424B3 1 a2036088z424b3.txt FORM 424(B) Filed Pursuant to Section 424(b)(3) Prospectus Registration No. 333-50212 PROSPECTUS INZECO HOLDINGS INC. 3,557,500 Shares of Common Stock -------------- This prospectus relates to 3,557,500 shares of common stock of Inzeco Holdings Inc.. The shares are outstanding shares of common stock owned by the persons named in this prospectus under the caption "Selling Shareholders." The shares were acquired by the selling shareholders through private placements which were either not subject to, or exempt from the registration provisions of the Securities Act of 1933, as amended. On January 2, 2001, the closing price of our common stock on the Canadian Venture Exchange was C$0.61 (approx. US $0.41) per share (CDNX Symbol "IZE"). Prior to this offering, there has been no public market for the common stock in the United States and there can be no assurance that a public market for such securities will develop. We intend to have our common stock listed on the Over-the-Counter Bulletin Board under the symbol INZCF. We will not receive any part of the proceeds of any sales of shares made hereunder. AN INVESTMENT IN SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 6. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR SALE UNDER THE SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA. THE SECURITIES ARE NOT BEING OFFERED FOR SALE AND MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, IN CANADA, OR TO ANY RESIDENT THEREOF, IN VIOLATION OF THE SECURITIES LAWS OF ANY PROVINCE OR TERRITORY OF CANADA. The date of this prospectus is January 9, 2001. TABLE OF CONTENTS PAGE PROSPECTUS SUMMARY .......................................................... 3 RISK FACTORS ................................................................ 4 FORWARD LOOKING STATEMENTS .................................................. 9 ENFORCEABILITY OF CIVIL LIABILITIES ......................................... 9 EXCHANGE RATE DATA AND ACCOUNTING PRINCIPLES ................................ 11 USE OF PROCEEDS ............................................................. 11 MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS ..................... 11 DIVIDEND POLICY ............................................................. 12 CAPITALIZATION .............................................................. 12 PLAN OF OPERATION ........................................................... 13 BUSINESS .................................................................... 15 MANAGEMENT .................................................................. 20 PRINCIPAL SHAREHOLDERS ...................................................... 25 PROMOTERS ................................................................... 26 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............................. 27 DESCRIPTION OF SECURITIES ................................................... 28 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES ............................................................. 30 MATERIAL UNITED STATES AND CANADIAN FEDERAL INCOME TAX CONSIDERATIONS ....... 30 INVESTMENT CANADA ACT ....................................................... 32 SHARES ELIGIBLE FOR FUTURE SALE ............................................. 33 SELLING SHAREHOLDERS ........................................................ 34 PLAN OF DISTRIBUTION ........................................................ 35 CHANGE IN ACCOUNTANTS ....................................................... 36 LEGAL MATTERS ............................................................... 36 EXPERTS ..................................................................... 36 WHERE YOU CAN FIND ADDITIONAL INFORMATION ................................... 37 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY HIGHLIGHTS SOME OF THE INFORMATION IN THIS PROSPECTUS. IT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THIS OFFERING FULLY, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS AND CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES ACCOMPANYING THE CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES IN THIS PROSPECTUS TO "WE," "OUR" AND "US" REFER TO INZECO HOLDINGS INC., AN ALBERTA CORPORATION. THE COMPANY Inzeco Holdings Inc. was incorporated in Alberta, Canada on May 30, 1997. Through our wholly owned subsidiary RTICA Inc., we are engaged in advanced plastics processing. We have developed technology and a production process for making high performance insulating products from low cost recycled polyethylene terephthalate (PET). Our principal executive offices are located at 999 Barton Street, Stoney Creek, Ontario L8E 54H Canada and our telephone number is (905) 634-8669. RISK FACTORS The purchase of the securities offered hereby involves a high degree of risk. The various risk factors related to this offering should be considered carefully before an investment is made. See "Risk Factors." THE OFFERING The shares being offered under this prospectus are owned by the persons named under the caption "Selling Shareholders." The selling shareholders may from time to time sell the shares on the OTC-BB, on any other national securities exchange or automated quotation system on which the common stock may be listed or traded, in negotiated transactions or otherwise, at prices then prevailing or related to the then current market price or at negotiated prices. The shares may be sold directly or through brokers or dealers. See "Plan of Distribution." Number of Shares ....................... 3,557,500 shares of common stock Shares of Common Stock Outstanding Before and After Offering ........... 32,871,886 shares of common stock Use of Proceeds ........................ We will not receive any proceeds from the sale of shares of common stock by the selling shareholders. See "Use of Proceeds" and "Selling Shareholders." 3 RISK FACTORS AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING SHOULD BE CONSIDERED CAREFULLY IN EVALUATING INZECO AND ITS BUSINESS BEFORE INVESTING IN THE SECURITIES. WE ONLY HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN ANALYZE OUR POTENTIAL PROFITABILITY. Because of our limited operating history, our strategies may not prove to be effective in dealing with problems associated with the formation of a new business and as a result our RTICA(TM) product may never be successfully commercialized. Since inception, we have been engaged primarily in start-up activities related to our RTICA(TM) insulating products. We may encounter problems, expenses, complications and delays in connection with the development and application or the utilization of our technology, particularly because that technology is new and commercially unproven and because of the competitive environment in which we plan to operate. WE HAVE NOT SOLD ANY PRODUCT AND WE HAVE OPERATED AT A LOSS SINCE INCEPTION. Since inception we have operated at a loss and we may never be able to operate profitably. On May 31, 2000, we had an accumulated deficit from inception of C$4,340,723 (approx. US$2,884,450), and we have incurred a loss for the three months ended August 31, 2000 of C$554,290 (approx. US$375,375). We anticipate that we will continue to experience significant operating and net losses through the end of our fiscal year ending May 31, 2001 as a result of start-up costs associated with implementing our business plan and our proposed expanded operations. Such losses will continue until such time, if ever, that our products can successfully be brought to market and generate sufficient operating revenues. We may never become profitable or may not be able to sustain profitability if achieved. Based upon these factors and others discussed in Note 1 to the Financial Statements for the fiscal year ended May 31, 2000, our independent auditors have issued a qualified opinion, indicating that the continuation of Inzeco as a going concern is dependent upon achieving additional financing and, ultimately, upon the achievement of profitable operations. See "Plan of Operation" and the Financial Statements. WE ONLY HAVE SUFFICIENT FUNDS TO OPERATE FOR THE NEXT TWELVE MONTHS AND WE CANNOT BE SURE THAT WE WILL GENERATE THE NECESSARY ADDITIONAL CAPITAL TO FINANCE THE GROWTH OF OUR BUSINESS. We estimate that we have sufficient cash resources to fund our operations for approximately 12 months based on our current cash requirements, which result principally from: - the implementation of our business plan and working capital needs; - the assumption of costs in connection with this registration; and - high start-up costs. Our current cash resources came from three transactions which we closed during calendar year 2000. In May 2000, we closed a private placement in the United States in which we raised net proceeds of approximately US$1,107,319. In June 2000, we closed a private placement in Canada in which we raised net proceeds of approximately C$2,202,700 (approx. US$1,500,272). Also in June 2000, 850,418 of the 1,243,633 common share purchase warrants issued in connection with Inzeco's acquisition of RTICA Inc. were exercised at an exercise price of C$0.65 (approx. US$0.45) for a total of C$553,541 (approx. US$373,308). As at August 31, 2000, we had cash reserves of C$3,191,274 (approx. US$2,161,187). See "Description of Securities." The proceeds from these transactions are being used principally for 4 equipment, engineering and installation, start-up expenses and working capital. Unless we generate significant revenues during calender 2001, our failure to obtain additional financing prior to December 31, 2001, may prevent us from becoming a large commercial producer, force us to scale back our operations and limit our ability to effectively compete in the insulation and building materials industry. OUR PROJECTED MANUFACTURING COST ESTIMATES AND GROSS MARGIN PERCENTAGES FOR COMMERCIAL OPERATIONS MAY NOT BE ACCURATE SINCE THEY ARE BASED PRINCIPALLY UPON ASSUMPTIONS DRAWN FROM SMALL SCALE, TEST OPERATIONS. Given that we have no history of commercial scale operations, and because we are producing a new and innovative product, our current projections with respect to manufacturing costs and gross margins per unit of production may not be realized. In the event that the gross margin percentage is less than currently projected by management, cash flow contributions from operations may be less than we have projected which would limit our growth potential and may prevent us from achieving profitability or becoming a large scale commercial producer. WE MAY BE UNABLE TO PROTECT OUR PATENT AND PROPRIETARY TECHNOLOGY RELATED TO THE MANUFACTURE OF RTICATM DUE TO OUR LIMITED FINANCIAL RESOURCES. Our success and competitive position are dependent in large part on our ability to defend our technology against infringement from others. Although we have patents in the United States and Canada, as well as proprietary technology and trade secrets protected by non-disclosure agreements, the cost of defending our technology and intellectual property could be beyond our present or future financial resources. In addition, our competitors may independently develop technology which is substantially equivalent or superior to our technology, or our competitors may develop functionally similar products outside the protection of any licenses, patents or other intellectual property rights that we have or may obtain. WE LACK OPERATING EXPERIENCE WHICH MAY IMPEDE OUR ABILITY TO EFFECTIVELY PRODUCE AND MARKET OUR PRODUCT. Because we are a development stage enterprise and have only limited operating experience, we may not be able to effectively produce and market our product. The transition from a start-up operation to an enterprise capable of effectively marketing RTICA(TM) products may require additional management, technical personnel, capital and other resources. Competition for qualified personnel in these areas is intense. Failure to obtain qualified personnel or to meet marketing standards could prevent or delay the effective commercialization of our products, even if successfully developed by us. OUR CURRENT MARKETING AND SALES STRATEGY IS DIRECTED AT A SINGLE, TARGETED CUSTOMER BASE. If we cannot successfully implement our marketing strategy, we may not be able to successfully commercialize and sell our product. We do not currently have well-established sales and distribution channels for our product. We are currently focusing our marketing and sales effort on certain major insulation subcontractors in the United States and Canada. We believe that these users represent a significant potential customer base for the RTICA(TM) products. Marketing to this directed group can be accomplished with a limited number of our personnel and at a relatively low cost. If our strategy is not successful and we do not succeed in selling our product to this targeted customer base, we may be forced to develop a broad, national based sales and distribution network to generate customer demand and to sell our products on a national basis. The development of such a network would likely involve significant costs and additional risks and uncertainties. Therefore, the failure of our current marketing and sales strategy would likely have a material adverse effect on our business, results of operations and financial condition. 5 OUR CURRENT MANUFACTURING CAPACITY IS EXTREMELY LIMITED AND WE CANNOT BE SURE THAT OUR EFFORTS TO EXPAND OUR CAPACITY TO A COMMERCIAL SCALE WILL BE SUCCESSFUL. We currently have limited manufacturing capacity and we may encounter problems scaling up our system to commercial scale. The failure to expand our current manufacturing facility to a commercial level would limit our ability to manufacture significant quantities of our product and thereby limit our sales potential. Although we currently have a manufacturing facility in Stoney Creek, Ontario, Canada that is in the process of being expanded, our plant as currently configured is not large enough to produce commercial quantities profitably. To manufacture RTICATM in sufficient quantities and at acceptable costs under our plan we must continue to expand our current facility. In connection with our expansion effort, we may encounter equipment and process problems when we attempt to duplicate our results at higher commercial production levels. OUR BUSINESS IS BASED SOLELY ON THE SUCCESS OF RTICATM, WHICH IS NOT COMMERCIALLY PROVEN. Our reliance upon one product to generate revenues exposes us to commercial risks reflecting lack of product diversification. We have not generated any revenues to date and our revenues over at least the next year will be entirely dependent upon the sale of our RTICA(TM) insulation and related technology and licensing opportunities. If our RTICA(TM) insulation does not achieve market acceptance, our lack of diversification could have material adverse effects on our business. THE TECHNOLOGY THAT WE USE IN PRODUCING RTICA(TM) MAY NOT PASS LONG-TERM TESTING. Because RTICA(TM) represents a new product thAt has not undergone long-term testing, our products may experience unanticipated problems. While we believe that RTICA(TM) represents a novel technology in insulating materials, commercialization has only just begun. Our product and technology may not provide equal or superior performance compared with competitive products and commercialization may not be successful. Moreover, although we have completed both internal testing and testing by an independent laboratory, and although the initial results from presenting our products to established users have demonstrated advantages over other products, there has been no long-term testing done on the product to ensure our integrity over significant time periods. Thus, RTICA(TM) products may experience unanticipated problems. OUR RTICA(TM) PRODUCT HAS NOT YET BEEN SOLD ON A COMMERCIAL BASIS, WE CANNOT BE SURE IT WILL RECEIVE BROAD MARKET ACCEPTANCE. Even if our technology is successful after long-term testing, as discussed above, RTICA(TM) products may not be accepted by the market. Factors that may limit the market acceptance of RTICA(TM) may include: - obstacles in market entry relative to competitive products, - the availability of alternative products, - the price of our products relative to alternative products, and - the possible lack of motivation of potential customers to change suppliers. WE HAVE A LIMITED NUMBER OF EMPLOYEES AND LIMITED FINANCIAL RESOURCES, WHICH COULD LIMIT OUR ABILITY TO MANAGE THE GROWTH OF OUR BUSINESS. We may not have adequately provided for the costs and risks associated with rapid future growth. Any such growth could place a significant strain on our managerial, operational and financial resources, and we would be required to implement and improve our managerial controls and procedures and operational and financial systems. In addition, we will be required to hire, train, integrate, manage and retain our workforce including our technology, manufacturing, engineering, sales and business development staff. Locating and retaining qualified 6 personnel in the insulation industry is extremely competitive. We may not have adequately allowed for the costs and risks associated with our proposed expansion and our systems, procedures or controls may not be adequate to support our operations. Furthermore, we may not be able to successfully locate, train and integrate personnel into our workforce. THE INSULATION INDUSTRY IS HIGHLY COMPETITIVE; WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN OUR INDUSTRY BECAUSE SOME OF OUR COMPETITORS ARE BETTER KNOWN AND HAVE SUBSTANTIALLY GREATER RESOURCES THAN WE DO. We may not be able to effectively compete against such well entrenched industry competitors with much greater technical resources and broad distribution networks. The insulation industry is dominated by a small number of very large and well-capitalized multinational participants. In response to environmental and health concerns, these companies are utilizing increasing percentages of recycled materials in their production processes, and are developing new products which are perceived to have fewer health related concerns. WE MAY NOT BE ABLE TO OBTAIN THE RECYCLED PLASTIC NEEDED TO MANUFACTURE OUR PRODUCT. Because the largest percentage of the production cost of RTICA(TM) is the cost of the recycled plastic useD in its production, the lack of availability of that raw material or a significant increase in its cost could impair our ability to profitably produce our product. We rely on a plentiful and continuing supply of a specific type of low cost recycled plastic. While we currently believe that there are adequate supplies of the recycled plastic that we use from several sources, if supply of the type of recycled plastic we use becomes more difficult to obtain or the price for that raw material increases significantly we may not be able to secure adequate raw material supplies to profitably produce and market RTICA(TM). WE MAY NOT BE ABLE TO SECURE TIMELY BUILDING CODE CERTIFICATION. Inzeco does not yet have building code certification and listing in Canada and the United States. Customer acceptance and sales of our product may be adversely impacted if we do not obtain certification under United States and Canadian building codes. Although building code approval is not legally required to sell our product to our target market in either the United States or Canada, certification would enable us to bypass the review of our product specifications on a case by case basis in connection with each sale, and to market our product with a listing reference number. We are currently in the process of applying for certification in Canada and the United States; however, certification will not be obtained until we are able to demonstrate our ability to generate consistent, approved product quality on an on going basis using our upscaled plant. There is no guarantee that our standard will be accepted or that we will be certified and establish a listing. Our failure to achieve certification could impair our ability to market and sell our product on a large scale. See "Description of Business - General." OUR DIRECTORS AND OFFICERS MAY BE ABLE TO CONTROL OR SIGNIFICANTLY INFLUENCE US DUE TO THEIR CONCENTRATED STOCK OWNERSHIP. Our directors and officers beneficially own approximately 30.5% of our issued and outstanding stock (without giving effect to the exercise of options held by said persons) and, therefore, may be able to influence or control the outcome of substantially all actions requiring stockholder approval, including the election of the entire Board of Directors, and the outcome of any stockholder votes concerning a merger, asset sale, or other major corporate transaction affecting Inzeco. Such control could also delay, deter, or prevent an unsolicited takeover of Inzeco. OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH; OUR INDEBTEDNESS IS SECURED BY ALL OF OUR TANGIBLE ASSETS. In order to fund our development program, we 7 have incurred substantial liabilities, certain of which are collateralized by all of our tangible assets. Our substantial indebtedness could: - require us to dedicate much of our available cash to payments on the indebtedness, and so reduce the availability of cash to fund our working capital, capital expenditures and other general corporate purposes, and - limit our ability to obtain additional financing to fund working capital , capital expenditures and other general corporate expenses. Also, if we are unable to generate sufficient cash flow from operations to meet scheduled debt payments or otherwise to comply with the terms of such indebtedness, we may be required to refinance all or a portion of our existing debt or to obtain additional financing. We may not be able to obtain such refinancing or additional financing. If no such refinancing or additional financing is available when needed, we may be forced to default on our debt obligations which would have a material adverse effect on us, including the possibility of receivership or liquidation of Inzeco. In such an event, our secured creditors could elect to foreclose on our assets and it is likely that the shares of Common Stock would significantly diminish in value or be worthless. CURRENCY FLUCTUATIONS THAT DEVALUE THE CANADIAN DOLLAR AGAINST THE UNITED STATES DOLLAR COULD ADVERSELY EFFECT OUR RESULTS OF OPERATIONS. In the event that the Canadian dollar were materially devalued against the United States dollar, our operating results could be materially adversely affected. The volatility of the Canadian dollar against United States currency may affect our profits, as certain supplies and equipment purchased by us are manufactured and exported to Canada by foreign companies. Accordingly, the relationship of the Canadian dollar to the value of the United States dollar may materially affect our operating results. AN INVESTMENT IN INZECO MAY HAVE LIMITED LIQUIDITY IF AN ACTIVE TRADING MARKET IN THE UNITED STATES DOES NOT DEVELOP OR CONTINUE. Although our common stock currently trades on the Canadian Venture Exchange (CDNX), the trading history suggests there is limited liquidity in the public market for our securities and liquidity may not increase and/or be sustained. We intend to have our common stock listed on the OTC-BB under the symbol INZCF. Factors such as announcements of quarterly variations in our financial results and changes in general market conditions, among other things, could cause the market price of the shares to fluctuate significantly. In recent years, the stock market has experienced significant price and volume fluctuations. IF OUR STOCK IS LISTED ON A U.S. EXCHANGE, IT MAY BE SUBJECT TO PENNY STOCK REGULATION. Disclosure requirements adopted by the Commission may have the effect of reducing the trading activity in the secondary market for our stock if it becomes subject to the penny stock rules. In addition, if our common stock becomes subject to the penny stock rules, purchasers of shares may find it more difficult to sell their shares. These rules regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the Commission, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations 8 for the penny stock, the compensation of the broker-dealer and our salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Based on the recent trading prices of common stock in Canada (C$0.61 (approximately US$0.41) on January 2, 2001), it is likely that our stock will be subject to the penny stock regulations for the foreseeable future. WE MAY BE SUBJECT TO CLAIMS BY USERS OF OUR RTICATM PRODUCT AND WE MAY NOT HAVE SUFFICIENT INSURANCE TO COVER SUCH CLAIMS. Although our product has been tested, it is newly developed and only has a short performance history. Accordingly, we are at greater risk of potential liability for breach of contract, personal injury, property damage, and negligence, including claims for lack of timely performance and/or for failure to deliver the service promised (including improper or negligent performance or design, failure to meet specifications, and breaches of express or implied warranties). Further, while we have general liability insurance, including product liability coverage, in effect, we may not have sufficient coverage to protect us against such claims. THE SALE OF INSULATION PRODUCTS IS SEASONAL AND THE SEASONALITY OF OUR PRODUCT SALES COULD ADVERSELY EFFECT THE VALUE OF OUR STOCK. Once we begin manufacturing and sales, our business will probably experience seasonal fluctuations in sales and operating results from quarter to quarter. In general, operating results in the industry are weakest in the first calendar quarter because of the effects of winter weather on construction and the consequent reduction in sales of insulation. Fluctuations in our quarterly sales and operating results caused by the seasonality of our industry could result in significant volatility in, and otherwise adversely affect, the market price of the common stock. FORWARD LOOKING STATEMENTS This prospectus contains certain forward-looking statements concerning our operations, economic performance and financial conditions, including, in particular, the likelihood of our success in developing and bringing RTICA(TM) to market. These statements aRE based upon a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond our control and reflect future business decisions which are subject to change. Some of these assumptions inevitably will not materialize, and unanticipated events will occur which will affect our results. Consequently, actual results will vary from the statements contained herein and such variance may be material. Prospective investors should not place undue reliance on this information. ENFORCEABILITY OF CIVIL LIABILITIES Our headquarters are located in, and our officers, directors and auditors are residents of Canada and a substantial portion of our assets are, or may be, located outside the United States. Accordingly, it may be difficult for investors to effect service of process within the United States upon non-resident officers and directors, or to enforce against them judgments obtained in the United States courts predicated upon the civil liability provision of the Securities Act or state securities laws. However, there is doubt as to the enforceability in Canada against us or against any of our directors, controlling persons, officers or the experts named herein, who are not residents of the United States, in original actions or in actions for enforcement of judgments of United States courts, of liabilities predicated solely upon United 9 States federal securities laws. Service of process in the United States may be effected, however, upon our duly appointed agent for service of process, Dornbush Mensch Mandelstam & Schaeffer, LLP, New York, New York. If investors have questions with regard to these issues, they should seek the advice of their individual counsel. 10 EXCHANGE RATE DATA AND ACCOUNTING PRINCIPLES We maintain our books of account in Canadian dollars, and have provided the financial data in this prospectus in Canadian dollars and on the basis of generally accepted accounting principles as applied in Canada. ALL REFERENCES TO DOLLAR AMOUNTS IN THIS PROSPECTUS, UNLESS OTHERWISE INDICATED, ARE TO CANADIANS DOLLARS, PRESENTED IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. The following table sets forth, for the periods indicated, certain exchange rates based on the Interbank rate. The average exchange rate is based on the average of the exchange rates on the last day of each month during such periods. On November 14, 2000, the exchange rate was C$1.00 per US$0.6478. Fiscal Year Ended Three Months Ended MAY 31, AUGUST 31, -------------------------------------------------------- 1998 1999 2000 2000 ---- ---- ---- ---- Rate at end of period (C$) $0.6866 $0.6784 $0.6645 $0.6772 Average rate during period (C$) 0.7094 0.6627 0.6797 0.6762 High (C$) 0.7318 0.6917 0.6983 0.6833 Low (C$) 0.6807 0.6307 0.6588 0.6636 USE OF PROCEEDS We will not receive any proceeds from the sale of shares of common stock offered hereby. 11 MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK Our authorized capital stock consists of an unlimited number of shares of common stock, of which 32,856,886 were issued and outstanding as of November 30, 2000, and an unlimited number of Preferred Stock, none of which is outstanding. Our common stock currently trades on the Canadian Venture Exchange (CDNX) under the symbol IZE. We have no established trading market in the United States. We believe that as of November 30, 2000, there were approximately 679 record holders of common stock. The following table sets forth, for the period indicated, the high and low bid prices, in Canadian Dollars for our shares of common stock from June 1, 1998 through November 30, 2000, as reported by the CDNX: HIGH LOW (In Canadian Dollars) Year Ended May 31, 1999 First Quarter $0.50 $0.30 Second Quarter 0.35 0.15 Third Quarter 0.42 0.26 Fourth Quarter 0.30 0.08 Year Ended May 31, 2000 First Quarter 0.50 0.18 Second Quarter 0.50 0.35 Third Quarter 0.45 0.30 Fourth Quarter 1.00 0.22 Year Ending May 31, 2001 First Quarter 0.84 0.57 Second Quarter 0.81 0.58 The high and low bid prices, in Canadian Dollars for shares of our common stock on January 2, 2001 were both C$0.61 (approx. US$0.41). We have not declared any dividends during the aforesaid twenty-four month period. We are not aware of any restrictions that limit our ability to pay dividends on our common stock or that are likely to do so in the future. OUTSTANDING OPTIONS AND CONVERTIBLE SECURITIES We currently have outstanding (i) options that are exercisable for 2,820,250 shares of common stock and (ii) Debentures in the principal amount of C$360,000 (approx. US$249,913) that are convertible into 900,000 shares of common stock. The exercise price of the options range from C$0.20 (approx. US$0.13) to C$0.75 (approx. US$0.49). 12 DIVIDEND POLICY We have never declared or paid any cash dividends to the holders of our common stock and we have no present intention to declare or pay cash dividends on the common stock in the foreseeable future. We intend to retain any earnings which we may realize in the foreseeable future to finance our operations. Our board of directors will have the sole discretion in determining whether to declare and pay dividends in the future. We do not currently have any restrictions that limit our ability to pay dividends on our common stock or that are likely to do so in the future. CAPITALIZATION The following table sets forth our capitalization on August 31, 2000. Because we will not receive any of the proceeds from, or incur any of the expenses of the sale of shares offered hereby, such shares will not have any effect on our capitalization. AUGUST 31, 2000 DESIGNATION OF SECURITIES (UNAUDITED) (IN CANADIAN DOLLARS) Convertible debentures (1).............................................. $ 356,321 Shareholders' equity: Preferred shares unlimited shares authorized; no issued and outstanding..... $ 0 Common shares unlimited shares authorized; 28,823,553 shares issued and outstanding (2)........................... $ 6,167,346 Special Warrants, 4,033,333 issued and o u t s t a n d i n g (3)......................................... $ 2,202,700 Equity component of convertible debentures.. $ 10,722 Deficit..................................... -- ($ 4,895,103) ------------ Total shareholders' equity.................. 3,485,755 ------------ Total capitalization............................. 3,842,076 ============ ---------- (1) See note 4 to consolidated financial statements for the year ended May 31, 2000 attached to this prospectus for disclosure related to convertible debentures. (2) See note 5 of the consolidated financial statements for the year ended May 31, 2000 attached to this prospectus for disclosure related to the stock options. (3) As of October 15, 2000, all of the special warrants sold in the June 2000 Canadian private placement were converted into common stock for no additional consideration. 13 PLAN OF OPERATION Our future success as a manufacturer and distributor of RTICA(TM) products will be influenced by several factors including technological developments in the commercial production of RTICA(TM), our ability to efficiently meet the requirements of our customers, and the market acceptance of our product. Further factors impacting our operations are increases in expenses associated with continued sales growth, our ability to control costs, management's ability to market the product to increase sales and target satisfactory profit margins, and competition. We have had no revenues from operations to date and we continue to be in the development stage. We plan to continue our research and development effort during the next twelve months. Currently, substantially all R&D efforts have been contracted to National Research Council Industrial Materials Institute ("NRC-IMI"), an outside agency in Quebec, Canada with a specialized infrastructure and personnel relating to our products. These R&D activities are focused on making production of our products more cost effective and improving product features to add value. Under the terms of our current agreement with NRC-IMI, we pay NRC-IMI a total contract amount of C$400,000 (approx. US$259,108) payable at the rate of C$20,000 (approx. US$12,955) per month for 17 months (plus an initial prepayment of C$20,000), as well as two additional payments of C$20,000 for an interim and final written report from NRC-IMI. The interim report was recently provided to us and the final report is anticipated to be delivered in or about June 2001. The agreement with NRC-IMI commenced in February 2000 and runs through June 30, 2001, subject to the right of either party to terminate the agreement on sixty days' notice. The agreement is not exclusive, so we may contract with additional entities or individuals to advance our R&D efforts if deemed necessary. Under a grant program with the Canadian federal government through the National Research Council Canada ("NRC-Canada"), we are eligible to be reimbursed for 40% of R&D expenses paid by us to NRC-IMI as they are incurred, to a maximum of C$200,000 (approx. US$129,554). During our fiscal year ended May 31, 2000, we were reimbursed for C$30,000 (approx. US$19,935) of eligible R&D expenditures. This program terminates on June 30, 2001. In November 2000, we entered into a Repayable Contribution Agreement with NRC Canada under which NRC Canada agreed to make repayable contributions up to C$445,000 (approx. US$288,257) for the performance of certain work we undertake, with up to C$185,417 (approx. US$120,107) available from November 1, 2000 to March 31, 2001, and C$259,583 (approx. US$168,150) available from April 1, 2001 to October 31, 2001. During the period January 1, 2004 to October 1, 2005, we are obligated to make repayments of contributed amounts, with such repayments equal to 1% of our gross revenues for the quarter preceding the repayment. Unreimbursed amounts thereafter will be repaid on the same basis until the earlier of the full repayment of the NRC Canada contributions or ten years after the start of the repayment period. Interest will accrue on any overdue amounts at a rate of 1% per month compounded monthly (annual rate of 12.68%). Contributions from NCR Canada will be subject to our fulfillment of certain obligations, including our continued performance of work related to the scaling up of our manufacturing process. No amounts have been drawn under this agreement at the date of this prospectus. During 1999, we focused on the installation of our third generation production system. This manufacturing equipment and supporting systems were successfully installed and tested on schedule in the last calendar quarter of 1999. In the first calendar quarter of 2000 we stepped-up business development initiatives and began increasing the output from the original installed capacity of 1 house per day. This 14 expansion to 5 houses per day is underway and is scheduled to be completed by the end of the first calendar quarter of 2001. Despite numerous delays encountered with several key suppliers, we expect to be ready to begin commercial production of limited quantities of RTICA(TM) brand insulation in the first calendar quarter of 2001, approximately as scheduled. Upon the commencement of commercial production, we expect to begin sales to customers. Our plant in Stoney Creek, Ontario, Canada, as currently configured, is not large enough to produce commercial quantities of RTICATM profitably. We are in the process of expanding our production capability to enable us to manufacture RTICATM in sufficient quantities and at acceptable costs. This effort requires the purchase and installation of a significant amount of new equipment. During the fiscal year ending May 31, 2001, we anticipate equipment expenditures of approximately C$1,000,000. However, the actual amount of such expenditures may vary significantly, upward or downward, depending on numerous factors including: - anticipated price increases in the purchase price of equipment, - unanticipated equipment, - unanticipated process problems encountered in attempting to duplicate our results at higher commercial production levels, and - customer demand of our product exceeding our increased supply capability, thereby requiring additional equipment purchases to further increase production capability. Marketing initiatives included the hiring of a new Vice-President of Sales and Marketing (see "Management - Directors and Officers"), and development of packaging design and a web site for the RTICA(TM) brand. In addition, the second issue of our newsletter, "R.NEWS", was produced and distributed to over 600 recipients in August 1999. The third issue was distributed in December 2000. Operating expenses for the three months ended August 31, 2000 were C$576,916 (approx. US$390,698), which is consistent with planned budgets. This included general and administration charges of C$291,758 (approx. US$198,718). On May 31, 2000, we completed a private placement in the United States of 2,807,500 common shares with a subscription price of US$0.40 per share for gross proceeds of US$1,123,000. If we do not have a Registration Statement filed and declared effective by the Securities and Exchange Commission in the United States by December 31, 2000, we will be required to issue one additional common share for each ten shares issued under this private placement. There were no brokerage or agency fees or commissions associated with this private placement. On June 14, 2000, we completed a private placement in Canada of 4,033,333 special warrants at a subscription price of C$0.60 (approx. US$0.41) each, resulting in gross cash proceeds of C$2,420,000 (approx. US$1,648,277). Pursuant to the subscription agreement, each special warrant was convertible into one common share or 1.1 common shares if a receipt for the related prospectus was not received by October 15, 2000. We received a receipt for the prospectus dated October 13, 2000. Accordingly, the 4,033,333 special warrants have been converted into shares of common stock. Costs of arranging the private placement, including agent's commissions is C$217,300 (approx. US$148,004) plus 201,667 special warrants granted to the agent. On June 30, 2000, 850,418 of the 1,243,633 common share purchase warrants issued in connection with our acquisition of RTICA Inc., were exercised at an exercise price of C$0.65 (approx. US$0.45) each. The warrants were held by former stockholders of RTICA Inc. and converted to 850,418 shares of common stock for a total of C$553,541 (approx. US$373,308). The remaining 393,215 common share purchase warrants issued in connection with the acquisition expired that same day. 15 Our only liquid asset at this time is cash reserves. Our cash balance as at August 31, 2000 was C$3,191,274 (approx. US$2,161,187) an increase of C$3,000,830 (approx. US$2,032,215) from August 31, 1999. At this time there are no other sources of capital confirmed and these reserves must sustain us until other funds are obtained. The report of our independent auditors for the year ended May 31, 2000 contains an explanatory paragraph discussing the substantial doubt that exists regarding our ability to continue as a going concern. However, based on our current cash balance, the funding provided by NRC-Canada under the Repayable Contribution Agreement (described above), and our anticipated operating expenses for the foreseeable future, we believe our current funds on hand will last at least twelve (12) months, even if operations during fiscal 2001 do not generate positive cash flow. BUSINESS Inzeco was incorporated by Certificate of Incorporation issued pursuant to the provisions of the BUSINESS CORPORATIONS ACT (Alberta) on May 30, 1997. Our principal office is located at 999 Barton Street, Stoney Creek, Ontario, Canada. Our registered office is located at Suite 1210, 606 - 4th Street S.W., Calgary, Alberta, T2P 1T1. We maintain a website at www.rtica.com. We are a public corporation traded, since October 1997, on the Canadian Venture Exchange (CDNX) under the symbol IZE. We were incorporated under the Junior Capital Pool policy of the former Alberta Stock Exchange to purchase E2 Development Corporation ("E2D"), a private Ontario corporation that invented RTICA(TM). We then acquired all the outstanding shares of E2D in April 1998. As a result, E2D became a wholly owned subsidiary of Inzeco. Subsequent to the fiscal year ended May 31, 1999, E2D changed its name to RTICA Inc. GENERAL We are in the business (through our RTICA subsidiary) of developing and producing insulating materials for use in the residential and commercial building market. Our insulating products are marketed under the name "RTICATM ." RTICATM is a non-irritating insulating material for thermal and acoustical applications. We manufacture RTICATM utilizing polyethylene terephthalate ("PET"), a plastic commonly used in soft drink bottles, packaging, film and fibers. PET is a commodity raw material available from many sources in Canada and the United States. For more than the past five years, we have endeavored to improve the insulating properties of our product while increasing production levels of consistent, high quality product. RTICATM is characterized by its: - simplified industrial hygiene requirement; - excellent thermal and acoustical properties; - resistence to chemicals and moisture; - variety of useful forms; and - specifications compatible with building code standards. We are currently in the process of expanding our manufacturing capabilities and anticipate producing and offering limited quantities of RTICATM for sale during the first quarter of calendar 2001. Sales will initially be targeted to large insulation contractors in Canada and in the East Coast of the United 16 States. As we successfully implement our expansion strategy, we will offer increasing quantities of our products. There can be no assurance, however, that we will succeed in increasing our manufacturing capability of large commercial quantities. RTICATM looks and is applied like fiberglass in both blowing wool and batt applications. Results from internal and independent laboratory testing demonstrate that RTICATM provides an equivalent thermal performance to glass and rock wool fibers, cellulose and expanded polystyrene foam insulating materials. In addition, based on our manufacturing costs, we believe that RTICATM can be sold at competitive prices. RTICATM can be produced in a variety of forms and shapes to satisfy most insulation applications. This includes, flexible batts, boards, shapes, and blowing wool (loose fill). In addition, no special protection is needed to handle the material. These qualities, combined with lower production costs associated with RTICATM than required for the production of traditional insulation materials make RTICATM competitive with all but the lowest performance insulation. Our success will depend in large part upon the ability of our products to meet targeted performance and cost objectives. We are committing considerable time, effort and resources to finalize development of our products and product enhancements. Although we anticipate initial sales of RTICATM during the first quarter of calendar 2001, significant commercial production will not occur until at least the end of the year. Our ability to produce large scale commercial quantities of RTICATM of consistent high quality is unproven. Large scale commercial production is subject to unanticipated delays, expenses, difficulties, the possible insufficiency of funding as well as other risks inherent in the development of new products and technologies. There can be no assurance as to when, or whether, such large scale commercialization of RTICATM will be successfully completed. See "Risk Factors -- We only have a limited operating history upon which you can analyze our potential profitability." Our future operating results will also depend upon our ability to gain market acceptance of RTICA(TM). The market for our product is new and evolving, it is difficult to assess or predict with any assurance the growth rate, if any, or the size of the market for RTICA(TM). There can be no assurance that the market for our product will develop, or that our product will achieve market acceptance. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, or if RTICA(TM) does not achieve significant market acceptance, our business, operating results or financial condition will be materially adversely affected. See "Risk Factors - Our RTICA (TM) product has not yet been sold on a commercial basis, we cannot be sure it will receive broad market acceptance." MANUFACTURING PROCESS RTICA(TM) is made in a one-stop process: the recycled PET is melted and multiple strands of molten plastic are introduced into a high-speed airflow to create thin fibers that become entangled to form a thick pad, or batt. These non-woven fibers, when formed into batts or shapes constitute our RTICA(TM) insulating material. Our manufacturing process results in a product with high thermal efficiency, identified by its superior fiber configuration, strength and density. OUR manufacturing process is dependent on the availability of sufficient quantities of PET. Currently, we purchase PET on the open market from a variety of suppliers. Because we can use PET of any color and from numerous sources (both bottle and film waste), we do not have the limitation faced 17 by many other users of PET whose products require specific colors or sources of PET. While we currently believe that there are adequate supplies of the recycled plastic that we use, if supply of PET becomes more difficult to obtain or its price materially increases, we may not be able to secure adequate raw material supplies to profitably produce and market RTICA(TM). See "Risk Factors - We may not be able to obtain the recycled plastic needed to manufacture our product." Competitive Advantage We believe that certain attributes of RTICATM provide us with a competitive advantage. These attributes include the following: - User Friendly Product: RTICATM neither causes skin irritation on contact nor poses a threat to respiratory health due to dust inhalation. Such ease and comfort in handling are factors that we believe provide the most significant advantage of our product for all users, especially professional installation contractors. - Thermal Performance: RTICATM provides excellent thermal performance properties with optimum cost-efficiency. - Energy Conservation: RTICATM requires less energy to make than most competitive products, yet conserves more energy when in place; it utilizes significant quantities of recycled PET, an inducement to recycling of plastic waste. RESEARCH AND DEVELOPMENT From inception to May 31, 2000, we have incurred C$1,709,649 (approx. US$1,136,078) on research and development. We currently contract substantially all of our R&D efforts to National Research Council Industrial Materials Institute ("NRC-IMI"), an outside agency in Quebec, Canada with a specialized infrastructure and personnel relating to our products. These R&D activities are focused on making production of our products more cost effective and improving product features to add value. Under a grant program with the Canadian federal government through the National Research Council Canada ("NRC-Canada"), we are eligible to be reimbursed for a portion of R&D expenses paid by us to NRC-IMI. In addition, we are parties to a Repayable Contribution Agreement with NRC-Canada under which NRC Canada agrees to make repayable contributions up to C$445,000 (approx. US$288,257) for the performance of certain work we undertake. Amounts contributed by NRC-Canada are repayable commencing January 1, 2004. See "Plan of Operation." MARKETING AND SALES The residential segment of the insulation market in North America is currently dominated by fiberglass and other mineral fiber products. We believe our RTICA(TM) product is well positioned to supply product for high performance thermal and acoustical applications in construction and manufacturing sectors currently occupied by fiberglass and plastic foams. However, RTICA(TM) is a new product with no broad based recognition and we do not currently have any established sales and distribution channels for RTICA(TM). To overcome the lack of an existing market, we have adopted a strategy of a focused 18 marketing effort directed at large insulation contractors in Canada and the East Coast of the United States. We believe that this market represents a significant customer base that can be targeted at relatively low cost, rather than expending significant funds for the creation of a broad-based national sales network. Relationships developed with large insulation contractors will assist and enhance our marketing efforts by providing product validation as well as important anticipated customer endorsements for RTICA(TM) which will generate additional consumer demand. Based on the success of our marketing and sales effort, we can then consider expanding our marketing program to include architects, builders, sub-contractors and retail outlets throughout Canada and the United States. Consistent with our marketing strategy, we are presently negotiating with United States installation contractors, who we believe will purchase all the initial output of our production facility subject to competitive pricing. Such sales will likely be subject to the purchaser obtaining building code approval for the intended product application. To date, no sales contracts have been entered into and there can be no assurance that any sales will actually be made to these contractors. We believe that in the future, we will have the potential to sell licenses to manufacture, use and sell RTICA(TM) products using our patented technology and trademarks outside of Canada and the United States. Potential licensees include contractors, distributors of construction materials and end users who require large quantities of insulation materials. We may also seek strategic partners among product users and manufacturers that use and/or produce PET, as well as other investors who are interested in participating to bring RTICA(TM) to market. On September 1, 1997, we sold for a fee of C$20,000 (approx. US$14,417), an option for an exclusive ten-year license to make, use and sell our insulation products in four provinces located in western Canada using our technology. The option may be exercised at any time within six months after the date we produce RTICA(TM) at a rate of 500 kilograms per hour at our Ontario facility. The exercise price for the option is C$500,000 (approx. US$323,885). Although the license would be exclusive even as to Inzeco, management believes that the territory covered by the license represents approximately 2% of the potential customer base (by population) in Canada and the United States. There can be no assurance that the optionee will exercise its option for the license. During fiscal 2000, we hired Richard Galloway, as Vice President of Sales and Marketing. Mr. Galloway brings to us twenty-five years of experience in the fiberglass insulation industry, the majority of that time spent in sales and marketing. We believe his established relationships with the market and potential customers will assist us in establishing a network of customers and implementing our marketing strategy. GOVERNMENT REGULATION Based on our product testing, we believe that RTICA(TM) will meet applicable building code standards in most jurisdictions in Canada and the United States. Although building code certification is generally necessary as a practical matter, it is not required to legally sell our product; users of our product may obtain approval for their intended product use on a case-by-case basis in the local jurisdiction where the product is being used. Once a product is certified, it is given a "listing reference number," which enables users to bypass the building code review process on a case by case basis in connection with each proposed use of the product. As certification thereby saves users time and effort, we believe that it is imperative that we obtain certification for RTICATM as soon as practicable. We are currently in the process of applying for certification in Canada and the United States. Building code certification of a 19 product generally requires an audit of manufacturing and testing processes and a manufacturer's demonstration of its ability to make a product with given specifications on a consistent, ongoing basis. Therefore, we believe certification of RTICATM will not be obtained until the expansion of our manufacturing capability is completed and reasonable production levels are sustained. There is no guarantee that our standard will be accepted or that we will be certified and establish a listing. The failure to obtain certification could have a significant adverse affect on our ability to successfully commercialize our product. See "Risk Factors - We may not be able to secure timely building code certification." PRICING There are a number of parameters that impact upon the pricing of insulation products. These include costs of raw materials, costs of energy, the density of the fiber, fiber thickness, direct labor and packaging. In addition, numerous factors are likely to influence cost competitiveness considerations, including ease of installation and resistance to heat flow. Our pricing assumptions are based upon underlying assumptions with respect to direct labor, materials, and yield, which in turn is predicated upon certain mean assumptions with respect to production output, fiber physical properties, thickness, loft, resultant density and thermal performance. While we have made test installations of RTICA(TM), we have not yet sold any product. Therefore, our ability to fully test the reasonableness of our pricing assumptions is not yet evident. This will be necessary if we are to instill confidence in builders and distributors, and in various trade associations, which might then be willing to promote the dissemination of RTICA(TM) in the marketplace. PATENTS We have US patent number 5,582,905 (published on December 10, 1996) and Canadian patent number 2,190,957 (published on April 6, 1999). These patents cover fiber based plastic insulating products made without using adhesives or mechanical methods to create thickness, or loft, which is a fundamental requirement for efficient insulating performance. Although RTICA(TM) is made of recyled PET, we believe that the patents cover a wide range of polymers. The US patent will expire on December 9, 2016, and the Canadian patent will expire on April 5, 2019. Applications for such patents are also pending in the European Patent Office. Even though our patents do not prevent others from making thermoplastic fiber insulation, we believe that they will result in their incurring higher manufacturing costs due to the need to use more difficult methods to create the loft. We have filed additional patent applications for our method and related equipment designs in the United States. See "Risk Factors- We may be unable to protect our patent and proprietary technology related to the manufacture of RTICA(TM) due to our limited financial resources." COMPETITION RTICA(TM) will compete in the extremely competitive building insulation market, principally composed of large domestic and multinational companies which have significantly greater assets, working capital and marketing personnel than us. See "Risk Factors -- The insulation industry is highly competitive; we may not be able to compete successfully with other companies in our industry because some of our competitors are better known and have substantially greater resources than we do". We believe that there is no insulation product on the market that competes directly with RTICA(TM) in terms of achieving significant savings through the use of recycled plastic to produce insulation material. However, we expect that if our products become successful, competitors will be more likely to develop and introduce into the marketplace comparable 20 products and technologies. In such event, we will likely be competing with larger, better capitalized and nationally recognized competitors. EMPLOYEES We currently employ eight full-time employees and three full-time consultants, including Warren Arseneau, President of Inzeco, who provides services pursuant to a written consulting agreement. See "Management -- Contracts with Executives." As we grow, we will be required to hire, train, integrate, manage and retain our workforce including our technology, manufacturing, engineering, sales and business development staff. PROPERTY Our executive offices and our prototype equipment and development facilities are located 30 minutes west of Toronto in Stoney Creek, Ontario, Canada. The site is equipped with production, office and test laboratory facilities and is under a lease expiring May 31, 2004 and has a monthly rent of C$7,100 (approx. US$4,665) plus taxes. LEGAL PROCEEDINGS There are no pending legal proceedings to which we are a party, and we are not aware of any threatened legal proceedings involving us. MANAGEMENT DIRECTORS AND OFFICERS The following table sets forth the information regarding all directors and executive officers of Inzeco: NAME AGE POSITION WITH INZECO Warren D. Arseneau 51 President and Director Roger J. Short 60 Director Robert H. Stikeman 54 Counsel and Director Martin H. Beck 48 Vice President, Technology and Director Michael Boyd 48 Director Steve Letwin 45 Director Richard Galloway 50 Vice-President, Sales and Marketing WARREN ARSENEAU - Warren Arseneau - President and Director since April 1987. Mr. Arseneau has occupied a key role in guiding the development of RTICA Inc. since its establishment 21 in 1991. RTICA Inc. is a wholly owned subsidiary of Inzeco Holdings Inc. and was named E2 Development Corporation prior to its name change in 1999. From June 1991 to June 1998, Mr. Arseneau served as a consultant to Inzeco pursuant to a management contract between E2 Development Corporation and Mr. Arseneau. From June 1998 through December 1999, Mr. Arseneau provided services to E2 Development Corporation, RTICA Inc. and Inzeco Holdings Inc. pursuant to a management contract with Flat Rock Management, a sole proprietorship in Ontario engaged in management consulting which is wholly owned by Mr. Arseneau. Flat Rock Management does not (and will not) provide services to any business other than Inzeco and its affiliates. From December 1999 through May 15, 2000, Mr. Arseneau worked without a written agreement. On May 15, 2000, a second consulting agreement was effected between Flat Rock Management and RTICA Inc. Mr. Arseneau currently serves as a consultant to Inzeco under this contract which will remain in effect until December 31, 2004. See "Executive Compensation - Contracts with Executives." ROGER J. SHORT - Director since inception. Since September 1996, Mr. Short has owned Lecourt Enterprises Investment Management and Consulting. From September 1994 to September 1996, Mr. Short was chairman and chief executive officer of ES&S Limited, a privately held Canadian corporation in the industrial distribution business. From January 1991 to September 1994, Mr. Short was president and chief executive officer of Wajax Ltd., a Canadian public corporation listed on both the Toronto Stock Exchange and the Montreal Stock Exchange. He was also a director of Wajax Ltd. ROBERT H. STIKEMAN - Counsel, Director and Chief Financial Officer since inception. Mr. Robert Stikeman has practised law in the Province of Ontario for approximately twenty years. Since 1986 he has served as senior partner in Stikeman, Graham & Keeley, a law firm which he was instrumental in establishing. Prior to that he was employed in private practice since approximately 1975. MARTIN H. BECK - Vice President, Technology and Director since inception. Since 1988, Mr. Beck has been the principal shareholder and director of Dev Tech Labs, Inc., a private corporation providing a research and development facility. In 1986, Mr. Beck founded Dev Tech, Inc., a consulting and engineering corporation. In 1991, Dev Tech, Inc. and Dev Tech Labs, Inc. merged. During the period from 1977 to 1985, Mr. Beck was employed by Continental Can Corporation, a public corporation in the United States, initially as a research and development supervisor and then a general manager of research and engineering and site manager in research and development, engineering and manufacturing support and division quality control. MICHAEL M. BOYD - Director since inception. Since September 1997, Mr. Boyd has been Vice- President of Merchant Banking with HSBC Capital (Canada) Inc. HSBC Capital (Canada) Inc. is a subsidiary of the HSBC Bank Canada, a member of the HSBC Group which is one of the largest financial institutions in the world. From May 1995 to present, Mr. Boyd has also served as President of Junior Industrial Finance Corp, a personal investment company. Mr. Boyd has over twenty-four years of business experience in the areas of venture capital investment, corporate finance and merchant banking. Mr. Boyd also serves as a Director for Acton Food Group Inc. which is listed on the Toronto Stock Exchange under the symbol AFF, Wescam Inc, listed on the Toronto Stock Exchange as WSC, and Stake Technology Limited, listed on NASDAQ under the symbol STKL. STEVEN LETWIN - Director since November 2000. Mr. Letwin is currently the Vice-President, Distribution & Services of Enbridge Inc. and prior to holding this position he was the President and Chief Operating Officer of Energy Services for Enbridge Inc. during the period of March 1999 through August 2000. Prior to his employment with Enbridge Inc., he was employed as the Chief Financial Officer (from 22 March 1998 to March 1999) and Vice-President, Marketing (from October 1995 to March 1998) of TransCanada Pipelines. Mr. Letwin has held senior executive positions with a number of companies in the energy transmission, exploration and production sectors. He has been responsible for acquisitions and divestitures, corporate economics and planning, corporate services and information systems, and financial services in companies that were involved in gas transmission, oil, refined products and electrical power. RICHARD GALLOWAY - Vice-President, Sales and Marketing since June 2000. Prior to that period, from September 1999 to May 2000, Mr. Galloway performed similar marketing services for Inzeco on a part time basis. From September 1989 through December 1999, Mr. Galloway performed marketing services for Team Contracting Inc. in the construction industry. Specifically Mr. Galloway worked in the areas of construction management for additions and renovations and construction of low income housing. His major clients included the United States Military, the Department of Housing, in various locations through out the United States, the New York City Board of Education and the City of New York Design & Construction Department. Prior to his employment at Team Contracting, Inc., Mr. Galloway was a sales and marketing executive in the insulation industry. All Directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Directors currently receive no compensation for serving on the Board of Directors other than reimbursement of reasonable expenses incurred in attending meetings. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. There is no family relationship between any Director or Officer and any other Director or Officer. EXECUTIVE COMPENSATION The following table sets forth all compensation paid in respect of the Chief Executive Officer and those individuals who received compensation in excess of US$100,000 per year ("Named Executive Officer"). Inzeco has one Named Executive Officer. There were no other individuals who received compensation in excess of US$100,000 in the most recently completed fiscal year. During our most recently completed financial year the Named Executive Officer received an aggregate cash compensation by Inzeco and RTICA Inc. in the amount of C$195,000 (approx. US$127,693). SUMMARY COMPENSATION TABLE(1) IN CANADIAN DOLLARS ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------- ---------------------- NAME AND PRINCIPAL SECURITIES UNDERLYING POSITION YEAR SALARY (C$) BONUS(C$) OPTIONS/SARS (#) ------------------ ---- ----------- --------- ---------------- Warren Arseneau........ 2000 120,000(1) 75,000(2) - President 1999 120,000(1) - - 1998 120,000(1) - - 1997 118,700(1) - 225,000 (1) This represents management fees paid under a consulting contract pursuant to which office and administrative expenses of approximately C$40,000 (approx. US$26,193) incurred by Mr. Arseneau were to be paid by Mr. Arseneau. 23 (2) Under the terms of Mr. Arseneau's contract with Inzeco, over the four year term of the agreement, Mr. Arseneau is entitled to bonuses totaling up to C$325,000 (approx. US$210,525) if Inzeco meets certain economic and strategic goals. See "Contracts with Executives." CONTRACTS WITH EXECUTIVES RTICA Inc., the wholly owned subsidiary of Inzeco, signed a consulting agreement with Warren Arseneau dated May 15, 2000 to manage Inzeco. The consulting agreement terminates on December 31, 2004. In consideration for the services to be provided by Mr. Arseneau, we have agreed to pay the following consulting fees to Mr. Arseneau: C$12,500 (approx. US$8,185) per month from June 1, 2000 through December 31, 2000; C$13,000 (approx. US$8,513) per month during 2001; C$13,500 (approx. US$8,840) per month during 2002; C$14,000 (approx. US$9,168) per month during 2003; C$1,500 (approx. US$982) per day, for a maximum of 100 days during 2004. Mr. Arseneau is also entitled to bonuses totaling C$325,000, in the event the company meets certain economic and strategic goals. In the event of a sale of Inzeco, Mr. Arseneau will be entitled to one percent (1%) of the sale proceeds. In addition, in the event of a change in control, we will owe Mr. Arseneau a penalty fee of C$750,000 (approx. US$485,286) if the consulting agreement is terminated within 24 months of the change in control. In addition, Mr. Arseneau will also be granted options to purchase a total of 425,000 shares of Inzeco's common stock. The options shall be issued as to 100,000 shares on each of December 1, 2000, January 15, 2001, January 15, 2002, and January 15, 2003, and as to the remaining 25,000 shares underlying the options on January 15, 2004. The options shall be immediately exercisable at the fair market value on the date of issuance. Mr. Arseneau is also reimbursed for certain travel expenses and other direct expenses made on behalf of Inzeco. RTICA Inc. has also signed a confidentiality, non-competition and intellectual property agreement with Warren Arseneau dated May 15, 2000. The term of the agreement is for 3 years after termination of the consulting agreement with Mr. Arseneau. Mr. Michael Boyd, through Junior Industrial Finance Corp., ("JIFC") provides financing, strategic planning and other consulting services to Inzeco pursuant to a consulting agreement between RTICA Inc., a wholly owned subsidiary of Inzeco, and JIFC. The agreement is effective as of April 1, 2000 and terminates on December 30, 2001. Under the agreement, Mr. Boyd receives US$500 per month plus US$50 per month expense allowance and reimbursement for out of pocket expenses incurred in connection with services performed. Mr. Martin Beck provides financing, strategic planning and other consulting services to Inzeco pursuant to a consulting agreement with RTICA Inc., a wholly owned subsidiary of Inzeco. The agreement is effective as of April 1, 2000 and terminates on December 30, 2002. Under the agreement, Mr. Boyd receives US$1,000 for up to ten hours consulting services per month plus US$100 expense allowance for up to twenty hours consulting services per month. For consulting services over ten hours per month, Mr. Beck is paid fees of US$1,000 per day and US$50 per day for expenses incurred over twenty hours of consulting services per month. In addition, Mr. Beck is entitled to a bonus of US$5,000 in the event Inzeco secures financing of at least C$2,000,000 (approx. US$1,294,096) during the term of the agreement. 24 Mr. Roger Short serves Inzeco pursuant to a consulting agreement executed by RTICA Inc. and Mr. Short. The agreement is effective as of January 1, 2000 and terminates on December 31, 2001. Under the agreement, Mr. Short receives C$2,500 (approx. US$1,609) per month plus C$300 (approx. US$203) per month expense allowance for up to two days of consulting services per month and reimbursement for out of pocket expenses incurred by Mr. Short in connection with services performed. For consulting services over two days per month, Mr. Short is paid fees of C$1,600 (approx. US$1,035) per day. From September 1999 through May 2000, Mr. Richard Galloway provided consulting services to Inzeco related to sales and marketing on a part time basis and was paid a total of US$52,853 for that period. Since June 2000, Mr. Galloway has provided such consulting services on a full time basis and receives US$8,500 per month for services performed. Mr. Galloway has no written contract with us, however, we intend to enter a written consulting agreement with Mr. Galloway during the fiscal year ending May 31, 2001. Mr. Galloway has not been granted any bonuses or options to date. None of our other executive officers or directors presently receives or has received a salary or other compensation from Inzeco or RTICA Inc. However, it is intended that certain of our officers may be employed in the future pursuant to written employment agreements. We presently believe that none of the salaries will exceed C$30,000 (approx. US$20,634) during the fiscal year ending 2001. DIRECTORS AND OFFICERS INSURANCE We do not maintain directors and officers insurance. KEY MAN INSURANCE We maintain a Canadian one million dollar (C$1,000,000, approx. US$647,769) term life insurance policy on Warren Arseneau. STOCK OPTION PLAN The shareholders of Inzeco have adopted the Inzeco Holdings Inc. Stock Option Plan in order to provide an incentive for key directors, officers and employees. Inzeco's stock option plan provides that the Board of Directors of Inzeco may, from time to time in its discretion, grant to key directors, officers and employees and consultants providing significant time and attention to Inzeco under contract to Inzeco, or the registered retirement savings plan, or holding companies of them, the option to purchase shares of Inzeco's common stock. The Board of Directors may determine the market price per share of common stock and the number of shares of common stock which may be allotted to each such person or plan and all other terms and conditions of the option, in accordance with the applicable policies of any relevant regulatory authority or the Canadian Venture Exchange. These options will be exercisable for a period not exceeding 5 years from the date of grant. The shareholders have authorized the granting of up to 3,500,000 options by the directors. Currently there are 2,820,250 outstanding, which have been granted at the following exercise prices: 1,795,250 at C$0.20 per share; 5,000 at C$0.22 per share; 55,000 at C$0.25 per share; 30,000 at C$0.35 per share; 115,000 at C$0.39 per share; 10,000 at C$0.66 per share; 85,000 at C$0.68 per share; 110,000 at C$0.70 per share; 100,000 at C$0.72 per share; and 515,000 at C$0.75 per share. Inzeco's stock option plan provides that if a participant ceases to be eligible due to the loss of corporate office (being that of an officer or director) or employment or consultant status, the option shall 25 expire after 90 days. The stock option plan also provides that the estate of a deceased participant can exercise the deceased's options for a period not exceeding six months following the date of the death. INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS Since the beginning of our last completed fiscal year, none of our directors or senior officers nor any of their respective associates or affiliates, has been indebted to Inzeco or to our wholly owned subsidiary, except Warren Arseneau who owed C$39,117 (approx. US$25,993), which was paid prior to the year ending May 31, 2000. See "Certain Relationships and Related Transactions." 26 PRINCIPAL SHAREHOLDERS To our knowledge, we are not directly or indirectly owned or controlled by another corporation or by any foreign government. The following table sets forth information as of January 2, 2001 with respect to the beneficial ownership of shares of common stock currently issued and outstanding by (i) each person known to us to be the owner of more than 5% of the outstanding shares of common stock, (ii) each officer and director, and (iii) all officers and directors as a group. Unless otherwise indicated, the address for each individual listed is 999 Barton Street, Stoney Creek, Ontario L8E 5H4 Canada.
================================================================================= Title of Class Name Amount Percent of Class (12) --------------------------------------------------------------------------------- Common Stock Warren Arseneau 3,908,175 (1) 11.79% --------------------------------------------------------------------------------- Common Stock Martin Beck 5,085,962 (2) 15.21% --------------------------------------------------------------------------------- Common Stock Michael Boyd 1,074,222 (3) 3.27% --------------------------------------------------------------------------------- Common Stock Richard Galloway 33,503 0.10% --------------------------------------------------------------------------------- Common Stock Steven Letwin 100,000 (4) 0.30% --------------------------------------------------------------------------------- Common Stock Roger J. Short 1,577,518 (5) 4.72% --------------------------------------------------------------------------------- Common Stock Robert Stikeman 368,026 (6) 1.12% Stikeman, Graham & Keeley 220 Bay Street, 7th Floor, Box 24 Toronto, Ontario M5J 2W4 Canada --------------------------------------------------------------------------------- Common Stock Acuity Investment 2,400,000 7.30% Management Inc. as agent for AUIF3817002(7) 65 Queen Street West, Suite 1800 Toronto, Ontario M5H 2M5 Canada --------------------------------------------------------------------------------- Common Stock Enbridge Inc. (8) 3,627,723 (9) 10.74% Canada Trust Tower 421 7th Avenue SW, Suite 2900 Calgary, Alberta T2P 4K9 Canada --------------------------------------------------------------------------------- Common Stock Nice Investments LLC (10) 2,807,500 8.54% 40 West Gude Drive, Suite 210 Rockville, Maryland 20850 --------------------------------------------------------------------------------- Common Stock All officers and 12,147,406 (11) 34.94% directors as a group (7 persons) =================================================================================
----------- 27 (1) Includes 310,000 shares subject to options granted to Mr. Arseneau that are currently exercisable. (2) Includes 4,083,212 shares owned by Greensulate L.L.C., a private U.S. company controlled by Martin Beck. Also includes 567,750 shares subject to options granted to Mr. Beck that are currently exercisable. (3) Includes 302,154 shares owned directly by Mr. Boyd; 186,437 shares owned indirectly through Investor Services in Trust for Mr. Boyd's RRSP; and 350,631 shares owned indirectly through Junior Industrial Finance Corp., a private company wholly owned by Mr. Boyd. Also includes 235,000 shares subject to options granted to Mr. Boyd that are currently exercisable. (4) Includes 100,000 shares subject to options granted to Mr. Letwin that are currently exercisable. (5) Includes 577,500 shares subject to options granted to Mr. Short that are currently exercisable. (6) Includes 100,000 shares subject to options granted to Mr. Stikeman that are currently exercisable. (7) Acuity Investment Management Inc. as agent for A/C AUIF3817002 is mutual fund investment company. (8) Enbridge Inc. is a public company that trades on the Toronto Stock Exchange under the symbol ENB and on NASDAQ under the symbol ENBR. (9) Includes an aggregate of 900,000 shares issuable upon the conversion of Debentures held by Enbridge Inc. (10) Nice Investments LLC is a Delaware limited liability company owned by members of a trade association in the construction industry. (11) Includes an aggregate of 1,805,250 shares issuable upon exercise of currently outstanding options granted to officers and directors of Inzeco that are currently exercisable or exercisable within 60 days. (12) Shares of common stock which a person has the right to acquire within 60 days of the date of this prospectus pursuant to the exercise of options, warrants or other convertible securities are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. See "Management - Option Plans and Grants" and "Plan of Distribution." PROMOTERS Warren D. Arseneau and Martin Beck, who are Directors of Inzeco, may be considered to be its promoters in that they took the initiative in forming Inzeco. For a listing of common shares and options issued to the promoters named in this section, see "Directors and Officers" and "Executive Compensation - Stock Options." 28 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Except as set forth below, we have not entered into any transactions during the last two fiscal years with any director, executive officer, director nominee, 5% or more shareholder, or any member of the immediate families of the foregoing persons (including spouses, parents, children, siblings and in-laws). 1. Since 1997, DevTech Labs Inc. ("DevTech") has provided us with product and process development services in consideration for the following amounts for the years indicated: US$88,940 (1999) and US$49,292 (2000). Mr. Martin Beck, a Director of Inzeco is the President, Director and a principal shareholder of DevTech. In addition, since January 1, 2000, we have paid Mr. Beck US$1,100 per month as consulting fees. 2. On June 25, 1999, we loaned Mr. Warren Arseneau C$25,000 (approx. US$17,025) pursuant to a term promissory note bearing interest at a rate of 9% per annum with a maturity date of May 31, 2000. There was no prepayment penalty under the terms of the note. Mr. Arseneau repaid the total indebtedness including interest due under the note and an unused advance received for expenses in the amount of C$39,117 (approx. US$25,993) prior to the maturity date. 3. On November 23, 1999, DevTech loaned RTICA, Inc., a wholly owned subsidiary of Inzeco, US$25,000 pursuant to a promissory note bearing interest at a rate of 5.42% per annum with a maturity date of November 22, 2000. There was no prepayment penalty under the terms of the note. RTICA Inc. repaid the total indebtedness due under the note prior to the maturity date. 4. On April 4, 2000, we obtained short term financing from a number of investors. Mr. Michael Boyd, a director of Inzeco and one of the investors in the group, loaned Inzeco C$31,800 (approx. US$21,934) pursuant to a term promissory note bearing interest at a rate of 20% per annum with a maturity date of May 31, 2000. The note was repaid in full prior to the maturity date. 5. Messrs. Arseneau, Boyd, Beck and Short, all of whom are Directors of Inzeco, perform services for the company pursuant to consulting contracts. The terms of these contracts are set forth in the section entitled "Executive Compensation - Contracts with Executives." 6. Mr. Robert Stikeman through Stikeman, Graham & Keeley receives fees from Inzeco in consideration for legal services provided to Inzeco. We believe that the terms of the transactions described above were comparable to those which could have been obtained from non-affiliated parties. 29 DESCRIPTION OF SECURITIES GENERAL Inzeco's authorized capital stock consists of an unlimited number of shares of common stock, of which 32,856,886 are presently issued and outstanding, and an unlimited number of Preferred Stock, none of which is outstanding. Inzeco's common stock currently trades on the Canadian Venture Exchange (CDNX) under the symbol IZE. Inzeco intends to have its common stock listed on the OTC-BB under the symbol INZCF. COMMON STOCK Subject to preferential rights with respect to any outstanding Preferred Stock, none of which is presently issued and outstanding, holders of common stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of Inzeco, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and satisfaction of preferential rights and have no rights to convert their common stock into any other securities. All shares of common stock have equal, non-cumulative voting rights, and have no preference, exchange, preemptive or redemption rights. Inzeco is authorized to issue an unlimited number of shares of common stock without nominal value or par value, of which as at the date hereof, 32,856,886 are issued and outstanding as fully paid and non-assessable; 2,820,250 are issuable upon the exercise of options granted under Inzeco's Stock Option Plan; 900,000 shares of common stock are reserved for issuance upon the conversion of debentures of Inzeco in the principal amount of C$360,000 (approx. US$249,913) held by Enbridge Inc. Inzeco plans to retain any future earnings for use in its business and, accordingly, does not anticipate paying dividends in the foreseeable future. Payment of dividends is within the discretion of Inzeco's Board of Directors and will depend, among other factors, upon Inzeco's earnings, financial condition and capital requirements. There can be no assurance that dividends will ever be declared and paid. PREFERRED STOCK The Board of Directors of Inzeco, without action by the stockholders, is authorized to issue the shares of Preferred Stock in one or more series and, within certain limitations, to determine the voting rights (including the right to vote as a series on particular matters), preferences as to dividends and in liquidation, conversion, redemption and other rights of each such series. The Board of Directors could issue a series with rights more favorable with respect to dividends, liquidation and voting than those held by the holders of any class of common stock. The authority of the Board to issue the Preferred Stock could have the effect of discouraging attempts to obtain control of Inzeco by means of merger, tender offer, proxy contests or otherwise or could delay and make more costly any such attempt. The voting and conversion rights provided to such shares could adversely affect the voting power of the holders of common stock. There are presently no agreements or understandings, and the Board of Directors currently has no intention, to issue any shares of Preferred Stock. 30 ESCROWED SHARES Particulars of the shares of common stock that are escrowed are as follows
: -------------------------- -------------------------- --------------------------- NUMBER OF SHARES OF PERCENTAGE OF SHARES OF DESIGNATION OF SECURITY COMMON STOCK HELD IN COMMON STOCK HELD IN ESCROW ESCROW -------------------------- -------------------------- --------------------------- Common Shares 10,295,939 31.34% -------------------------- -------------------------- ---------------------------
10,295,939 shares of common stock are held in escrow pursuant to the following three escrow agreements: (1) 450,001 shares of common stock are held in escrow pursuant to an escrow agreement dated September 18, 1997, among Inzeco, Montreal Trust Company of Canada, Roger J. Short, William R. Beavers, Sheila M. Finn, Martin H. Beck, Doug W. Lammle, Barrie W. Lammle, Robert Griesdale and Ken Unger, (the "Security Holders") all of whom executed such escrow agreement (the "Initial Escrow Agreement"). The Security Holders under the Initial Escrow Agreement have deposited in escrow with Montreal Trust Company of Canada all of the shares of common stock beneficially owned, directly or indirectly, at the time of the offering made by Inzeco pursuant to the prospectus of Inzeco dated September 19, 1997 (filed with Alberta Securities Commission), or to be acquired upon exercise of options held by them prior to a major transaction. The shares held in escrow pursuant to the agreement are to be released as to one third of the original number of escrowed shares on each of the first, second and third anniversaries of completion of the acquisition of E2 Development Corporation ("E2D") by Inzeco holdings Inc. (the "Major Transaction"), which took place on April 28, 1998. Accordingly, as of December 31, 2000, 450,001 of the escrowed shares remain held in trust by Montreal Trust Company of Canada and will be released on April 28, 2001. (2) In relation to Inzeco's Major Transaction, CDNX required that 1,640,998 shares of common stock be held in escrow pursuant to a timed release escrow agreement dated April 28, 1998 (the "Timed Release Escrow") between Inzeco and Roger J. Short, William R. Beavers, Greensulate L.L.C., Sheila M. Finn, Warren D. Arseneau, Michael Boyd, Junior Industrial Finance Corp. Robert H. Stikeman, Gundyco in Trust for Sheila Finn RRSP Account #550-28824-17, T/D Investor Company in Trust for Mike Boyd RRSP Account #140422-S, and RBC Dominion in Trust for William Beavers RRSP Account #49380616-1-3 (the "Securityholders"), whereby the escrowed securities shall, with the consent of CDNX, be released from escrow as to one third thereof on each of the first, second, and third anniversaries of April 28, 1998, the date the Major Transaction was completed. As of December 31, 2000, 546,999 shares of common stock remain in escrow and will be released on April 28, 2001. (3) In relation to Inzeco's Major Transaction, CDNX further required that 9,298,939 shares of common stock be held in escrow pursuant to a performance escrow agreement dated April 28, 1998 (the "Performance Release Escrow") between Inzeco and the Securityholders, whereby one escrowed share shall, with the consent of CDNX, be released for each C$0.20 (approx. US$0.13) of cash flow generated by or from Inzeco's assets as shown on the audited financial statements or verified by Inzeco's auditors, provided that the maximum number of shares which may be released from escrow in any one calendar year to any Securityholder shall be one-third of 31 the original number of shares held in escrow on behalf of such Securityholder. As of December 31, 2000, 9,298,939 shares of common stock remain in escrow. (4) The Initial Escrow Agreement, the Time Release Escrow Agreement and the Performance Escrow Agreement were requirements of the Alberta Securities Commission pursuant to the Alberta Securities Commission Policy 4.11 and the Alberta Stock Exchange Circular No. 7. These policies require officers, directors, promoters, ten percent shareholders and their associates and affiliates ("Related Parties") of Inzeco and E2D to place their shares in escrow pending satisfaction of certain criteria including (1) the passage of time and (2) the performance of the company. The Alberta Securities Commission imposed the Initial Escrow Agreement to ensure that the insiders and promoters of the public shell completed a major transaction. The Timed Release Escrow Agreement was imposed to encourage the Related Parties of Inzeco and E2D who acquired shares pursuant to the Major Transaction to maintain their interest and investment risk for a meaningful period following the Major Transaction. The Performance Escrow Agreement was imposed to ensure that the shares would only be released if the company proved the value of the shares, as measured by the company's cash flow. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Inzeco's certificate of incorporation generally provides for indemnification of each director, officer, employee or agent as long as these individuals acted in good faith and in a manner he or she believed to be in or not opposed to its best interest and had no reasonable cause to believe that such conduct was unlawful. The Securities and Exchange Commission is of the opinion that indemnification of directors, officers and controlling persons for liabilities arising under the Securities Act is against public policy and is, therefore, unenforceable. MATERIAL UNITED STATES AND CANADIAN FEDERAL INCOME TAX CONSIDERATIONS UNITED STATES The following describes material United States federal income tax consequences of the purchase, ownership and disposition of Inzeco shares of common stock by a shareholder who is a citizen or resident of the United States or a United States domestic corporation or who otherwise will be subject to United States federal income tax. This summary is based on the United States Internal Revenue Code of 1986 (the "Code"), as amended, administrative pronouncements, judicial decisions and existing and proposed Treasury Regulations, changes to any of which subsequent to the date of this prospectus may affect the tax consequences described herein. This summary discusses only the material United States federal income tax consequences to those beneficial owners holding the securities as capital assets within the meaning of Section 1221 of the Code and does not address the tax treatment of a beneficial owner that owns 10% or more of shares of our common stock. It is for general guidance only and does not address the consequences applicable to certain specialized classes of taxpayers such as certain financial institutions, insurance companies, dealers in securities or foreign currencies, certain religious, scientific, charitable and similar tax-exempt organizations, or United States persons whose functional currency (as defined in Section 985 of the Code) is not the United States dollar. Persons considering the purchase of these securities should consult their own tax advisors with regard to the application of the United States and other income tax laws to their particular situations. In particular, a United States shareholder should consult his own tax advisor with regard to the application of the United States federal income tax laws to his situation. A United States shareholder generally will realize, to the extent of our current and accumulated earnings and profits, foreign source ordinary income on the receipt of cash dividends, if any, on the shares of our common stock equal to the United States dollar value of such dividends determined by reference to the exchange rate in effect on the day they are received by (or credited to) the United States shareholder 32 (with the value of such dividends computed before any reduction for any Canadian withholding tax). United States shareholders should consult their own tax advisors regarding the treatment of foreign currency gain or loss, if any, on any dividends received which are converted into United States dollars on a date subsequent to receipt. Subject to the requirements and limitations imposed by the Code, a United States shareholder may elect to claim (as a foreign tax credit against the United States federal income tax liability of such holder) the amount of any Canadian tax withheld or paid with respect to dividends on the shares of our common stock. Dividends on the shares of our common stock generally will constitute "passive income" or, in the case of certain United States shareholders, "financial services income," for United States foreign tax credit purposes. Subject to the requirements and limitations imposed by the Code, United States shareholders who do not elect to claim any foreign tax credits may claim a deduction (in computing their United States taxable income) for any Canadian income tax withheld or paid with respect to such Dividends. Dividends paid on the shares of our common stock will not be eligible for the dividends received deduction available in certain cases to United States corporations. Upon a sale or exchange of a share of our common stock, a United States shareholder will generally recognize gain or loss equal to the difference between the amount realized on such sale or exchange and the tax basis of such share of common stock. Generally, any gain or loss recognized as a result of the foregoing will be a capital gain or loss and will be either long-term or short-term depending upon the period of time the shares of our common stock that were sold or exchanged, as the case may be, were held. EACH INVESTOR SHOULD CONSULT HIS TAX ADVISOR TO DISCUSS THE TAX CONSEQUENCES OF OWNING SHARES IN VIEW OF HIS PARTICULAR SITUATION. CANADA The following is a summary of material Canadian federal income tax considerations generally applicable to the acquisition, holding and disposition of shares of our common stock purchased pursuant to this prospectus by a United States shareholder who, for the purposes of the Income Tax Act (Canada) and the Canada-United States Income Tax Convention, as applicable and at all relevant times: - is resident in the United States and not resident in Canada; - holds shares of our common stock as capital property; - does not have a"permanent establishment" or "fixed base" in Canada; and - deals with us at arm's length. Special rules, which are not discussed in this summary, may apply to "financial institutions" and to non-resident insurers carrying on an insurance business in Canada and elsewhere. This summary is based on the current provisions of the Income Tax Act (Canada) and the regulations thereunder and the Canada-United States Income Tax Convention, all specific proposals to amend the Income Tax Act (Canada) or the regulations thereunder announced by the Canadian Minister of Finance prior to the date of this prospectus and the current published administrative practices of Revenue Canada. This summary does not otherwise take into account or anticipate any changes in law or administrative practice nor does it take into account income tax laws or considerations of any province or territory of Canada or any jurisdiction other than Canada, which may differ from the federal income tax consequences described herein. 33 EACH INVESTOR SHOULD CONSULT HIS TAX ADVISOR TO DISCUSS THE TAX CONSEQUENCES OF OWNING SHARES IN VIEW OF HIS PARTICULAR SITUATION. DIVIDENDS Under the Income Tax Act (Canada) and the Canada-United States Income Tax Convention, dividends paid or credited, or deemed to be paid or credited, on the shares of our common stock to a United States shareholder who owns less than 10% of our voting shares will be subject to Canadian withholding tax at the rate of 15% of the gross amount of such dividends or deemed dividends. Under the Canada-United States Income Tax Convention, dividends paid or credited to certain religious, scientific, charitable and similar tax exempt organizations and certain pension organizations that are resident, and exempt from tax, in the United States and that have complied with certain administrative procedures are exempt from this Canadian withholding tax. EACH INVESTOR SHOULD CONSULT HIS TAX ADVISOR TO DISCUSS THE TAX CONSEQUENCES OF OWNING SHARES IN VIEW OF HIS PARTICULAR SITUATION. DISPOSITION OF SHARES OF COMMON STOCK A capital gain realized by a United States shareholder on a disposition or deemed disposition of shares of our common stock will not be subject to tax under the Income Tax Act (Canada) unless such shares constitute taxable Canadian property within the meaning of the Income Tax Act (Canada) at the time of the disposition or deemed disposition. In general, the shares of our common stock will not be "taxable Canadian property" to a United States shareholder unless they are not listed on a prescribed stock exchange (which includes the Nasdaq Small Cap Market) or at any time within the five-year period immediately preceding the disposition the United States shareholder, persons with whom the United States shareholder did not deal at arm's length, or the United States shareholder together with such persons owned or had an interest in or a right to acquire more than 25% of any class or series of our shares. A deemed disposition of shares of our common stock will arise on the death of a United States shareholder. If the shares of common stock are taxable Canadian property to a United States shareholder, any capital gain realized on a disposition or deemed disposition of such shares will generally be exempt from tax under the Income Tax Act (Canada) by virtue of the Canada-United States Income Tax Convention if the value of the shares of common stock at the time of the disposition or deemed disposition is not derived principally from real property situated in Canada. We are of the view that the shares of common stock do not now derive their value principally from real property situated in Canada; however, the determination as to whether Canadian tax would be applicable on a disposition or deemed disposition of shares of our common stock must be made at the time of the disposition or deemed disposition. EACH INVESTOR SHOULD CONSULT HIS TAX ADVISOR TO DISCUSS THE TAX CONSEQUENCES OF OWNING SHARES IN VIEW OF HIS PARTICULAR SITUATION. INVESTMENT CANADA ACT 34 The Investment Canada Act, a Federal Canadian statute, regulates the acquisition of control of existing Canadian businesses by any non-Canadian (as that term is defined in the Investment Canada Act). We are currently a Canadian company (as that term is defined in the Investment Canada Act). If a non-Canadian seeks to acquire control of us, such acquisition will be subject to the Investment Canada Act. In general, any transaction which is subject to the Investment Canada Act is a reviewable transaction if the book value of the target company's assets, as set out in its most recent financial statements, exceeds the applicable threshold. If the potential acquirer is a "WTO Investor," (as defined below) acquiring control of us would only be reviewable if the book value of our assets exceeded C$192 million (approx. US$124,371,664). (This number is the threshold amount for 2000 and this amount is increased each year by a factor equal to the increase in the rate of Canadian inflation for the previous year). A WTO Investor is defined in the Investment Canada Act as an investor ultimately controlled by nationals of World Trade Organization member states, such as the United States of America. If the book value of our assets exceeds the applicable threshold for review, the potential acquirer must file an application for review and obtain the approval of the Minister of Industry before acquiring control of us. In deciding whether to approve the reviewable transaction, the Minister considers whether the investment "is likely to be of net benefit to Canada." This determination is made on the basis of economic and policy criteria set out in the Investment Canada Act. The approval process begins with an initial review period of 45 days from the date the completed application is received. However, the Minister of Industry has authority to extend the review period unilaterally for 30 more days. Any further extensions require the potential acquirer's consent. SHARES ELIGIBLE FOR FUTURE SALE We have 32,871,886 shares of common stock issued and outstanding. The 3,557,500 shares offered by this prospectus will be freely tradeable without restriction or further registration under the Securities Act, except for any shares purchased by an affiliate of Inzeco. An affiliate of Inzeco, a person who has a controlling position with regard to Inzeco, will be subject to resale limitations of Rule 144 under the Securities Act. 187,600 shares of common stock currently outstanding that were sold in the United States and/or held by United States persons are "restricted securities" as the term is defined in Rule 144. Such restricted shares will become eligible for sale under Rule 144 commencing in July 2001 (one year following our issuance of the shares), provided that our common stock is registered under the Securities Exchange Act of 1934 and we have been subject to the reporting requirements of such Act for at least 90 days (both conditions required under Rule 144). The ability to sell under Rule 144 is also subject to compliance with the notice and manner of sale requirements of Rule 144 and our being current in our reporting obligations under the Securities Exchange Act of 1934. In addition, the number of restricted securities that can be sold by a person during any three month period is subject to limitations under Rule 144. 3,961,151 shares of common stock currently outstanding, which were sold by us during the past 12 months outside of the United States to non-United States persons, are registered for sale in Canada (and are thereby freely tradeable in Canada without restriction) but may be resold in the United States only if they are registered under the Securities Act or an exemption from registration such as Rule 144 is 35 available. Of said 3,961,151 shares, 3,283,333 shares will become available for sale under Rule 144 commencing in June 2001, 662,818 shares will become available for sale under Rule 144 commencing in July 2001 and 15,000 shares will become available for sale under Rule 144 commencing in October 2001, in each case subject to compliance with the other requirements of Rule 144 described above. All of the remaining 25,150,635 shares of common stock were issued by us more than one year ago and have been registered for sale in Canada (and are thereby freely tradeable in Canada without restriction) but may be resold in the United States only if they are registered under the Securities Act or an exemption from registration such as Rule 144 is available. All of such shares may be resold in the United States under Rule 144 commencing 90 days after our common stock is registered and we become subject to the reporting requirements under the Securities Exchange Act of 1934, subject to compliance with the other requirements of Rule 144 described above. We cannot predict the effect, if any, that market sales of common stock or the availability of these shares for sale will have on the market price prevailing from time to time. Nevertheless, the possibility that substantial amounts of common stock may be sold in the public market may adversely affect prevailing market prices for the common stock and could impair our ability to raise capital through the sale of our equity securities. SELLING SHAREHOLDERS The table below sets forth certain information regarding the beneficial ownership of the common stock by the selling shareholders and as adjusted to give effect to the sale of the shares offered in this prospectus.
-------------------------------------------------------------------------------- Number of Number of Number of Percentage Shares of Shares of Shares of of Common Name of Selling Common Stock Common Stock to Shareholder Stock Owned Eligible Stock to be Owned as of the for Resale be Owned following Date of the Pursuant to Following the Prospectus the the Offering Prospectus Offering -------------------------------------------------------------------------------- Eleuterra Investment 250,000 250,000 0 0% Management Inc. - First Wave Inc. 2004-200 King Street West Toronto, Ontario M5H 3T4 Canada Nice Investments LLC 2,807,500 2,807,500 0 0% 40 West Gude Drive, Suite 210 Rockville, MD 20850 Superior Intech Inc. 500,000 500,000 0 0% 1340 Warwick Avenue Oakville, Ontario L6L 2W1 Canada
All of the selling shareholders other than Nice Investments LLC acquired their shares in October 2000 upon conversion of special warrants issued in a private placement consummated in Canada (and not subject to the Securities Act) in June 2000. The special warrants were sold for C$.60 each (approx. US$0.45) and automatically converted into one share of common stock upon the filing of an appropriate 36 prospectus with Ontario Securities Commission. Such shares may currently be sold in Canada on the Canadian Venture Exchange without restriction. See "Plan of Operation." Nice Investments LLC acquired its 2,807,500 shares for US$.40 each in a private placement consummated in the United States in May 2000. In recognition of the fact that the selling shareholders may wish to be legally permitted to sell their shares of common stock when they deem appropriate, we agreed with the selling shareholders to file with the United States Securities and Exchange Commission, under the Securities Act, as amended, a registration statement on Form SB-2, of which this prospectus is a part, with respect to the resale of the shares of common stock, and have agreed to prepare and file such amendments and supplements to the registration statement as may be necessary to keep the registration statement in effect until the shares of common stock are no longer required to be registered for the sale thereof by the selling shareholders. 37 PLAN OF DISTRIBUTION The shares of common stock offered hereby by the selling shareholders may be sold from time to time by the selling shareholders, or by pledgees, donees, transferees and other successors in interest. These pledgees, donees, transferees and other successors in interest will be deemed "selling shareholders" for the purposes of this prospectus. The shares of common stock may be sold on - one or more exchanges or in the over-the-counter market (including the OTC-BB); - or in privately negotiated transactions. The shares of common stock may be sold to or through brokers or dealers, who may act as agent or principal, or in direct transactions between the selling shareholders and purchasers. In addition, the selling shareholder may, from time to time, sell short the common stock, and in these instances, this prospectus may be delivered in connection with the short sale and the shares of common stock offered hereby may be used to cover the short sale. Transactions involving brokers or dealers may include, without limitation, the following: - ordinary brokerage transactions, - transactions in which the broker or dealer solicits purchasers, - block trades in which the broker or dealer will attempt to sell the shares of common stock as agent but may position and resell a portion of the block as principal to facilitate the transaction; and - purchases by a broker or dealer as a principal and resale by such broker or dealer for its account. In effecting sales, brokers and dealers engaged by the selling shareholders or the purchasers of the shares of common stock may arrange for other brokers or dealers to participate. These brokers or dealers may receive discounts, concessions or commissions from the selling shareholders and/or the purchasers of the shares of common stock for whom the broker or dealer may act as agent or to whom they may sell as principal, or both (which compensation as to a particular broker or dealer may be in excess of customary commissions). We are bearing all of the costs relating to the registration of the shares of common stock (estimated at US$125,000) other than certain fees and expenses, if any, of counsel or other advisors to the selling shareholders. Any commissions, discounts or other fees payable to brokers or dealers in connection with any sale of the shares of common stock will be borne by the selling shareholders, the purchasers participating in the transaction, or both. Any shares covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act, as amended, may be sold under Rule 144 rather than pursuant to this prospectus. The selling shareholders have agreed to indemnify us and we have agreed to indemnify the selling shareholders, against certain liabilities, including liabilities under the Securities Act. All expenses of registration incurred in connection with this offering are being borne by Inzeco, but all selling and other expenses incurred by the selling shareholders will be borne by the selling shareholders. See "Selling Shareholders." 38 The selling shareholders and any broker-dealers participating in the distribution of the shares may be deemed to be "underwriters" within the meaning of the Securities Act, and any commissions or discounts given to any such broker-dealer may be regarded as underwriting commissions or discounts under the 1933 Act. The shares have not been registered for sale by the selling shareholders under the securities laws of any state as of the date of this prospectus. Brokers or dealers effecting transactions in the shares should confirm the registration thereof under the securities laws of the States in which transactions occur or the existence of any exemption from registration. CHANGE IN ACCOUNTANTS Effective August 21, 1998, KPMG LLP, Chartered Accountants, were engaged as our independent auditors, replacing Collins Barrow, our former auditors. The change was made in connection with the acquisition of RTICA Inc. Prior to the acquisition, KPMG LLP, Chartered Accountants, were the auditors for RTICA Inc. and Collins Barrow were the auditors for Inzeco Holdings Inc. Our Board of Directors determined that it was in our best interest to retain KPMG LLP, Chartered Accountants following the acquisition, and approved the change of auditors by resolution on August 21, 1998. There were no disagreements with the former auditors on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure with respect to Inzeco's financial statements for the fiscal years covered by Collins Barrow or up through the time of replacement. LEGAL MATTERS Certain legal matters in connection with the offering, including the validity of the issuance of the shares of common stock offered hereby, will be passed upon for us by McManus Thomson, Alberta, Canada. EXPERTS Our financial statements as of May 31, 2000 and 1999 and for the years ended May 31, 2000 and 1999 and for the period from June 13, 1991 (inception) to May 31, 2000, appearing in this prospectus and registration statement have been audited by KPMG LLP, Chartered Accountants, as set forth in their report thereon appearing elsewhere herein and in the registration statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The report covering these financial statements includes Comments By Auditors For U.S. Readers On Canada-U.S. Reporting Differences which is dated July 31, 2000, except for note 11(b) which is as of October 15, 2000 and note 5(e) which is as of January 4, 2001, which contains a reference to note 1 where it states that we had suffered recurring losses from operations and had not commenced commercial production which raises substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. 39 WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form SB-2 under the Securities Act with respect to the common shares offered by this prospectus. This prospectus is part of that registration statement and does not contain all of the information included in the registration statement. For further information with respect to us and our common shares, you should refer to the registration statement and its exhibits. The registration statement, including all exhibits attached to it, may by inspected and copied at the public reference facilities maintained by the United States Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the regional offices of the United States Securities and Exchange Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained from the Public Reference Section of the Securities and Exchange Commission, Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,Washington, D.C. 20549, and its public reference facilities in New York, New York and Chicago, Illinois upon payment of the prescribed fees. Electronic registration statements filed through the Electronic Data Gathering, Analysis, and Retrieval System are publicly available through the United States Securities and Exchange Commission's Web site (http://www.sec.gov). Further information on public reference rooms available at the United States Securities and Exchange Commission is available by contacting the United States Securities and Exchange Commission at 1-(800) SEC-0330. We will be subject to the information requirements of the U.S. Securities Exchange Act of 1934, known as the Exchange Act, applicable to "foreign private issuers" having a class of securities registered under Section 12(g) of the Exchange Act. Accordingly, we will be required to file annual reports on Form 20-F and periodic reports on Form 6-K with the Commission. Copies of these reports may be accessed in the same manner as is indicated above for the registration statement and its exhibits. As a foreign private issuer, however, we will be exempt from provisions of the Exchange Act regarding the furnishing and content of proxy statements to shareholders and rules relating to short swing profits reporting and liability. 40 INDEX TO FINANCIAL STATEMENTS
PAGE ------ CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT..................................................................................................F-3 COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES.........................F-4 CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2000 AND 1999............................................F-5 CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT FOR THE YEARS ENDED MAY 31, 2000 AND 1999 AND CUMULATIVE PERIOD FROM JUNE 13, 1991 (INCEPTION) TO MAY 31, 2000...........................................................................................F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MAY 31, 2000 AND 1999 AND CUMULATIVE PERIOD FROM JUNE 13, 1991 (INCEPTION) TO MAY 31, 2000...........................................................................................F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.........................................................F-8 CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) INTERIM CONSOLIDATED BALANCE SHEETS AS OF AUGUST 31, 2000 AND 1999 (UNAUDITED) ...................F-28 INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT FOR THE THREE MONTHS ENDED AUGUST 31, 2000 AND 1999 AND CUMULATIVE PERIOD FROM JUNE 13, 1991 (INCEPTION) TO AUGUST 31, 2000 (UNAUDITED)....................................................F-29 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 31, 2000 AND 1999 AND CUMULATIVE PERIOD FROM JUNE 13, 1991 (INCEPTION) TO AUGUST 31, 2000 (UNAUDITED)....................................................F-30 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS................................................F-31
F-1 kpmg KPMG LLP CHARTERED ACCOUNTANTS Telephone(905) 949-7800 Mississauga Executive Centre Telefax(905) 949-7799 Four Robert Speck Parkway www.kpmg.ca Suite 1500 Mississauga ON L4Z 1S1 AUDITORS' REPORT To the Board of Directors of Inzeco Holdings Inc. We have audited the consolidated balance sheets of Inzeco Holdings Inc. (a development stage company) as at May 31, 2000 and 1999 and the consolidated statements of operations and deficit and cash flows for the years ended May 31, 2000 and 1999 and cumulative period from June 13, 1991 (inception) to May 31, 2000. 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 audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company (a development stage company) as at May 31, 2000 and 1999 and the results of its operations and its cash flows for the years ended May 31, 2000 and 1999 and for the period from June 13, 1991 (inception) to May 31, 2000 in accordance with Canadian generally accepted accounting principles. Accounting principles generally accepted in Canada vary in certain significant respects from accounting principles generally accepted in the United States. Application of accounting principles generally accepted in the United States would have affected the financial statements to the extent summarized in note 12 to the consolidated financial statements. /s/ KPMG LLP ------------------------------- Chartered Accountants Mississauga, Canada July 31, 2000, except for note 11(b) which is as of F-2 October 15, 2000 and note 5(e) which is as of January 4, 2001 F-3 kpmg KPMG LLP CHARTERED ACCOUNTANTS Telephone(905) 949-7800 Mississauga Executive Centre Telefax(905) 949-7799 Four Robert Speck Parkway www.kpmg.ca Suite 1500 Mississauga ON L4Z 1S1 COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES 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 note 1 to the consolidated financial statements. Our report to the directors dated July 31, 2000, except for note 11(b) which is as of October 15, 2000 and note 5(e) which is as of January 4, 2001 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 Mississauga, Canada July 31, 2000, except for note 11(b) which is as of October 15, 2000 and note 5(e) which is as of January 4, 2001 F-4 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Consolidated Balance Sheets (Expressed in Canadian dollars) May 31, 2000 and 1999 ------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash in trust (note 5(e)) $1,712,725 $ 666,429 GST receivable 92,953 77,459 Prepaid expenses 8,442 21,966 ------------------------------------------------------------------------------ 1,814,120 765,854 Fixed assets (note 3) 534,481 18,790 Goodwill, net of accumulated amortization of $56,210 (1999 - $29,846) 52,728 79,092 Deferred development costs 1 1 ------------------------------------------------------------------------------ $2,401,330 $ 863,737 ------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 742,348 $ 11,850 Accrued liabilities 25,900 29,500 Convertible debenture (note 4) - 1,460,000 ------------------------------------------------------------------------------ 768,248 1,501,350 Convertible debentures (note 4) 349,278 - Shareholders' equity (deficiency): Share capital (note 5) 5,613,805 2,292,703 Equity component of convertible debentures (note 4) 10,722 105,000 Deficit accumulated during development stage (4,340,723) (3,035,316) ------------------------------------------------------------------------------ 1,283,804 (637,613) Going concern (note 1) Commitments and contingencies (note 9) ------------------------------------------------------------------------------ $2,401,330 $ 863,737 ------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. F-5 On behalf of the Board: Director Director F-6 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Consolidated Statements of Operations and Deficit (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 and cumulative period from June 13, 1991 (inception) to May 31, 2000 ------------------------------------------------------------------------------ Period from June 13, 1991 (inception) to 2000 1999 May 31, 2000 ------------------------------------------------------------------------------ Income: Interest $ 7,095 $ 60,233 $ 70,423 Fees and licenses 6,077 - 622,482 ------------------------------------------------------------------------------ 13,172 60,233 692,905 Operating expenses: Consulting 354,110 102,434 816,834 Management fees 267,174 209,864 884,386 Development 246,870 568,562 1,709,649 General and administrative 116,260 85,221 378,050 Professional fees 117,109 176,652 464,233 Rent 68,187 12,683 99,720 Travel 44,795 82,965 297,462 Interest on convertible debentures 40,248 65,000 105,248 Amortization of goodwill 26,364 26,364 56,210 Repairs and maintenance 18,673 - 18,673 Amortization of fixed assets 8,025 4,094 24,114 Interest and bank charges 10,764 892 134,763 Patents - 12,962 44,286 ------------------------------------------------------------------------------ 1,318,579 1,347,693 5,033,628 ------------------------------------------------------------------------------ Loss for the period (1,305,407) (1,287,460) (4,340,723) Deficit accumulated during development stage, beginning of period (3,035,316) (1,747,856) - ------------------------------------------------------------------------------ Deficit accumulated during development stage, end of period $(4,340,723) $(3,035,316) $(4,340,723) ------------------------------------------------------------------------------ Loss per share (note 8) $ (0.06) $ (0.06) ------------------------------------------------------------------------------ Weighted average number of shares outstanding 23,493,237 21,259,757 ------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. F-7 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Consolidated Statements of Cash Flows (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 and cumulative period from June 13, 1991 (inception) to May 31, 2000 ------------------------------------------------------------------------------ Period from June 13, 1991 (inception) to 2000 1999 May 31, 2000 ------------------------------------------------------------------------------ Cash provided by (used in): Operating activities: Loss for the period $(1,305,407) $(1,287,460) $(4,340,723) Items not involving cash: Interest on convertible debenture 40,248 65,000 105,248 Amortization 34,389 30,458 80,324 Interest expense on converted loan - - 96,000 Expenses settled by issuance of common shares - - 431,388 Change in non-cash operating working capital balances: GST receivable (15,494) (57,539) (92,953) Prepaid expenses 13,524 7,010 (8,442) Accounts payable 730,498 (9,692) 661,003 Accrued liabilities (3,600) 200 25,900 ------------------------------------------------------------------------------ (505,842) (1,252,023) (3,042,255) Financing activities: Issuance of convertible debentures 360,000 - 1,860,000 Issuance of common shares 1,715,854 25,250 2,269,767 Issuance of special warrants - - 667,959 Decrease in due to related parties - (259,792) - Proceeds from loan payable - - 254,000 ------------------------------------------------------------------------------ 2,075,854 (234,542) 5,051,726 Investing activities: Purchase of fixed assets (523,716) (19,180) (558,595) Investment in deferred development costs - - (1) Cash acquired on reverse takeover - - 261,850 ------------------------------------------------------------------------------ (523,716) (19,180) (296,746) ------------------------------------------------------------------------------ Increase (decrease) in cash 1,046,296 (1,505,745) 1,712,725 Cash and cash equivalents, beginning of period 666,429 2,172,174 - ------------------------------------------------------------------------------ Cash and cash equivalents, end of period $1,712,725 $ 666,429 $1,712,725 ------------------------------------------------------------------------------ Supplemental cash flow information: Interest paid $ 10,214 $ 1,241 $ 46,752 ------------------------------------------------------------------------------ F-8 Cash and cash equivalents are comprised of cash and cash in trust. See accompanying notes to consolidated financial statements. F-9 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ Inzeco Holdings Inc. ("Inzeco" or the "Company") is a public company that was incorporated on May 30, 1997 under the Business Corporations Act (Alberta) and is listed on the Canadian Venture Exchange. The Company continues to develop the technology and productivity process to enable commercial production of insulating products from recycled plastics and to pursue the sale of licensing rights to the technology. 1. GOING CONCERN: These financial statements have been prepared on a going concern basis and, as such, it has been assumed that the Company will be able to realize its assets and discharge its liabilities in the normal course of operations. To May 31, 2000, the Company has incurred continuing losses from operations and an accumulated a deficit of $4,340,723. The ability of the Company to continue is dependent upon the ongoing support of its shareholders, the attainment of financing necessary to complete the technology and begin commercial production and the achievement of profitable operations from the commercial production and licencing of the insulating products and sale of licensing rights. At May 31, 2000, the Company had cash balances of $1,712,725 and subsequent to year end issued common shares for proceeds net of issue costs of approximately $2.2 million (note 11(b)). These financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern. F-10 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 2. SIGNIFICANT ACCOUNTING POLICIES: These financial statements have been prepared in accordance with accounting principles generally accepted in Canada. A reconciliation to accounting principles generally accepted in the United States is provided in note 12. Significant accounting policies adopted by the Company are as follows: (a) Basis of presentation: These financial statements include the accounts of the Company and its wholly owned subsidiaries, Inzeco Overseas Limited and RTICA Inc. ("RTICA"), (formerly E2 Development Corporation ("E2D")). RTICA was acquired in a reverse takeover and is treated as the continuing entity and the acquiror for financial accounting purposes, notwithstanding that Inzeco is the continuing entity for legal purposes given that the former shareholders of RTICA controlled the combined entity after the transaction. Accordingly, the consolidated statements of operations are a continuation of RTICA's financial statements, and therefore reflect the following: (i) the operations of RTICA from inception (June 13, 1991); and (ii) the operations of the Inzeco after April 28, 1998, the date of acquisition. As part of the reverse takeover, Inzeco entered into share for share agreements with each shareholder of E2D whereby Inzeco agreed to acquire all of the outstanding common shares and 310,908 common share purchase warrants of E2D, in exchange for 17,499,995 common shares and 1,243,633 common share purchase warrants of Inzeco which represented 86% of the issued and outstanding common shares of Inzeco on a fully diluted basis as at April 28, 1998. F-11 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 2. Significant accounting policies (continued): The accounting for the business combination was as follows: ------------------------------------------------------------------------------ Ascribed value attributed to shares and warrants issued to acquire Inzeco Holdings Inc. $ 480,000 Less transaction costs (190,557) ------------------------------------------------------------------------------ Net proceeds $ 289,443 ------------------------------------------------------------------------------ Fair value of net assets of Inzeco Holdings Inc.: Current assets (including cash of $261,850) $ 350,811 Goodwill 108,938 Current liabilities (170,306) ------------------------------------------------------------------------------ $ 289,443 ------------------------------------------------------------------------------ All significant intercompany transactions and balances are eliminated on consolidation. (b) Fixed assets: Fixed assets are recorded at original cost less accumulated amortization. Amortization is provided when the assets are available for use, on a declining-balance basis over the estimated useful lives of the assets at the following annual rates: ------------------------------------------------------------------------------ Machinery and equipment 25% Furniture 25% Vehicles 30% Computer hardware 30% ------------------------------------------------------------------------------ (c) Goodwill: Goodwill is recorded at cost less accumulated amortization and is being amortized on a straight-line basis over five years. On an annual basis, management reviews the recoverability of goodwill by assessing future cash flows on an undiscounted basis. F-12 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 2. Significant accounting policies (continued): (d) Development and patents: Development costs are expensed in the period incurred until technical feasibility has been obtained, adequate resources exist and recoverability is assured at which time development costs are capitalized. To date only a nominal amount of development costs has been capitalized. Patent costs are expensed in the period incurred, prior to establishment of technical feasibility of the product. (e) Income taxes: The Company follows the tax allocation method of accounting for income taxes, whereby the provision for income taxes is based upon income for financial reporting purposes rather than income for tax purposes. Timing differences may occur when revenue and expense are recognized in the accounts in one year, but are taxed or claimed for income tax purposes in another year. The tax effect of these timing differences is recorded as deferred income taxes. (f) Foreign currency translation: Transactions in foreign currencies are translated into Canadian dollars using exchange rates in effect on the date of the transaction. Monetary assets and liabilities are translated into Canadian dollars using current exchange rates and non-monetary assets and liabilities using historical exchange rates. Translation gains and losses are included in the consolidated statement of operations and deficit. (g) Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates. F-13 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 2. Significant accounting policies (continued): (h) Fair values of financial instruments: Cash and cash held in trust and accounts payable and accrued liabilities are reflected in the financial statements at carrying values which approximate fair values because of the short-term maturities of these instruments. The carrying value of the debt component of the convertible debentures approximates its fair value since the interest rate approximates current interest rates. (i) Stock-based compensation plan: The Company has a stock-based compensation plan, which is described in note 5(c). No compensation expense is recognized for this plan when shares or stock options are issued to employees or non-employees. Any consideration paid by employees or non-employees on exercise of stock options or purchase of shares is credited to share capital. If shares or stock options are repurchased from employees or non-employees, the excess of the consideration paid over the carrying amount of the shares or stock options cancelled is charged to deficit. 3. FIXED ASSETS: ------------------------------------------------------------------------------ Accumulated Net book 2000 Cost amortization value ------------------------------------------------------------------------------ Machinery and equipment $525,292$ 7,842 $517,450 Furniture 10,105 1,263 8,842 Vehicles 7,500 1,125 6,375 Computer hardware 15,698 13,884 1,814 ------------------------------------------------------------------------------ $558,595 $ 24,114 $534,481 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Accumulated Net book 1999 Cost amortization value ------------------------------------------------------------------------------ Machinery and equipment $ 19,181 $ 2,983 $ 16,198 Computer hardware 15,698 13,106 2,592 ------------------------------------------------------------------------------ $ 34,879 $ 16,089 $ 18,790 ------------------------------------------------------------------------------ F-14 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ F-15 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 4. CONVERTIBLE DEBENTURES: On May 26, 1998, the Company issued a $1,500,000 Series I Convertible Senior Debenture. The principal was convertible at any time, in whole or in part, at the option of the holder into common shares at $0.55 per common share. Once the Company built a plant which produced a specified output, the debenture was convertible at the Company's option. On December 21, 1999, the debenture was converted at the Company's option into 2,727,723 common shares at $0.55 per common share. The amount of interest recorded in the current year prior to conversion was $40,248 (1999 - $65,000). On April 15, 2000, the Company issued three $120,000 convertible debentures for total proceeds of $360,000. The principal and any accrued and unpaid is convertible at any time, in whole or in part, at the option of the holder into common shares at $0.40 per common share. The principal outstanding bears interest at 6.5% per annum payable semi-annually and in arrears on June 15 and December 15 of each year, commencing on June 15, 2000 and is due on June 30, 2001. The debenture is secured by the tangible assets of the Company and can be subordinated to other debt incurred by the Company up to $1,250,000. These debentures represent compound financial instruments with their component parts measured at their respective fair values at the time of issue. The debt component has been calculated at the present value of the required payment at maturity, discounted at 8% which approximates the interest rate that would have been applicable to non-convertible debt at the date of issue. The original value assigned will increase over time to the settlement amount on maturity, with a corresponding charge to interest expense for the year. F-16 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 4. Convertible debentures (continued): The equity component represents the excess of the face value over the debt component at the date of issuance. The continuity of the equity component of convertible debentures from inception is as follows: F-17 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Equity component of $1,500,000 convertible debenture, May 26, 1998 $105,000 ------------------------------------------------------------------------------ Balance, May 31, 1998 and 1999 105,000 Conversion of $1,500,000 convertible debenture, December 21, 1999 (105,000) Equity component of three $120,000 convertible debentures, April 15, 2000 10,722 ------------------------------------------------------------------------------ Balance, May 31, 2000 $ 10,722 ------------------------------------------------------------------------------ 5. Share Capital: The authorized share capital of the Company consists of unlimited preference shares issuable in series and unlimited common shares. F-18 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 5. Share Capital (continued): Common share transactions from inception are as follows: ------------------------------------------------------------------------------ Shares Amount ------------------------------------------------------------------------------ Shares issued for cash, June 13, 1991 1,000 $ 10 Shares issued on stock split, May 30, 1996 2,199,000 - Shares issued for consulting services, May 30, 1996 456,166 431,388 ------------------------------------------------------------------------------ Balance, May 31, 1997 2,656,166 431,398 Shares issued for cash, August 29, 1997 825,000 275,000 Shares issued on conversion of warrants, December 23, 1997 145,833 121,528 Shares issued on conversion of warrants, March 7, 1998 153,750 128,125 Shares issued on conversion of E2D warrants, March 7, 1998 20,250 - Shares issued for debt and accrued interest, April 28, 1998 236,830 350,000 Shares exchanged on reverse takeover, April 28, 1998 (4,037,829) - Shares exchanged on reverse takeover, April 28, 1998 17,499,995 - Shares issued to Inzeco shareholders at reverse takeover, April 28, 1998 2,925,000 289,443 Shares issued on exercise of options, May 20, 1998 20,000 4,000 ------------------------------------------------------------------------------ Balance, May 31, 1998 20,444,995 1,599,494 Shares issued on conversion of special warrants, October 25, 1998 1,666,667 667,959 Shares issued on exercise of options, May 20, 1999 126,250 25,250 ------------------------------------------------------------------------------ Balance, May 31, 1999 22,237,912 2,292,703 Shares issued on conversion of debenture, December 21, 1999 2,727,723 1,605,248 Shares issued on exercise of options, October 26, 1999 75,000 33,750 Shares issued on exercise of options, November 26, 1999 125,000 25,000 Shares issued for cash, May 31, 2000 2,807,500 1,657,104 ------------------------------------------------------------------------------ Balance, May 31, 2000 27,973,135 $5,613,805 ------------------------------------------------------------------------------ F-19 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 5. SHARE CAPITAL (CONTINUED): Shares which may be issued under options, warrants and convertible debenture are as follows:
------------------------------------------------------------------------------------------------------------------ Weighted average Weighted Range of remaining average Number exercise contractual exercise of shares price Expiry life price ------------------------------------------------------------------------------------------------------------------ Directors' and management's December 20, 2001 to stock option plan 1,870,250 $0.20 - 0.25 April 29, 2003 3.06 years $ 0.20 Directors' and management's December 20, 2001 to stock option plan 145,000 0.35 - 0.39 February 8, 2003 2.75 years 0.38 Common share purchase warrants 1,243,633 0.65 June 30, 2000 Convertible debenture 900,000 0.40 June 30, 2001 ------------------------------------------------------------------------------------------------------------------
All options outstanding at May 31, 2000 are exercisable. (a)On April 28, 1998, all of RTICA's outstanding common shares and warrants were exchanged for 17,499,995 common shares and 1,243,633 warrants of Inzeco. The warrants have an exercise price of $0.65 per common share, with an expiry date of June 30, 2000. In connection with this transaction, the Canadian Venture Exchange required that a total of 10,939,937 common shares be held in escrow. Of these shares, 1,640,998 shall be released at a rate of 1/3 each year commencing April 28, 1999. On April 28, 2000, 547,000 (1999 - 546,999) shares were released from escrow. The remaining 9,298,939 are to be released at a rate of 1 share for every $0.20 of cash flow generated to a maximum of 1/3 per year. Cash flow generated is defined by the escrow agreement to be audited net income adjusted by certain non-cash items. None of these shares were released from escrow in 2000. 1,350,000 common shares are also held in escrow in connection with the initial public offering of Inzeco pursuant to the prospectus of the Company dated September 19, 1997. These initial escrowed shares will also be released at a rate of 1/3 for each of the three years ending April 28, 1999, 2000 and 2001, respectively. During the year, 449,999 (1999 - F-20 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 450,000) shares were released from escrow. F-21 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 5. SHARE CAPITAL (CONTINUED): (b)On April 28, 1998, Inzeco completed a private placement of 1,666,667 special warrants at a subscription price of $0.45 each for net proceeds of $667,959. The special warrants were converted to common shares on October 25, 1998. In addition to the commission of 10% of the gross proceeds of the issue, the Agent was granted a non-transferable option to acquire 166,667 common shares at $0.45 per share. On October 26, 1999, the Agent exercised 75,000 share options for total consideration of $33,750. The remaining 91,667 options expired on October 27, 1999. (c)Inzeco has established a stock option plan for its directors and officers and certain consultants and has reserved for issuance 2,503,750 common shares. Pursuant to the plan, stock options vest immediately and are exercisable for a period of between three to five years from the date of grant. Options are granted at the closing market price of the Company's common stock on the date of grant. At year end, 2,015,250 (1999 - 2,020,250) options are outstanding at an exercise price ranging from $0.20 to $0.39 per share with 1,705,250 (1999 - 1,830,250) options issued to five directors and officers. A summary of the company's stock option activity is as follows: ------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------ Weighted Weighted Number of average Number of average stock exercise stock exercise options price options price ------------------------------------------------------------------------------ Outstanding, beginning of year 2,020,250 $ 0.20 2,035,000 $ 0.20 Granted 120,000 0.38 85,000 0.28 Exercised (125,000) 0.20 (71,250) 0.20 Forfeited - - (28,500) 0.20 ------------------------------------------------------------------------------ Outstanding, end of year 2,015,250 0.21 2,020,250 0.20 ------------------------------------------------------------------------------ Exercisable, end of year 2,015,250 $ 0.21 2,020,250 $0.20 ------------------------------------------------------------------------------ Available for grant 488,500 108,500 ------------------------------------------------------------------------------ During the year, the maximum number of shares issuable under the stock option plan was F-22 increased by 500,000 to 2,700,000. F-23 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 5. Share Capital (continued): (d)In connection with an initial public offering in fiscal 1998, 150,000 non-transferable common share purchase options at $0.20 each were granted to the Agent. 95,000 options were exercised in fiscal 1998 for total consideration of $19,000. On May 20, 1999, 55,000 options were exercised for total consideration of $11,000. F-24 (e)On May 31, 2000, Inzeco completed a private placement of 2,807,500 common shares with a subscription price of U.S. $0.40 per share for gross proceeds of U.S. $1,123,000 or Cdn. $1,680,570. The shares were fully paid, with the proceeds held in trust by the Company's escrow agent until June 6, 2000 when the Funds were wired to the Company. Costs of arranging the private placement were $23,466. If the Company does not have a Registration Statement filed and declared effective by the Securities and Exchange Commission in the United States by December 31, 2000, the Company will be required to issue one additional common share for each ten shares issued under this private placement. The Registration Statement was not declared effective by December 31, 2000. Inzeco has not yet issued for nil consideration the 280,750 additional common shares required due to not having the Registration Statement filed and declared effective by December 31, 2000. When these shares are issued, they will be accounted for like a stock split, with an increase to the number of shares outstanding but no change to the value of share capital. 6. RELATED PARTY TRANSACTIONS: In the normal course of operations, the Company had the following transactions, which were measured at the exchange amount, with certain related parties: ------------------------------------------------------------------------------ Nature of relationship 2000 1999 ------------------------------------------------------------------------------ Purchase of fixed assets Shareholder $330,000 $ - Management fees Shareholders, officers and directors 267,000 210,000 Consulting Shareholders, officers and directors 163,000 18,000 Development charges Shareholders, officer and director 57,000 452,000 Professional fees Shareholder, officer and director 26,000 36,000 ------------------------------------------------------------------------------ F-25 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 7. INCOME TAXES: During the year, approximately $301,000 of non-capital losses expired. At May 31, 2000, the Company has approximately $2,854,000 of non-capital losses and $136,000 of research and development expenses available to reduce future years' income for income tax purposes. The tax benefit of these items will be recorded in the consolidated financial statements when realized: ------------------------------------------------------------------------------ Non-capital losses: 2002 $ 257,000 2003 200,000 2004 210,000 2005 813,000 2006 349,000 2007 1,025,000 Research and development expenses - no expiry 136,000 ------------------------------------------------------------------------------ 8. LOSS PER SHARE: Loss per share figures are calculated using the weighted average number of common shares outstanding calculated on a daily basis. The effect of the exercise of the special warrants, share purchase options and share purchase warrants and the conversion of the convertible debentures would not have a dilutive effect. F-26 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 9. COMMITMENTS AND CONTINGENCIES: (a)On September 1, 1997, the Company sold for proceeds of $20,000 an option for an exclusive license to make, use and sell insulation products in western Canada using the Company's technology. If the option is exercised, the price for the license is $500,000 for a 10-year term. F-27 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 9. COMMITMENTS AND CONTINGENCIES (CONTINUED): (b)The Company is committed to minimum annual payments under an operating lease for its administrative office and manufacturing facility as follows: ------------------------------------------------------------------------------ 2001 $ 60,000 2002 60,000 2003 62,500 2004 65,000 ------------------------------------------------------------------------------ $247,500 ------------------------------------------------------------------------------ (c)On February 1, 2000, the Company signed a contract with the National Research Council which is to perform certain research and development projects on the Company's behalf. The Company is committed to pay $20,000 per month from February 2000 to June 2001 as well as three additional payments of $20,000 each once certain reporting milestones are achieved. In accordance with the Company's accounting policy, these payments are expensed as incurred. Under a separate grant program with the Federal government, the Company is eligible to be reimbursed for a portion of its expenses from the above program as they are incurred, to a maximum of $200,000. At year end, the Company has been reimbursed for $30,000 of expenditures incurred to date, which has been credited to development expenses. 10. COMPARATIVE FIGURES: Certain 1999 comparative figures have been reclassified to conform to the financial statement presentation adopted in 2000. F-28 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 11. SUBSEQUENT EVENTS: (a)On June 6, 2000, an additional 450,000 options at an exercise price of $0.75, with an expiry date of June 6, 2003, were reserved for a consultant. F-29 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 11. SUBSEQUENT EVENTS (CONTINUED): (b)On June 14, 2000, Inzeco completed a private placement of 4,033,333 special warrants at a subscription price of $0.60 each for gross cash proceeds of $2,420,000. Each special warrant was convertible into one common share or 1.1 common shares if a receipt for the related prospectus was not received by October 15, 2000. Costs of arranging the private placement, including Agent's commissions is $217,300 plus 201,667 special warrants granted to the Agent. The prospectus was filed on October 12, 2000 and on October 15, 2000 the special warrants were converted into 4,033,333 common shares. (c)On June 30, 2000, 850,418 of the 1,243,633 common share purchase warrants were exercised for $553,541. The remaining 393,215 warrants expired on the same day. 12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES: These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP") which differ in certain respects with those principles and practices that the Company would have followed had its financial statements been prepared in accordance with accounting principles and practices generally accepted in the United States ("U.S. GAAP"). The Company's accounting principles generally accepted in Canada differ from accounting principles generally accepted in the United States as follows: (a) Earnings per share: Under Canadian GAAP, basic earnings per share are calculated including the escrow shares, while under U.S. GAAP, 9,298,939 of the escrowed shares outstanding at year end requiring the Company to meet specified performance measures are considered contingently issued and accordingly are excluded from the basic earnings per share calculation. Since the Company is in a loss position all potential common share issuances would result in an anti-dilutive per share amount. The following are items which could potentially dilute basic earnings per share in the future: (I) The conversion of the three convertible debentures disclosed in note 4; F-30 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 12. Differences between canadian and united states accounting principles (continued): (ii) The release of the 9,298,939 performance release escrow shares disclosed in Note 5(a); (iii) The exercise of the 2,015,250 directors and officers stock options disclosed in Note 5(c); and (iv) The exercise of the 850,418 common share purchase warrants, which occurred on june 30, 2000 as disclosed in Note 11(c). The reconciliation of the outstanding shares for purposes of the basic earnings per share calculation under Canadian and U.S. GAAP is as follows: ------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------ Weighted average number of outstanding shares for Canadian GAAP 23,493,237 21,259,757 Less escrow shares to be released based on achieving specified performance measures 9,298,939 9,298,939 ------------------------------------------------------------------------------ Weighted average number of outstanding shares for U.S. GAAP 14,194,298 11,960,818 ------------------------------------------------------------------------------ (b) Deferred tax assets: Under Canadian GAAP, the Company accounts for income taxes using the tax allocation method under which income taxes are provided in the year transactions affect net income regardless of when such transactions are recognized for tax purposes. The Financial Accounting Standards Board ("FASB") issued Statement 109 on Accounting for Income taxes ("FAS 109") which is effective for fiscal years beginning after December 14, 1992. FAS 109 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method of FAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. F-31 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED): The following table summarizes the significant components of the Company's deferred tax balances: ------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------ Deferred tax assets: Non-capital loss carryforwards $1,085,000 $ 809,000 Deferred financing costs 74,000 81,000 Fixed assets 29,000 26,000 Cumulative eligible capital 1,000 1,000 Research and development expenses 51,000 - Investment tax credit 12,000 - ------------------------------------------------------------------------------ 1,252,000 917,000 Valuation allowance for deferred tax asset (1,252,000) (917,000) ------------------------------------------------------------------------------ $ - $ - ------------------------------------------------------------------------------ F-32 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ The valuation allowance on deferred tax asset must reflect that portion of the future tax assets including the income tax loss carryforward which more likely than not will not be realized from future operations. Considering the Company's cumulative losses in recent years, the Company believes it is appropriate to provide an allowance of 100% against all available future tax assets including income tax loss carryforwards, regardless of their terms of expiry. (c) Stock options: Beginning in 1996, United States accounting principles allow, but do not require companies to record compensation for employee stock option plans at fair value. The Company has chosen to continue to account for employee stock options using the intrinsic value method as permitted under Canadian and United States accounting principles. Using this approach, however, the Company is still required under United States accounting principles to account for stock options issued to consultants under the fair value method. F-33 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED): Since none of the Company's stock options have been issued by virtue of employment or directorship, all of the stock options have been accounted for under U.S. GAAP using the fair value method. The fair value of these options has been estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 2000 and 1999, respectively: risk free interest rate of 6.4% and 4.7%; dividend yields of 0%, volatility factors of the expected market price of the Company's common stock of 310% and 160%; and a weighted average expected life of the options of 3 years. The estimated fair value of these options is expensed in the period granted since there is no vesting period. The weighted average grant date fair values of options issued in 2000 and 1999 were $0.38 and $0.35, respectively. The United States accounting pronouncement does also require the disclosure of pro forma loss and loss per share information as if the Company had accounted for its employee stock options issued in 1995 and subsequent years under the fair value method. As all options have already been accounted for under the fair value method, the pro forma information is the same as reported for the year. F-34 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ (d) Convertible debentures: Under Canadian GAAP, convertible debentures are split for accounting purposes between debt and shareholders' equity as described in note 4. Under U.S. GAAP, all of the convertible debenture is recorded as debt, except if the conversion price at date of issuance is less than the fair market value, in which case the intrinsic value of the beneficial conversion feature is allocated to paid-in capital and the resulting discount is recognized as interest expense over the period through to the earliest conversion date. The convertible debenture issued on April 15, 2000 is considered to have a beneficial conversion feature under U.S. GAAP given that the conversion price of $0.40 per share was less than the recent private placements of $0.60 per share. (e) Share Capital: Under Candian GAAP, the additional common shares to be issued, as described in note 5(e), would be accounted for like a stock split. Under U.S. GAAP, the additional shares would be recorded at $193,718 ($0.69 per share), which is the market value on December 31, 2000, the date they became issuable, by a charge to deficit. The shares will be included in the basic earnings per share calculation from December 31, 2000. F-35 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED): (f) Business combinations: Under Canadian GAAP, a reverse takeover transaction is accounted for as a business combination, with the amount of the purchase price in excess of the fair market value of the net assets acquired allocated to goodwill. Under U.S. GAAP, the merger of a private operating company into a non-operating public shell corporation with nominal net assets is considered to be a capital transaction, rather than a business combination, with no goodwill being recorded. (g) Comprehensive income: Under U.S. GAAP, comprehensive income or loss must be reported which is defined as all changes in equity other than those resulting from investments by owners and distributions to owners. Under U.S. GAAP, the Company's comprehensive loss is the same as its reported loss for the year. F-36 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ (h) New accounting pronouncements: In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.133 established methods of accounting for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. Application for this SFAS has been postponed. As such, the Company will be required to implement SFAS No. 133 for its fiscal year ended May 31, 2001. The Company expects that the adoption of this pronouncement will have no material impact on its financial position, results of operations or cash flows. The U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), on December 3, 1999. It is effective for the Company no later than the fourth quarter of fiscal 2001. SAB 101 provides additional guidance on the application of existing generally accepted accounting principles to revenue recognition in financial statements. The Company does not expect the guidance of SAB 101 to have a material effect on its financial statements upon adoption. F-37 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED): The impact of the items noted above on the financial statements is as follows: ------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------ Loss for the year per Canadian GAAP $(1,305,407) $(1,287,460) Goodwill amortization 26,364 26,364 Compensation expense from stock options issued to non-employees (45,950) (29,450) Additional interest resulting from beneficial conversion feature on convertible debt (180,000) - ------------------------------------------------------------------------------ Loss for the year per U.S. GAAP $(1,504,993) $(1,290,546) ------------------------------------------------------------------------------ Basic loss per share per U.S. GAAP $ (0.11) $ (0.11) ------------------------------------------------------------------------------ Weighted average number of shares outstanding per U.S. GAAP 14,194,298 11,960,818 ------------------------------------------------------------------------------ F-38 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------ Total convertible debentures per Canadian GAAP $ 349,278 $1,460,000 Reclass equity component of convertible debentures 10,722 105,000 ------------------------------------------------------------------------------ Total convertible debentures per U.S. GAAP $ 360,000 $1,565,000 ------------------------------------------------------------------------------ Other paid-in capital, end of the year per Canadian GAAP $ - $ - Fair value of stock options issued to non-employees 438,195 392,245 Beneficial conversion feature of convertible debentures 180,000 - ------------------------------------------------------------------------------ Other paid-in capital, end of the year per U.S. GAAP $ 618,195 $ 392,245 ------------------------------------------------------------------------------ Share capital, end of the year per Canadian GAAP $5,613,805 $2,292,703 Elimination of goodwill (108,938) (108,938) ------------------------------------------------------------------------------ Share capital, end of the year per U.S. GAAP $5,504,867 $2,183,765 ------------------------------------------------------------------------------ F-39 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Years ended May 31, 2000 and 1999 ------------------------------------------------------------------------------ 12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED): The consolidated statement of deficit under U.S. GAAP is as follows: ------------------------------------------------------------------------------ Deficit, June 1, 1998 per Canadian GAAP $(1,747,856) Goodwill amortization for years prior to 1999 3,482 Compensation expense from stock options for years prior to 1999 (362,795) ------------------------------------------------------------------------------ Deficit, June 1, 1998 per U.S. GAAP (2,107,169) Loss for the year per U.S. GAAP (1,290,546) ------------------------------------------------------------------------------ Deficit, May 31, 1999 per U.S. GAAP (3,397,715) Loss for the year per U.S. GAAP (1,504,993) ------------------------------------------------------------------------------ Deficit, May 31, 2000 per U.S. GAAP $(4,902,708) F-40 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Interim Consolidated Balance Sheets (Expressed in Canadian dollars) August 31, 2000 and 1999 (Unaudited) ------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------ Assets Current assets: Cash and cash equivalents $3,191,274 $ 190,444 Miscellaneous receivable 121,070 92,041 Loan receivable - 25,000 Prepaid expenses 8,442 22,666 ------------------------------------------------------------------------------ 3,320,786 330,151 Fixed assets 510,414 142,895 Goodwill, net of accumulated amortization of $62,801 (1999 - $36,437) 46,137 72,501 Deferred development costs 1 1 ------------------------------------------------------------------------------ $3,877,338 $ 545,548 ------------------------------------------------------------------------------ Liabilities and Shareholders' Equity (Deficiency) Current liabilities: Accounts payable $ 35,262 $ 33,250 Convertible debentures 356,321 1,472,232 ------------------------------------------------------------------------------ 391,583 1,505,482 Shareholders' equity (deficiency): Share capital 8,370,046 2,292,703 Equity component of convertible debentures 10,722 105,000 Deficit (4,895,013) (3,357,637) ------------------------------------------------------------------------------ 3,485,755 (959,934) ------------------------------------------------------------------------------ $3,877,338 $ 545,548 ------------------------------------------------------------------------------ See accompanying notes to interim financial statements. F-41 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Interim Consolidated Statements of Operations and Deficit (Expressed in Canadian dollars) Three months ended August 31, 2000 and 1999 and cumulative period from June 13, 1991 (inception) to August 31, 2000 (Unaudited) ------------------------------------------------------------------------------ Period from June 13, 1991 (inception) to August 31, 2000 1999 2000 ------------------------------------------------------------------------------ Income: Interest $ 22,626 $ 3,361 $ 93,049 Fees and licenses - 6,077 622,482 ------------------------------------------------------------------------------ 22,626 9,438 715,531 Operating expenses: General and administrative 291,758 236,918 669,808 Other 236,986 66,232 4,572,229 Amortization of fixed assets 34,267 9,561 58,381 Interest on convertible debenture 7,043 12,232 112,291 Amortization of goodwill 6,591 6,591 62,801 Interest and bank charges 271 225 135,034 ------------------------------------------------------------------------------ 576,916 331,759 5,610,544 ------------------------------------------------------------------------------ Loss for the period (554,290) (322,321) (4,895,013) Deficit accumulated during development stage, beginning of period (4,340,723) (3,035,316) - ------------------------------------------------------------------------------ Deficit accumulated during development stage, end of period $(4,895,013) $(3,357,637) $(4,895,013) ------------------------------------------------------------------------------ Loss per share $ (0.02) $ (0.02) ------------------------------------------------------------------------------ Weighted average number of shares outstanding 28,540,080 22,237,912 ------------------------------------------------------------------------------ See accompanying notes to interim financial statements. F-42 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Interim Consolidated Statements of Cash Flows (Expressed in Canadian dollars) Three months ended August 31, 2000 and 1999 and cumulative period from June 13, 1991 (inception) to August 31, 2000 (Unaudited) -------------------------------------------------------------------------------- Period from June 13, 1991 (inception) to August 31, 2000 1999 2000 -------------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Loss for the period $ (554,290) $ (322,321) $(4,895,013) Items not involving cash: Interest on convertible debenture 7,043 12,232 112,291 Amortization 40,858 16,152 121,182 Interest expense on converted loan - - 96,000 Expenses settled by issuance of common shares - - 431,388 Change in non-cash operating working capital: Miscellaneous receivable (28,117) (14,582) (121,070) Loan receivable - (25,000) - Prepaid expenses - (700) (8,442) Accounts payable (732,986) (8,100) (46,083) Accrued liabilities (25,900) - - -------------------------------------------------------------------------------- (1,267,492) (342,319) (4,309,747) Financing activities: Issuance of convertible debentures - - 1,860,000 Issuance of common shares 2,756,241 - 5,026,008 Issuance of special warrants - - 667,959 Proceeds from loan payable - - 254,000 -------------------------------------------------------------------------------- 2,756,241 - 7,807,967 Investing activities: Purchase of fixed assets (10,200) (133,666) (568,795) Investment in deferred development costs - - (1) Cash acquired on reverse takeover - - 261,850 -------------------------------------------------------------------------------- (10,200) (133,666) (306,946) -------------------------------------------------------------------------------- F-43 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Interim Consolidated Statements of Cash Flows (Expressed in Canadian dollars) Three months ended August 31, 2000 and 1999 and cumulative period from June 13, 1991 (inception) to August 31, 2000 (Unaudited) -------------------------------------------------------------------------------- Period from June 13, 1991 (inception) to August 31, 2000 1999 2000 -------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 1,478,549 (475,985) 3,191,274 Cash and cash equivalents, beginning of period 1,712,725 666,429 - -------------------------------------------------------------------------------- Cash and cash equivalents, end of period $3,191,274 $ 190,444 $3,191,274 -------------------------------------------------------------------------------- See accompanying notes to interim financial statements. F-44 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Notes to Interim Consolidated Financial Statements (continued) (Expressed in Canadian dollars) Three months ended August 31, 2000 and 1999 (Unaudited) ------------------------------------------------------------------------------ 1. SIGNIFICANT ACCOUNTING POLICIES: These interim financial statements include all adjustments which in the opinion of management are necessary in order to make the financial statements not misleading. For a full description of accounting polices which have been applied on a consistent basis in these interim financial statements, except as described in note 2, refer to the Company's annual financial statements. Accounting principles generally accepted in Canada vary in certain significant respects from accounting principles generally accepted in the United States. Application of accounting principles generally accepted in the United States would have affected the financial statements to the extent summarized in note 4 to the interim financial statements. 2. CHANGE IN ACCOUNTING POLICY: Effective January 1, 2000, The Canadian Institute of Chartered Accountants ("CICA") changed the accounting standards relating to the accounting for income taxes. The CICA's new standard on accounting for income taxes adopts the liability method of accounting for future income taxes. Under the liability method, future income tax assets and liabilities are determined based on "temporary differences" (differences between the accounting basis and the tax basis of the assets and liabilities), and are measured using the currently enacted, or substantively enacted, tax rates and laws expected to apply when these differences reverse. A valuation allowance is recorded against any future income tax asset if it is more likely than not that the asset will not be realized. Income tax expense or benefit is the sum of the Company's provision for current income taxes and the difference between the opening and ending balances of the future income tax assets and liabilities. Prior to adoption of this new accounting standard, income tax expense was determined using the deferral method. Under this method, deferred income tax expense was determined based on "timing differences" (difference between the accounting and tax treatment of items of expense or income), and were measured using the tax rates in effect in the year the differences originated. Certain deferred tax assets, such as the benefit of tax losses carried forward, were not recognized unless there was virtual certainty that they would be realized. The adoption of this standard has had no impact on the Company's financial position, results of operations or cash flows. F-45 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Interim Consolidated Balance Sheets (Expressed in Canadian dollars) August 31, 2000 and 1999 (Unaudited) ------------------------------------------------------------------------------ 3. SHARE CAPITAL: (a)On June 6, 2000, an additional 450,000 options at an exercise price of $0.75, with an expiry date of June 6, 2003 were reserved for a consultant. (b)On June 14, 2000, the Company completed a private placement of 4,033,333 special warrants at a subscription price of $0.60 each for gross cash proceeds of $2,420,000. Each special warrant is convertible into 1 common share or 1.1 common shares, if a receipt for the related prospectus is not received by October 15, 2000. Costs of arranging the private placement, including agent's commissions, is $217,300 plus 201,667 special warrants granted to the agent. The prospectus was filed on October 12, 2000 and on October 15, 2000, the special warrants were converted into 4,033,333 common shares. (c)On June 30, 2000, 850,418 of the 1,243,633 common share purchase warrants were exercised for $553,541. The remaining 393,215 warrants expired on the same day. (d)On May 31, 2000, Inzeco completed a private placement of 2,807,500 common shares with a subscription price of U.S. $0.40 per share for gross proceeds of U.S. $1,123,000 or Cdn. $1,680,570. The shares were fully paid, with the proceeds held in trust by the Company's escrow agent until June 6, 2000 when the Funds were wired to the Company. Costs of arranging the private placement were $23,466. If the Company does not have a Registration Statement filed and declared effective by the Securities and Exchange Commission in the United States by December 31, 2000, the Company will be required to issue 1 additional common share for each 10 shares issued under this private placement. The Registration Statement was not declared effective by December 31, 2000. Inzeco has not yet issued for nil consideration the 280,750 additional common shares required due to not having the Registration Statement filed and declared effective by December 31, 2000. When these shares are issued, they will be accounted for like a stock split, with an increase to the number of shares outstanding but no change to the value of share capital. On August 31, 2000, the Company had 28,823,553 common shares and 2,015,250 stock options outstanding. F-46 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Interim Consolidated Balance Sheets (Expressed in Canadian dollars) August 31, 2000 and 1999 (Unaudited) ------------------------------------------------------------------------------ 4. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES: These interim financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"), which differ in certain respects from those principles and practices that the Company would have followed had its financial statements been prepared in accordance with accounting principles and practices generally accepted in the United States ("U.S. GAAP"). Canadian GAAP differs from accounting U.S. GAAP as follows: (a) Earnings per share: Under Canadian GAAP, basic earnings per share are calculated including the escrow shares, and excluding special warrants until converted into shares while under U.S. GAAP (i) the 9,298,939 escrow shares outstanding at the end of the period requiring the Company to meet specified performance measures are considered contingently issued and accordingly are excluded from the basic earnings per share calculation and (ii) the common shares, into which the special warrants will be converted, are included in the basic earnings per share calculation since there is no additional consideration to be received on conversion. Since the Company is in a loss position, all potential common share issuances would result in an anti-dilutive per share amount. The reconciliation of the outstanding shares for purposes of the basic earnings per share calculation under Canadian and U.S. GAAP is as follows: ------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------ Weighted average number of outstanding shares for Canadian GAAP 28,540,080 22,237,912 Plus weighted average number of shares attributable to the 4,033,333 special warrants issued on June 14, 2000 3,463,406 - Less escrow shares to be released based on achieving specified performance measures (9,298,939) (9,298,939) ------------------------------------------------------------------------------ Weighted average number of outstanding shares for U.S. GAAP 22,704,547 12,938,973 ------------------------------------------------------------------------------ (b) Stock options: Beginning in 1996, U.S. GAAP accounting principles allow, but do not require companies to record compensation for employee stock option plans at fair value. The Company has chosen to continue to account for employee stock options using the intrinsic value method as permitted under Canadian and U.S. GAAP. Using this approach, the Company is still required under United States accounting principles to account for stock options issued to F-47 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Interim Consolidated Balance Sheets (Expressed in Canadian dollars) August 31, 2000 and 1999 (Unaudited) ------------------------------------------------------------------------------ consultants under the fair value method. F-48 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Interim Consolidated Balance Sheets (Expressed in Canadian dollars) August 31, 2000 and 1999 (Unaudited) ------------------------------------------------------------------------------ 4. Differences between Canadian and United States accounting principles (continued): Since none of the company's stock options has been issued by virtue of employment or directorship, all of the stock options have been accounted for under U.S. GAAP using the fair value method. The fair value of these options has been estimated at the date of grant using a black-scholes option pricing model with the following assumptions for 2000 (none granted in 1999): risk-free interest rate of 6.1%; dividend yield of 0%, volatility factor of the expected market price of the company's common stock of 200%; and a weighted average expected life of the options of three years. The estimated fair value of these options is expensed in the period granted since there is no vesting period. The weighted average grant date fair values of options issued in 2000 was $0.69. (c) Convertible debentures: Under Canadian GAAP, convertible debentures are split for accounting purposes between debt and shareholders' equity. Under U.S. GAAP, the convertible debenture is recorded as debt, except if the conversion price at date of issuance is less than the fair market value, in which case, the intrinsic value of the beneficial conversion feature is allocated to paid-in capital and the resulting discount is recognized as interest expense over the period through to the earliest conversion date. The convertible debenture issued on April 15, 2000 is considered to have a beneficial conversion feature under U.S. GAAP given that the conversion price of $0.40 per share was less than the recent placements of $0.60 per share. (d) Business combinations: Under Canadian GAAP, a reverse takeover transaction is accounted for as a business combination, with the amount of the purchase price in excess of the fair market value of the net assets acquired allocated to goodwill. Under U.S. GAAP, the merger of a private operating company into a non-operating public shell corporation with nominal net assets is considered to be a capital transaction, rather than a business combination, with no goodwill being recorded. F-49 INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY) Interim Consolidated Balance Sheets (Expressed in Canadian dollars) August 31, 2000 and 1999 (Unaudited) ------------------------------------------------------------------------------ 4. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED): (e) Comprehensive income: Under U.S. GAAP, comprehensive income or loss must be reported, which is defined as all changes in equity other than those resulting from investments by owners and distributions to owners. Under U.S. GAAP, the Company's comprehensive loss is the same as its reported loss for the period. F-50 The impact of the items noted above on the financial statements is as follows: ------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------ Loss for the period per Canadian GAAP $ (554,290) $ (322,321) Goodwill amortization 6,591 6,591 Compensation expense from stock options issued to non-employees (310,500) - ------------------------------------------------------------------------------ Loss for the period per U.S. GAAP $ (858,199) $ (315,730) ------------------------------------------------------------------------------ Basic loss per share per U.S. GAAP $ (0.04) $ (0.02) ------------------------------------------------------------------------------ Weighted average number of shares outstanding per U.S. GAAP 22,704,547 12,938,973 ------------------------------------------------------------------------------ Total convertible debentures per Canadian GAAP $ 356,321 $ 1,472,232 Reclass equity component of convertible debentures 10,722 105,000 ------------------------------------------------------------------------------ Total convertible debentures per U.S. GAAP $ 367,043 $ 1,577,232 ------------------------------------------------------------------------------ Other paid-in capital, end of period per Canadian GAAP $ - $ - Fair value of stock options issued to non-employees 748,695 392,245 Beneficial conversion feature of convertible debentures 180,000 - ------------------------------------------------------------------------------ Other paid-in capital, end of period per U.S. GAAP $ 928,695 $ 392,245 ------------------------------------------------------------------------------ Share capital, end of period per Canadian GAAP $ 8,370,046 $ 2,292,703 Elimination of goodwill (108,938) (108,938) ------------------------------------------------------------------------------ Share capital, end of period per U.S. GAAP $ 8,261,108 $ 2,183,765 ------------------------------------------------------------------------------ Deficit, beginning of period per U.S. GAAP $(4,902,708) $(3,397,715) Loss for the period per U.S. GAAP (858,199) (315,730) ------------------------------------------------------------------------------ Deficit, end of period per U.S. GAAP $(5,760,907) $(3,713,445) ------------------------------------------------------------------------------ F-51 [INZECO HOLDINGS INC. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH ANY DIFFERENT OR ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OR THE DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES. UNTIL FEBRUARY 19, 2001, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.