex were reduced to 600,000
shares in 1994 and 325,000 shares in November 1998, when it sold 275,000 shares
for US $149,794. In January 1999, the remaining 325,000 shares of Ontex owned by
Micromem were sold. Sam Fuda, Chairman of the Board of Directors of Micromem,
served as President and Chief Executive Officer of Ontex from 1986 to December
1998, and has served as Chairman of the Board of Ontex since that date. Ross
McGroarty, Executive Vice President and Secretary, and a Director, of Micromem,
was a director of Ontex from 1988 to September 1999.
By 1992, Micromem's oil and gas interests centered on the development
of the Valentine oil and gas field located in Lafourche Parish, Louisiana, in
which it had a 6.25% interest. In 1994 Micromem increased its interest in the
Valentine field to 9.75%, then sold its entire interest in 1995 to the field's
operator, Aroc Inc., formerly known as Alliance Resources PLC ("Aroc"), an oil
and gas exploration company whose shares are listed on the London Stock
Exchange, in exchange for 18,000,000 Aroc common shares and US $150,000. In
fiscal year 1997 a one for 40 reverse split of the Aroc common shares resulted
in a reduction of the number of common shares being held by
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<PAGE>
Micromem from 18,000,000 shares to 450,000 shares which, at March 31, 2000, had
a quoted market value of US $22,500.
Micromem also owned interests in six Crown granted mining claims in
British Columbia and 30 unpatented mining claims in Ontario. These interests,
which had an aggregate carrying value of US $153,564 at the end of fiscal year
1992, were written down to nominal value by Micromem in fiscal year 1995 and
written off in fiscal year 1998 when all remaining unpatented claims lapsed.
Purchase of Pageant Technologies Incorporated
On January 11, 1999, Micromem completed the acquisition of 100% of the
capital stock of Pageant Technologies Incorporated, a company incorporated under
the laws of the Turks & Caicos Islands ("Pageant International"), in exchange
for 32,000,000 Common Shares and warrants for the purchase of an additional
1,000,000 Common Shares (the "Warrants"), representing 88.94% of the outstanding
Common Shares of Micromem (89.24% assuming exercise of all the Warrants). The
Warrants were exercisable at CDN $2.00 per share through January 11, 2000 and
are exercisable thereafter at CDN $2.30 per share through January 12, 2001.
Immediately prior to the acquisition Pageant International had only two
stockholders, Ataraxia Corp., which owned 99.70% of the Pageant International
shares, and Magaly Bianchini, an individual unaffiliated with Ataraxia Corp.,
who owned the remaining 0.30%.
Pursuant to the terms of the purchase agreement, on January 11, 1999,
Micromem issued 16,600,000 of the 32,000,000 acquisition shares to Ataraxia
Corp., 100,000 to the other Pageant International owner, Magaly Bianchini, and
the remaining 15,300,000 to five companies, Thorblaujep Inc. (3,466,587 shares),
Skyfield Ventures (3,400,000 shares), Deux Basil Inc. (2,900,000 shares),
Sterling 1850 Ltd. (2,833,413 shares) and Millcreek Limited (2,700,000 shares).
Concurrently, Micromem issued all 1,000,000 Warrants to Sterling 1850 Ltd. A
list of the persons who received Common Shares and Warrants from Micromem on
January 11, 1999, the number of Common Shares and Warrants they received, and
the number and percentage of the outstanding Common Shares such shares and
Warrants represented on a fully diluted basis, are set forth in the table below:
RECIPIENTS OF
COMMON SHARES AND WARRANTS FROM MICROMEM
on January 11, 1999
Shares (Fully Diluted)
Name of Recipient Shares Warrants Number Percent
Ataraxia Corp. 16,600,000 -- 16,600,000 44.89%
Sterling 1850 Ltd. 2,833,413 1,000,000 3,833,413 10.37%
Thorblaujep Inc. 3,466,587 -- 3,466,587 9.37%
Skyfield Ventures 3,400,000 -- 3,400,000 9.19%
Deux Basil Inc. 2,900,000 -- 2,900,000 7.84%
Millcreek Limited 2,700,000 -- 2,700,000 7.30%
Magaly Bianchini 100,000 -- 100,000 0.27%
---------- ---------- ---------- -----
32,000,000 1,000,000 33,000,000 89.23%
========== ========== ========== =====
The next day, January 12, 1999, Ataraxia Corp. transferred 12,700,000
of its 16,600,000 acquisition shares to five companies, Levan Trading SA
(3,200,000 shares), Saigon Holdings Ltd. (3,100,000 shares), Chaimina Foundation
(2,900,000 shares), Marose Holdings Ltd. (1,900,000 shares) and Hibernian Trust
Co. Ltd. (1,500,000 shares), and one individual, David Formosa (100,000 shares).
In addition, Sterling 1850 Ltd. transferred 971,824 of the 1,000,000 Warrants to
29 persons in amounts ranging from 5,737 to 200,000 Warrants (0.02% to 0.54% of
the issued and outstanding Common Shares assuming exercise of all Warrants). The
remaining 28,176 Warrants were retained by Sterling 1850 Ltd. until April 30,
1999 when they were sold to a company controlled by Sam Fuda,
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<PAGE>
Chairman of the Board of Directors of Micromem, for US $3.12 per Warrant, who
then exercised all of the Warrants at CDN $2.00 per share.
A list of the persons who received Common Shares from Ataraxia Corp.
and Warrants from Sterling 1850 Ltd. on January 12, 1999, the number of Common
Shares and Warrants they received, and the number and percentage of the
outstanding Common Shares such shares and Warrants represented on a fully
diluted basis, are set forth in the table below:
RECIPIENTS OF
COMMON SHARES FROM ATARAXIA CORP.
AND
WARRANTS FROM STERLING 1850 LTD.
on January 12, 1999
Shares From Warrants From Shares (Fully Diluted)
Name of Recipient Ataraxia Sterling 1850 Number Percent
Levan Holdings SA 3,200,000 -- 3,200,000 8.26%
Saigon Holdings Ltd. 3,100,000 -- 3,100,000 8.38%
Chaimina Foundation 2,900,000 -- 2,900,000 7.84%
Marose Holdings Ltd. 1,900,000 -- 1,900,000 5.14%
Hibernian Trust Co. Ltd. 1,500,000 70,500 1,570,500 4.25%
Clifford Goodwill -- 200,000 200,000 0.54%
I-SM Ltd. -- 112,500 112,500 0.30%
David Formosa 100,000 -- 100,000 0.27%
Gael E. Rowland -- 100,000 100,000 0.27%
Pacific Star Ltd. -- 76,200 76,200 0.21%
Rick Corbett -- 50,000 50,000 0.14%
Bob and Wendy Erikson -- 50,000 50,000 0.14%
Daniel and Geraldine Gentsler -- 50,000 50,000 0.14%
Bill Hillman -- 37,500 37,500 0.10%
Irving Bakerman -- 25,000 25,000 0.07%
Andy Warden -- 25,000 25,000 0.07%
Thomas Sheppard -- 15,000 15,000 0.04%
Dawn Brecher -- 12,500 12,500 0.03%
Todd English -- 12,500 12,500 0.03%
Laurie Formosa -- 12,500 12,500 0.03%
Michael French -- 12,500 12,500 0.03%
Mark Hassett -- 12,500 12,500 0.03%
Ronald Mitchell -- 12,500 12,500 0.03%
Connie Polmantwin -- 12,500 12,500 0.03%
William T. Schwartz -- 12,500 12,500 0.03%
Merle Sheilds Long -- 9,287 9,287 0.03%
Lynda Lee Hillman -- 7,600 7,600 0.02%
Murray DeGiralamo -- 6,250 6,250 0.02%
Brian McLaughlan -- 6,250 6,250 0.02%
Janette Merrick -- 6,250 6,250 0.02%
Michael Salisbury -- 6,250 6,250 0.02%
Jeff Suave -- 6,250 6,250 0.02%
Michele Suave -- 6,250 6,250 0.02%
Christina Hillman -- 5,737 5,737 0.02%
---------- ---------- ---------- -----
12,700,000 971,824 13,671,824 36.97%
========== ========== ========== =====
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<PAGE>
As a result of the transfers described above, by the close of business
January 12, 1999, the day following the acquisition, Ataraxia Corp. owned 10.84%
of Micromem's outstanding Common Shares (10.55% assuming exercise of the
Warrants). The balance of the acquisition shares were held by ten other
companies who owned from 4.17% to 9.63% of Micromem's outstanding Common Shares
(4.06% to 9.37% assuming exercise of the Warrants), and two individuals who each
owned 0.28% (0.27% assuming exercise of the Warrants). The Warrants were held by
30 persons in amounts ranging from 200,000 to 5,737 Warrants (0.54% to 0.02% of
the Common Shares assuming exercise of all Warrants), including Hibernian Trust
Company with 70,500 Warrants and Sterling 1850 Ltd. with 28,176 Warrants. A list
of the persons who held the Common Shares and Warrants issued by Micromem in the
acquisition as of the close of business January 12, 1999, the number of shares
and Warrants they held and the percentage of the outstanding Common Shares such
shares and Warrants represented on a fully diluted basis are set forth in the
table below:
HOLDERS OF ACQUISITION SHARES AND WARRANTS
as of January 12, 1999
<TABLE>
<CAPTION>
Shares (Fully Diluted)
Name of Holder Shares Warrants Number Percent
<S> <C> <C> <C>
Ataraxia Corp. 3,900,000 -- 3,900,000 10.55%
Thorblaujep Inc. 3,466,587 -- 3,466,587 9.37%
Skyfield Ventures 3,400,000 -- 3,400,000 9.19%
Levan Trading SA 3,200,000 -- 3,200,000 8.65%
Saigon Holdings Ltd. 3,100,000 -- 3,100,000 8.38%
Chaimina Foundation 2,900,000 -- 2,900,000 7.84%
Deux Basil Inc. 2,900,000 -- 2,900,000 7.84%
Sterling 1850 Ltd. 2,833,413 28,176 2,861,589 7.74%
Millcreek Limited 2,700,000 -- 2,700,000 7.30%
Marose Holdings Ltd. 1,900,000 -- 1,900,000 5.14%
Hibernian Trust Co. Ltd. 1,500,000 70,500 1,570,500 4.25%
Clifford Goodwill -- 200,000 200,000 0.54%
I-SM Ltd. -- 112,500 112,500 0.30%
Magaly Bianchini 100,000 -- 100,000 0.27%
David Formosa 100,000 100,000 0.27%
Gael E. Rowland -- 100,000 100,000 0.27%
Holders having less than 100,000
shares on a fully diluted basis as a
group(1) -- 488,824 488,824 1.32%
---------- ---------- ---------- ------
32,000,000 1,000,000 33,000,000 89.24%
Shares Previously Outstanding 3,980,646 -- 3,980,646 10.76%
---------- ---------- ---------- ------
35,980,646 1,000,000 36,980,646 100.00%
========== ========== ========== ======
</TABLE>
1 Includes 25 holders holding Warrants in amounts ranging from 76,200 to
5,737 (0.21% to 0.02% assuming exercise of all Warrants). See table on
page 5 for a complete list of the holders.
None of the persons who received Micromem Common Shares or Warrants by
January 12, 1999 were affiliated with each other or with Micromem except for (i)
Ataraxia Corp., Sterling 1850 Ltd. and Hibernian Trust Co. Ltd., and (ii) Marose
Holdings Ltd. and David Formosa. Hugh O'Neill, the controlling stockholder of
Ataraxia Corp., is a member of the management of Sterling 1850 Ltd. and a
director of Hibernian Trust Co. Ltd. Mr. O'Neill controls Sterling 1850 Ltd. and
Hibernian Trust Co. Ltd. as well as Ataraxia Corp., and is considered to have
beneficial ownership of the Common Shares and Warrants owned by all three, which
totaled 8,332,089 Common Shares (assuming exercise of all Warrants) or 22.53% as
of January 12, 1999. All of the shares held by Hibernian Trust Co. Ltd., being
1,500,000 shares or 4.06% (assuming exercise of the Warrants) were held in trust
for Tillion Investment Co. Ltd., a Bahamian company, and were subsequently
distributed to it. As of April 25, 2000, neither
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<PAGE>
Sterling 1850 Ltd. nor Hibernian Trust Co. Ltd. owned any Common Shares or
Warrants. David Formosa is the controlling shareholder of Marose Holdings Ltd.
Neither David Formosa nor Marose Holdings is affiliated with Micromem, though
Mr. Formosa served as a director of Micromem from January 25, 1999 to March 9,
1999. Magaly Bianchini, one of the two Pageant International selling
stockholders, had no affiliation with Micromem until February 25, 2000, when she
was appointed to the Micromem Board of Directors.
Of the 30 persons holding Warrants at the close of business January 12,
1999, the only persons who either had affiliations with Pageant or Ataraxia or
held Common Shares were Sterling 1850 Ltd., which had 28,176 Warrants (0.08% of
the issued and outstanding Common Shares assuming exercise of all Warrants and,
together with its 2,833,413 shares, 2,861,589 shares or 7.74% assuming exercise
of all Warrants) and Hibernian Trust Company Ltd. which had 70,500 Warrants
(0.19% of the issued and outstanding Common Shares assuming exercise of all
Warrants and, together with its 1,500,000 shares, 1,570,500 shares or 4.25%
assuming exercise of all Warrants).
The distributions of Common Shares and Warrants described above made on
January 11, 1999 by Micromem pursuant to the instructions of Ataraxia Corp. and
on January 12, 1999 by Ataraxia Corp. and Sterling 1850 Ltd., were made for the
purpose of repaying loans and paying for services rendered to Ataraxia Corp.
during the period when Ataraxia Corp. was organizing Pageant International and
acquiring and developing the MAGRAM(TM) technology. Thorblaujep Inc. had loaned
$175,000 in cash and had provided development services. Skyfield Ventures had
introduced Ataraxia Corp. to Micromem. Deux Basil Inc. had loaned $150,000 and
had provided development services. Levan Holdings SA had loaned $240,000. Saigon
Holdings Ltd. had loaned $223,000. Chaimina Foundation had loaned $217,5000.
David Formosa, directly and through Marose Holdings Ltd., had provided
development services. The Warrants were distributed to persons who had helped
finance the early stage development of the MAGRAM(TM) technology or had provided
services for that purpose, including key personnel of Ataraxia or of the
University of Utah.
The total purchase price for the Pageant International Common Stock was
US $30,000,000, based on a valuation report prepared by the business appraisal
firm Business Equity Appraisal Reports, Inc. ("Bear"), entitled Estimated Market
Value of HFRAM Technology as of July 6, 1998 (the "Bear Report"). (HFRAM, or
"Hall Ferromagnetic Random Access Memory" is the technology now referred to by
Micromem as MAGRAM(TM).) The value of the Common Shares to be used to pay the
purchase price was determined through arm's length negotiations using as a point
of reference the price per Common Share of US $1.16 on September 23, 1998.
On January 11, 1999, immediately following the acquisition, Stephen
Fleming, the President and Chief Executive Officer of Pageant USA, was elected
to Micromem's Board to join Sam Fuda and Ross McGroarty, who had served as
directors since 1992 and 1988, respectively. The Board then elected Mr. Fuda as
Chairman, Mr. Fleming as President and Chief Executive Officer, and Mr.
McGroarty, who had been serving as President, as Executive Vice President and
Secretary. Subsequently, on March 18, 1999, Robert Patterson, who had been
serving as Chairman of the Board and Vice President of Corporate Development of
Pageant USA, was elected President and Chief Executive Officer of Micromem to
replace Mr. Fleming. On November 15, 1999, Antonio Lopes was appointed Chief
Financial Officer of Micromem.
The primary asset of Pageant International is an undivided 50% interest
in a patent, registered in the United States with corresponding patent
applications in Europe and Japan, for nonvolatile random access memory
technology called MAGRAM(TM). The balance of the 50% interest is owned by
Estancia Limited, a company incorporated under the laws of the Turks & Caicos
Islands, which has granted Pageant International an exclusive worldwide license
(the "MAGRAM(TM) License") to develop, manufacture and sell the MAGRAM(TM)
technology. The MAGRAM(TM) License, which was originally executed by Ataraxia
Corp. and then assigned to Pageant International with the written consent of
Estancia Limited, also provides that if Pageant International, as approved
assignee of Ataraxia Corp., sells the rights to the MAGRAM(TM) technology to a
third party not owned or controlled by it, it will have to pay Estancia Limited
50% of the proceeds from such transaction. This provision makes it clear that in
the event of the sale of all of the MAGRAM(TM) technology rights, 50% of the
proceeds would go to Estancia Limited, reflecting its 50% undivided interest in
the technology, rather than 40% reflecting its royalty rights under the
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<PAGE>
MAGRAM(TM) License. Estancia Limited is controlled by Mr. John Zammit. Mr.
Zammit has no direct control relationship with Micromem, and the management of
Micromem is not aware that Mr. Zammit has any indirect control relationship with
Micromem or any control relationship, direct or indirect, with Ataraxia Corp.
The acquisition of Pageant International was treated as a reverse
purchase acquisition for accounting purposes. A reverse acquisition is deemed to
have occurred when a company uses so much of its voting stock to purchase
another company that the former stockholders of the acquired company could be
said to have ended up controlling the company doing the acquiring. In the case
of the purchase of Pageant International by Micromem, the two former
shareholders of Pageant International ended up with a greater number of voting
shares than did the pre-acquisition Micromem shareholders and therefore have
been deemed to have apparent control. The consolidated financial statements of
Micromem are presented as a continuation of the financial position and results
of Pageant International, even though Micromem remains the legal parent and
Pageant International remains the legal subsidiary. The primary consequence of
the application of this treatment to the acquisition is that the patent rights
are recorded at US $100, the historical value at which they were carried on the
Pageant International balance sheet, rather that the being increased to reflect
the significantly greater valuation ascribed to them by the Bear Report.
The MAGRAM(TM) Technology
Background
MAGRAM(TM), which stands for "magnetic random access memory," is a
ferromagnetic based technology designed to provide digital nonvolatile memory
that can be both read and written randomly, and consists of microscopic
ferromagnetic rods which are stacked together vertically on a substrate of
material such as silicon or glass, making a digital memory array. Each rod
provides 1 bit of data based on its ability to alternate between states of
magnetic polarization, which states are read by a sensor attached to the rod.
Since a rod's state is determined by magnetic polarity rather than by the
presence of an electric charge, memory devices using the rods will not lose
information when power is cut off. The various characteristics of MAGRAM(TM) can
be better understood by describing them in the context of the three basic types
of memory used by present day computers, Random Access Memory (RAM), Read Only
Memory (ROM), and secondary storage devices such as floppy and hard disks. The
three types of memory are described below.
Random Access Memory (RAM) is memory that can be both read and written
randomly, which means that its storage locations can be accessed in any order.
Thus, a computer using RAM can find and go directly to the selected location
rather than performing a sequential search. RAM is usually semi-conductor based
and is considered a computer's main or primary memory, because it is either in,
or closely associated with, the computer's central processing unit (CPU or
processor), the computational or control unit of the computer responsible for
interpreting and executing instructions. RAM, however, is also generally
volatile, which means that all stored information vanishes once the power supply
is removed. As a consequence, all of the information must be restored each time
the power is resumed.
Two typical examples of RAM are Dynamic Random Access Memory and Static
Random Access Memory. Dynamic Random Access Memory (Dynamic RAM or DRAM) uses
integrated circuits containing capacitors, resulting in significant storage
capacity and speed. DRAM can be written and read in the speed range of less than
100 nanoseconds. In addition to being volatile, however, DRAM has a second major
drawback, which is that its capacitors lose their charge over time and therefore
information contained in DRAM must be continually refreshed. Basically, this
means that on average DRAM must stop operations every 16-30 milliseconds and
restore all of the data it contains, failing which the data will disappear.
During this refresh time, the processor has no access to the information being
refreshed.
Static Random Access Memory (Static RAM or SRAM) differs from DRAM in
that it stores information in a logic circuit referred to as a flip-flop, rather
than in a capacitor. SRAM memory does not need to be refreshed while the power
is on, but -- like DRAM memory -- loses its information once the power is turned
off. SRAM memory is less commonly used than DRAM memory because it has roughly a
quarter of the density of DRAM memory and
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has more complex circuitry, although SRAM is becoming more commonly used as
cache memory, which is used in close association with CPUs.
Read Only Memory (ROM), like RAM can be read randomly, but cannot be
written randomly. Unlike RAM, however, it is non-volatile and does not lose its
information when a computer's power is cut off. ROM is typically employed to
store vital program information required during the first moments after a
computer is powered on. It may be used for such purposes as forcing system test
routines or preparing the processor for work by pointing to input/output devices
needed for further instructions or for controlling access to certain computer
devices or subsystems such as hard drives. ROM, however, has one major drawback,
which is that in most cases, once in place, it cannot be rewritten and even when
it can, it cannot be rewritten quickly and efficiently.
Speed and random accessibility of memory data are key to successful and
efficient computer operation. However, although DRAM and ROM are both digital
memories, each having benefits and drawbacks, it has been difficult to reach a
middle ground and maximize the potential of a synthesis of the two. The basic
objective of MAGRAM(TM) is to utilize ferromagnetic technology to combine the
best, seemingly mutually exclusive features of both these memories:
nonvolatility, speed, random read and no refresh requirement in the case of ROM,
and random read/write and high density in the case of DRAM.
Disks, both floppy and hard, are secondary storage devices. Floppy
Disks are light and portable, and are written and read by a motor driven
mechanical drive. They normally have a storage capacity in the kilobyte to low
megabyte range. The hard drive in which Hard Disks are located has become the
workhorse of mass and archival storage. Hard disks traditionally store vast
amounts of programs and raw and processed data which can be written and read
indirectly by the processor, far exceeding floppy disks in storage capacity.
Both Floppy Disks and Hard Disks are non-volatile and can be both written and
read, but being serial (as opposed to parallel) devices, they are considerably
slower than RAM.
Description of the MAGRAM(TM) Technology
The MAGRAM(TM) technology is based on the same physical principle
employed by magnetic disks, diskettes, and audio, video and digital tapes, and
is similar to the old "core" memories used in early main frame computers. Those
devices all rely on ferromagnets to store data and, as a consequence, are
intrinsically reliable because once a ferromagnet has experienced a polarity
reversal, only a force equal and opposite to that which set it to its present
state will change its magnetic moment or polarity. The MAGRAM(TM) technology,
unlike the old "core" memories, has passive read capability, which means that
the memory cells can be read any number of times using only a single read cycle
for each read event, and that no write or restore cycles are required. The
"core" memories, though nonvolatile and technically requiring no refresh, must
be "flipped" or reversed in order to be read, which process requires several
operations, including write cycles, and therefore effectively could be
considered similar to refresh.
In addition, the strength of ferromagnets appears not to be weakened by
repeated polarity reversals over time. MAGRAM(TM) substitutes individual
ferromagnetic elements in place of the capacitor/transistor (DRAM) or flip-flop
(SRAM) designs now most widely used. The main advantages of the ferromagnetic
technology over the capacitor/transistor-based (DRAM/SRAM) technologies is
expected to be that:
a) the stored information will be non-volatile, i.e., data will
not be lost when power is removed;
b) the need for memory refresh cycles would be eliminated;
c) the need for other types of memory, such as DRAM, cache and
ROM, may be reduced or eliminated;
d) heat production should be reduced;
e) the need for constant save routines and even uninterruptible
power supply devices should be reduced or eliminated; and
f) the need for batteries, a major source of environmental
pollution, is eliminated.
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In a computer system designed around a device using such technology
ideally only one type of memory would be needed, replacing ROM, RAM and even
hard drives. A system centered around this memory technology would be
considerably faster, would rely on less software "overhead," and ultimately
would be safer for data. Sequences used to start up a computer when its power is
turned on, now stored in ROM, could be stored in protected areas of RAM and
therefore could be easily modified. Sequences triggered when a computer is
turned off, whether intentionally or otherwise, could be reduced or eliminated
in that current register contents could be saved to RAM. Moreover, the operating
system itself could be resident in RAM, rather than having to be reloaded from
the hard drive each time power is restored. Thus, MAGRAM(TM) conceivably could
take the place of all standard digital memory devices in a typical computer, in
which case the need to allocate archival memory devices or mass memory for
operating systems and other programs would disappear, since they could be
accessed and run directly from a single memory system.
Devices incorporating this memory storage technology have the potential
to be as fast as or faster than current DRAM or SRAM technology. The MAGRAM(TM)
technology also has the potential to use less power in computer systems and
therefore should produce less heat than conventional memory, both due to its
lower power requirement and to the elimination of unnecessary refresh cycles.
The MAGRAM(TM) technology is expected to be compatible with the
existing equipment that reads and writes digital information into one-bit memory
sites. In addition, it is expected that MAGRAM(TM) technology will be able to be
incorporated into a memory device (e.g., chip) with minimum impact on the
current digital memory device fabrication process, and could replace the current
method of imbedding one-bit memory sites into a memory array. This would be of
great importance to manufacturers since only a few, simple, additional steps
would need to be added to the manufacturing process in order to apply this
technology to the production of memory devices, although it is expected that the
overall number of steps would be reduced. Perhaps even more significant than the
reduction in the overall number of steps in the manufacturing process, the
MAGRAM(TM) technology is expected to require no need for exotic materials or
specialized equipment, enabling manufacturers to incorporate the MAGRAM(TM)
technology using their current equipment, processes and personnel.
In summary, the key characteristics to consider in understanding the
potential significance of the MAGRAM(TM) memory technology are the following:
NON-VOLATILITY - Volatility in an electronic digital memory
device refers to its inability to retain stored data
subsequent to the removal of electrical power. The principal
feature of MAGRAM(TM) is its ability to retain such data after
loss of electrical power, and to do so indefinitely. This is
particularly important when considered in the context of
random, versus serial, access.
NO REFRESH REQUIRED - Refresh is the process of first reading,
then re-writing, or restoring, data previously stored in a
memory cell. It requires not only electrical energy, but
computer cycles to perform. During refresh, the areas of
memory storage being refreshed are inaccessible to the CPU.
Refresh is costly, therefore, in terms of both time and
energy, and its effect becomes increasingly significant over
time, especially as computer clock and CPU speeds become
faster. With MAGRAM(TM), once data is written or set into a
cell, there is no need for refresh since the data will not
vary until it is forcibly changed during a subsequent write
cycle.
PASSIVE READ CAPABILITY - This feature means that the memory
cells can be read any number of times using only a single read
cycle for each read event, and that no write or restore cycles
are required. This capability should be contrasted to the
process used in some ferromagnetic memory technologies, such
as "core" memories, which, though non-volatile and technically
requiring no refresh, must be "flipped" or reversed in order
to be read. This process requires several operations,
including write cycles, and effectively could be considered
similar to refresh.
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SPEED - Computer clocks (or timers) and CPUs work in concert
at high speed. These speeds are measured in MHz and in parts
of a second, such as nanoseconds. Since the CPU receives
programmed instructions from RAM, the RAM, being the immediate
source of such data, must operate at the same speeds. One of
the salient features of DRAM, leading to its heralded use in
the industry, is its ability to deliver instructions and store
data at such speeds. MAGRAM(TM) also is expected to operate at
these high rates of speed.
HIGH DENSITY - Density in integrated circuit devices refers to
the amount of electronics that are packed into a square unit
of measure. The base unit is the micron, which is one
one-millionth of a meter, or 0.0000039 inches. Typically, the
greater the density of the packaging, the greater the
efficiency of the device. MAGRAM(TM) cells will be small
enough to compete favorably against other memory devices,
whether random or serial.
LOW POWER CONSUMPTION - All electronic devices consume power
and radiate heat. The degree to which they do depends directly
on their efficiency. Memory devices based on the MAGRAM(TM)
technology are expected to be energy conservative. This is due
to the fact that "write" and "read" current will be required
only during the short periods of time when data is being
changed or retrieved. Since MAGRAM(TM) is truly non-volatile,
there are no laborious energy consuming refresh cycles and the
power source can be completely removed from MAGRAM(TM) devices
between sessions without a loss of data. DRAM, by contrast,
must be fully powered at all times when reliance on the stored
data is required.
RADIATION HARD - Different types of radiation can damage or
alter the function of integrated circuit devices. Although
appropriate testing for radiation hardness (resistance to
alteration and damage) has not been conducted on MAGRAM(TM)
devices, it is expected that they will fare well in this
category.
ENVIRONMENTAL TOLERANCE - Integrated circuit devices have
definite temperature, humidity, atmospheric pressure and
vibration tolerance limits. Since MAGRAM(TM) memories are to
be built within industry standards of encapsulated devices,
they are expected to be similarly tolerant.
INDEFINITE DATA RETENTION - Other than purposefully forcing a
ferromagnet to reverse polarity, there is no known reason why
it will not retain that polarity indefinitely. MAGRAM(TM)
memories will be capable of this feature without the use of
continuous electrical power.
NO FATIGUE PROBLEM - MAGRAM(TM) has no "fatigue" problem per
se. Since ferromagnets are not known to decay or lose their
ability to reverse and maintain polarity over time and use,
the life span of MAGRAM(TM) should be as long as that of the
basic device itself. Fatigue is a condition that plagues
ferroelectric and other non-volatile memories such as flash.
Ferroelectric memory is based on the shift of an atom within a
crystal, the result of which is a reversal of electrical
potential on the crystal surface, which in turn, is used to
store digital data. These crystals, however, eventually break
down over time and with use, so that the memory cell loses its
usefulness. Because of this inherent weakness, ferroelectric
memories are not reliable for constant write/read
environments.
CONCURRENT READ/WRITE FEASIBILITY - Since MAGRAM(TM) memories
require no refresh and thus no corresponding constant "address
sweep" across the memory field, it should be feasible to
design a memory such that one byte (group of cells) may be
written simultaneously with a read operation on the same die
(memory area) so long as those two addresses are not the same.
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NON-EXOTIC TECHNOLOGY - MAGRAM(TM) memories are expected to be
composed of inexpensive, easily obtainable materials.
Patents
A U.S. patent for the MAGRAM(TM) Technology (U.S. Patent 5,295,097
entitled Nonvolatile Random Access Memory, the "Patent") was issued to Richard
M. Lienau on March 15, 1994. Mr. Lienau has also filed corresponding patent
applications for Europe (application no. 93918644.1) and Japan (application no.
505547/199) (the "Patent Applications"). On November 18, 1997, Mr. Lienau
assigned his entire right, title and interest in the Patent and Patent
Applications to Estancia Limited and on November 19, 1997, Estancia Limited
assigned a nontransferable undivided 50% interest in the Patent and Patent
Applications to Pageant International through Pageant International's parent
company Ataraxia Corp. A patent was subsequently issued with respect to the
European Patent Application. The Japanese Patent Application is still pending.
In addition to an undivided 50% interest in the Patent and Patent
Applications, Pageant International has been granted an exclusive worldwide
license to develop the MAGRAM(TM) technology and manufacture and sell the
related products. The License was granted by Estancia Limited to Pageant
International's then parent company Ataraxia Corp. pursuant to an agreement
dated September 17, 1997 among Ataraxia Corp., Estancia Limited and Richard M.
Lienau (the "License Agreement"), which Ataraxia Corp. assigned to Pageant
International on October 22, 1997. The License Agreement also provides that
Estancia Limited and Richard Lienau will grant to Pageant International a right
of first refusal to acquire rights in respect of any patent improvements or new
technology or application developed or under the control of Estancia Limited or
Richard Lienau relating to any invention, technology, application or product
which may reasonably be regarded as similar to or competitive with the
MAGRAM(TM) technology. The License Agreement requires Pageant International pay
to Estancia Limited or its nominee a royalty of 40% of the gross profits less
expenses agreed by the parties for each technology license sold. Additionally,
Pageant International will pay Estancia Limited 40% of any per unit royalty
received by Pageant less properly documented reasonable expenses directly
related to the obtaining of said royalties and as agreed by the parties in
writing. Pageant International will also pay Estancia Limited 40% of any other
revenues (less those expenses agreed by the parties) of Pageant International
related to the grant of rights or use of the MAGRAM(TM) technology by Estancia
Limited, exclusive of participation of Estancia Limited in the contract.
The License Agreement requires Pageant International to provide the
funding necessary to support the work then being done by the University of Utah
(see "Research and Development") to develop a prototype and to test,
manufacture, document or otherwise take the technology to the marketplace.
Pageant International also is to be responsible for all marketing, sales and
licensing of the technology. In the event of default by Pageant International,
all right, title and interest in the technology and related intellectual
property rights transferred to Pageant International under the License Agreement
shall revert back to Estancia Limited.
The Company continued to apply for patents covering discoveries made
during its ongoing development program. Since the acquisition, the Company has
filed over a dozen patent applications related to the MAGRAM(TM) technology in
the United States with corresponding applications in significant jurisdictions
around the world.
Research and Development
Pageant entered into a Research Agreement dated as of November 24, 1997
with the University of Utah (the "Research Agreement") providing for work to be
performed by University faculty, staff and students within the University's
Department of Electrical Engineering for the purpose of producing a working
prototype of a micron scale, integrated circuit ferromagnetic nonvolatile random
access memory. The Research Agreement also provided that the University would
own all rights, title and interest in all inventions and improvements conceived
or reduced to practice by the University or University personnel, and could at
its election file all related patent applications, but that the University must
grant to Pageant, on such terms and conditions as the University may specify, an
option for an exclusive license on any such inventions, improvements,
applications or patents. As of April 26, 2000, the
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University had neither filed any such applications nor given any notice to
Pageant of any such inventions or improvements.
The Research Agreement broke down the actual research and development
work into two phases. The first phase was to consist of a series of tests and
actions with respect to the development of a single micron scale memory cell,
from the research of appropriate ferromagnetic materials for use in such a cell
to the testing of such a cell for various capabilities under a variety of
conditions appropriate for such a device. The second phase was to consist of the
construction, testing and packaging as finished products of groupings of bytes
of such cells from an 8 bit (one byte) grouping to groupings to the order of 32
to 64 bytes. The first phase testing was completed in December 1999 with the
production by the University of 8 bit technology evaluation samples. Micromem
does not envision a need for 32 to 64 byte samples at this time. The total cost
to the Company for the work done by the University of Utah was $515,000.
On December 9, 1999, as the University of Utah was completing its work
under the Research Agreement, Pageant USA entered into an Agreement (the "DOE
Agreement") with AlliedSignal Federal Manufacturing & Technologies
("AlliedSignal") operating under contract with the US Department of Energy
("DOE") to conduct an engineering evaluation of the MAGRAM(TM) technology as
embodied in the 8 bit samples prepared by the University of Utah. The evaluation
was to be conducted at the DOE's Kansas City, Missouri facility managed for DOE
by AlliedSignal. AlliedSignal was subsequently acquired by Honeywell, Inc.
("Honeywell"), which assumed responsibility for both performance of the DOE
Agreement and management of the DOE Facility.
During the course of its evaluation, Honeywell concluded that a
vertically stacked configuration of memory cell arrays would present far greater
market opportunities than the flat 8 bit array samples that had been produced by
the University of Utah. The Company had been planning to market the MAGRAM(TM)
technology to potential licensees using the 8 bit samples, assuming successful
results from Honeywell's evaluation, but following discussions with Honeywell
the Company decided to set those plans aside and prepare samples using the
configuration Honeywell recommended.
Preparation of the new samples for Honeywell was done by Pageant at the
University of New Mexico's Center for High Technology Materials (the "CHTM") in
Albuquerque. Pageant had been planning to undertake its own research and
development work, as well as the limited production of memory modules employing
the MAGRAM(TM) technology, upon termination of the Research Agreement with the
University of Utah at the end of 1999. For that purpose it had been negotiating
for space at a specially designed research and manufacturing facility then under
construction at the University of Utah's Research Park in Salt Lake City. The
Salt Lake City facility experienced significant delays, however, and the
decision was made to look elsewhere. On December 31, 1999, Pageant entered into
a Use Agreement with the Regents of the University of New Mexico (the "Use
Agreement") for the use by Pageant of laboratory space and specialized equipment
at the CHTM through December 9, 2000, at a rate of $500 for each day Pageant
actually used the space and equipment, but in no case more than $3,000 per
month. The laboratory space subject to the Use Agreement consists of the
University of New Mexico's class 100/1000 clean room, sputter deposition
laboratory and test equipment laboratories. The equipment covered by the Use
Agreement includes, among other things, equipment capable of working at a level
of miniaturization deemed desirable by Honeywell.
In mid April, 2000, Pageant delivered to Honeywell a series of
differently arrayed micron scale configurations, fully embedded on a substrate,
that it had produced at the CHTM. Honeywell's evaluation of the arrays will
consist of a series of tests, such as stress tests to measure the effect of
temperature extremes, shock, vibration, static discharge and high electrical
currents, and tests to measure speed and power consumption under both read and
write conditions.
While one of the options under consideration is for Pageant to
undertake its own manufacturing, the likelihood is that it will be primarily
dependent on licensees, contract manufacturers or commercial partners to
manufacture its proposed products. Although this dependence on third parties for
manufacturing may adversely affect operating results as well as Pageant's
ability to develop and deliver products on a timely and competitive
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basis, Management believes that there is ample capacity within the memory cell
manufacturing industry to accommodate Pageant's needs for the foreseeable
future. Management further believes that the competitiveness among contract
manufacturers will ensure that adequate and reliable supplies of materials can
be sourced in a cost effective manner for the foreseeable future.
At April 25, 2000, the Company had nine full time employees, one part
time employee and two paid consultants.
Market Opportunities
The MAGRAM(TM) technology potentially applies to many different
markets. Products using the technology can be implemented as a subcomponent, a
component or a stand alone system. The technology has a varied number and type
of applications because of such special attributes as high level of speed, low
power consumption, elimination of refresh cycles, and retention of memory
without power.
There are a number of market segments that could be expected to make
immediate use of MAGRAM(TM) Technology. Virtually every cell phone contains
flash memory integrated circuits, and cell phone manufacturers are forced to
continually strive for the longest life per battery charge in an effort to
satisfy consumer needs and remain competitive. The MAGRAM(TM) Technology would
be a great asset to these manufacturers since it would consume less power than
flash memory circuits and does not have write cycle limitations. Similarly,
small handheld devices such as two way pagers, palm PC's and organizers do not
have disk memory to store information. Due to this limitation, they are
typically forced to use flash memory in an effort to conserve power. As in the
case of cellular phones, MAGRAM(TM) would provide a meaningful alternative. Many
devices use custom ASIC's (application specific integrated circuits) to replace
a group of components in an effort to reduce the size, weight, cost and power
consumption of a circuit. The auto industry, for example, is a major user of
ASIC technology. Although there are many advantages to ASIC's, one major
disadvantage is that they typically require long development cycles. Moreover,
if the ASIC has a design flaw that requires correction, the modification process
could extend the design cycle by an additional 2-6 months. Incorporation of the
MAGRAM(TM) technology into ASIC designs would allow for changes to be made
without redesigning the ASIC and restarting the cycle, thus saving designers
critical time. A great many household appliances contain small memory devices to
store time or simple instructions. The MAGRAM(TM) technology provides a low cost
method of providing nonvolatile memory to store user preferences for devices
like clocks so they need not be reprogrammed after the power has been removed or
turned off. Examples of appliances that could make immediate use of this
technology are VCR's, digital clocks, answering machines and microwaves.
These are just examples of immediate applications of the MAGRAM(TM)
technology in the marketplace. The list is not exhaustive and basically anything
electrical that has a memory could benefit from MAGRAM(TM). Other possible uses
would certainly be in hard drive replacements, RAM type floppies, personal
pocket memories, and various devices employed in the military and space
programs.
The computer industry presents a particularly important market for the
MAGRAM(TM) technology for a number of reasons. The industry is experiencing a
growing need to develop memory that is fast enough to keep pace with high CPU
clock speeds. The current hard disk is too slow and prone to wear and frequent
failure, being an electro-mechanical device consisting of spinning platters upon
which data is stored and accessed by moveable arms that seek the data from place
to place on the platters. MAGRAM(TM), on the other hand, is based on a
ferromagnetic material virtually impervious to internal defect and change, and
will be marketed as a viable solution to these industry problems. Both the new
market and the upgrade market will be targeted.
The market for memory chips is extremely large. The BEAR Report stated
that, in a reference to ". . . chips manufactured and distributed to OEMs and
other volume channels, various sources estimate the total market which is
potentially relevant to this technology to be on the order of $40-50 billion and
growing at 30% per year." Management believes that successful incorporation of
the MAGRAM(TM) technology would be of immense value to any of the large chip
makers.
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Marketing Strategy
Prior to the DOE Agreement, the Company had been pursuing the
establishment of a partnership between it and one or more major memory
manufacturers on the grounds that combining the MAGRAM(TM) Technology with the
strength of such strategic partners in the marketplace would make it easier for
the Company to obtain highly favorable licensing agreements with other major
companies worldwide. Preliminary information from Honeywell has made management
aware that a strategy that excludes a manufacturing option may not optimize the
Company's potential for revenue. As a result of this information, licensing
discussions have been delayed while further consideration is given to
formulating a new market strategy with the assistance of the information being
generated by Honeywell under the DOE Agreement, which strategy could include the
Company manufacturing products as well as licensing the technology.
The BEAR Report stressed the importance of finding a strategic partner,
noting that until such a partner had been located, "some caution concerning
[MAGRAM's(TM)] present market value is necessary." Having said that, however,
the BEAR Report proceeded to state that "[n]evertheless, it is impossible to
ignore the extraordinary potential market for this technology . . ." and
concluded that, based on the assumptions and qualifications set forth in the
report, ". . . it is our opinion that the market value of the technology, in its
current state of development, is approximately $30 million." As development
progresses, management believes that the market value of the technology will
increase. However, since the technical risk appears to be relatively low, the
increase in value with completion of a prototype is also likely to be low.
Management believes that the next significant increases in market value will
come after a marketing strategy is implemented and products based on the
technology are introduced to the marketplace.
Competition
Technological competition in the memory technology industry is intense
and is characterized by rapidly changing technology, short product life cycles,
cyclical oversupply and rapid price erosion. Pageant's success depends
significantly upon its ability to obtain and maintain a competitive position in
the development or acquisition of products and technology in its area of
concentration. Rapid technological development by others may result in actual
and proposed products or technology becoming obsolete in a relatively short
period of time. Some of Pageant's competitors will have substantially greater
financial and technical resources, manufacturing and marketing capabilities than
Pageant. In addition, some of Pageant's potential competitors have significantly
greater experience in undertaking beta testing and cookbook trials of new or
improved hardware computer products. Such competitors may have, unknown to
Pageant, products which are technologically superior to those of Pageant.
Most of the established technologies with which MAGRAM(TM) will
compete, while well established in the marketplace, lack one or more of
MAGRAM's(TM) special characteristics. EPROMs (erasable programmable read-only
memory) and EEPROMs (electrically erasable read-only memory) can be erased and
rewritten, but must be written "en masse," rather than at the individual word
level. "Flash" memory is a form of EEPROM that is widely used today in such
devices as cell phones, modems and personal digital assistants, handheld devices
otherwise known as PDAs. The drawbacks to Flash memory are that write times are
slower, the number of read/write cycles are limited and it can be more difficult
and expensive to manufacture. Another competitive product is DRAM or SRAM backed
by a lithium battery with enough low level voltage and support circuitry to
perform the necessary refresh cycles. The retention time for such memory could
be long, depending on the life of the battery, but the cost is high.
DRAM (Dynamic Random Access Memory) is a digital memory device
ubiquitous in the computer industry. It is usually found as RAM (Random Access
Memory) in computers of all sizes and types throughout the world. The principal
reasons for its popularity are that it is fast (write/read times less than 100ns
(nanoseconds; 1/100,000,000 part of a second)), dense (many bytes of data in a
small area) and inexpensive. Speed and density are important because the CPU
(Central Processing Unit), the device that oversees all activities in a
computer, must work closely with RAM, which holds software (instructions) and
data (information) for immediate, rapid bi-directional access.
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DRAM has drawbacks, however, the primary one being that it is volatile.
Volatile devices cannot retain, or "remember" data after their power is removed.
Furthermore, even with available power, DRAM devices are unable to retain data
longer than about 30ms (milliseconds; 1/1,000 part of a second). Some have a
shorter retention span; as low as 4-5ms. This negative factor requires an action
called "refresh," and means that the data in DRAM is restored at least every
30-33ms, or some 30 times per second. During refresh, access to RAM by the CPU
is denied, and no write/read functions can take place. In addition, though DRAM
devices are inexpensive, their manufacture, or fabrication, requires many steps
to complete.
MAGRAM(TM) devices, on the other hand, have several advantages over
DRAM devices. First, and foremost, they are non-volatile. This means that they
retain data after power off. Moreover, they do not require refresh. Since there
is no refresh, there is no need to stop access to RAM on the part of the CPU.
Second, MAGRAM(TM) is as fast (write/read speeds) as DRAM, and in some cases,
faster. In addition, MAGRAM(TM) devices are simpler to make than DRAMs, use less
exotic tooling and therefore can be fabricated more quickly and cheaply.
Although DRAMs are dense, it is expected that MAGRAM(TM) devices can be
fabricated to be as dense as DRAMs in the near term.
There are additional implications for the use of the MAGRAM(TM)
technology to replace DRAMs configured as RAM. Since DRAMs are volatile, hard
drives, ROMs (Read Only Memories) and cache (CPU-close fast, non-refresh, but
volatile) memories are necessary to make up for DRAM deficiencies. In a computer
system with MAGRAM(TM)-based RAM, MAGRAM(TM) memory devices could serve as an
extension of these three other memory types and conceivably even eventually
could replace them.
While several companies have been reported to be conducting research
with respect to the development of products having capabilities similar to
MAGRAM(TM), management is aware of no competitive products that are currently
available either commercially or for demonstration purposes that provide both
true nonvolatile memory and random writes. The only product of which the Company
has knowledge which comes close to those objectives is a FRAM device produced by
Ramtron International Corporation. MAGRAM(TM) is also a FRAM device, but while
both devices are "Random Access Memory," the Ramtron device is ferroelectric
rather than ferromagnetic. This means that its nonvolatility results from the
movement of an electric charge trapped in a crystal matrix rather than from the
polarity reversals of ferromagnets. Although ferroelectric memory devices are
non-volatile, they tend to degrade over time because each time the electric
charge, or polarity, of a ferroelectric memory cell is switched, some of the
crystals break down and become useless. After many uses the cell then becomes
unable to maintain or "remember" enough of an electric charge to be useful. As a
consequence, ferroelectric devices tend to be used in data processing circuits
that require their use only on an occasional basis as, for example, in
situations where data needs to be stored in an emergency.
The ability of the Company to compete successfully depends on elements
outside of its control, including the rate at which customers incorporate the
Company's products into their systems, the success of such customers in selling
those systems, the Company's protection of its intellectual property, the
number, nature and success of competitors and their product introductions, and
general market and economic conditions. In addition, the Company's success will
depend in a large part on its ability to develop, introduce, and license in a
timely manner products that compete effectively on the basis of product features
(including speed, density, die size, and packaging), availability, quality,
reliability and price, together with other factors including the availability of
sufficient manufacturing capacity and the adequacy of production yields. For
example, from time to time an oversupply of DRAM has caused a significant drop
in DRAM prices. Such a drop conceivably could have a material adverse effect on
the sale of MAGRAM(TM) products, though since the Company has not yet begun
marketing MAGRAM(TM) it does not know the extent to which price sensitivity with
respect to DRAM or any other product will be a relevant marketing consideration.
There is no assurance that the Company will be able to compete successfully in
the future.
-16-
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
Micromem maintains corporate headquarters in Toronto, Ontario, Canada.
The space, consisting of approximately 2,500 square feet, is part of a larger
office space leased by Ontex Resources Limited ("Ontex") pursuant to a lease
that expires January 30, 2002. Micromem reimburses Ontex at cost for its space.
There is no written sublease between Ontex and Micromem. Sam Fuda, Chairman of
the Board of Directors of Micromem, is Chairman of the Board of Directors of
Ontex. An administrative office for the use of Pageant is located in Santa Fe,
New Mexico. The space consists of 1,852 square feet and is leased. The lease
expires December 31, 2000. Pageant has an agreement with the University of New
Mexico for the use of specialized laboratory space and equipment at the
University's Center for High Technology Materials in Albuquerque, New Mexico,
through December 9, 2000. See "Item 1. Description of Business -- Production."
ITEM 3. LEGAL PROCEEDINGS
Except as set forth below, there are no legal proceedings involving
Micromem as of the date hereof, nor are any such proceedings known to be
contemplated.
In January 2000, Greenwood Construction Company ("Greenwood") filed a
complaint in the Third Judicial Court in and for Salt Lake City, Utah, against
Clear Blue Laboratories, Inc. ("Clear Blue"), Pageant USA and certain
individuals alleging damages totaling $804,627.00 plus interest for failure to
pay for work performed by Greenwood on property located in Salt Lake City, Utah.
The action is based on a construction contract between Greenwood and Clear Blue.
While Pageant USA is not a party to the construction contract, the complaint
alleges that "Pageant [USA] and/or Clear Blue . . . are merely alter egos of
each other [and of certain individual defendants]."
Pageant USA has moved to dismiss the complaint on the grounds that it
was not a party to the construction contract and had no interest in the
property, and that no evidence was presented to support the allegation that
Pageant USA was an "alter ego" of Clear Blue.
ITEM 4. CONTROL OF REGISTRANT
The following table sets forth, as of April 25, 2000, certain
information with respect to (i) each person known by Micromem to be the owner of
more than 10% of Micromem's Common Shares, and (ii) the officers and directors
of Micromem as a group:
Title of Class Identity of Person or Group Amount Owned Percent of Class
Common Shares All officers and directors as a 2,468,610(1) 5.9%
group
(1) Includes (i) options granted to Sam Fuda to purchase prior to January
25, 2009, up to 800,000 Common Shares at a price per share of US $3.00,
and (ii) options granted to Stephen Fleming to purchase prior to
February 25, 2001, up to 500,000 Common Shares at a price per share of
US $6.00.
There are no arrangements known to Micromem the operation of which may at a
subsequent date result in a change of control of Micromem.
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<PAGE>
ITEM 5. NATURE OF TRADING MARKET
Trading in the Common Shares is quoted on the NASD's OTC Bulletin
Board. The table below sets forth the high and low sales prices for Common
Shares in U.S. Dollars as reported since trading began in April 1998. Micromem's
fiscal year ends October 31. The Common Shares are not traded in Canada.
U.S. Dollars:
High Low
---- ---
Quarter ended April 30, 1998 0.7500 0.6520
Quarter ended July 31, 1998 0.5625 0.5000
Quarter ended October 31, 1998 3.2500 0.3125
Quarter ended January 31, 1999 5.1250 2.9375
Quarter ended April 30, 1999 8.2500 3.3000
Quarter ending July 31, 1999 7.7500 4.5000
Quarter ending October 31, 1999 5.9690 3.6880
Quarter ending January 31, 2000 6.2500 2.7500
At April 20, 2000, approximately 15.23% of the outstanding Common
Shares were held by registered shareholders with addresses in the United States.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
As of the date of this Registration Statement, there are no
governmental laws, decrees or regulations in Canada that restrict the export or
import of capital, including, but not limited to, foreign exchange controls, or
that affect the remittance of dividends or other payments to nonresident holders
of Common Shares.
There are no limitations under the laws of Canada or the Province of
Ontario, or in the charter or any other constituent documents of Micromem on the
right of nonresidents of Canada or persons who are not Canadian citizens to hold
and/or vote the Common Shares of Micromem.
ITEM 7. TAXATION
The following is a summary of certain Canadian federal income tax
provisions applicable to United States corporations, citizens, and resident
alien individuals purchasing, holding and disposing of Common Shares. The
discussion is a general summary only and does not purport to deal with all
aspects of Canadian federal taxation that may be relevant to shareholders,
including those subject to special treatment under the income tax laws.
Shareholders are advised to consult their own tax advisers regarding the
Canadian federal income tax consequences of holding and disposing of Micromem's
Common Shares, as well as any consequences arising under U.S. federal, state or
local tax laws or tax laws of other jurisdictions outside the United States. The
summary is based on the assumption that, for Canadian tax purposes, the
purchasers or shareholders (i) deal at arm's-length with Micromem, (ii) are not
residents of Canada, (iii) hold the Common Shares as capital property, and (iv)
do not use or hold Common Shares in, or in the course of, carrying on business
in Canada (a "Non-Resident Holder").
Dividends paid or credited on the Common Shares to a non-resident
holder will be subject to a non-resident withholding tax under the Income Tax
Act (Canada) at the rate of 25%, although such rate may be reduced under the
provisions of an applicable income tax treaty. For this purpose, dividends will
include amounts paid by Micromem in excess of the paid-up capital of the Common
Shares on a redemption or a purchase for cancellation of such shares by Micromem
(other than purchases on the open market). Under the Canada-United States Income
Tax Convention, 1980 (the "Tax Treaty") the rate is generally reduced to 15% for
dividends paid to a person who is a US resident. Dividends paid to US companies
owning at least 10% of the voting stock of Micromem are subject to a withholding
tax rate of 5% under the Tax Treaty as amended by the Protocol signed on March
17, 1995. Other applicable tax treaties may reduce the 25% Canadian tax rate for
other Non-Resident Holders.
-18-
<PAGE>
A Non-Resident Holder generally will be subject to tax in Canada on
capital gains realized from disposition of Common Shares, where such shares are
"Taxable Canadian Property" within the meaning of the Income Tax Act (Canada).
Taxable Canadian Property includes shares of a private corporation. However, it
may be possible to obtain an exemption pursuant to a treaty. Article 13 of the
Tax Treaty generally provides an exemption from Canadian taxation on the sale of
shares provided that the value of the common shares at the time of disposition
is not derived principally from real property located in Canada. However, a
clearance certificate is required in order to avoid a withholding tax liability.
This summary is not exhaustive of all possible income tax
considerations and shareholders and prospective purchasers are advised to
consult with their own tax advisors with respect to their particular
circumstances.
ITEM 8. SELECTED FINANCIAL DATA
Micromem is a development stage company. Its financial statements are
prepared on a basis that Micromem is a continuation of Pageant Technologies
Incorporated ("Pageant International"), the company considered to be the
acquiring company for accounting purposes in the January 11, 1999 acquisition.
The information set forth below is derived from the audited Financial
Statements included in Item 17 of this Registration Statement and listed in the
Index to Financial Statements appearing on page A-1. It therefore should be read
in conjunction with such financial statements and with Item 9 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
While Micromem is the technical acquirer of Pageant International, the
acquisition has been treated as a reverse takeover for accounting purposes. This
means that the consolidated financial statements of Micromem are presented as a
continuation of the financial position and results of Pageant International,
even though Micromem remains the legal parent and Pageant International remains
the legal subsidiary. Consequently, control of the net assets and operations of
Micromem is deemed to have been acquired by Pageant effective January 11, 1999,
the date of the acquisition of the Pageant International stock, and all
financial information prior to January 11, 1999 is that of Pageant International
and its subsidiary alone. The information set forth below, therefore, goes back
only to September 3, 1997, the date on which Pageant Technologies was
incorporated, and shows selected financial data for Pageant International for
its fiscal years ended October 31, 1998 and 1997, the earlier period being only
for September 3, 1997 through October 31, 1997. The consolidated Financial
Statements from which the data has been derived have been prepared in accordance
with Canadian GAAP.
-19-
<PAGE>
<TABLE>
<CAPTION>
(United States Dollars)
Years Ended October 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Working capital (deficiency) $ (3,173,096) $ (516,425) (1,249)
Investment -- -- --
Patent 100 100 --
Capital assets 55,097 15,334 --
Equity (deficiency) (3,095,695)) (500,991) (1,249)
Revenue:
Interest earned 1,303 2,571 --
Costs and expenses:
Compensation 3,283,850 -- --
Administration expenses 373,794 116,304 --
Professional fees 468,954 100,750 1,250
Wages and salaries 236,661 81,457 --
Development expenses 455,288 50,000 --
Travel and Entertainment 261,919 176,012 --
Loss on sale of investment 54,606 -- --
Write down of investment 61,020 -- --
Amortization 7,598 4,751 --
Interest expense 3,246 -- --
Unrealized loss (gain) on
foreign exchange 2,154 (26,961) --
Net loss 5,207,787 499,742 1,250
Net loss per share - basic and diluted 0.14 0.02 --
Weighted average shares 36,213,319 32,120,676 32,000,000
</TABLE>
There are no material differences between the presentation of the
Financial Statements from which this information was derived in accordance with
Canadian GAAP and their presentation had they been prepared in accordance with
United States Generally Accepted Accounting Standards.
Reconciliation between Canadian GAAP and US GAAP
Micromem's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted ("GAAP") in Canada which, in the
case of Micromem, conform in all material respects with those in the United
States.
Micromem has chosen to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion ("APB") No. 25
"Accounting for Stock Issued to Employees". Under this method, compensation
expense is recorded if fair market value exceeds exercise price at date of
grant. Accordingly, compensation expense, if any, is recognized, at the date of
option grants or when the option shares are earned based on the quoted market
price of the stock, in the consolidated statement of operations and deficit.
Micromem qualifies as a development stage enterprise as defined in SFAS No. 7.
The financial statements have been prepared to include the additional
information required to be disclosed by SFAS No. 7.
Micromem's comprehensive income as determined under SFAS No. 130 would not
differ from net loss as shown above for all periods presented.
-20-
<PAGE>
There are no differences in cash used in operating, investing and financing
activities as reported and as per U.S. GAAP.
There are no differences in shareholders' equity as reported and per U.S. GAAP.s
<TABLE>
<CAPTION>
Year Ended October 31, September 3, 1997 September 3, 1997
to to
1999 1998 October 31, 1997 October 31, 1999
---- ---- ---------------- ----------------
<S> <C> <C> <C> <C>
Net loss as reported and as per $ 5,207,787 $ 499,742 $ 1,250 $ 5,708,779
----------- ----------- ----------- -----------
U.S. GAAP
Net loss per share - basic $ 0.14 $ 0.02 $ -- $ 0.16
----------- ----------- ----------- -----------
Net loss per share - diluted $ 0.14 $ 0.02 $ -- $ 0.16
----------- ----------- ----------- -----------
Weighted average shares 36,213,319 32,120,676 32,000,000 36,213,319
Plus incremental shares from 1,610,673 879,324 -- 1,610,673
----------- ----------- ----------- -----------
assumed conversion of warrants
and options
Adjusted weighted average shares 37,823,992 33,000,000 32,000,000 37,823,992
=========== =========== =========== ===========
</TABLE>
The above incremental shares from assumed conversion of warrants have been
excluded from the calculation of the diluted loss per share because to do so
would be anti-dilutive for the periods presented.
Income Taxes
Micromem follows the "deferral method" of accounting for deferred income taxes,
pursuant to which it records deferred taxes on "timing differences" (differences
between accounting and tax treatment of certain revenues and expenses), using
tax rates effective for the year in which the timing differences arise.
Under U.S. GAAP, Micromem is required to use the "asset and liability method" of
accounting for deferred taxes, which gives recognition to deferred taxes on all
"temporary differences" (differences between accounting basis and tax basis of
Micromem's assets and liabilities) using currently enacted tax rates. In
addition, U.S. GAAP requires Micromem to record all deferred tax assets,
including the future tax benefits of losses carried forward. Micromem is then
required to record a "valuation allowance" for any deferred tax assets where it
is more likely than not that the asset will not be realized.
-21-
<PAGE>
Micromem has not recorded any deferred tax asset or liability, as it believes
that it does not meet the test of virtual certainty under Canadian GAAP or the
"more likely than not" test under U.S. GAAP. See detailed schedule below.
<TABLE>
<CAPTION>
(Deductible)
Temporary
Difference
Carrying Amount Tax Basis 1999
<S> <C> <C> <C>
Cash $ 130,160 $ 130,160 $ --
Other receivables 377,766 377,766 --
Deferred exploration -- -- --
Unused non capital tax losses -- -- --
Unused capital tax losses -- -- --
Investment 22,204 862,050 ( 839,846)
Patent 100 100 --
Capital assets 55,097 52,207 2,890
----------- ----------- -----------
Total assets $ 585,327 $ 1,422,283 $ (836,956)
=========== =========== ===========
Accounts payable and accrued liabilities $ 3,681,022 $ 3,681,022 $ --
Share capital 2,068,193 2,068,193 --
Contributed surplus 544,891 544,891 --
Retained earnings (deficit) (5,708,779) (4,871,823) (836,956)
----------- ----------- -----------
Total equity (3,095,695) (2,258,739) (836,956)
----------- ----------- -----------
Total liabilities and equity $ 585,327 $ 1,422,283 (836,956)
=========== =========== ===========
Deferred tax asset $ (836,956) Tax rate 45% $ (376,630)
=========== ===========
Valuation allowance $ 376,630
Net deferred (tax assets)/liability $ --
-----------
</TABLE>
-22-
<PAGE>
Exchange Rate Data
The following table sets forth, for the periods indicated, the high,
low, end of period and average for period noon buying rates in New York City for
cable transfers in Canadian Dollars certified for customs purposes by the
Federal Reserve Bank of New York, as expressed in the amount of U.S. Dollars
equal to one Canadian dollar.
Year Ended October 31,
1999 1998 1997 1996 1995
High for period .6428 .6341 .7093 .7235 .7024
Low for period .6891 .7140 .7513 .7458 .7527
End of period .6793 .6480 .7093 .7458 .7462
Average for period .6677 .6830 .7279 .7323 .7272
On April 26, 2000, the noon buying rate for one Canadian dollar as
quoted by the Federal Reserve Bank of New York was US $1.4758 (US $1.00 = CDN
$.6776).
No dividends were issued by Micromem during the periods referred to in
the above table.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with Item 8 - Selected
financial Data and the Financial Statements starting on page A-1 of this Report.
While the Registrant, a development stage company, which changed its
name to Micromem Technologies Inc. from AvantiCorp International Inc. on January
14, 1999, is the legal acquirer of Pageant International, the acquisition has
been treated as a reverse purchase acquisition (or reverse takeover) for
accounting purposes. This means that the consolidated financial statements of
Micromem are presented as a continuation of the financial position and results
of Pageant International, even though Micromem remains the legal parent and
Pageant International remains the legal subsidiary. Consequently, control of the
net assets and operations of Micromem is deemed to have been acquired by Pageant
effective January 11, 1999, the date of the acquisition of the Pageant
International stock, and all financial information prior to January 11, 1999 is
that of Pageant International and its subsidiary alone. Thus, the historical
financial condition and results of operations being presented for all periods
prior to January 11, 1999, the date of the reverse purchase acquisition, are
those of Pageant International alone, and the historical financial condition and
results of operations for all periods after January 11, 1999 are those of both
Pageant International and Micromem. Therefore, to the extent the following
discussion concerns financial periods ended prior to January 11, 1999, only the
financial condition and results of operations of Pageant International will be
addressed, even though all references are to Micromem Technologies Inc., the
Registrant's actual name.
Fiscal year ended October 31, 1999 with comparatives for the year
ended October 31, 1998
The fiscal year ended October 31, 1999 includes the financial
information of only Pageant International and its subsidiary through January 10,
1999, since the acquisition is being treated as a reverse takeover for
accounting purposes. Starting January 11, 1999, the date of the acquisition, the
financial information of Micromem is also included. All financial information
relating to the year ended October 31, 1998 is that of Pageant International and
its subsidiary alone.
Micromem had no operating revenue in either year, its only activities
being the acquisition of the rights to the MAGRAM(TM) technology, and subsequent
research and development. Its only income during these 2 years were US $1,303
and US $2,571, being the interest it earned in 1999 and 1998.
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<PAGE>
Costs and expenses increased 883.8% to US $5,206,936 for the year ended
October 31, 1999 from US $529,274 in 1998.
The largest component of the costs was the US $3,283,850 ascribed to
compensation in 1999 as contrasted with no compensation costs recorded in 1998.
The compensation amount represents the payments aggregating US $1,837,264 to Sam
Fuda, Chairman of Micromem, under a one-year agreement ending December 31, 1999
and payments aggregating US $1,446,586 to Mast Holding (Bermuda) Ltd. ("Mast"),
a company controlled by Robert Patterson, President and Chief Executive Officer
of Micromem, under a one-year agreement in effect from March 9, 1999 to March
10, 2000. Total compensation expense under each of the agreements is based on
the price of a Micromem common share during the life of the consulting
agreements. (See "Item 11. Compensation of Directors and Officers" for a
discussion of the two agreements and the assumptions concerning total
compensation expense).
In addition, development expenses increased 810.6%, to US $455,288 in
1999 from US $50,000 in 1998 due primarily to the payments made to the
University of Utah under the Research Agreement dated November 24, 1997. (See
"Item 1. Description of Business - Research and Development.") Professional fees
increased 365.5% to US $468,954 in 1999 from US $100,750 in 1998 reflecting
primarily the legal and accounting fees resulting from the acquisition, work
with respect to licensing the technology and perfecting the patent protection,
and the preparation and filing of Micromem's registration statement under the US
securities laws.
Wages and salaries increased 190.5% to US $236,661 in 1999 from US
$81,457 in 1998 and administration expenses increased 221.4% to US $373,794 in
1999 from US $116,304 in 1998, in each case reflecting Micromem's expansion and
the addition of the Toronto office.
Micromem had an unrealized foreign exchange loss of US $2,154 in 1999
as compared to a gain of US $26,961 in 1998, due to the effect of exchange rates
on advances made by shareholders in Canadian dollars and held in Canadian dollar
denominated bank accounts.
During the year ended October 31, 1999 Micromem had loss on sale of
investment of US $54,606 resulting from the sale of 325,000 shares of Ontex
Resources Limited, representing all of Micromem's remaining interest in that
company, at an aggregate sales price of US $233,641. Micromem had no such loss
for the comparable period in 1998. The Ontex stock had been acquired by the
pre-acquisition Micromem Technologies Inc. (formerly AvantiCorp International
Inc.). Ontex is a mining company as was AvantiCorp International Inc., and the
sale of the Ontex stock reflects the intention of Micromem to focus its
resources on the development of its technology. Micromem's investment in Ontex
had been carried at CDN $180,000 (US $116,640) as reflected in its October 31,
1998 financial statements, but was marked to market as of January 11, 1999
consistent with reverse takeover accounting practices, market being CDN $435,500
(US $289,273) based on a market price of CDN $1.34 (US $0.89) for a share of
Ontex common stock on such date, resulting in a gain of CDN $338,000 (US
$224,510).
During the year ended October 31, 1999, Micromem wrote down its
investment in Aroc Inc., a publicly traded company formerly known as Alliance
Resources PLC, by US $61,020 from US $83,224 to US $22,204 to reflect the quoted
market price of the company's stock. Micromem took the writedown following a
determination that the decline in the market price of the stock was due to
factors that were other than temporary.
Micromem had a net loss of US $5,207,787 for the year ended October 31,
1999 or US $0.14 per share, an increase of 1042.1% over the net loss of US
$499,742 or US $0.02 per share for the year ended October 31, 1998. As of
October 31, 1999, Micromem had a cumulative deficit of US $5,708,779 or US $0.16
per share.
Fiscal year ended October 31, 1998 with comparatives for the period from
September 3, 1997 (date of incorporation) to October 31, 1997
Micromem had no revenues from its inception through to the end of its
fiscal year ended October 31, 1998 except for US $2,571 in interest income.
Micromem's wholly-owned subsidiary, Pageant International, was created for the
purpose of acquiring and developing the MAGRAM(TM) Technology and during this
period its primary
-24-
<PAGE>
activities were obtaining license rights with respect to the Technology
(agreement dated September 17, 1997), acquiring an undivided 50% interest in the
MAGRAM(TM) Technology patent (assignment dated November 19, 1997) and commencing
research and development activities (Research Agreement with the University of
Utah dated November 24, 1997).
Costs and expenses during the fiscal year ended October 31, 1998
totaled US $529,274. Of this amount, US $176,012 (33.3%) was for travel and
entertainment expenses incurred in negotiating the acquisition of the
technology, raising the capital for the acquisition and coordinating operations
among the Pageant International offices in the Turks & Caicos Islands, the
Pageant administrative offices in Santa Fe, New Mexico, and the research
headquarters at the University of Utah in Salt Lake City, Utah. Professional
fees during this period totaled US $100,750 (19.0%), representing primarily
legal and accounting expenses incurred in connection with forming the
enterprise, acquiring the technology, obtaining patent protection, and
negotiating license rights and the Research Agreement with the University of
Utah.
Other expenses incurred during the fiscal year ended October 31, 1998
included US $81,457 (15.4%) for wages and salaries, US $116,304 (22.0%) for
administrative expenses and US $50,000 (9.4%) for development expenses. The US
$50,000 in development expenses was the first installment (9.7%) of the US
$515,000 payable to the University of Utah under the Research Agreement dated
November 24, 1997, and ended December 31, 1999.
Amortization for the fiscal year ended October 31, 1998 totaled US
$4,751 (0.9% of total expenses) and represented primarily depreciation on
fixtures and equipment, calculated using the straight-line method to write off
the cost of the fixtures and equipment over their estimated useful lives of
three years.
Micromem had unrealized gain on foreign exchange during the fiscal year
ended October 31, 1998 of US $26,961. This gain results from the effect of
exchange rates on advances made by shareholders in Canadian dollars and held by
Micromem in Canadian dollar denominated bank accounts. Such advances were
interest-free and unsecured, and had no fixed repayment date. As of October 31,
1998, shareholder advances of US $625,177 were outstanding, of which US $594,032
were held in Canadian dollars and US $31,145 were held in United States dollars.
Micromem incurred a net loss of US $499,742 for the year ended October
31, 1998, as compared to a net loss of US $1,250 for the period ended October
31, 1997. Micromem is still in the development stage and has generated no
revenues from its operations.
Three month period ended January 31, 2000 with comparatives for the three month
period ended January 31, 1999
The quarter ended January 31, 1999 includes the financial information
of only Pageant International and its subsidiary through January 10, 1999, since
the acquisition is being treated as a reverse takeover for accounting purposes.
Starting January 11, 1999, the date of the acquisition, the financial
information of Micromem is also included.
Micromem had no operating revenue in either quarter, its only
activities being the acquisition of the rights to the MAGRAM(TM) technology, and
subsequent research and development.
Costs and expenses increased to US $1,569,230 for the quarter ended
January 31, 2000 from US $59,797 for the quarter ended January 31, 1999..
The largest component of the costs was the US $1,010,311 ascribed to
compensation in the quarter ended January 31, 2000, as contrasted with no
compensation costs recorded for the quarter ended January 31, 1999. The
compensation amount represents the payments aggregating US $357,598 to Sam Fuda,
Chairman of Micromem, under a one-year agreement ending December 31, 1999 and
payments aggregating US $652,713 to Mast Holding (Bermuda) Ltd. ("Mast"), a
company controlled by Robert Patterson, President and Chief Executive Officer of
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<PAGE>
Micromem, under a one-year agreement in effect from March 9, 1999 to March 10,
2000. Total compensation expense under each of the agreements is based on the
price of a Micromem common share during the life of the consulting agreements.
(See "Item 11. Compensation of Directors and Officers" for a discussion of the
two agreements and the assumptions concerning total compensation expense).
Professional fees increased to US $275,516 in the quarter ended January
31, 2000 from US $14,688 in the quarter ended January 31, 1999, reflecting
primarily the legal and accounting fees resulting from the acquisition, work
with respect to licensing the technology and perfecting the patent protection,
and the preparation and filing of Micromem's registration statement under the US
securities laws.
Administrative expenses increased to US $136,452 in the quarter ended
January 31, 2000 from US $6,836 in the quarter ended January 31, 1999, wages and
salaries increased to US $99,792 in the quarter ended January 31, 2000 from US
$26,437 in the quarter ended January 31, 1999, and travel and entertainment
increased to US $35,167 in the quarter ended January 31, 2000 from US $9,836 in
the quarter ended January 31, 1999, in each case reflecting Micromem's expansion
and the addition of the Toronto office.
Micromem had an unrealized foreign exchange loss of US $10,985 in the
quarter ended January 31, 2000, due to the effect of exchange rates on advances
made by shareholders in Canadian dollars and held in Canadian dollar denominated
bank accounts.
Micromem had a net loss of US $1,580,215 for the quarter ended January
31, 2000 or US $0.04 per share, as compared to the net loss of US $59,797 (less
than US $0.01 per share) for the quarter ended January 31, 1999.
Liquidity
Micromem currently has no cash flow from operations and will have none
until it is in a position to either license or directly produce and sell its
products utilizing MAGRAM(TM) technology. The researchers of the University of
Utah who were hired by Micromem to complete the research on the technology have
produced working prototype 8 bit technology samples. Based on recommendations
from Honeywell, however, the 8 bit samples were replaced by differently
configured more advanced samples produced by Pageant, which samples were sent to
Honeywell for evaluation in mid April, 2000. Meanwhile the financing of
Micromem's activities came primarily from shareholder advances of US $625,117
during fiscal year 1998, $544,891 of which was forgiven by Ataraxia Corp., the
former parent company of Pageant International, and treated as contributed
surplus in fiscal year 1999. The balance of the shareholder advances were repaid
in fiscal year 1999, leaving none outstanding at October 31, 1999. A second
source of financing was the sale of Common Shares, which totaled US $1,682,137
during fiscal year 1999, and the sale of Micromem's investment in Ontex
Resources Limited for US $233,641 on January 27, 1999.
Micromem currently has no lines of credit in place and must obtain
financing from investors and from persons who hold outstanding options and
Warrants in order to meet its cash flow needs before it begins receiving
revenues from licensing or direct sales. In May 1999 Micromem completed an arm's
length private placement with Exterland Corporation in Lugano, Switzerland, of
350,000 Common Shares at US $3.00 per share, from which Micromem received
proceeds of US $1,050,000. The US $3.00 per share price was below the then
market value, reflecting the 18 month restriction on transfer imposed on the
purchaser under Ontario securities law. In February 2000 Micromem raised an
additional US $5,000,000 through the sale of 2,000,000 Common Shares at a price
of US $2.50 per share pursuant to an arm's length private placement with
Framcove Limited. The share price for this sale, set on December 30, 1999, the
date on which the Framcove agreement was executed, was also below the then
market value, again reflecting the Ontario securities law's 18 month restriction
on transfer.
At April 15, 2000, Micromem had outstanding Warrants for the purchase
of 798,074 Common Shares at CDN $2.30 per share until January 11, 2001. This
exercise price is materially below the current sales price of a Common Share
(CDN $16.64 or US $11.34 per share at April 26, 2000). Micromem also has granted
options for the purchase of 1,000,000 Common Shares to Sam Fuda, Chairman of
Micromem and a Director, at an exercise price of US $3.00 per Common Share,
pursuant to the Micromem Technologies Inc. 1999 Stock Option Plan as part of a
compensation package for Mr. Fuda. Since the exercise
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price of US $3.00 per Common Share was the prevailing market price, no
compensation expense was recognized by Micromem when the options were granted.
The options expire January 23, 2009. Mr. Fuda exercised options for the purchase
of 100,000 Common Shares on each of October 1, 1999 and November 4, 1999,
bringing an additional $600,000 to Micromem. It is expected that Mr. Fuda will
exercise the balance of these options as and when Micromem requires funding.
Neither Mr. Fuda nor any of the holders of Warrants, however, has any obligation
to exercise, and there can be no assurance that Micromem will realize funds from
any of these sources.
Impact of SFAS 131 and SFAS 133
Micromem is not affected by the provisions of either SFAS 131 or SFAS
133. Micromem is still in a development stage and has not yet commenced
operations. It is anticipated that Micromem will operate as a reportable segment
and that therefore the provisions of SFAS 131 will not have an impact. SFAS 133
does not apply because Micromem does not now and does not expect in the future
to deal in derivative contracts.
MAGRAM(TM) Technology
The primary asset of Micromem is its undivided 50% interest in the
patent for the MAGRAM(TM) Technology, which it holds through its wholly-owned
subsidiary Pageant Technologies Incorporated ("Pageant International"). Pageant
International acquired its interest by means of a patent assignment from
Ataraxia Corp. Pageant International also received an assignment from Ataraxia
Corp. of its entire interest in a license agreement with Estancia Limited and,
if Pageant International were to be in breech of its obligations under the
license agreement, the 50% interest and all related intellectual property rights
would revert back to Estancia Limited. Management believes, however, that the
risk of the patent reverting to Estancia Limited is low, since the license
agreement contains no minimum performance criteria and since the other
obligations of Pageant International under the license agreement (a minimal
initial payment, financing of the research at the University of Utah and the
marketing, sales licensing and manufacturing of the technology, and the payment
of 40% royalties based on net sales) have either been performed or are well
within Micromem's and Pageant International's capabilities.
Year 2000 Compliance
Many older computer software programs refer to years in terms of their
final two digits only. This simple problem, which could, for example, cause a
computer to interpret 2000 as the year 1900, has the potential to cause a
company serious harm even after January 1, 2000. Date related failures or
miscalculations could disrupt a company's operations, including its research and
development activities, information technology systems, and even, in extreme
cases, could cause its business to shut down entirely. Even if a company has
taken great care to eliminate all year 2000 problems in its own operations it
still could face serious damage to its business if such a problem were to
disrupt the business of a key customer or supplier.
Micromem to date has not incurred, and in the future is unlikely to
incur, any replacement or remediation costs for equipment or systems as a result
of a year 2000 problem. Micromem has no revenue generating operations at this
time and has minimal reliance on computerized systems for its operations other
than those at the University of New Mexico's CHTM laboratories and those being
used by Honeywell at the DOE Facility, neither of which appear to have
experienced any material effects from the transition to the year 2000.
Management believes that Micromem is unlikely to face any year 2000 problem that
would have a material financial impact on it, and that Micromem is ready to
face, and can easily remediate, any year 2000 problem that does arise with
respect to its operations.
Capital Resources
Micromem had no material commitments for capital expenditures as of
October 31, 1998 or 1999.
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<PAGE>
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The Directors, Executive Officers and other key personal of Micromem as
at April , 2000 are set forth below:
Name Age Position
---- --- --------
Robert Patterson 51 President and Chief Executive Officer
Sam Fuda 65 Chairman of the Board of Directors
Ross McGroarty 60 Executive Vice President and Secretary, Director
Antonio Lopes 36 Chief Financial Officer
Magaly Bianchini 44 Director
Stephen Fleming 53 Director
Robert Patterson has served as the President and Chief Executive
Officer of Micromem since March 18, 1999. In 1997 he was one of the founders of
Pageant USA and served as that company's Chairman of the Board and Vice
President of Corporate Development until its acquisition by Micromem in January
1999. From 1995 to 1997 he served as Vice President of Corporate Development for
SGL International, Inc.
Sam Fuda has served as Chairman of the Board of Micromem since January
11, 1999 and a Director of Micromem since 1992. From 1992 to January 11, 1999 he
also served as Secretary of Micromem. He served as President and Chief Executive
Officer of Ontex Resources Limited from 1986 to December 1998 and as Chairman of
the Board of Ontex Resources Limited since that date.
Ross McGroarty was elected Executive Vice President and Secretary of
Micromem on January 11, 1999. For ten years prior to that he served Micromem as
President. He has been a director of Micromem since 1998 and served as a
director of Ontex Resources Limited from 1988 to December 1999.
Antonio Lopes was appointed Chief Financial Officer of the Company on
October 15, 1999. He also has been serving as Controller and Chief Financial
Officer of Federal White Cement Limited, a privately held corporation, since
1993, and prior to that was a Senior Accountant at Ernst & Young from 1989 to
1993.
Magaly Bianchini was elected a director of Micromem on February 25,
2000. Since July 1998, she has also been serving as a director of Leader Capital
Corp., a publicly traded Ontario corporation which holds investments in three
land development projects situated in Ontario and Quebec, Canada. Additionally,
Ms. Bianchini has been involved in real estate development and construction with
a focus on high-rise condominium projects since July 1996.
Stephen Fleming was elected a Director of Micromem on January 11, 1999
following the ratification by Micromem's shareholders of the acquisition of
Pageant International, and served as the President and Chief Executive Officer
of Micromem from January 11, 1999 to March 18, 1999. He has served as the
President and Chief Executive Officer of Pageant USA from 1997 to February 1,
2000, and President of SGL International Inc., a company he co-founded that is
engaged in technology development, since 1996. From 1990 to 1995 he served as
Senior Vice President for International Technology Development of International
Ion Incorporated.
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<PAGE>
There are no arrangements or understandings between any director and
any other person pursuant to which the director was selected as a director or
executive officer. There is no family relationship between any director or
executive officer and any other director or executive officer.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of compensation paid by Micromem and its
subsidiaries during Micromem's last fiscal year to all directors and officers as
a group for services in all capacities was $24,000, all of which was paid to
Ross McGroarty in his capacity as President.
Pursuant to a verbal agreement between Micromem and Ross McGroarty,
Executive Vice-President and Secretary of Micromem, Mr. McGroarty received a
salary of CDN $5,000 per month from February through April 1999.
On January 25, 1999, as part of a compensation package for Sam Fuda,
Micromem granted Mr. Fuda options to purchase, prior to January 25, 2009, up to
1,000,000 Common Shares at a price per share of US $3.00 pursuant to the
Micromem Technologies Inc. 1999 Stock Option Plan (the "Stock Option Plan"). On
February 25, 2000, Micromem granted Stephen Fleming, a director of Micromem and
the former President of Pageant USA, options to purchase, prior to February 25,
2001, up to 500,000 Common Shares at a price per share of US $6.00 pursuant to
the Stock Option Plan.
Pursuant to a consulting agreement between 275311 Ontario Inc., a
corporation controlled by Sam Fuda, Chairman and a director of Micromem, and
Micromem dated as of January 29, 1999, Micromem retained 275311 Ontario Inc. to
arrange for Sam Fuda to serve as a director of Micromem and to provide certain
consulting and management services during the period from January 1, 1999
through to December 31, 1999, including assisting and advising Micromem's Board
of Directors and senior management in negotiations with prospective purchasers,
manufacturers and licensees of the MAGRAM(TM) Technology, overseeing Micromem's
compliance with corporate and securities regulations in Canada and those of any
trading system or stock exchange on which Micromem's shares may become listed,
retaining and instructing Micromem's professional advisers, including its legal
counsel and auditors, providing advice to Micromem's Board of Directors and
senior management with respect to structuring of Micromem's equity funding by
private placement and/or public offering and providing introductory services to
the financial and investment community in Toronto, and managing a corporate
office of Micromem to be situated in Toronto during the period from January 1,
1999 through to December 31, 1999.
The interest of 275311 Ontario Inc. in the agreement was assigned to
164189 Canada Limited ("FudaCo"), a corporation controlled by Mr. Fuda, and
FudaCo assumed all of 275311 Ontario Inc.'s obligations under the agreement. As
a result, FudaCo was responsible for ensuring the rendering by Mr. Fuda of the
services contracted for under the agreement and at the direction of FudaCo Mr.
Fuda was paid fees under the agreement in form of Common Shares (as opposed to
fees in the form of cash payments), calculated on a quarterly basis. Under the
terms of the agreement, Micromem elected to pay the fees through the issuance of
a number of Common Shares calculated under the terms of the agreement as the
product of 0.3125% of the simple average of the number of shares of Micromem
that were outstanding on the last day of each month during each quarter (the
"Average Outstanding") of the term of the agreement. On March 15, 2000 Micromem
issued 454,292 Common Shares to Mr. Fuda under the agreement. Of the total
number of shares issued to Mr. Fuda, 377,935 shares were issued in respect of
the period from January 1, 1999 through to October 31, 1999 and 76,357 shares
were issued in respect of the period from November 1, 1999 through to December
31, 1999. Had Micromem elected to pay the fees through quarterly cash payments,
then the amount of such fees would have been calculated as the product of
0.3125% of the Average Outstanding multiplied by the simple average of the daily
close price of Micromem's Common Shares during the quarter.
Pursuant to a consulting agreement between Mast Holding (Bermuda) Ltd.
("Mast"), a Bermuda corporation, and Micromem dated March 10, 1999, Micromem
retained Mast to provide certain consulting and management services, to be
rendered by Robert Patterson, during the period from March 9, 1999 to March 10,
2000.
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The services rendered under the agreement include the services of Mr. Patterson
as the President and Chief Executive Officer of Micromem. Under the agreement,
Mast was to be paid fees on a quarterly basis, in the form of cash or Common
Shares at the option of Micromem. Micromem elected to pay the fees through the
issuance of a number of Common Shares calculated under the terms of the
agreement as the product of 0.3125% of the simple average of the number of
shares of Micromem that were outstanding on the last day of each month during
each quarter of the term of the agreement (the "Average Outstanding"). On March
15, 2000, Micromem issued 446,818 Common Shares to Mast under the agreement. Of
the total number of shares issued to Mast, 291,919 shares were issued in respect
of the period from March 9, 1999 to October 31, 1999 and 154,899 shares were
issued in respect of the period from November 1, 1999 to March 10, 2000. Had
Micromem elected to pay the fees through quarterly cash payments, then the
amount of such fees would have been calculated as the product of 0.3125% of the
Average Outstanding multiplied by the simple average of the daily close price of
Micromem's Common Shares during the quarter.
The issuance of Common Shares under both the agreement with 275311
Ontario Inc. and the agreement with Mast Holding (Bermuda) Ltd. were conditioned
upon approval being obtained by Micromem from its shareholders, failing which
Micromem is would have been required to pay the cash equivalent of the fees
under each of the agreements. On January 12, 2000, the two agreements were
amended to remove the conditions requiring approvals from Micromem's
shareholders and Micromem's Board of Directors granted its approval to the
issuance of Common Shares under both agreements.
Directors of Micromem receive CDN $500 and expenses for each meeting of
the Board of Directors or committee of the Board of Directors they attend.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT
Warrants for the purchase of 798,074 Common Shares issued as part of
the purchase price for Pageant International, were outstanding on April 15,
2000. Each warrant entitles its holder to purchase one Common Share at a
purchase price of CDN $2.30 through January 12, 2001, at which time the warrants
expire. No warrants are held by any directors or officers of Micromem.
On January 25, 1999, Micromem granted Sam Fuda options to purchase,
prior to January 25, 2009, up to 1,000,000 Common Shares at a price per share of
US $3.00, pursuant to the Stock Option Plan. Mr. Fuda exercised options for the
purchase of 100,000 Common Shares at an aggregate purchase price of US $300,000
on each of October 1, 1999 and November 4, 1999, leaving options for a balance
of 800,000 Common Shares outstanding. On February 25, 2000, Micromem granted
Stephen Fleming, a director of Micromem and the former President of Pageant USA,
options to purchase, prior to February 25, 2001, up to 500,000 Common Shares at
a price per share of US $6.00 pursuant to the Stock Option Plan.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
During the past three fiscal years and to the date of this registration
statement, there have been no material transactions in which Micromem or any of
its subsidiaries was a party, and in which any director or officer of Micromem
had a direct or indirect material interest, except as set forth below.
Pursuant to a consulting agreement between 275311 Ontario Inc., a
corporation controlled by Sam Fuda, Chairman and a director of Micromem, and
Micromem dated as of January 29, 1999, Micromem retained 275311 Ontario Inc. to
provide certain consulting and management services during the period from
January 1, 1999 through to December 31, 1999, including arranging for Mr. Fuda
to serve as a director of Micromem and assisting and advising Micromem's Board
of Directors and senior management in negotiations with prospective purchasers,
manufacturers and licensees of the MAGRAM(TM) Technology, overseeing Micromem's
compliance with corporate and securities regulations in Canada and those of any
trading system or stock exchange on which Micromem's shares may become listed,
retaining and instructing Micromem's professional advisers, including its legal
counsel and auditors, providing advice to Micromem's Board of Directors and
senior management with respect to
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<PAGE>
structuring of Micromem's equity funding by private placement and/or public
offering and providing introductory services to the financial and investment
community in Toronto.
The interest of 275311 Ontario Inc. in the agreement has been assigned
to 164189 Canada Limited ("FudaCo"), a corporation controlled by Mr. Fuda, and
FudaCo has assumed all of 275311 Ontario Inc.'s obligations under the agreement.
As a result, FudaCo was responsible for ensuring the rendering of the services
contracted for under the agreement by Mr. Fuda and by direction form FudaCo Mr.
Fuda was paid fees calculated on a quarterly basis, in the form of Common shares
(as opposed to fees in the form of cash payments), under the agreement. Under
the terms of the agreement, Micromem elected to pay the fees through the
issuance of a number of Common Shares, calculated under the terms of the
agreement as the product of 0.3125% of the simple average of the number of
shares of Micromem that were outstanding on the last day of each month during
each quarter (the "Average Outstanding") of the term of the agreement. On March
15, 2000 Micromem issued 454,292 Common Shares to Sam Fuda under the agreement.
Of the total number of shares issued to Mr. Fuda, 377,935 shares were issued in
respect of the period from January 1, 1999 through to October 31, 1999 and
76,357 shares were issued in respect of the period from November 1, 1999 through
to December 31, 1999. Had Micromem elected to pay the fees through quarterly
cash payments, then the amount of such fees would have been calculated as the
product of 0.3125% of the Average Outstanding multiplied by the simple average
of the daily close price of Micromem's Common Shares during the quarter. See
"Item 11. Compensation of Directors and Officers".
Pursuant to a consulting agreement between mast Holding (Bermuda) Ltd.
("Mast"), a Bermuda corporation, and Micromem dated March 10, 1999, Micromem
retained Mast to provide certain consulting and management services, to be
rendered by Robert Patterson, during the period from March 9, 1999 to March 10,
2000. the services rendered under the agreement include the services of Mr.
Patterson as the President and Chief Executive Officer of Micromem. Under the
agreement, mast was to be paid fees on a quarterly basis, in the form of cash or
Common Shares at the option of Micromem. Micromem elected to pay the fees
through the issuance of a number of Common Shares calculated under the terms of
the agreement as the product of 0.3125% of the simple average of the number of
shares of Micromem that were outstanding on the last day of each month during
each quarter of the term of the agreement (the "Average Outstanding). On March
15, 2000, Micromem issued 446,818 Common Shares to Mast under the agreement. Of
the total number of shares issued to Mast, 291,919 shares were issued in respect
of the period from march 9, 1999 to October 31, 1999 and 154,899 shares were
issued in respect of the period from November 1, 1999 to march 10, 2000. Had
Micromem elected to pay the fees through quarterly cash payments, then the
amount of such fees would have been calculated as the product of 0.3125% of the
Average Outstanding multiplied by the simple average of the daily close price of
Micromem's Common Shares during the quarter. See "Item 11.
Compensation of Directors and Officers".
The issuances of Common Shares under both the agreement with 275311
Ontario Inc. and the agreement with Mast Holding (Bermuda) Ltd. (the "Consulting
Agreements") were conditional upon approval being obtained by Micromem from its
shareholders, failing which Micromem would have been required to pay the cash
equivalent of the fees under each of the agreements. On January 12, 2000, the
Consulting Agreements were amended to remove the conditions requiring approvals
from Micromem's shareholders and Micromem's Board of Directors granted its
approval to the issuance of Common Shares under both Consulting Agreements.
During the past three years, no relatives, spouses or relatives of
spouses of officers or directors were involved in material transactions with
Micromem, and no such transaction is currently proposed.
During the past three fiscal years and the current fiscal year, no
officer or director and no associate of any officer or director, has been
indebted to Micromem.
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<PAGE>
Part III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY
FOR REGISTERED SECURITIES AND USE OF PROCEEDS
None.
Part IV
ITEM 17. FINANCIAL STATEMENTS
The financial statements required by Item 17 are listed in the Index to
Financial Statements appearing on Page A-1.
ITEM 18. FINANCIAL STATEMENTS
Not applicable
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
See the Index to Financial Statements on page A-1 of the financial
statements filed as part of this annual report as Attachment A.
(b) Exhibits:
See the Index to Exhibits on page B-1 of the Exhibits filed as part of
this annual report as Attachment B.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MICROMEM TECHNOLOGIES INC.
By: /s/ Sam Fuda
---------------------------------------
Name: Sam Fuda
Title: Chairman of the Board of Directors
Dated: April 28, 2000
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<PAGE>
ATTACHMENT A
INDEX TO FINANCIAL STATEMENTS
Micromem Technologies Inc. (Formerly AvantiCorp International Inc.) A
Development Stage Company Consolidated Financial Statements for the
Years Ended October 31, 1999 and 1998 and for the periods from
September 3, 1997 (date of incorporation) to October 31, 1997 and
September 3, 1997 to October 31, 1999 A-3
Auditors' Report to the Shareholders A-4
Comments by Auditors for U.S. Readers on Canada-U.S. Reporting
Difference A-5
Consolidated Balance Sheets as of October 31, 1999 and 1998 A-6
Consolidated Statements of Operations and Deficit for the
Years ended October 31, 1999 and 1998, and for the periods
from September 3, 1997 (date of incorporation) to October 31,
1997 and September 3, 1997 to October 31, 1999 A-7
Consolidated Statements of Cash Flows for the Years ended
October 31, 1999 and 1998, and for the periods from September
3, 1997 (date of incorporation) to October 31, 1997 and
September 3, 1997 to October 31, 1999 A-8
Notes to Consolidated Financial Statements for the years ended
October 31, 1999 and 1998, and for the periods from September
3, 1997 (date of incorporation) to October 31, 1997 and
September 3, 1997 to October 31, 1999 A-10
Pageant Technologies Incorporated (A Development Stage Corporation)
Consolidated Financial Statements for The Year Ended October 31, 1998
And the Period from September 3, 1997 (Date of Incorporation) to
October 31, 1997 A-25
Independent Auditors' Report A-26
Consolidated Balance Sheet as of October 31, 1998 and October
31, 1997 A-27
Consolidated Statement of Loss and Accumulated Deficit for
Year Ending October 31, 1998 and for the period from September
3, 1997 (Date of Incorporation) to October 31, 1997 A-28
A-1
<PAGE>
Consolidated Statement of Cash Flows for Year Ending October
31, 1998 and for the period from September 3, 1997 (Date of
Incorporation) to October 31, 1997 A-29
Notes to Consolidated Financial Statements for Year Ending
October 31, 1998 And For The Period From September 3, 1997
(Date of Incorporation) to October 31, 1997 A-30
AvantiCorp International Inc. Financial Statements October 31, 1998,
1997 and 1996 A-34
Auditor's Report A-35
Balance Sheets as of October 31, 1998, 1997 and 1996 A-36
Statements of Operations and Deficit for Years Ended
October 31, 1998, 1997 and 1996 A-37
Statements of Changes in Cash Position for Years Ended
October 31, 1998, 1997 and 1996 A-38
Notes to Financial Statements October 31, 1998 A-39
Micromem Technologies Inc. (Formerly AvantiCorp International Inc.)
Consolidated Statement of Operations for the Three
Month Period Ended January 31, 2000 (Unaudited) A-45
Consolidated Statement of Cash Flows for the Three
Month Period Ended January 31, 2000 (Unaudited) A-46
Notes to the Unaudited Consolidated Statements of Operations
and Cash Flows for the three month period ended January 31,
2000 with comparatives for the three month period ended
January 31, 1999 A-47
A-2
<PAGE>
Consolidated Financial Statements
(Expressed in United States dollars)
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Years ended October 31, 1999 and 1998 and for the periods from
September 3, 1997 (date of incorporation) to October 31, 1997
and September 3, 1997 to October 31, 1999
A-3
<PAGE>
KPMG
KPMG LLP
Chartered Accountants Telephone(416) 777-8500
Commerce Court West Telefax (416) 777-8818
PO Box 31 Stn Commerce Court www.kpmg.ca
Suite 3300
Toronto ON M5L 1B2
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheet of Micromem Technologies Inc.
(formerly Avanticorp International Inc.) as at October 31, 1999 and the
consolidated statements of operations and deficit and cash flows for the year
then ended and for the period from September 3, 1997 to October 31, 1999. 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. The cumulative statements of operations and deficit and cash flows
for the period from September 3, 1997 to October 31, 1999 include amounts for
the period from September 3, 1997 to October 31, 1997, which were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for the period from September 3, 1997
through October 31, 1998 is based solely on the report of the other auditors. We
conducted our audit in accordance with Canadian 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, based on our audit and the report of other auditors, these
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as at October 31, 1999 and the results of its
operations and its cash flows for the year then ended and for the period from
September 3, 1997 to October 31, 1999 in accordance with Canadian generally
accepted accounting principles. Canadian generally accepted accounting
principles vary in certain significant respects from accounting principles
accepted in the United States. Application of accounting principles generally
accepted in the United States would have affected results of operations for each
of the periods in the three year period ended October 31, 1999 and shareholders'
deficiency as at October 31, 1999, 1998 and 1997 to the extent summarized in
note 12 to the consolidated financial statements. We did not audit the
consolidated financial statements of the Company for the period from September
3, 1997 to October 31, 1997. The financial statements as at October 31, 1998 and
for the period then ended were audited by another firm of chartered accountants
who expressed an opinion without reservation on those statements in their report
dated December 20, 1999.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
February 25, 2000
A-4
<PAGE>
KPMG
KPMG LLP
Chartered Accountants Telephone(416) 777-8500
Commerce Court West Telefax (416) 777-8818
PO Box 31 Stn Commerce Court www.kpmg.ca
Suite 3300
Toronto ON M5L 1B2
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
the introductory paragraphs to the notes to the financial statements. Our report
to the shareholders dated February 25, 2000 is expressed in accordance with
Canadian reporting standards which do not permit a reference to such events and
conditions in the auditors' report when these are adequately disclosed in the
financial statements.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
February 25, 2000
A-5
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Consolidated Balance Sheets
(Expressed in United States dollars)
October 31, 1999 and 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 130,160 $ 147,063
Other receivables (note 7) 377,766 1,523
- ----------------------------------------------------------------------------------------------
507,926 148,586
Investment (note 2) 22,204 -
Patent (note 3) 100 100
Capital assets, net of amortization of $12,349 (1998 - $4,751) 55,097 15,334
- ----------------------------------------------------------------------------------------------
$ 585,327 $ 164,020
- ----------------------------------------------------------------------------------------------
Liabilities and Shareholders' Deficiency
Current liabilities:
Accounts payable and accrued liabilities $ 397,172 $ 39,834
Compensation expense payable (note 7) 3,283,850 -
Shareholder loan (note 4) - 625,177
- ----------------------------------------------------------------------------------------------
3,681,022 665,011
Shareholders' deficiency:
Share capital (note 5):
Authorized:
2,000,000 special preference shares,
redeemable, voting
Unlimited common shares
Issued:
36,551,319 common shares (1998 - 1) 2,068,193 1
Contributed surplus (note 8) 544,891 -
Deficit (5,708,779) (500,992)
- ----------------------------------------------------------------------------------------------
(3,095,695) (500,991)
- ----------------------------------------------------------------------------------------------
$ 585,327 $ 164,020
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
Salvatore Fuda Director
- --------------
Salvatore Fuda
/s/ Magaly Bianchini Director
- --------------------
Magaly Bianchini
A-6
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Consolidated Statements of Operations and Deficit
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
From From
September 3, September 3,
1997 to 1997 to
October 31, October 31,
1999 1998 1997 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Interest earned $ 1,303 $ 2,571 $ - $ 3,874
Costs and expenses:
Compensation 3,283,850 - - 3,283,850
Administration expenses 373,794 116,304 - 490,098
Professional fees 468,954 100,750 1,250 570,954
Wages and salaries 236,661 81,457 - 318,118
Development expenses 455,288 50,000 - 505,288
Travel and entertainment 261,919 176,012 - 437,931
Loss on sale of investment 54,606 - - 54,606
Write-down of investment 61,020 - - 61,020
Amortization 7,598 4,751 - 12,349
Interest expense 3,246 - - 3,246
- ----------------------------------------------------------------------------------------------
5,206,936 529,274 1,250 5,737,460
- ----------------------------------------------------------------------------------------------
Loss before undernoted item 5,205,633 526,703 1,250 5,733,586
Unrealized loss (gain) on foreign
exchange 2,154 (26,961) - (24,807)
- ----------------------------------------------------------------------------------------------
Loss for the period 5,207,787 499,742 1,250 5,708,779
Deficit, beginning of period 500,992 1,250 - -
- ----------------------------------------------------------------------------------------------
Deficit, end of period $ 5,708,779 $ 500,992 $ 1,250 $ 5,708,779
- ----------------------------------------------------------------------------------------------
Net loss per share - basic and
diluted $ 0.14 $ 0.02 $ - $ 0.16
Weighted average shares 36,213,319 32,120,676 32,000,000 36,213,319
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
A-7
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
From From
September 3, September 3,
1997 to 1997 to
October 31, October 31,
1999 1998 1997 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Loss for the period $(5,207,787) $ (499,742) $ (1,250) $(5,708,779)
Adjustments to reconcile loss for
the period to net cash used in
operating activities:
Loss on sale of investment 54,606 -- -- 54,606
Write-down of investment 61,020 -- -- 61,020
Amortization 7,598 4,751 -- 12,349
Compensation expense 3,283,850 -- -- 3,283,850
- --------------------------------------------------------------------------------------------------------
(1,800,713) (494,991) (1,250) (2,296,954)
Change in non-cash working capital
items, net of effects from
reverse takeover:
Increase in deposits and other
receivables (367,646) (1,523) -- (369,169)
Increase in accounts payable and
accrued liabilities 251,294 38,585 1,249 291,128
- --------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,917,065) (457,929) (1) (2,374,995)
Cash flows from investing activities:
Sale of investment 233,641 -- -- 233,641
Patent -- (100) -- (100)
Capital assets (47,361) (20,085) -- (67,446)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 186,280 (20,185) -- 166,095
Cash flows from financing activities:
Issue of common shares 1,682,137 -- 1 1,682,138
Net proceeds from (repayment of)
shareholder loan (80,286) 625,177 -- 544,891
Loan proceeds from Avanticorp 112,031 -- -- 112,031
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,713,882 625,177 1 2,339,060
-----------
Increase (decrease) in cash (16,903) 147,063 -- 130,160
Cash, beginning of period 147,063 -- -- --
- --------------------------------------------------------------------------------------------------------
Cash, end of period $ 130,160 $ 147,063 $ -- $ 130,160
- --------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 3,246 $ -- $ -- $ 3,246
- --------------------------------------------------------------------------------------------------------
</TABLE>
A-8
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Consolidated Statement of Cash Flows (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
Supplemental schedule of non-cash operating and financing activities:
On January 11, 1999, Micromem Technologies Inc. issued 32 million common shares
and 1 million warrants to acquire all of the issued and outstanding shares of
Pageant Technologies Inc. As a result of this transaction, the shareholders of
Pageant Technologies Inc. owned 88.9% of the outstanding shares of Micromem
Technologies Inc. and accordingly, the purchase of Pageant Technologies Inc. is
accounted for as a reverse takeover transaction. In conjunction with the reverse
takeover accounting, the following is the fair value of Micromem as of January
11, 1999:
- --------------------------------------------------------------------------------
Assigned fair value of net assets of Micromem $ 549,140
Less cash and bank balances (168,084)
- --------------------------------------------------------------------------------
Net non-cash items $ 381,056
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
A-9
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
Micromem Technologies Inc. ("Micromem" or the "Company") is a corporation
incorporated under the laws of the Province of Ontario, Canada. By Articles of
Amendment dated January 14, 1999, the Company changed its name from Avanticorp
International Inc. to Micromem Technologies Inc. On January 11, 1999, Micromem
Technologies Inc., acquired all the outstanding shares of Pageant Technologies
Inc., a company incorporated under the laws of the Turks & Caicos Islands,
B.W.I. This acquisition was recorded as a reverse takeover under Canadian
generally accepted accounting principles (note 1(a)).
The Company is a development stage enterprise, and through its wholly owned
subsidiary, engaged in the development and exploitation of patented technology
known as MAGRAM which relates to high performance memory and memory intensive
logic products. The planned principal commercial operations relating to
production of MAGRAM has not commenced and is still in the development stage.
These financial statements have been prepared on the basis of Canadian generally
accepted accounting principles as applicable to a going concern. The Company has
incurred substantial losses in its development stage. The continuation as a
going concern is dependent on the continued support from the Company's investors
and on achieving a source of income. Failure to continue as a going concern
would then require that stated amounts of assets and liabilities be reflected on
a liquidation basis which could differ from the going concern basis.
1. Significant accounting policies:
These consolidated financial statements include the accounts of the
Company's wholly owned legal subsidiaries, Pageant Technologies Inc. and
Pageant Technologies (U.S.A.)
Inc.
A-10
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies (continued):
The significant policies used in the preparation of these financial
statements conform in all material respects, to Canadian generally
accepted accounting principles. These are as follows:
(a) Basis of presentation:
On January 11, 1999, Micromem Technologies Inc. issued 32 million
common shares and 1 million warrants to acquire all of the issued
and outstanding shares of Pageant Technologies Inc. On that date,
the total number of Micromem Technologies Inc. shares outstanding
was 3,980,643 shares. As a result of this transaction, the
shareholders of Pageant Technologies Inc. owned 88.9% of the
outstanding common shares of Micromem Technologies Inc. and,
accordingly, the purchase of Pageant Technologies Inc. by Micromem
Technologies Inc. is accounted for as a reverse takeover
transaction.
Application of reverse takeover accounting results in the following:
(i) the consolidated financial statements of the combined entity
are issued under the name of the legal parent, Micromem
Technologies Inc., but are considered a continuation of the
financial statements of Pageant Technologies Inc., the legal
subsidiary;
(ii) as Pageant Technologies Inc. is deemed to be the acquirer for
accounting purposes, its assets and liabilities are included
in the consolidated financial statements at their historical
carrying values;
(iii) the comparative financial statements are those of Pageant
Technologies Inc.; and
(iv) control of the assets and operations of Micromem Technologies
Inc. is deemed to be acquired by Pageant Technologies Inc.
effective January 11, 1999. For purposes of this transaction,
the deemed consideration is $549,140 ascribed to the net
assets of Micromem Technologies Inc. outstanding immediately
prior to the business combination plus $52,933 of transaction
costs.
A-11
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies (continued):
The transaction was accounted for by the purchase method with the
results of operations included in the financial statements from the
date of acquisition.
Details of the acquisition are as follows:
Net assets acquired at assigned fair values:
- --------------------------------------------------------------------------------
Cash $ 168,084
Non-cash current assets 115,629
Investments 371,471
- --------------------------------------------------------------------------------
655,184
Less current liabilities 106,044
- --------------------------------------------------------------------------------
Assigned fair value of net assets of Micromem
Technologies Inc. acquired $ 549,140
- --------------------------------------------------------------------------------
Expenses relating to the revenue takeover, of $52,933, have been
accounted for through the consolidated statement of operations and
deficit.
(b) Foreign currency translation:
Transactions in foreign currencies have been converted to United States
dollars at the rate of exchange prevailing at the date of each
transaction. Assets and liabilities denominated in foreign currencies
are converted into United States dollars at the rate of exchange
prevailing at year end. The resulting translation gains or losses are
included in the determination of net earnings.
A-12
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(c) Investments:
Investments where the Company has no significant influence are
carried at cost. A write-down of the carrying value is charged
against income when evidence indicates a decline in the underlying
value and earning power of an individual investment is other than
temporary. Realized gains and losses are included in investment and
other income.
(d) Capital assets:
Capital assets are carried at cost. Amortization is provided on
capital assets on the straight-line basis for a period of up to
three years.
(e) Patent:
The patent is carried at cost and amortization will commence on an
appropriate basis when sales commence.
(f) Income taxes:
The Company follows the tax allocation basis of accounting for
income taxes whereby income taxes deferred to future years as a
result of timing differences between accounting income and income
for tax purposes are recorded as deferred income taxes.
(g) Development expenses:
Development expenses are expensed in the period in which they are
incurred, unless they meet the criteria for deferral under Canadian
generally accepted accounting principles.
(h) Measurement uncertainty:
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
revenue and expenses during the year. Actual results could differ
from those estimates.
A-13
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(i) Transactions with related parties:
Transactions with related parties are measured at the carrying
amounts of the goods and services being exchanged, unless such
transactions are determined to be in the normal course of
operations, in which case, they are recorded at the agreed upon
exchange amount.
2. Investment:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Quoted
Carrying market
value value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Ontex Resources Limited ("Ontex"), January 11, 1999:
325,000 shares $ 288,247
Alliance Resources PLC ("Alliance"), January 11, 1999:
450,000 shares 83,224
- ----------------------------------------------------------------------------------------------
371,471
Sale of Ontex, January 27, 1999:
325,000 shares (233,641)
Loss on sale of 325,000 shares of Ontex (54,606)
Write-down of Alliance, October 31, 1999 (61,020)
- ----------------------------------------------------------------------------------------------
Balance, October 31, 1999 $ 22,204 $ 22,204
- ----------------------------------------------------------------------------------------------
</TABLE>
The loss on sale relates to losses incurred on the sale of 325,000 Ontex
shares. The Company has written down its investment in Alliance shares to
quoted market prices at October 31, 1999 due to "other than temporary"
decline in value of the investment.
A-14
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
3. Patent:
A subsidiary of the Company, Pageant Technologies Inc., has a 50% interest
in a patent registered in the United States with corresponding patent
applications in Europe and Japan, for non-volatile random access memory
technology called Magram(TM). The subsidiary has an exclusive worldwide
license to develop, manufacture and sell the Magram(TM) technology. The
License Agreement provides that the subsidiary would pay a royalty of 40%
of the gross profits less certain agreed expenses for revenue received
from the Magram(TM) technology to a company which holds the balance of the
50% interest. The 50% interest held by the Company's subsidiary will
revert back to the original owner if the License Agreement is in default.
The Company's obligations under the License Agreement, other than its
obligation to pay a royalty, are very general obligations related to
supporting development of the technology and being responsible for
marketing, sales and licensing. The License Agreement does not create any
obligations for the Company that present a particularly significant risk
that might cause it to lose its right to the patent.
4. Shareholder loan:
Shareholder loan continuity is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Denominated in
U.S.$ Cdn.$ Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, October 31, 1997 $ - $ - $ -
Advances during 1998 31,145 698,569 729,714
Repayments during 1998 - (66,670) (66,670)
Unrealized exchange gain - (37,867) (37,867)
- ----------------------------------------------------------------------------------------------
Balance, October 31, 1998 31,145 594,032 625,177
Advances 300,850 - 300,850
Interest 3,246 - 3,246
Repayments (335,241) (49,141) (384,382)
Transfer to contributed surplus (note 8) - (544,891) (544,891)
- ----------------------------------------------------------------------------------------------
Balance, October 31, 1999 $ - $ - $ -
- ----------------------------------------------------------------------------------------------
</TABLE>
A company controlled by the Chairman advanced funds periodically to meet
the cash flow requirements of the Company.
A-15
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
5. Share capital:
(a)Authorized:
Unlimited common shares without par value
(b)Issued and outstanding:
The ascribed share capital of Micromem Technologies Inc., the
continuing consolidated entity, as at October 31, 1999 for accounting
purposes is computed as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
<S> <C>
Existing share capital of Pageant Technologies Inc.,
October 31, 1998 $ 1
Common shares of Pageant Technologies Inc.,
December 4, 1998 4,999
- ----------------------------------------------------------------------------------------------
Existing common share capital of Pageant Technologies Inc.,
January 11, 1999 5,000
Assigned fair value of net assets of Micromem Technologies Inc.,
(note 1(a)(iv)) 549,140
- ----------------------------------------------------------------------------------------------
Share capital of Micromem Technologies Inc.,
January 11, 1999 554,140
Exercise of common share purchase warrants for cash 164,053
Exercise of director's stock options for cash 300,000
Private placement of common stock for cash 1,050,000
- ----------------------------------------------------------------------------------------------
Common share capital, October 31, 1999 $ 2,068,193
- ----------------------------------------------------------------------------------------------
</TABLE>
A-16
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
5. Share capital (continued):
As a result of the business combination, Pageant Technologies Inc.,
became a wholly owned subsidiary of Micromem Technologies Inc. For
accounting purposes, at January 11, 1999, the outstanding shares of
Micromem Technologies Inc., the continuing consolidated entity,
consisted of the number of Micromem shares issued to that date with an
assigned value equal to the share capital of the continuing
consolidated entity at that date as computed above. As a result, the
number of outstanding shares of Micromem are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
<S> <C>
Existing outstanding common shares of Micromem,
October 31, 1998 3,490,643
Exercise of director's stock options 490,000
- ----------------------------------------------------------------------------------------------
Existing common share capital of Micromem Technologies
Inc., January 11, 1999 3,980,643
Common shares issued to effect the business combination
with Pageant Technologies Inc. 32,000,000
Exercise of common share purchase warrants for cash 120,676
Exercise of director's stock options for cash 100,000
Private placement of common stock for cash 350,000
- ----------------------------------------------------------------------------------------------
Outstanding common shares, October 31, 1999 36,551,319
- ----------------------------------------------------------------------------------------------
</TABLE>
(c) At October 31, 1999, an option is outstanding on 900,000 shares of
the Company's capital at $3.00 per share, exercisable on or before
January 25, 2009.
(d) Common share purchase warrants:
As part of the purchase consideration of Pageant Technologies Inc.,
1,000,000 common share purchase warrants exercisable on a
one-for-one basis were issued. Out of this total, 879,324 are
outstanding at October 31, 1999 and are exercisable at a price of
Cdn. $2.00 per share through January 11, 2000 and Cdn. $2.30 from
January 12, 2000 through January 12, 2001. The warrants expire on
January 12, 2001.
A-17
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
6. Commitments:
The minimum annual future lease commitments of the Company for its office
premises under non-cancellable operating leases are as follows:
- --------------------------------------------------------------------------------
2000 $ 29,533
2001 5,299
- --------------------------------------------------------------------------------
The agreement with the University of Utah for the research and development
work provided for an expenditure commitment of $282,549. At October 31,
1999, the Company has expended a total of $455,288.
7. Related party transactions:
In the normal course of business, the Company enters into transactions
with companies under common control. Such items are measured at agreed
upon exchange amounts and included in the consolidated financial
statements. Related party transactions and balances are as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Compensation expense and payable $ 3,283,850 $ - $ -
Other receivables 362,046 - -
Interest expense 3,246 - -
- --------------------------------------------------------------------------------
(a) On January 29, 1999 and March 10, 1999, the Company entered into two
consulting agreements with the Chairman and a company controlled by
the President, respectively. At the option of Micromem for the
services contracted for, the individual/company will be paid fees on a
quarterly basis, in the form of cash or common shares, under the
agreement. If Micromem elects to pay the fees through quarterly
issuances of common shares, then the number of shares to be issued to
the individual/company, quarterly, would be calculated as the product
of 0.3125% of the simple average of number of shares of Micromem that
were outstanding on the last date of each month during the quarter. If
Micromem elects to pay the fees through quarterly cash payments, then
the amount of such fees would be calculated as the product of 0.3125%
of the average shares outstanding multiplied by a simple average of
the daily close price of Micromem's common shares during the quarter.
A-18
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
7. Related party transactions (continued):
An amount of $3,283,850 has been accrued for assuming that the
Company will issue shares subject to the approval of shareholders.
(b) On January 25, 1999, as part of a compensation package, the Company
granted the Chairman options to purchase, prior to January 25, 2009,
up to 1,000,000 common shares at the prevailing market price per
share of $3.00 pursuant to the Micromem Technologies Inc. 1999 stock
option plan. The Chairman purchased 100,000 shares against this
option in October 1999.
(c) Included in other receivables is $362,046 which represent amounts
advanced to Clear Blue Laboratories, Inc., a related party by virtue
of its control by a principal shareholder. These amounts are
interest free, unsecured and repayable on demand.
8. Contributed surplus:
Ataraxia, the former parent company of Pageant Technologies Inc., forgave
$544,891 of indebtedness it was owed. This forgiven debt was treated as
contributed surplus, a separate component of shareholders' deficiency, as
this balance was between related parties.
9. Fair values of financial instruments:
The fair values for all financial assets and liabilities are considered to
approximate their carrying values due to their short-term nature.
10. Income taxes:
The Company has losses of approximately $257,000 available to reduce
future taxable income, the benefit of which will be recognized in the
accounts when realized. The tax losses expire in 2007.
The Company's subsidiary, Pageant Technologies (U.S.A.), Inc., has losses
of approximately $1,144,000 available to reduce future taxable income, the
benefit of which will be recognized in the accounts when realized. The tax
losses expire in 2020.
A-19
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
11. Contingencies:
The Company is a co-defendant in a lawsuit alleging breach of contract
under a construction contract entered into by a related party and claiming
dues amounting to $805,000. The Company has filed a motion to dismiss the
claim. This litigation is in its preliminary stages and the outcome is not
currently determinable.
In the normal course of business, the Company and its subsidiaries are
involved in various legal actions. In management's opinion, the ultimate
disposition of these actions, individually or in aggregate, will not have
a material adverse effect on the financial condition of the Company.
12. Reconciliation between Canadian GAAP and U.S. GAAP:
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted ("GAAP") in
Canada which, in the case of the Company, conform in all material respects
with those in the United States.
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") No. 25 "Accounting for Stock Issued to Employees". Under this
method, compensation expense is recorded, if fair market value exceeds
exercise price at date of grant. Accordingly, compensation expense, if
any, is recognized, at the date of option grants or when the option shares
are earned based on the quoted market price of the stock, in the
consolidated statement of operations and deficit.
The Company qualifies as a development stage enterprise as defined in SFAS
No. 7. The financial statements have been prepared to include the
additional information as required to be disclosed by SFAS No. 7.
The Company's comprehensive income as determined under SFAS No. 130 would
not differ from net loss as shown above for all periods presented.
There are no differences in cash used in operating, investing and
financing activities as reported and as per U.S. GAAP.
A-20
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
12. Reconciliation between Canadian GAAP and U.S. GAAP (continued):
There are no differences in shareholders' equity as reported and per
U.S. GAAP.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
September 3, September 3,
1997 to 1997 to
October 31, October 31,
1999 1998 1997 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss as reported and
as per U.S. GAAP $ 5,207,787 $ 499,742 $ 1,250 $5,708,779
- ----------------------------------------------------------------------------------------------
Net loss per share - basic $ 0.14 $ 0.02 $ - $ 0.16
- ----------------------------------------------------------------------------------------------
Net loss per share - diluted $ 0.14 $ 0.02 $ - $ 0.16
- ----------------------------------------------------------------------------------------------
Weighted average shares 36,213,319 32,120,676 32,000,000 36,213,319
Plus incremental shares from
assumed conversion of
warrants and options 1,610,673 879,324 - 1,610,673
- ----------------------------------------------------------------------------------------------
Adjusted weighted average shares37,823,992 33,000,000 32,000,000 37,823,992
- ----------------------------------------------------------------------------------------------
</TABLE>
The above incremental shares from assumed conversion of warrants have been
excluded from the calculation of the diluted loss per share because to do
so would be anti-dilutive for the periods presented.
Income taxes:
The Company follows the "deferral method" of accounting for deferred
income taxes, pursuant to which the Company records deferred taxes on
"timing differences" (differences between accounting and tax treatment of
certain revenue and expenses), using tax rates effective for the year in
which the timing differences arise.
A-21
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
12. Reconciliation between Canadian GAAP and U.S. GAAP (continued):
Under U.S. GAAP, the Company is required to use the "asset and liability
method" of accounting for deferred taxes, which gives recognition to
deferred taxes on all "temporary differences" (differences between
accounting basis and tax basis of the Company's assets and liabilities)
using currently enacted tax rates. In addition, U.S. GAAP requires the
Company to record all deferred tax assets, including the future tax
benefits of losses carried forward. The Company is then required to record
a "valuation allowance" for any deferred tax assets where it is more
likely than not that the asset will not be realized.
The Company has not recorded any deferred tax asset or liability, as it
believes that it does not meet the test of virtual certainty under
Canadian GAAP or the "more likely than not" test under U.S. GAAP. See
detailed schedule below:
A-22
<PAGE>
12. Reconciliation between Canadian GAAP and U.S. GAAP (continued):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1999
- ----------------------------------------------------------------------------------------------
(Deductible)
Carrying temporary
amount Tax basis difference
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash $ 130,160 $ 130,160 $ -
Other receivables 377,766 377,766 -
Deferred exploration - - -
Unused non capital
tax losses - - -
Unused capital tax
losses - - -
Investment 22,204 862,050 (839,846)
Patent 100 100 -
Capital assets 55,097 52,207 2,890
- ----------------------------------------------------------------------------------------------
Total assets $ 585,327 $ 1,422,283 $ (836,956)
- ----------------------------------------------------------------------------------------------
Accounts payable and
accrued liabilities $ 3,681,022 $ 3,681,022 $ -
Share capital 2,068,193 2,068,193 -
Contributed surplus 544,891 544,891 -
Retained earnings (deficit) (5,708,779) (4,871,823) (836,956)
- ----------------------------------------------------------------------------------------------
Total equity (3,095,695) (2,258,739) (836,956)
- ----------------------------------------------------------------------------------------------
Total liabilities and
equity $ 585,327 $ 1,422,283 $ (836,956)
- ----------------------------------------------------------------------------------------------
Deferred tax asset $ (836,956) Tax rate 45% $ (376,630)
=============
Valuation allowance 376,630
- ----------------------------------------------------------------------------------------------
Net deferred (tax assets) liability $ -
- ----------------------------------------------------------------------------------------------
</TABLE>
A-23
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Financial Statements (continued)
(Expressed in United States dollars)
Years ended October 31, 1999 and 1998, and for the periods from September 3,
1997 (date of incorporation) to October 31, 1997 and September 3, 1997 to
October 31, 1999
- --------------------------------------------------------------------------------
13. Subsequent events:
Subsequent to the year end, the Chairman of the Company exercised 100,000
share options at $3.00 per share granted to him as part of his
compensation package.
In December 1999, a subsidiary of the Company, entered into an agreement
with the Regent's of the University of New Mexico (the "Regents") to lease
laboratory facilities and equipment (the "Facility"). Under the terms of
the agreement, the Company is obligated to pay Regents $500 per day it
uses the Facility, not exceeding $3,000 in any one month.
In satisfaction of amounts earned and accrued up to December 1999, in
January 2000, the Company authorized the issue of 454,292 shares to the
Chairman and 330,098 shares to a company controlled by the President under
the consulting services agreements.
In February 2000, the Company issued 2 million shares at $2.50 per share
for $5,000,000 pursuant to a private placement agreement.
14. 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. Although the change in date has
occurred, it is not possible to conclude that all aspects of the Year 2000
Issue that may affect the Company, including those related to the efforts
of customers, suppliers, or other third parties, have been fully resolved.
A-24
<PAGE>
PAGEANT TECHNOLOGIES INCORPORATED
(a development stage corporation)
Consolidated Financial Statements
For The Year ending October 31, 1998
And the period from September 3, 1997 (date of
Incorporation) And October 31, 1997
And Independent Auditors' Report
A-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholder of
Pageant Technologies Incorporated
We have audited the consolidated balance sheets of Pageant Technologies
Incorporated, a development stage corporation, (The "Company") as of October 31,
1998 and October 31, 1997, and the consolidated statements of loss and
accumulated deficit and cash flows for the year ending October 31, 1998 and for
the period from September 3, 1997 (date of incorporation) to October 31, 1997.
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 in accordance with Canadian and United States Generally
Accepted Auditing Standards. Those Standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion these financial statements present fairly, in all material
respects, the financial position of the Company as of October 31, 1998 and
October 31, for the year ending October 31, 1998 and for the period from
September 3, 1997 (date of incorporation) to October 31, 1997 in accordance with
Canadian Geanerally Accepted Accounting Standards.
Without qualifying our opinion we draw attention to Note 7 to the financial
statements, which states that there are no material differences between the
presentation of these financial statements in accordance with Canadian Generally
Accepted Accounting Standards and their presentation had they been prepared in
accordance with United States Generally Accepted Accounting Principles.
/s/ Deloitte & Touche
December 20, 1999
A-26
<PAGE>
PAGEANT TECHNOLOGIES INCORPORATED
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 31, 1998 AND OCTOBER 31, 1997
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
1998 1997
ASSETS
CURRENT ASSETS:
Cash at Bank $ 147,063 $ --
Deposits and advances 1,523 --
--------- ---------
Total current assets 148,586 --
FIXED ASSETS (Note 3) 15,334 --
PATENTS (Note 4) 100 --
--------- ---------
TOTAL $ 164,020 $ --
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 39,834 $ 1,249
Shareholder advances (Note 5) 625,177 --
--------- ---------
Total current liabilities 665,011 1,249
--------- ---------
SHAREHOLDER'S DEFICIT
Share capital (Note 7) 1 1
Accumulated deficit during development stage (500,992) (1,250)
--------- ---------
Total shareholder's deficit (500,991) (1,249)
--------- ---------
TOTAL $ 164,020 $ --
========= =========
Approved on behalf of the Board
/s/
- ---------------------------------------
Director
See notes to financial statements.
A-27
<PAGE>
PAGEANT TECHNOLOGIES INCORPORATED
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENT OF LOSS AND ACCUMULATED DEFICIT
FOR YEAR ENDING OCTOBER 31, 1998 AND FOR THE PERIOD FROM
SEPTEMBER 3, 1997 (DATE OF INCORPORATION) TO OCTOBER 31, 1997
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
From
inception
to October, 31
1998 1997 1998
INTEREST INCOME $ 2,571 $ -- $ 2,571
--------- --------- ---------
<S> <C> <C>
EXPENSES
Travel and entertainment 176,012 -- 176,012
Professional fees 166,182 1,250 167,432
Wages and salaries 81,457 -- 81,457
Administration expenses 50,872 -- 50,872
Development expenses 50,000 -- 50,000
Depreciation 4,751 -- 4,751
Total expenses 529,274 1,250 530,524
--------- --------- ---------
NET OPERATING LOSS (526,703) (1,250) (527,953)
Unrealised gain on foreign exchange (Note 8) 26,961 -- 26,961
--------- --------- ---------
NET LOSS (499,742) (1,250) (500,992)
ACCUMULATED DEFICIT
DURING DEVELOPMENT STAGE :
BEGINNING OF YEAR (1,250) -- --
--------- --------- ---------
END OF YEAR $(500,992) $ (1,250) $(500,992)
========= ========= =========
</TABLE>
See notes to financial statements.
A-28
<PAGE>
PAGEANT TECHNOLOGIES INCORPORATED
(A DEVELOPMENT STAGE CORPORATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR YEAR ENDING OCTOBER 31, 1998 AND FOR THE PERIOD FROM
SEPTEMBER 3, 1997 (DATE OF INCORPORATION) TO OCTOBER 31, 1997
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
From
inception
to October, 31
1998 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(499,742) $ (1,250) $(500,992)
Adjustments for:
Depreciation 4,751 -- 4,751
--------- --------- ---------
(494,991) (1,250) (496,241)
Increase in deposits and advances (1,523) -- (1,523)
Increase in accounts payable and accrued expenses 38,585 1,249 39,834
--------- --------- ---------
Cash used in operating activities (457,929) (1) (457,930)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (20,085) -- (20,085)
Purchase of Patent (100) -- (100)
--------- --------- ---------
Cash used in investing activities (20,185) -- (20,185)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issue of shares -- 1 1
Shareholder advances 625,177 -- 625,177
--------- --------- ---------
Cash from financing activities 625,177 1 625,178
--------- --------- ---------
NET INCREASE IN CASH 147,063 -- 147,063
CASH, BEGINNING OF YEAR -- -- --
--------- --------- ---------
CASH, END OF YEAR $ 147,063 $ -- $ 147,063
========= ========= =========
</TABLE>
See notes to financial statements.
A-29
<PAGE>
PAGEANT TECHNOLOGIES INCORPORATED
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEAR ENDING OCTOBER 31, 1998 AND FOR THE PERIOD FROM
SEPTEMBER 3, 1997 (DATE OF INCORPORATION) TO OCTOBER 31, 1997
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
1. GENERAL
Pageant Technologies Incorporated, a development stage corporation (The
"Company") was incorporated on September 3, 1997 in The Turks and
Caicos Islands B.W.I., company number E21820. The Company acts
principally as an asset holding and development company. The Company
currently does not have any significant operating income and is
therefore dependent on the advances from its parent company to finance
its day to day operations
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of Pageant Technologies Incorporated are
prepared in accordance with Canadian Generally Accepted Accounting
Standards. The significant accounting policies of the Company are as
follows:
a. Basis of Consolidation - These consolidated financial
statements include Pageant Technologies Incorporated and its
wholly owned subsidiary, Pageant Technologies (USA) Inc., a
research and development company incorporated in the State of
Utah U.S.A.
b. Patents - Patents are carried at cost less accumulated
amortisation. Amortisation of patents is calculated using the
straight line method to write them off over their estimated
useful lives of 15 years
c. Foreign currency translation - The reporting currency of these
financial statements is the United States dollar. Income and
expenses in foreign currencies have been converted to United
States at the rate of exchange prevailing at date of each
transaction. Assets and liabilities denominated in foreign
currencies are converted into United States dollars at the
rate of exchange prevailing at October 31, 1998. Any resulting
unrealised gains and losses are recognised in income.
d. Fixed assets - Fixtures and equipment are carried at cost less
accumulated depreciation. Depreciation on fixtures and
equipment is calculated using the straight-line method to
write them off over their estimated useful lives of 3 years.
e. Development costs - development costs are written off in the
period in which they are incurred as currently no future
accounting benefit is foreseen.
A-30
<PAGE>
f. Cash flow statements - The Company adopted International
Accounting Standard 7 "Cash Flow Statements" for its financial
statements. Under the Standard, cash equivalents are defined
as short-term, highly liquid investments with maturities of
three months or less when purchased, that are readily
convertible to known amounts of cash and are subject to an
insignificant risk of changes in value. Cash and cash
equivalents are reconciled to the balance sheet; and non-cash
items are excluded from the cash flow statement.
g. Transactions with related parties - Transactions with related
parties are measured at the carrying amounts of the goods and
services being exchanged, unless such transactions are
determined to be in the normal course of operations, in which
case, they are recorded at the agreed exchange amount.
3. FIXED ASSETS
Fixed assets are made up as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
Beginning Ending
Balance Additions Disposals Balance
---------------------------------------------------------------
COST
<S> <C> <C> <C> <C>
Fixtures and Equipment $ -- $ 20,085 $ -- $20,085
========== ========= ========== =======
<CAPTION>
1998
---------------------------------------------------------------
Beginning Depreciation Ending
Balance Expense Disposals Balance
---------------------------------------------------------------
DEPRECIATION
<S> <C> <C> <C> <C>
Fixtures and Equipment $ -- $ 4,751 $ -- $ 4,751
========== ========= ========== =======
1998 Net movement $ -- $ 15,334 $ -- $15,334
========== ========= ========== =======
</TABLE>
4. PATENTS
The Company owns a fifty-percent interest in US patent # 5,295,097 and
has the exclusive right to develop, manufacture and sell the related
products associated with "nonvolatile random access memory". A working
prototype is being developed by the University of Utah.
At its current stage of development, the technology being developed
under the patent has an estimated market value of $30,000,000. This
estimated market value is based on a report, dated July 6, 1998,
prepared by Hans P. Schroeder, President of Business Equity Appraisal
Reports, Inc. of San Carlos California.
A-31
<PAGE>
5. SHAREHOLDER ADVANCES
The Shareholder, as a related party, advances funds periodically to
meet the cash flow requirements of the Company. These advances are
interest-free, unsecured and have no fixed repayment date. Movements
during the year were as follows:
1998 1997
Canadian Dollar
Advances $ 698,569 $ --
Repayments (66,670)
Unrealised exchange gain (37,867) --
--------- --------
594,032 --
United States Dollar
Advances 31,145 --
Repayments -- --
--------- ----
31,145 --
--------- ----
$ 625,177 $ --
========= ========
6. RELATED PARTY TRANSACTIONS
The only related pary transactions are the shareholder advances as
described in note 5, which is measured at agreed upon exchange amounts.
There are no transactions with related parties that are measured at
carying amounts of goofds and services being exchanged.
7. SHARE CAPITAL
The share capital of the Company is made up as follows:
1998 1997
Authorised:
5,000 ordinary shares of $1.00 each $ 5,000 $ 5,000
======= =======
Issued & fully paid:
1 ordinary share of $1.00 $ 1 $ 1
======= =======
On December 4, 1998 a further 4,999 ordinary shares of US$1.00 each
were issued to the existing shareholder at par.
A-32
<PAGE>
On January 12, 1999 the entire share capital of the company was
acquired by Micromem Technologies (formerly Avanti Corporation) for a
consideration of 32,000,000 shares.
8. UNREALISED FOREIGN EXCHANGE GAINS
Unrealised foreign exchange gains are made up as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Unrealised gains on translation of shareholder's advance $ 37,867 $ --
Unrealised (losses) on translation of foreign currency cash (10,906) --
-------- -------
Net unrealised gain $ 26,961 $ --
======== =======
</TABLE>
9. COMPLIANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
There are no material differences between the presentation of these
financial statements in accordance with International Accounting
Standards and their presentation had they been prepared in accordance
with United States Generally Accepted Accounting Principles.
* * * * * *
A-33
<PAGE>
AVANTICORP INTERNATIONAL INC.
FINANCIAL STATEMENTS
(Expressed in Canadian Currency)
OCTOBER 31, 1998, 1997 AND 1996
A-34
<PAGE>
DAVID J. HENDERSON
Suite 1710
150 King Street West
Toronto, Ontario
M5H 3S5
AUDITOR'S REPORT
To the Directors,
Avanticorp International Inc.
I have audited the balance sheets of Avanticorp International
Inc. as at October 31, 1998, 1997 and 1996 and the statements of operations and
deficit and changes in cash position for the years then ended. These financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these financial statements based on my audits.
I conducted my audits in accordance with generally accepted
auditing standards. Those standards require that I 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 my opinion, these financial statements present fairly, in
all material respects, the financial position of the Company as at October 31,
1998, 1997 and 1996 and the results of its operations and the changes in its
cash position for the years then ended in accordance with generally accepted
accounting principles.
Toronto, Canada
June 28, 1999, except as to
Notes 2, 3, 6 and 10 which are
as of November 15, 1999. Chartered Accountant.
A-35
<PAGE>
<TABLE>
<CAPTION>
AVANTICORP INTERNATIONAL INC.
BALANCE SHEETS
(Expressed in Canadian Currency)
October 31,
1998 1997 1996
---- ---- ----
ASSETS
<S> <C> <C> <C>
Current assets
Cash $ 8,394 $ 1,312 $ 4,291
Accounts receivable 1,590 688 25,672
----------- ----------- -----------
9,984 2,000 29,963
Investments in other companies (note 2) 342,000 485,865 1,725,494
Mineral exploration properties - 2 3
------------ ----------- -----------
$ 351,984 $ 487,867 $ 1,755,460
=========== =========== ===========
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 129,186 $ 81,482 $ 58,957
Notes payable (note 3) 119,752 192,043 218,702
----------- ----------- -----------
248,938 273,525 277,659
----------- ----------- -----------
SHAREHOLDERS' EQUITY
Share capital (note 4)
Authorized
Unlimited number of common shares
2,000,000 special, redeemable, voting preference shares
Issued
3,490,646 common shares 2,853,569 2,743,471 2,692,471
Deficit (2,750,523) (2,529,129) (1,214,670)
----------- ----------- -----------
103,046 214,342 1,477,801
----------- ----------- -----------
$ 351,984 $ 487,867 $ 1,755,460
=========== =========== ===========
Approved by the Board:
S. Fuda, Director
R.J. McGroarty, Director
</TABLE>
A-36
<PAGE>
<TABLE>
<CAPTION>
AVANTICORP INTERNATIONAL INC.
STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in Canadian Currency)
Years ended
October 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue $ - $ - $ -
Expenses
Administration and general 80,938 63,285 47,103
Interest 5,573 11,544 11,528
--------- ----------- ----------
86,511 74,829 58,631
--------- ----------- ----------
Operating loss 86,511 74,829 58,631
Investments in other companies written down 119,295 1,239,629 -
Loss (gain) on sale of investments in other companies 15,586 - (127,280)
Mineral exploration properties written off
2 1 -
--------- ----------- -----------
Net loss 221,394 1,314,459 (68,649)
Deficit, beginning of the year 2,529,129 1,214,670 1,283,319
----------- ----------- -----------
Deficit, end of the year $ 2,750,523 $ 2,529,129 $ 1,214,670
=========== =========== ===========
Net loss (income) per share - basic and diluted $ 0.07 $ 0.45 $ (0.03)
=========== =========== ===========
</TABLE>
A-37
<PAGE>
AVANTICORP INTERNATIONAL INC.
STATEMENTS OF CHANGES IN CASH POSITION
(Expressed in Canadian Currency)
<TABLE>
<CAPTION>
Years ended
October 31,
1998 1997 1996
---- ---- ----
Cash resources provided by (used in)
<S> <C> <C> <C>
Operating activities
Operating loss $ (86,511) $ (74,829) $ (58,631)
Change in non-cash working capital
(Increase) decrease in accounts receivable (902) 24,984 2,812
Increase (decrease) in accounts payable and
accrued liabilities 47,704 22,525 (81,992)
--------- --------- ---------
(39,709) (27,320) (137,811)
--------- --------- ---------
Investing activities
Investments in other companies
Purchases -- -- (189,817)
Disposals 8,984 -- 212,484
--------- --------- ---------
8,984 -- 22,667
--------- --------- ---------
Financing activities
Issue of common shares 110,098 51,000 81,600
Increase (decrease) in notes payable (72,291) (26,659) 36,202
--------- --------- ---------
37,807 24,341 117,802
--------- --------- ---------
Increase (decrease) in cash 7,082 (2,979) 2,658
Cash, beginning of the year 1,312 4,291 1,633
--------- --------- ---------
Cash, end of the year $ 8,394 $ 1,312 $ 4,291
========= ========= =========
</TABLE>
A-38
<PAGE>
AVANTICORP INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
(Expressed in Canadian Currency)
OCTOBER 31, 1998
Avanticorp International Inc. is a corporation incorporated under the laws of
the Province of Ontario, Canada and was formed to engage in the business of both
mineral and oil and gas exploration and development.
1. Significant accounting policies
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles as promulgated by The
Canadian Institute of Chartered Accountants.
The significant policies used in the preparation of these financial
statements conform in all material respects, to generally accepted
accounting principles. These are as follows:
a) Foreign currency translation
All amounts are stated in Canadian dollars. Assets and liabilities in
foreign currencies are translated into Canadian dollars at period-end
exchange rates. The resulting net charge or credit is included in the
operating results for the period. Revenues and expenses are
translated to Canadian dollars at the prevailing exchange rates at
the date of the transactions.
b) Investments
Investments are carried at cost. A write down of the carrying value
is charged against income when evidence indicates a decline in the
underlying value and earning power of an individual investment is
other than temporary. Realized gains and losses are included in
investment and other income.
c) Transactions with related parties
Transactions with related parties are measured at the carrying
amounts of the goods and services being exchanged, unless such
transactions are determined to be in the normal course of operations,
in which case, they are recorded at the agreed upon exchange amount.
d) Cash flow statements
The Company adopted the Canadian Institute of Chartered Accountants
Hand Book Section 1540, "Cash Flow Statements" for its financial
statements. Under the new Hand Book Section, the definition of cash
equivalents is changed to short-term, highly liquid investments with
maturities of three months or less when purchased, that are readily
convertible to known amounts of cash and are subject to an
insignificant risk of changes in value. Cash and cash equivalents are
reconciled to the balance sheet; and non-cash items are excluded from
the cash flow statement.
e) Income taxes
The Company follows the tax allocation basis of accounting for income
taxes whereby income taxes deferred to future years as a result of
timing differences between accounting income and income for tax
purposes are recorded as deferred income taxes.
f) Measurement of uncertainty
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 disclosures of contingent assets and liabilities at
the date of the financial statement and the reported amounts of
revenues and expenses during the period. Actual results could differ
from those estimates.
A-39
<PAGE>
AVANTICORP INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
(Expressed in Canadian Currency)
OCTOBER 31, 1998
2. Investments in other companies - at cost less amounts written off
<TABLE>
<CAPTION>
Quoted Quoted Quoted
Market Carrying Market Carrying Market Carrying
Value Value Value Value Value Value
1998 1998 1997 1997 1996 1996
---- ---- ---- ---- ---- ----
Alliance Resources
PLC
<S> <C> <C> <C> <C> <C> <C>
450,000 shares $ 162,000 $ 162,000 $ 281,295 $ 281,295 $ * $1,274,877
Ontex Resources
Limited
600,000 shares 294,000 180,000 222,000 180,000 150,000 180,000
Castello Casino
Corp.
122,850 shares -- -- -- 24,570 270,270 270,617
---------- ---------- ---------- ---------- ---------- ----------
-- -- 24,570 24,570 270,270 270,617
---------- ---------- ---------- ---------- ---------- ----------
$ 456,000 $ 342,000 $ 527,865 $ 485,865 $ 420,270 $1,725,494
========== ========== ========== ========== ========== ==========
</TABLE>
* The shares of Alliance were suspended from trading on the London
Stock Exchange on August 13, 1996 at which time the quoted market
value was $858,600.
Reconciliation of change in carrying value of investments between 1995
and 1998:
<TABLE>
<CAPTION>
Carrying Adjustment Per U.S.
Value ** GAAP
<S> <C> <C> <C> <C>
Balance, October 31, 1995 $ 1,620,881
Proceeds from sale of Castello Casino Corp. - 172,000 shares (212,484)
Realized gain on sale of Castello Casino Corp. - 172,000 shares 127,280
Purchase of Castello Casino Corp. - 153,000 shares 189,817
----------
Balance, October 31, 1996 1,725,494 $ - $ 1,725,494
Write down of Alliance Resources PLC, October 31, 1997 (993,583)
Write down of Castello Casino Corp., October 31, 1997 (246,046)
----------
Balance, October 31, 1997 485,865 515,265
29,400
Write down of Alliance Resources PLC, October 31, l998 (119,295)
Proceeds from sale of Castello Casino Corp., June 24, 1998
122,850 shares (8,984)
Realized loss on sale of Castello Casino Corp. (15,586)
----------
Balance, October 31, 1998 as reported $ 342,000 79,800 421,800
==========
</TABLE>
The loss on sale relates to losses incurred on the sale of 122,850
Castello Casino Corp. shares. The company has written down its
investments in Alliance Resources PLC to quoted market prices at October
31, 1998 due to "other than temporary" decline in value of the
investment.
** Net unrealized gains on Ontex Resources Limited (note 10)
A-40
<PAGE>
AVANTICORP INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
(Expressed in Canadian Currency)
OCTOBER 31, 1998
3. Notes payable
Notes payable are due on demand and bear interest at 8% per annum.
These notes payable are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C> <C>
Note 1 From third party $ 107,000 $ 153,083 $ 169,783
Note 2 From related party - note 6 10,110 7,682 -
Note 3 From related party - note 6 2,642 31,278 48,919
--------- --------- ---------
$ 119,752 $ 192,043 $ 218,702
========= ========= =========
</TABLE>
These notes and related interest were repaid on November 23, 1998.
4. Share capital
a) Authorized: unlimited number of common shares without par value.
b) Issued and outstanding:
The Company issued common shares as follows: Shares Capital
Balance, October 31, 1995 2,555,646 $ 2,610,871
Exercise of directors' stock options 170,000 81,600
--------- -----------
Balance, October 31, 1996 2,725,646 2,692,471
Exercise of directors' stock options 255,000 51,000
--------- -----------
Balance, October 31, 1997 2,980,646 2,743,471
Exercise of directors' options 510,000 110,098
--------- -----------
Balance, October 31, 1998 3,490,646 $ 2,853,569
========= ===========
c) Stock options:
Pursuant to the Company's Incentive Stock Option Plan, directors'
options are outstanding on 490,000 shares at U.S.$0.66 exercisable
over a period of two years from September 15, 1998. No compensation
expense was recognized on the granting of these options.
5. Financial instruments
The carrying value of cash, accounts receivable and accounts payable and
accrued liabilities reflected in the balance sheet approximate their
respective fair values. The fair values of investments in other companies
are assumed to approximate quoted market values, as disclosed in note 2.
A-41
<PAGE>
AVANTICORP INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
(Expressed in Canadian Currency)
OCTOBER 31, 1998
6. Related party transactions
In the normal course of business, the Company enters into transactions
with companies under common control on terms similar to those offered to
non-related parties. Such items are included in the financial statements
as follows:
Carrying Value Carrying Value Carrying Value
1998 1997 1996
---- ---- ----
a) Investments in other
companies $ 180,000 $ 180,000 $ 180,000
b) Notes payable 12,752 38,960 48,919
a) The investments in other companies of $180,000 represents the
carrying value of Ontex Resources Limited.
The Ontex investment was a related party investment. Sam Fuda,
Chairman of the Board of Directors of the Company, served as
President and Chief Executive Officer of Ontex from 1986 to December
1998, and has served as Chairman of the Board of Ontex since that
date. Ross McGroarty, Executive Vice President and Secretary, and a
Director of the Company, has been a director of Ontex since 1988.
b) The notes payable from related parties are as follows:
1998 1997 1996
---- ---- ----
Giomardi Holdings Inc. $ 2,642 $31,278 $48,919 Family trust with
discretionary powers with
Mr. Sam Fuda
Agamete Group 10,110 7,682 -- Mr. Ross McGroarty is
president of the company
-------- ------- -------
$12,752 $38,960 $48,919
======== ======= =======
7. Income tax information
As of October 31, 1998, the Company has mineral exploration and
development expenses of $339,000 available for carry forward indefinitely
against future taxable income. Operating losses total $353,000 and expire
as to $39,000 in 2000, $146,000 in 2001, $7,000 in 2003, $75,000 in 2004
and $86,000 in 2005. Operating losses can be carried back three years and
forward seven years against taxable income.
8. Events subsequent to October 31, 1998
a) The Company sold 275,000 shares of Ontex Resources Limited for
$232,150.
b) The balances due on notes payable in the total amount of $119,752 at
October 31, 1998 were repaid.
c) By Articles of Amendment dated January 14, 1999, the Company changed
its name to Micromem Technologies Inc.
d) On January 11, 1999, the Company acquired all the shares of Pageant
Technologies Inc., a Turks and Caicos Islands, British West Indies
corporation by the issue of 32,000,000 shares of its capital and
1,000,000 share purchase warrants. The share purchase warrants could
be exercised during a period of two years from the issue date. The
exercise price would be $2.00 per share during the first twelve months
of the period or $2.30 per share during the second twelve months.
A-42
<PAGE>
AVANTICORP INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
(Expressed in Canadian Currency)
OCTOBER 31, 1998
9. 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 effects 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 entity, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
10. Reconciliation between Canadian GAAP and U.S. GAAP
The only difference between Canadian and U.S. GAAP for the presentation
of the balance sheets and statements of operations and deficit of these
accompanying financial statements is as follows:
1998 1997 1996
Shareholders' equity, as reported $ 103,046 $214,342 $1,477,801
Net unrealized gains in investments
(net of estimated tax) 79,800 29,400 -
--------- -------- ----------
Shareholders' equity as per U.S. GAAP $ 182,846 $243,742 $1,477,801
========= ======== ==========
The net unrealized gains in investments relate to the company's holding
of 600,000 shares of Ontex Resources. The net unrealized gains are not
recognized in the financial statements under Canadian GAAP. Under U.S.
GAAP, per SFAS 115, the unrealized gain in investments is excluded from
earnings and reported as a net amount in a separate component of
shareholders' equity.
1998 1997 1996
---- ---- ----
Net loss (income) for the period as
reported and per U.S. GAAP $ 221,394 $1,314,459 $ (68,649)
========== ========== ===========
Net loss (income) per share - basic $ 0.07 $ 0.45 $ (0.03)
=========== =========== ===========
Net loss (income) per share - diluted $ 0.07 $ 0.45 $ (0.03)
=========== =========== ===========
Weighted average shares 3,301,084 2,902,399 2,669,289
Plus: Incremental shares from assumed
conversion of options 253,535 45,959 56,357
---------- ---------- -----------
Adjusted weighted average shares 3,554,619 2,948,358 2.725,646
========== ========== ===========
The above incremental shares from assumed conversion of options have been
excluded from the calculation of the diluted loss per share for the years
1998 and 1997 because to do so would be antidilutive for the periods
presented.
The Company follows the "deferral method" of accounting for deferred
income taxes, pursuant to which the Company records deferred taxes on
"timing differences" (differences between accounting and tax treatment of
certain revenues and expenses), using tax rates effective for the year in
which the timing differences arise. In addition, the company did not
recognize future tax benefits in connection with provisions for loss of
$871,000 recorded in Micromem Technologies Inc., because, under Canadian
GAAP, the Company did not have virtual certainty that it would realize
these tax benefits prior to their expiry.
A-43
<PAGE>
AVANTICORP INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS
(Expressed in Canadian Currency)
OCTOBER 31, 1998
10. Reconciliation between Canadian GAAP and U.S. GAAP, continued
Under U.S. GAAP, the Company is required to use the "asset and liability
method" of accounting for deferred taxes, which gives recognition to
deferred taxes on all "temporary differences" (differences between
accounting basis and tax basis of the Company's assets and liabilities)
using currently enacted tax rates. In addition, U.S. GAAP requires the
Company to record all deferred tax assets, including the future tax
benefits of losses carried forward. The Company is then required to
record a "valuation allowance" for any deferred tax assets where it is
more likely than not that the asset will not be realized.
The Company has not recorded any deferred tax asset or liability, as it
believes that it does not meet the test of certainty under Canadian GAAP
or the "more likely than not" test under U.S. GAAP. See detailed schedule
below:
<TABLE>
<CAPTION>
1998 1997 1996
(Deductible) (Deductible) (Deductible)
Carrying Temporary Temporary Temporary
Amount Tax Basis Difference Difference Difference
------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash $ 8,394 $ 8,394 $ -- $ -- $ --
Accounts receivable 1,590 1,590 -- -- --
Deferred exploration -- 339,427 (339,427) (339,427) (339,427)
Unused non capital tax
losses -- 353,107 (353,107) (290,869) (216,040)
Unused capital tax
losses -- 374,104 (374,104) (63,962) (63,962)
Investments in other
companies 342,000 1,764,111 (1,422,111) (1,705,390) (465,761)
----------- ----------- ----------- ----------- -----------
Total assets $ 351,984 $ 2,840,733 $(2,488,749) $(2,399,648) $(1,085,190)
=========== =========== =========== =========== ===========
Accounts payable and
accrued liabilities $ 129,186 $ 129,186 $ -- $ -- $ --
Notes payable 119,752 119,752 -- -- --
----------- ----------- ----------- ----------- -----------
Total liabilities 248,938 248,938 -- -- --
----------- ----------- ----------- ----------- -----------
Share capital 2,853,569 2,853,569 -- -- --
Retained earnings (2,750,523) (261,774) -- -- --
----------- ----------- ----------- ----------- -----------
Total equity 103,046 2,591,795 -- -- --
----------- ----------- ----------- ----------- -----------
Total $ 351,984 $ 2,840,733 -- -- --
=========== =========== =========== =========== ===========
Future tax asset $(2,488,749) Tax rate 45% $(1,119,937) $(1,079,842) $ (488,335)
=========== ----------- ----------- -----------
Valuation allowance $ 1,119,937 $ 1,079,842 $ 488,335
=========== =========== ===========
Net future tax
(asset)/liability $ -- $ -- $ --
=========== =========== ===========
</TABLE>
A-44
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Consolidated Statement of Operations
(Expressed in United States Dollars)
For the Three Month Period Ended January 31,
[Unaudited]
2000 1999
Revenues $ -- $ --
Expenses
Compensation 1,010,311 --
Administrative Expenses 136,452 6,836
Professional Fees 275,516 14,688
Wages & Salaries 99,792 26,437
Development Expenses 9,492 --
Travel & Entertainment 35,167 9,836
Amortization 2,500 2,000
- --------------------------------------------------------------------------------
Loss before Foreign Exchange 1,569,230 59,797
- --------------------------------------------------------------------------------
Unrealized Loss on Foreign Exchange 10,985 --
- --------------------------------------------------------------------------------
Net Loss for the Period $ 1,580,215 $ 59,797
- --------------------------------------------------------------------------------
Net Loss per share - basic & diluted $ 0.04 $ --
Weighted Average Shares 36,319,287 32,000,000
A-45
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Consolidated Statement of Cash Flows
(Expressed in United States Dollars)
For the Three Month Period Ended January 31,
[Unaudited]
2000 1999
Cash Flows from Operating Activities
Loss for the Period $(1,580,215) $ (59,797)
Adjustments to reconcile loss
for the period to net cash
used in operating activities:
Amortization 2,500 --
Compensation expense 1,010,311 --
- --------------------------------------------------------------------------------
(567,404) (59,797)
Change in non-cash working capital items:
Increase in deposits and other
receivables (115,193) --
Increase in accounts payable
and accrued liabilities 245,230 --
- --------------------------------------------------------------------------------
Net cash used in operating activities (437,367) (59,797)
Cash Flows from Investing Activities
Capital assets (5,515) --
- --------------------------------------------------------------------------------
Net cash used in investing activities (5,515)
- --------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Issue of common shares for cash 326,646 168,084
Repayment of shareholder loan -- (29,249)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 326,646 138,835
Increase (decrease) in cash (116,236) 79,038
Cash, beginning of period 130,160 147,063
- --------------------------------------------------------------------------------
Cash, end of period 13,924 226,101
- --------------------------------------------------------------------------------
A-46
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Statements of Operations and Cash Flows
(Expressed in United States dollars)
Three month period ended January 31, 2000 with comparatives for the three month
period ended January 31, 1999
- ------------------------------------------------------------------------------
1. Reconciliation between Canadian GAAP and U.S. GAAP:
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted ("GAAP") in Canada
which, in the case of the Company, conform in all material respects with
those in the United States.
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") No. 25 "Accounting for Stock Issued to Employees". Under this
method, compensation expense is recorded, if fair market value exceeds
exercise price at date of grant. Accordingly, compensation expense, if any,
is recognized, at the date of option grants or when the option shares are
earned based on the quoted market price of the stock, in the consolidated
statement of operations and deficit.
The Company qualifies as a development stage enterprise as defined in
SFAS No. 7. The financial statements have been prepared to include the
additional information as required to be disclosed by SFAS No. 7.
The Company's comprehensive income as determined under SFAS No. 130 would
not differ from net loss as above for all periods presented.
There are no differences in cash used in operating, investing and
financing activities as reported and as per U.S. GAAP.
Income taxes:
The Company follows the "deferral method" of accounting for deferred income
taxes, pursuant to which the Company records deferred taxes on "timing
differences" (differences between accounting and tax treatment of certain
revenues and expenses), using tax rates effective for the year in which the
timing differences arise.
A-47
<PAGE>
MICROMEM TECHNOLOGIES INC.
(FORMERLY AVANTICORP INTERNATIONAL INC.)
A DEVELOPMENT STAGE COMPANY
Notes to Consolidated Statements of Operations and Cash Flows
(Expressed in United States dollars)
Three month period ended January 31, 2000 with comparatives for the three month
period ended January 31, 1999
- ------------------------------------------------------------------------------
Under U.S. GAAP, the Company is required to use the "asset and liability
method" of accounting for deferred taxes, which gives recognition to
deferred taxes on all "temporary differences" (differences between
accounting basis and tax basis of the Company's assets and liabilities)
using currently enacted tax rates. In addition, U.S. GAAP requires the
Company to record all deferred tax assets, including the future tax
benefits of losses carried forward. The Company is then required to record
a "valuation allowance" for any deferred tax assets where it is more likely
than not that the asset will not be realized.
The Company has not recorded any deferred tax asset or liability, as it
believes that it does not meet the test of virtual certainty under Canadian
GAAP or the "more likely than not" test under U.S. GAAP.
A-48
<PAGE>
ATTACHMENT B
INDEX TO EXHIBITS
Sequential Page
Number Exhibit Number
- ------ ------- ------
1.1 Work for Others Agreement effective as of December 9, 1999, B-2
Between AlliedSignal Federal Manufacturing & Technologies
and Pageant Technologies (USA) Inc.
1.2 Subscription Agreement dated December 30, 1999, between B-14
Micromem Technologies Inc. and Framcove Limited
1.3 Use Agreement dated December 31, 1999, by and between The B-23
Regents of the University of New Mexico and Pageant
Technologies (USA) Inc.
B-1
<PAGE>
Work for Others Agreement
No. 00KC0133
Between
AlliedSignal Federal Manufacturing & Technologies
Operating Under Contract No. DE-AC04-76DP00613 with the
U.S. Department of Energy
And
Pageant Technologies (USA) Inc.
GENERAL TERMS AND CONDITIONS
Article I. PARTIES TO THE AGREEMENT
The U. S. Department of Energy Contractor, AlliedSignal Federal manufacturing &
Technologies referred to as the "Contractor", has been requested by Pageant
Technologies, hereinafter referred to as the "Sponsor", to perform the work set
forth in the Statement of Work, attached hereto as Appendix A. It is understood
by the Parties that the Contractor is obligated to comply with the terms and
conditions of its Management and Operating contract with the United States
Government (hereinafter called the "Government") represented by the United
States Department of Energy (hereinafter called the "Department" or "DOE") when
providing services or materials to the Sponsor under this Agreement.
Article II. TERM OF THE AGREEMENT
The Contractor estimated period of performance for completion of the Statement
of Work is 10 month(s). The term of this Agreement shall be effective as of the
latter date of (1) the date on which it is signed by the last of the Parties
thereto, or (2) the date on which the Contractor receives advance funding from
the Sponsor. The term of this Agreement may be extended by mutual, written
agreement of the parties when the extension does not affect the cost, statement
of work, or terms and conditions, which require a formal amendment to the
Agreement.
Article III. COSTS
The Contractor estimated cost for the work to be performed under this Agreement
is 43,000. The Contractor has no obligation to continue or complete performance
of the work at a cost in excess of its estimated cost, including any subsequent
amendment. The Contractor agrees to provide at least 30 days' notice to the
Sponsor if the actual cost to complete performance will exceed its estimated
cost.
Article IV. FUNDING AND PAYMENT
The Contractor is required by DOE to receive advance funding before beginning
work. The Sponsor shall provide sufficient funds in advance to reimburse the
Contractor for costs to be incurred in performance of the work described in this
Agreement, and the Contractor shall have no obligation to perform in the absence
of adequate advance funds. If the estimated period of performance exceeds 90
days or the estimated cost exceeds $25,000, the Sponsor may with the
B-2
<PAGE>
Contractor's approval, advance funds incrementally. In such a case, the
Contractor will initially involve the Sponsor in an amount sufficient to perform
the work to proceed for 120 days and thereafter invoice the Sponsor monthly so
as to maintain approximately a 90-day period that is funded in advance. Payment
shall be made directly to the Contractor in accordance with billing
instructions. Upon termination or completion, any excess funds shall be refunded
by the Contractor to the Sponsor in accordance with the Contractor's close-out
procedures.
Article V. SOURCE OF FUNDS
The Sponsor hereby warrants and represents that, if the funding it brings to
this Agreement has been secured through other agreements, such other agreements
do not have any terms and conditions (including Intellectual property) that
conflict with the terms of this Agreement.
Article VI. PROPERTY
Unless the Parties otherwise agree in writing, all equipment produced or
acquired with funds provided by the Sponsor shall be disposed of as instructed
by the Sponsor.
Article VII. PRE-PUBLICATION REVIEW
The Parties agree to secure pre-publication approval from each other which shall
not be unreasonably withheld or denied beyond 30 days.
Article VIII. LEGAL NOTICE
Any technical paper, article publication, or announcement of advances generated
in connection with work done under this Agreement, during the period of
performance of the Agreement or in the future, shall give credit to the Sponsor
as a sponsor of the work and shall contain the following notice:
"This document was prepared by AlliedSignal Federal Manufacturing &
Technologies as an account of work performed under a sponsored agreement
and pursuant to a Management and Operating Contract with the United States
Department of Energy (DOE). Neither the Contractor, nor the DOE, nor any
of their employees, makes any warranty, express or implied, or assumes any
legal liability or responsibility for the accuracy, completeness, or
usefulness of any information, apparatus, product, or process disclosed,
or represents that its use would not infringe privately owned rights.
Reference herein to any specific commercial product, process, or service
by trade name, trademark, manufacturer, or otherwise, does not necessarily
constitute or imply its endorsement, recommendation, or favoring by the
Contractor or the DOB. The views and opinions of authors expressed herein
do not necessarily state or reflect those of the United States Government,
any agency thereof, or the Contractor."
Article IX. NON-INTERFERENCE
Notwithstanding any other provision contained herein, the use of a DOE facility
and/or FM&T personnel in support of this Agreement can only be authorized on a
noninterference basis, i.e., the work performed under this Agreement shall not
interfere with work related to the prime mission of the facility. Although
FM&T's commitment to this effort is equal to its commitment to DOE mission
programs, DOE programs may, for reasons related to national security or
exigency, preempt efforts in support of this Agreement. Accordingly, neither the
Government,
B-3
<PAGE>
DOE, FM&T, nor persons acting on their behalf will be responsible, irrespective
of causes, for failure to perform services or furnish information or data
hereunder at any particular time or in any specific manner.
Article X. DISCLAIMER
THE GOVERNMENT AND THE CONTRACTOR MAKE NO EXPRESSED OR IMPLIED WARRANTY AS TO
THE CONDITIONS OF THE RESEARCH OR ANY INTELLECTUAL PROPERTY OR PRODUCT MADE, OR
DEVELOPED UNDER THIS AGREEMENT, OR THE OWNERSHIP, MERCHANTABILITY, OR FITNESS
FOR A PARTICULAR PURPOSE OF THE RESEARCH OR RESULTING PRODUCT. NEITHER THE
GOVERNMENT NOR THE CONTRACTOR WILL BE LIABLE FOR SPECIAL, CONSEQUENTIAL, OR
INCIDENTAL DAMAGES.
Article XI. PRODUCT LIABILITY INDEMNITY
The Sponsor hereby agrees to indemnify and hold harmless the Contractor and the
Government, their officers, agents, and employees, from any and all liability,
claims or damages, including attorney's fees and costs whatsoever, for injury to
or death of persons, or damage to or destruction of property, as a result of or
arising out of the making, using, or selling of a product, process, or service
which was derived from the work performed under this Agreement by or on behalf
of the Sponsor, its assignees or likeness, provided however that neither the
Government nor the Contractor shall be considered assignees or licensees of the
Sponsor as a result of reserved Government and Contractor rights.
Article XII. INTELLECTUAL PROPERTY INDEMNITY-LIMITED This Sponsor shall
indemnify the Government and the Contractor and their officers, agents, and
employees against liability, including attorney's fees and costs, for
infringement of any United States patent, copyright or other intellectual
property arising out of any acts required or directed by the Sponsor to be
performed under this Agreement to the extent such acts are not already performed
at the facility. Such indemnity shall not apply to a claimed infringement that
is settled without the consent of the Sponsor unless required by a court of
competent jurisdiction.
Article XIII. NOTICE AND ASSISTANCE REGARDING PATENT AND COPYRIGHT INFRINGEMENT.
The Sponsor shall report to the Department and the Contractor, promptly and in
reasonable written detail, each claim of patent or copyright infringement based
on the performance of this Agreement of which the Sponsor has knowledge. The
Sponsor shall furnish to the Department and the Contractor, when requested by
the Department or the Contractor, all evidence and information in the possession
of the Sponsor pertaining to such claim.
Article XIV. PATENTS AND TECHNICAL DATA RIGHTS
Terms and conditions regarding patents and technical data rights are set forth
and attached hereto as Appendix B and Appendix C, respectively. The terms and
conditions of this article, and its respective appendices shall survive the
Agreement in the event that the Agreement is terminated before completion of the
Statement of Work.
B-4
<PAGE>
Article XV. ASSIGNMENT
Neither this Agreement nor any interest therein or claim thereunder shall be
assigned or transferred by either Party, except as authorized in writing by the
other Party to this Agreement provided however that the contractor may transfer
it to the Department, or its designee, with notice of such transfer to the
Sponsor, and the Contractor shall have no further responsibilities except for
the confidentiality, use, and/or non-disclosure obligations of this Agreement.
The obligation of the contractor shall apply to any successor in interests to
said contractor continuing the operation of the DOE facility involved in this
Agreement.
Article XVI. SIMILAR OR IDENTICAL SERVICES
The Government and/or contractor shall have the right to perform similar or
identical services in the Statement of Work (SOW) for other Sponsors as long as
neither the Sponsor's Proprietary Information nor Protected Information during
the term of its protection is utilized.
Article XVII. EXPORT CONTROL
Each Party is responsible for its own compliance with laws and regulations
governing expert control.
Article XVIII. TERMINATION
Performance of work under this Agreement may be terminated at any time by either
party, without liability, except as provided above, upon giving 30 day written
notice to the other Party. The contractor shall terminate this Agreement only
when the Contractor determines, after direction from DOE, that such termination
is in the best interest of the Government, provided however, that the Contractor
shall have the right to terminate if the Sponsor shall have failed to advance
the funds required by Article IV within 90 days of the Contractor's execution of
this Agreement. In the event of termination, the Sponsor shall be responsible
for the Contractor's costs (including close-out costs), through the effective
date of termination, but in no event shall the Sponsor's cost responsibility
exceed the total cost to the Sponsor as described in Article III, above.
It is agreed that any obligations of the Parties regarding Proprietary
Information or other intellectual property will remain in effect, despite early
termination of the Agreement.
Article XIX. ENTIRE AGREEMENT
It is expressly understood and agreed that this Agreement and its Appendices
contain the entire Agreement between the parties.
In witness whereof, the Parties hereto have executed this Agreement.
FOR Contractor: FOR Sponsor:
Name ___________________________ Name ______________________________
Title___________________________ Title _____________________________
Date____________________________ Date ______________________________
B-5
<PAGE>
APPENDIX A
STATEMENT OF WORK
Pageant Technologies - MAGRAM Evaluation
FIA-00KC0133 Rev: 0
11/10/99
I. DESCRIPTION OF SERVICES
1.0 Objective
The Sponsor requested KCP to conduct an engineering evaluation of a new
proprietary non-volatile memory technology.
2.0 Scope
KCP will provide an engineering evaluation of an 8 bit, and possibly up to a 64
bit, magnetic memory device call MAGRAM. The engineering evaluation will test a
variety of memory packaging configurations in accordance to the Sponsor's
specifications. KCP will design and prove-in semiautomatic test system to
perform parametric tests and measure functional performance.
3.0 Applicable Documents
Sponsor will provide test specifications, product specifications, and device's
theory of operation.
4.0 Technical Tasks
1. Define test requirements and receive six product samples 2. Package six
products and configure test hardware 3. Develop test software 4. Test devices 5.
Analyze test results 6. Provide test equipment documentation and product
specifications 7. Final report
II. REPORTS, DATA AND OTHER DELIVERABLES
(1) Package and test up to six devices and provide a report recommending
packaging processes, (2) provide test data and a description of the test system
and control software, and (3) recommend device specifications and suggestions
for future technology development and testing verification procedures.
B-6
<PAGE>
APPENDIX B
PATENT RIGHTS-USE OF FACILITIES
1. Definitions.
A. "Invention" means any invention or discovery which is or may be
patentable or otherwise protectable under Title 35 of the United States
Code or any novel variety of plant that is or may be protectable under
the Plan Variety Protection Act (7 U.S.C. 2321 et seq.).
B. "Sponsor Invention" means any invention, to the extent the Sponsor is
performing any work under this Agreement, of the Sponsor, conceived or
first actually reduced to practice in the course of under this Agreement.
C. "Patent Counsel" means the DOE Patent Counsel assisting the procuring
activity which has the administrative responsibility for the facility
where the work under this Agreement is to be performed.
2. Contractor Inventions. The Government and the Contractor shall have
rights in any Invention conceived in the performance of work under this
Agreement by employees of Contractor in accordance with the provisions
of Department of Energy's (DOE) operating contract with Contractor
subject to Sponsor obtaining, upon notice to the DOE Patent Counsel, a
nonexclusive, nontransferable, irrevocable, paid-up license to practice
said Invention throughout the world. Sponsor further has the first
option to negotiate with the contractor for an exclusive license in a
prenegotiated field of use on reasonable terms and conditions.
3. Sponsor's Election to Retain Rights. Subject to the provisions of
paragraph 4.B. of this clause with respect to any Sponsor Invention
reported and elected in accordance with paragraph 5, of this clause,
the Sponsor may elect to obtain the entire right, title, and Interest
in any patent application filed in any country on a Sponsor Invention
and in any resulting patent secured by the Sponsor. Where appropriate,
the filing of patent applications by the Sponsor is subject to DOE
security regulations and requirements.
4. Rights of Contractor and Government
A. Assignment to either the Contractor or the Government. The Sponsor
agrees to assign to either the Contractor or the Government, as required
by the Contractor, the entire right, title, and Interest in any country
to each Sponsor Invention where the Sponsor:
B-7
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(1) does not elect pursuant to this article to retain such rights; or
(2) elects to obtain title to a Sponsor Invention pursuant to paragraph
3, but fails to have a patent application filed in that country on the
Sponsor Invention or decides not to continue protection or not to pay any
maintenance fees covering the invention.
B. Terms and Conditions of Waived Rights
(1) To preserve the Contractor's and the Government's residual rights to
Sponsor Inventions, and in patent applications and patents on Sponsor
Inventors, the Sponsor shall take all actions in reporting, electing,
filing on, prosecuting, and maintaining invention rights promptly, but in
any event, in sufficient time to satisfy domestic and foreign statutory
and regulatory time requirements, or, if the Sponsor decides not to take
appropriate steps to protect the invention rights, it shall notify the
Contractor in sufficient time to permit either the Contractor or the
government to file, prosecute, and maintain patent applications and any
resulting patents prior to the end of such domestic or foreign statutory
or registry time requirements.
(2) The Sponsor shall convey or ensure the conveyance of any executed
instruments necessary to vest in either the Contractor or the Government
the rights set forth in this Article.
(3) With respect to any Sponsor Invention in which the Sponsor obtains
title, the Sponsor hereby grants to the Government a non-exclusive,
nontransferable, irrevocable, paid-up licensee to practice or have
practiced by or on behalf of the United States the Sponsor Invention
throughout the world.
(4) The Sponsor shall provide the Government a copy of any patent
applications filed on a Sponsor Invention within six (6) months after
such application is filed including its serial number and filing date.
(5) Preference for U.S. Industry. Notwithstanding any other provision of
this article, the Sponsor agrees that neither it nor any assignee will
grant to any person the exclusive right to use or sell any Sponsor
Invention in the United States unless such person agrees that any
products embodying the Sponsor Invention or produced through the use of
the Sponsor Invention will be manufactured substantially in the United
States. However, in individual cases, the requirement for such an
agreement may be waived by DOE upon a showing by the Sponsor or its
assignee that reasonable but unsuccessful efforts have been made to grant
licenses or similar terms to potential licensees that would be likely to
manufacture substantially in the United States or that under the
circumstances domestic manufacture is not commercially feasible.
(6) March-In Rights. The Sponsor agrees that with respect to any Sponsor
Invention the DOE shall retain the right to require the Sponsor to grant
to a responsible applicant, a nonexclusive, partially exclusive, or
exclusive license to
B-8
<PAGE>
use the Sponsor Invention in any field of use, on terms that are
reasonable under the circumstances, or if the Sponsor fails to grant such
a license, to grant the license itself. DOE may exercise this right only
in exceptional circumstances and only if DOE determines that:
(a) the action is necessary to meet health or safety needs that
are not reasonably satisfied by the Sponsor; or
(b) the action is necessary to meet the requirements for public
use specified by Federal regulations and such requirements
are not reasonably satisfied by the Sponsor; or
(c) such action is necessary because a license of the exclusive
right to use or sell any Sponsor Invention in the United
States is in breach of the agreement required by paragraph
4.B.(b).
(7) The Sponsor agrees to refund any amounts received as royalty charges
on any Sponsor Invention in procurement by or no behalf of the Government
and to provide for that refund in any instrument transferring rights to
any party in the invention.
(8) The Sponsor agrees to include, within the specification of any United
States patent applications and any patent issuing thereon covering a
Sponsor Invention, the following statement. "The Government has rights in
this invention pursuant to (specify this underlying Agreement)."
5. Invention Identification, Disclosures, and Reports
A. The Sponsor shall furnish the Patent counsel a written report
containing full and complete technical information concerning each
Sponsor Invention it makes within six (6) months after conception or
first actual reduction to practice, whichever occurs first, in the course
of, or under this Agreement but in any event prior to any on sale, public
use, or public disclosure of such invention known to the Sponsor. The
report shall identify the contract and inventory and shall be
sufficiently complete in technical detail and appropriately illustrated
by sketch or diagram to convey to one skilled in the art to which the
invention pertains a clear understanding to the extent known at the time
of disclosure, of the nature, purpose, operation, and to the extent
known, the physical, chemical, biological, or electrical characteristics
of the inventor. The report should also include any election of invention
rights under this article. When an invention is reported under this
paragraph 5.A., it shall be presumed to have been made in the manner
specified in Section (a)(1) and (2) of 42 USC 5906.
B. The Contractor shall report Contractor Inventions it makes in
accordance with the procedures set forth in its Management and Operating
Contract with the DOE. In addition, the Contractor shall disclose to the
Sponsor at the same time as disclosure to the Department any Contractor
Inventions made by the Contractor under this Agreement.
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<PAGE>
6. Limitation of Rights
Nothing contained in this patent rights article shall be deemed to give the
Government any rights with respect to any inventions other than a Contractor or
Sponsor Invention except as set forth in the Facilities License of paragraph 7.
7. Facilities License
In addition to the rights of the Parties with respect to inventions or
discoveries conceived or first actually reduced to practice in the course of or
under this Agreement, the Sponsor agrees to and does hereby grant to the
Government an irrevocable, non-exclusive, paid-up license it and to any
inventions or discoveries regardless of when conceived or first actually reduce
to practice or acquired by the Sponsor, which at any time, through completion of
this Agreement, are owned or controlled by the Sponsor and are incorporated in
the facility as a result of this Agreement to such an extent that the facility
is not restored to the condition existing prior to the Agreement (1) to practice
or to have practiced by or for the Government at the facility, and (2) to
transfer such license with the transfer of the facility. The acceptance or
exercise by the Government of the aforesaid rights and license shall not prevent
the Government at any time from contesting that enforceability, validity, or
scope of, or title to, any rights or patents herein licensed.
8. Early Termination of Agreement
The terms and conditions of this article shall survive the Agreement, in the
event that the Agreement is terminated before completion of the Statement of
Work.
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<PAGE>
APPENDIX C
RIGHTS IN TECHNICAL DATA - USE OF FACILITIES
(Short Form)
The Sponsor, the Contractor and the Government shall have the right to use,
disclose and duplicate for any purpose whatsoever, and have others do so, all
technical data first produced or used in the performance of work under this
Agreement. (Technical data is defined as set forth in 48 CFR 27.401.)
Any Sponsor furnished, properly marked, proprietary data necessary for, or
pertaining to, work under this Agreement will not be disclosed outside the
Government or Contractor, and will be returned to the Sponsor by or before
termination of this Agreement.
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<PAGE>
APPENDIX D
Alterations and Additions
Alterations and additions, if any, as agreed to by the parties prior to
execution of the Agreement are set forth below:
General Terms and Conditions, is revised by adding the following to paragraph
"XVII. Export Control."
"The materials provided hereunder are subject to export controls under the
International Traffic in Arms Regulations, and may not be exported without
appropriate license."
End of Appendix D
B-12
<PAGE>
Dear Sponsor/Partner:
The Department of Energy (DOE) has implemented a new policy regarding waiver of
the Federal Administrative Charge (FAC) for small businesses and nonprofit
organizations. This policy waives FAC costs for small businesses and nonprofit
organizations as defined below:
Small Business Enterprise. A business that qualifies to be designated
as a "small business concern" as defined in 13 C.F.R. Part 121, Small
Business Size Regulations.
Nonprofit Organization. Organizations that qualify as nonprofit
organizations under the Internal Revenue Code Sections 501 and 503,
including Universities and Institutes. Excluded from the definition of
"nonprofit organization" for purposes of this waiver are State and local
governments.
If your firm or organization qualifies as a small business or nonprofit
organization as defined above, please complete the following and return it to:
Alan Updike
Office of Industrial Partnership
AlliedSignal Federal Manufacturing & Technologies
2000 E. 95th Street
Kansas City, MO 64131-3095
FAX: (816) 997-4094
- --------------------------------------------------------------------------------
I certify that Pageant Technologies (USA) Inc. qualifies as a:
(x) Small Business pursuant to 13 C.F.R. Part 121, Small Business Regulations
( ) Nonprofit Organization under the Internal Revenue Code sections 501 and 503.
/s/ Stephen Fleming Pageant Technologies (USA), Inc.
- ------------------------------------ -----------------------------------
(Certifying Official) (Name of Organization)
President December 2, 1999
- ------------------------------------ -----------------------------------
(Title) (Date)
B-13
<PAGE>
Subscription Agreement
December 30, 1999
To: Framcove Limited
C/o Intel Trust
Corso Elvezia 4
6900 Lugano, Switzerland
Attention: Mr. Roberto Mameli
Dear Sirs:
Re: Sale of Common Shares
We hereby confirm your purchase, subject to the terms and conditions set forth
herein of 3,000,00 common shares (the "Purchased Shares") in the capital stock
of Micromem Technologies Inc. (the "Corporation") from the Corporation, at a
price of US $2.50 per share being an aggregate purchase price of US
($7,500,000.00) seven million, five hundred thousand dollars (the "Purchase
Price").
In connection with your purchase, we enclose Schedule A, with respect to closing
instructions, registration and payment, which we request that you complete, sign
and return to us along with an executed copy of this commitment letter by 12.00
p.m. on January 3, 2000.
You acknowledge and agree that you have not received or been provided with an
offering memorandum or similar document and that your decision to enter into
this agreement purchase the Purchased Shares agreed to be purchased by you has
not been made upon any verbal or written representation as to fact or otherwise
made by or on behalf of us or any other person and that your decision is based
entirely upon information concerning the Corporation which is publicly
available. You further acknowledge and agree that we assume no responsibility or
liability of any nature whatsoever for the accuracy or adequacy of any such
publicly available information, or as to whether all information concerning the
Corporation required to be disclosed by it has been generally disclosed. You
further acknowledge and agree that we have not engaged in any independent
investigation with respect to the Corporation or any such matter.
Conditions of Closing
The Corporation's obligation to sell the Purchased Shares to you is subject to
the condition that you execute and return to us all relevant documentation
required by applicable securities legislation and policy statements, as the sale
of the Purchased Shares from the Corporation to you will not be qualified by a
prospectus. You are purchasing the Purchased Shares as principal for your own
account and not for the benefit of or as agent for any other beneficial
purchaser who is acquiring Purchased Shares as principal for its own account.
You agree to comply with any applicable securities legislation, rules,
regulations, orders or policy statements concerning the sale of the Purchased
Shares and, in particular, you shall not offer, resell or other transfer the
Purchased Shares in Canada, the United States or elsewhere except in compliance
with
B-14
<PAGE>
applicable securities laws and the requirements of any stock exchange on which
the Purchased Shares may, from time to time, be listed for trading and you
acknowledge that the certificates representing the Purchased Shares shall have
the following legend printed thereon:
"The securities represented hereby have not been registered
under the United States Securities Act of 1933, as amended
(the "US. Securities Act"), and may be offered, sold or
otherwise transferred only (a) to the company, (b) outside the
United States in accordance with Rule 904 of Regulation S
under the U.S. Securities Act, (c) pursuant to an exemption
from registration under the U.S. Securities Act provided by
Rule 144A thereunder, if applicable, and in compliance with
any applicable state securities laws, or (d) with the prior
written consent of the company, pursuant to another exemption
from registration under the U.S. Securities Act and any
applicable state securities laws. Delivery of this certificate
may not constitute good delivery in settlement of transactions
or stock exchanges in Canada or the U.S.A. A new certificate
bearing no legend may be obtained from the registrar and
transfer agent and the company, to the effect that such sale
is being made in accordance with Rule 904 of Regulation S
under the U.S. Securities Act.
These securities are also subject to resale restrictions
contained securities legislation of the Province of Ontario
which provides that these securities may not be traded in
Ontario for a period of 18 months from the date of their issue
except pursuant to exemptions from prospectus requirements."
We acknowledge that your obligation to purchase the Purchased Shares hereunder
shall be conditional upon the Corporation's corm 20 F/ A Registration Statement
being cleared by the United States Securities & Exchange Commission by the
Closing Date.
Closing
Delivery and payment for the Purchased Shares shall be completed at the offices
of the Corporation, 150 York Street, Suite 1206, Toronto, Ontario, M5H-3S5 at
10:00 a.m. (Toronto time), on January 27, 2000 or as may be mutually agreed upon
by the Corporation and you (such completion date being the "Closing Date").
A single share certificate representing the Purchased Shares will be available
for delivery in Toronto, Ontario against delivery to the Corporation in the
mariner specified in Schedule A of the amount of the Purchase Price in freely
transferable United States funds for the Purchased Shares purchased by you on
the Closing Date.
Costs
Each party shall be responsible for his/her/its own expenses associated with the
transactions contemplated herein, including without limitation legal, accounting
and other advisory fees.
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<PAGE>
Prospectus Exemptions
The sale and delivery of the Purchased Shares by the Corporation to you are
conditional upon such sale being exempt from the prospectus filing requirements
of any applicable statute relating to the sale of such shares.
Covenants, Representations and Warranties
By your acceptance of this letter, you covert, represent and warrant to the
Corporation (which representations and warranties shall survive closing) that:
(a) (i) you are purchasing the Purchased Shares as principal for your own
account, and not for the benefit of any other person; and
(ii) the purchaser was not created or established solely to acquire
securities, or to permit purchases of securities without a
prospectus, in reliance on an exemption from the prospectus
requirements of applicable securities legislation;
(b) you, the beneficial purchaser, will execute and deliver all documentation
as may be required by applicable Canadian or U.S. securities legislation
and policy statements to permit the purchase of the Purchased Shares
hereunder on the terms as set forth herein;
(c) the Purchased Shares are being acquired by you for investment only and not
with a view to resale or distribution except strictly as may be permitted
under applicable securities legislation;
(d) you will not directly or indirectly beneficially own, control or have
direction over ten per cent (10%) or more of the outstanding voting
securities of the Corporation following completion of the transaction
contemplated herein; and
(e) you are not a related party in relation to the Corporation as such term is
defined in the Securities Act (Ontario) and the Rules thereunder.
This agreement is governed by the laws of Ontario. By your acceptance of this
letter below, you irrevocably attorn to the jurisdiction of the courts of
Ontario. All references to currency are to the currency of Canada unless
otherwise referenced. This agreement constitutes the entire agreement among the
parties hereto and supersedes all prior negotiations, agreements and
understandings. This agreement may not be amended except by written instrument
duly executed by the parties hereto.
B-16
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return the enclosed copy of this letter as soon as possible, to evidence the
binding agreement between you and the Corporation.
Yours very truly,
MICROMEM TECHNOLOGIES INC.
Per:/s/ Sam Fuda
- ----------------
Name: Sam Fuda
Title: Chairman
B-17
<PAGE>
To: Micromem Technologies Inc.
We accept the foregoing and agree to be bound by the terms thereof and, without
limitation, further agree that Micromem Technologies Inc. may rely upon the
covenants, representations and warranties contained therein as if it were a
contracting party.
We, the undersigned, hereby acknowledge that we have consented and requested
that all documents evidencing or relating in any way to the sale of the
Purchased Shares be drawn up in the English language only.
Framcover Limited
- ------------------------------------
(full legal name of purchaser)
Corso Elvezia 4
- ------------------------------------
(street address)
Lugano, Switzerland
- ------------------------------------
(city, country)
/s/ Roberto Mameli
- ------------------------------------
(Signature of authorized signing officer)
Roberto Mameli, President
- ------------------------------------
(name and Position of authorized signing officer)
B-18
<PAGE>
Schedule A
To: Micromem Technologies Inc.
150 York Street, Suite 1206
Toronto, Ontario
M5H-3S5
Attention: Mr. Sam Fuda, Chairman
Dear Sirs:
Re: Purchase of Common Shares
We acknowledge receipt of your letter of December 30, 1999.
1. Representation at Closing - complete either (a), (b) or (c).
(a) We authorize David Hynes, Barrister & Solicitor ("Our Agent") to
represent us, as our agent and attorney, at the closing of the
above sale at the offices of Micromem Technologies Inc. at 150
York Street, Suite 1206, Toronto, Ontario, at 10:00 a.m., on
January 27, 2000, or on such other date as may be determined to be
the Closing Date, and instruct Our Agent to deliver on our behalf
payment for the shares referred to in section 4, to receive
delivery of a certificate representing such securities and to
execute and deliver a receipt thereto and any other instrument or
document required in connection with the purchase and sale of the
said securities.
Yes |X| No |_|
(b) We intend to have another representative at the closing.
Yes |_| No |X|
Our representative, which we hereby appoint as our agent and
attorney with the powers as set forth in section 1(a) above, will
be:
(c) We plan to be present at the closing.
Yes |_| No |X|
2. Method of payment - complete (a) if _______________ has been appointed to
represent you at closing in section 1(a) above. Otherwise, complete (b).
Payment in the amount of US $2.50 per share will be made as follows:
B-19
<PAGE>
Check one
---------
(a) a bank draft or certified cheque payable in United States funds to
Micromem Technologies Inc. to arrive of the offices of Micromem
Technologies Inc. (Attention: San Fuda), at or before 10:00 a.m.
on January 27, 2000, or on such other date as may be determined to
be the Closing Date (in which event will deliver its certified
cheque at closing on your behalf);
(b) a bank draft or certified. cheque payable in United States funds
to _________and presented at the closing by us or our
representative named in section 1(b) above.
(c) wire transfer of the funds to our legal counsel in Toronto,
Ontario and presented at the closing by us or our representative
named in section 1(b) above.
B-20
<PAGE>
3. Delivery - please deliver the certificates representing ownership of the
shares to:
4. Registration - registration of the single certificate which is to be
delivered at closing should be made as follows;
* If this item is left blank, the share certificate will be registered in
the name of the purchaser as it appears on page one of the agreement to
which this Schedule A is attached.
5. We acknowledge that we will deliver to our legal counsel, David Hynes,
Barrister & Solicitor no later than 10:00 a.m. on January 27, 2000, or on
such other date as may be determined to be the Closing Date, all such
additional completed forms in respect of our purchase of securities of
Micromem Technologies Inc. as may be required for filing with the
appropriate securities and regulatory authorities.
Date: Framcove Limited
------------------------------
(name of Purchaser)
by: /s/Roberto Mameli
------------------------------
(signature)
Roberto Mameli, President
------------------------------
(print name and position)
B-21
<PAGE>
3. Delivery - please deliver the certificates representing ownership of the
shares to:
4. Registration - registration of the single certificate which is to be
delivered at closing should be made as follows;
* If this item is left blank, the share certificate will be registered in
the name of the purchaser as it appears on page one of the agreement to
which this Schedule A is attached.
5. We acknowledge that we will deliver to our legal counsel, David Hynes,
Barrister & Solicitor no later than 10:00 a.m. on January 27, 2000, or on
such other date as may be determined to be the Closing Date, all such
additional completed forms in respect of our purchase of securities of
Micromem Technologies Inc. as may be required for filing with the
appropriate securities and regulatory authorities.
Date: Framcove Limited
------------------------------
(name of Purchaser)
by : /s/Roberto Mameli
-------------------------
(signature)
Roberto Mameli, President
------------------------------
(print name and position)
B-22
<PAGE>
USE AGREEMENT
THIS USE AGREEMENT (this "Agreement") is made and entered into this 31st day of
December, 1999 (the "Effective Date"), by and between THE REGENTS OF THE
UNIVERSITY OF NEW MEXICO (the "University") and PAGEANT TECHNOLOGIES (USA),
INC., a Utah corporation ("Pageant").
BACKGROUND
A. As part of an effort to develop certain confidential and proprietary
technologies, Pageant has need of laboratory facilities, including a "class
1000" clean room and certain specialized equipment.
B. The University owns and operates such laboratory facilities and
equipment at its Center for High Technology Materials in Albuquerque, New
Mexico. Those facilities are accessible to and are used by students,
faculty and other employees of the University, and the University also
leases access to the Facilities to third parties.
C. The University desires to lease to Pageant, and Pageant desires to lease
from the University, the Facilities and equipment, subject to the terms and
conditions of this Agreement.
AGREEMENT
1. Facilities. Subject to the terms and conditions of this Agreement, the
University hereby leases the laboratory facility described on Exhibit
A (the "Laboratory") and the equipment listed on Exhibit B (the
"Equipment") to Pageant. The Laboratory and Equipment when referred to
collectively in this Agreement will be referred to as the
"Facilities").
2. Term. The term of this Agreement will be for a period of one (1) year,
commencing on December 10, 1999 (the "Commencement Date"), and unless
earlier terminated, expires automatically at midnight on December 9,
2000.
3. Compensation. In consideration for its use of the Facilities and for
the University's compliance with the other terms and conditions of
this Agreement, Pageant will pay the University Five Hundred Dollars
($500) for each day that it actually makes use of the Facilities
pursuant to this Agreement (the "Compensation"). However, regardless
of the number of days that Pageant actually uses the Facilities under
this Agreement, the Compensation will not exceed Three Thousand
Dollars ($3000) per month. Pageant will pay Compensation on or before
the 5th day of the month for its use of the Facilities during the
prior month; provided, however, that on the Commencement Date, Pageant
shall pay the University the sum of $3,000, representing the parties'
estimate of Pageant's last month's Compensation (the "Final
Compensation Payment"). Unless otherwise agreed by the parties, the
Final Compensation Payment shall be applied to payment of the
Compensation applicable to the last
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<PAGE>
month of the term of this Agreement and any remainder shall be
refunded promptly to Pageant.
4. Title and Condition of Facilities. The University warrants that it is
the sole owner of the Facilities and that upon the Commencement Date
Pageant will have the right to use the Facilities for the duration of
this Agreement from unreasonable interference by any person claiming
by, through or under the University, subject to the terms and
conditions of this Agreement. The University further warrants that
upon the Commencement Date, the Facilities will be in good condition
and repair and in compliance with generally accepted standards of good
repair for laboratories and equipment of this class and nature, and
agrees to maintain the Facilities in accordance with Section 11 of
this Agreement.
5. Pageant's Access to and Use of the Facilities.
(a) Pageant's Access to the Facilities. Up to four (4) individuals
designated by Pageant (the "Pageant Team") will have unlimited
but non-exclusive access to and use of the Facilities (except as
provided in Section 8) for twenty-four (24) hours a day, seven
(7) days a week, except for University-observed holidays. The
University will provide, at no additional cost to Pageant, any
items or services reasonably necessary to allow the Pageant Team
access to the Facilities as described above, including but not
limited to keys, identification cards, parking and the like.
(b) Pageant's Use of the Facilities. Pageant will use the Facilities
for development of certain of its proprietary technologies,
subject to the terms and conditions of this Agreement. Pageant
agrees to use the Facilities in accordance with the written
procedures established by the University for the operation of the
Facilities including training to be provided by the University
(collectively, the "Operating Procedures"). On or before the
Commencement Date, the University will deliver a copy of the
Operating Procedures, or otherwise make a copy thereof available
at the Facilities, to Pageant.
(c) Onsite Storage. Pageant will be allowed to install within the
Laboratory a safe or other secure storage unit (the "Storage
Unit"), provided it is clearly labeled as the property of
Pageant. Pageant will be allowed to store work in progress and
other materials therein in its sole discretion provided such
materials meet with the University' policies on the storage and
handling of hazardous materials. Pageant will retain ownership of
the Storage Unit and all materials stored therein, and the
University will have no right of access thereto. Upon termination
of this Agreement, Pageant will, at its sole cost and expense,
remove the Storage Unit and restore that portion of the
Laboratory affected thereby to its condition prior to
installation of the Storage Unit, reasonable wear and tear
excepted. Pageant agrees that the University shall not be
responsible for damage to the Storage Unit or the contents
thereof. Pageant agrees to store its confidential or proprietary
B-24
<PAGE>
information and materials in the Storage Unit, or remove such
information and materials from the Facilities, when Pageant
employees or representatives are not present at the Facilities.
(d) Consumables. Pageant, at its sole expense, will provide all
consumables necessary for its use of the Facilities. Pageant
agrees that the University shall not be responsible for loss or
damage to consumables brought on to the premises by Pageant.
6. Access to and Use of the Facilities by University and Third Parties.
Except as provided in Sections 8 and 10 below, nothing in this
Agreement will limit the access to and use of the Facilities typically
afforded by the University to its students, faculty and other
employees or to third parties.
7. No Participation by University Personnel. No University personnel will
participate or be involved in Pageants' work at the Facilities, except
to the extent of their responsibilities for cleaning, maintenance and
repair of the Facilities. Except as expressly set forth in section 9
below, Pageant personnel shall not seek technical advice from the
University concerning the development of Pageant's proprietary
technologies.
8. Coordination and Scheduling of Use of the Facilities. The University
shall be responsible for coordination the use of the Facilities by
Pageant and other users. The University will exercise prompt and
reasonable efforts to coordinate the use of the Facilities and
schedule the use thereof by other users so that Pageant may have
access to and use of the Facilities as permitted by Subsections 5(a)
and (b) above. Concurrently with the execution of this Agreement, the
University agrees to notify Pageant of any uses of the Facilities
which have been scheduled prior to the Commencement Date ("Previously
Scheduled Uses"), and the extent to which such uses may preclude or
otherwise impede Pageant's use of the Facilities. If any Previously
Scheduled Use has been granted on an exclusive basis, the University
will, at Pageant's request, make a reasonable effort to renegotiate or
reschedule that Previously Scheduled Use so as to prevent any conflict
between Pageant's use of the Facilities and the Previously Scheduled
Use. From and after the Commencement Date of the Agreement, the
University will use reasonable efforts to schedule use of the
Facilities by others in accordance with established University
scheduling procedures in a manner that will not unreasonably impede
Pageant's access to the Facilities or would excluded Pageant from
using the Facilities as permitted by Sections 5(a) and (b) above,
reasonable maintenance and repairs excepted.
9. Ownership of Proprietary Technology. The University acknowledges and
agrees that it will have no ownership or any other interest in any
inventions, know-how, samples, improvements, methods, data, concepts
or other information or technologies developed by Pageant during its
use of the Facilities or otherwise ("Proprietary Technology") unless
expressly granted by Pageant in a separate written agreement, and the
University hereby unconditionally and irrevocably
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<PAGE>
assigns any and all rights it may acquire in such Proprietary
Technology to Pageant. The parties agree that requests, if any, by
Pageant for technical assistance or advice from the University
concerning Pageant's development of its proprietary technologies shall
be handled as follows: (A) before requesting any technical assistance
or advice from the University concerning Pageant's proprietary
technologies, Pageant will provide prior written notice to the
University that it intends to make such a request of the University;
and (B) before any communications occur in which any such advice or
assistance is given, the parties shall have executed a mutually
acceptable agreement concerning the ownership of intellectual property
rights.
10. Confidentiality.
(a) Nondisclosure. The parties acknowledge that some information,
documents and materials which may be brought to or developed at
the Facilities by Pageant, the University or third parties may
constitute valuable trade secret or proprietary information of
that party, and that any disclosure or unauthorized use thereof
by a non-owner of such information will cause irreparable harm
and loss to the owner thereof. The University agrees that any
trade secret or proprietary information of Pageant or relating to
Pageant's use of the Facilities, acquired by the University or by
its employees, contractors or agents (whether provided to it by
Pageant or inadvertently disclosed), will be kept strictly
confidential and may not be used, duplicate or disclosed by the
University in any way, except as may be expressly authorized by
Pageant in writing or as set forth in Section 10(b) below.
Pageant agrees that any proprietary information of the University
acquired by Pageant or by its employees, contractors or agents
(whether provided to it by the University or inadvertently
disclosed) will be kept strictly confidential and may not be
used, duplicated or disclosed by Pageant in any way, except as
may be expressly authorized by the University in writing or as
permitted by Section 10(b) below. Each party will use its best
efforts to protect the confidentiality of the other party's
proprietary information and the proprietary information of others
using the Facilities. Each party will use the same degree of care
as it uses to protect its own proprietary information to prevent
the inadvertent, accidental or unauthorized, or mistaken
disclosure or use of confidential information. Without limiting
the parties' obligations pursuant to the covenants contained in
this Section 10, the parties agree that a party shall not be
responsible for any inadvertent disclosure by any other party of
its confidential or proprietary information.
(b) Exceptions. The covenants set forth in Section 10(a) above
prohibiting disclosure of trade secrets or proprietary
information shall not apply to:
(1) information which is or becomes publicly known through no
fault of a receiving party;
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(2) information learned from a third party entitled to disclose
it;
(3) information already known to or developed by a receiving
party before receipt from a disclosing party, as shown by
the receiving party's prior written records.
(4) information reasonably necessary to protect a party's
interests in a lawsuit, alternative dispute resolution
process, government investigation, as required by a court
order, administrative decision, or to the extent required by
law; and
(5) information reasonably necessary to process insurance claims
provided that a party, before making any disclosure described in
Subsection 10(b)(4) and (5) above, shall provide reasonably written
notice to the other party permitting sufficient time for it to obtain
an in camera review or a protective order with respect to the
information that it proposed to be disclosed.
11. Maintenance and Repair. The University will keep and maintain the
Facilities in a manner consistent with generally accepted standards of
good repair for laboratories and equipment of the class and nature
involved herein. If any Equipment becomes partially or completely
dysfunctional, or if the Laboratory or Equipment falls below generally
accepted standards of good repair for laboratories and equipment of
the class and nature involved herein, then the University will repair
the Equipment or otherwise remedy the problem within a reasonable
time, unless the dysfunction (reasonable war and tear excepted)
requiring repair results primarily from Pageant's failure to use the
Equipment in accordance with applicable Operating Procedures, in which
event Pageant shall repair or cause the repair of the Equipment at
Pageant's own expense.
12. Pageant's Equipment. Subject to compliance with the University's
policies from the storage and handling of hazardous materials and its
published safety regulations, Pageant may use or place within the
Laboratory any equipment or personal property used by Pageant in the
performance of its work at the Facilities. Such equipment and personal
property will at all times remain the property of Pageant. The
University will not be responsible for loss or damage to Pageant's
equipment or personal property at the Facilities.
13. Compliance with Law. The University will comply with and cause the
Facilities to comply with: (a) all legal requirements applicable to
the Facilities or the use thereof and (b) all terms, conditions,
covenants, agreements and requirements of insurance policies which may
be in force with respect to the Facilities, existing on the
Commencement Date or thereafter consented to by Pageant affecting the
Facilities or the ownership, occupancy or use thereof.
14. Utilities. The University will pay the cost of all utilities
associated with the Facilities, including but not limited to water,
gas, electricity and telephone.
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15. Taxes. Pageant will pay all taxes levied on or associated with
personal property and equipment owned by Pageant and kept in the
Laboratory.
16. Indemnification of University By Pageant; University's Liabilities for
Third Party Claims. Pageant will indemnify and hold the University
harmless from and against all claims, liabilities, actions, losses,
damages and costs Claims arising from or relating to (1) a breach of
any warranty made by Pageant herein, or (2) the use of the Facilities
by Pageant, its agents, employees or assigns; provided, however, that
Pageant will not be required to indemnify or hold the University
harmless from or against any portion of any Claim attributable to the
negligent act or omission of the University or its agents.
Notwithstanding anything to the contrary in this Agreement, the
University, shall be liable to the fullest extent permitted by the New
Mexico Tort Claims Act, Section 41.4.1 et seq. NFMA (1978 as amended),
for claims and actions asserted by third parties.
17. Insurance. Pageant will maintain and provide a copy of its current
level of insurance coverage with respect to (a) Worker's Compensation
and (b) Comprehensive General Liability Insurance, and will provide
the University with a least thirty (30) days' advance notice of any
change thereto.
18. Damage and Destruction. If any party of the Facilities are damaged or
are rendered partially or wholly inaccessible to Pageant due to fire
or other casualty, and such damage or other casualty is not remedied
within seven (7) days, Pageant may, at its option, terminate this
Agreement without further obligation, except in the event that Pageant
caused the damage, fire or casualty, Pageant will continue to be
responsible for Compensation through the termination date and for the
removal of its equipment and personal property.
19. Quiet Enjoyment. Subject to the provisions of this Agreement and
conditioned upon performance of all of the provisions to be performed
by Pageant hereunder, the University will secure to Pageant, through
the term of this Agreement, quiet and peaceful possession of the
Facilities and all rights and privileges appurtenant thereto.
20. Termination.
(a) Termination by the University.
(1) Termination by the University without Cause. The University
may terminate this Agreement without cause upon thirty (30)
calendar days' written notice to Pageant, except not within
the first six (6) months of this Agreement.
(2) Termination by the University for Cause. The University
may terminate this Agreement by written notice to
Pageant (effective three business days after mailing)
for any Pageant Default (as defined in Section 21
herein).
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(b) Termination by Pageant.
(1) Termination by Pageant without Cause. Pageant may terminate
this Agreement without cause upon five (5) calendar days'
written notice to the University.
(2) Termination by Pageant for Cause. Pageant may terminate this
Agreement by written notice to the University (effective
three business days after mailing) for any University
Default (as defined in Section 22 herein).
(c) Obligation to Pay Compensation. Upon termination of this
Agreement, Pageant will no longer be obligated to pay
Compensation for any period following the effective date of such
termination.
21. Default by Pageant. The occurrence of any one of the following events
will constitute a default by Pageant under this Agreement ("Pageant
Default"):
(a) Failure to Pay Compensation. Pageant fails to pay any
Compensation within ten (10) days after it is due, and such
failure continues for five (5) days after the University has
given Pageant written notice specifying the amount due;
(b) Failure to Perform Other Covenants. Pageant fails to perform any
of its covenants (other than payment of Compensation) under this
Agreement, and such failure continues for fifteen (15) days after
the University has given Pageant written notice specifying such
failure; provided that if the nature of such default is such that
it cannot be cured within the fifteen (15) day period noted
above, Pageant will not be deemed to be in default if it
commences a good faith effort to cure the specified failure
within the fifteen (15) day period and thereafter diligently
prosecutes the same to completion; or
(c) Bankruptcy. Pageant files a voluntary petition in bankruptcy or a
petition or answer seeking a reorganization, liquidation,
dissolution or other relief under the bankruptcy laws, or if
Pageant makes an assignment for the benefit of creditors.
22. Default by University. The occurrence of any one of the following
events will constitute a default by the University under this
Agreement ("University Default"):
(a) Breach of Covenant of Confidentiality. The University breaches
any of its obligations under Section 10 herein; or
(b) Failure to Perform Other Covenants. The University fails to
perform any of its covenants under this Agreement (other than its
obligations of confidentiality under Section 10), and such
failure continues for fifteen
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(15) days after Pageant has given the University written notice
specifying such failure; provided that if the nature of such
default is such that it cannot be cured within the fifteen (15)
day period noted above, the University will not be deemed to be
in default if it commences a good faith effort to cure the
specified failure within the fifteen (15) day period and
thereafter diligently prosecutes the same to completion.
23. Notices.
(a) Compensation and all notices, demands, requests, consents,
approvals and other instruments required or permitted to be given
pursuant to this Agreement will be in writing and will be deemed
to have been properly given if in writing, personally delivered,
or forwarded by postage prepaid, certified or registered mail,
return receipt requested, or by another commercially recognized
means of delivery (e.g., Federal Express), addressed as follows:
To the University: University of New Mexico
Attn: Robert B. Lauer
Associate Director
University of New Mexico CHTM
1313 Goddard S.E.
Albuquerque, NM 87106
To Pageant: Pageant Technologies (USA), Inc.
3205 Richard's Lane, Suite B
Santa Fe, New Mexico 87505
Attn: Stephen Fleming, President
(b) Either party may change its address for receipt of notices by
notifying the other party in writing of the change.
24. Waiver of Landlord's and Security Interests. The University hereby
waives all rights to acquire any landlord's or security interest in
any of Pageant's property.
25. Equitable Relief. Because any breach of Section 10 above could cause
irreparable harm and significant injury that may be difficult to
ascertain. Pageant will have the right to seek an immediate injunction
in the courts of New Mexico enjoining any breach or threatened breach
of this Agreement by the University in addition to any other remedies
to which Pageant may be entitled, including money damages. Pageant
shall not be required to follow the procedures or requirements of
Sections 29 or 30 below before bringing any such action.
26. Severability. If any term or provision of this Agreement or the
application of it to any person or circumstance is held to be invalid
and unenforceable, the remainder of this Agreement or the application
of such term or provision to persons or circumstances other than those
as to which it is invalid or unenforceable will not
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be affected thereby, and each term and provision of this Agreement
will be valid and will be enforced to the extent permitted by law.
27. Relationship Between the Parties. The provisions of this Agreement are
not intended to create, nor should they be construed to create a joint
venture, a partnership or any other similar relationship between the
parties hereto except that of landlord and tenant.
28. Governing Law. This Agreement will be governed and construed by the
laws of the state of New Mexico.
29. Mediation. Subject to Section 25 above, any controversy or claim
arising out of or relating to this Agreement, or the breach thereof,
shall be first mediated in Albuquerque, New Mexico, by a mediator
mutually agreeable to the parties. If the parties cannot agree on a
mediator, the parties shall each select one mediator. The two selected
mediators will then select a third mediator. The third mediator shall
mediate the dispute.
30. Arbitration. If the mediation described in Section 29 does not resolve
the controversy or claim arising out of or relating to this Agreement,
or the breach thereof, the parties, except as permitted by Section 25
above, shall submit such controversy or claim to binding arbitration
in Albuquerque, New Mexico, in accordance with the rules of the
American Arbitration Association.
31. Interpretation and Construction. This Agreement will be interpreted
and construed only by the contents hereof. The parties hereto have
both been represented by counsel in negotiating and drafting this
Agreement, and consequently this Agreement shall not be construed in
favor of one party or the other.
32. Remedies not Exclusive. The rights and remedies contained in this
Agreement are not exclusive of any other rights or remedies the
parties may have but will be construed as cumulative and will be in
addition to every other remedy now or hereafter existing at law, in
equity or by statute.
33. Successors and Assigns. All of the rights and obligations of the
parties under this Agreement will bind, and the benefits will inure
to, their respective legal representatives.
34. Counterparts. This Agreement may be executed in counterpart, all of
which will be considered one and the same Agreement.
35. Exhibits. The exhibits identified in this Agreement and attached
hereto are incorporated herein by reference and made a part hereof.
36. Entire Agreement; Amendments; Waivers. This Agreement contains the
entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements, negotiations,
representations, warranties,
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commitment offers, contract and writing with respect to that subject
matter. No modification or amendment of any provision of this
Agreement will be effective unless made in writing and signed by both
parties. No amendment, change, waiver or discharge hereof will be
valid unless in writing and signed by both parties.
37. Survival. The confidentiality and indemnification obligations of the
parties will survive any termination or expiration of this Agreement;
provided however, the covenant set forth in Section 10(a) prohibiting
disclosure of trade secret or proprietary information shall expire
five (5) years from the Commencement Date.
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EXHIBIT A
THE LABORATORY
The University's class 100/1000 clean room, sputter deposition laboratory and
test equipment laboratories.
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EXHIBIT B
THE EQUIPMENT
Classroom Equipment - 2 metal evaporators, 2 mask aligners, 1 dielectric
evaporator, all wet benches, 2 reactive ion etchers, 1 PBCVD, 2 spin stations, 1
scanning electron microscope with EDX.
Sputtering Lab - 1 dual spotter deposition chamber.
Test Equipment Labs - 1 impedance analyzer, 1 probe station. This test equipment
may be assigned to Principle Investigators (P.I.s) and not available for CHTM
general use. Permission for Pageant's use of this equipment has been granted by
the P.I.'s pursuant to the letters of authorization attached to this Exhibit B.
Test equipment not operating prior to the Commencement Date of this Agreement
and required by Pageant will be promptly restored to operating condition with
Pageant funds or Pageant will provide its own test equipment subject to
reasonable approval by CHTM.
NOTE: The two pieces of testing equipment (i.e. impedance analyzer and probe
station) exist in two separate laboratories. Hence, the phrase in Exhibit B, "1
impedance analyzer, 1 probe station." And also the phrase in Exhibit A, ". . .
test equipment laboratories."
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