10KSB 1 may200110ksb.txt YEAR END FILING MAY 31, 2001 Page 1 DELSECUR CORP Filing Type: 10KSB Description: Annual Report Filing Date: Oct. 10, 2001 Period End: May 31, 2001 Primary Exchange: Over the Counter Bulletin Board Ticker: DLSC SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 31, 2001 OR [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to Commission File No. 33-55254-15 DELSECUR CORPORATION. (Exact name of Small business issuer as specified in its charter) NEVADA 87-0438451 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1801 McGill College, Suite 1330 Montreal, Quebec, Canada H3A 2N4 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (514) 282-9000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-KSB is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] As of September 5, 2001, the aggregate market value of the voting stock held by non-affiliates of the registrant was $12,775,112.40 based on 7,514,772 shares and a bid price of $1.70. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding as of May 31, 2001 $.001 PAR VALUE CLASS A COMMON STOCK 14,509,304 SHARES DOCUMENTS INCORPORATED BY REFERENCE Form 8-K filed March 10, 1998 Page 1 PART I ITEM 1. Business. Certain statements contained in this Annual Report on Form 10-K ("Report"), including, without limitation, statements containing the words "anticipates", "expects, "hopeful" and words of similar import, constitute "forward-looking statements. "Readers should not place undue reliance on these forward-looking statements. delSECUR's actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including risks faced by the Company described in this Report, including the "Risk Factors" section contained in this Item 1, and the other documents delSECUR files with the Securities and Exchange Commission ("SEC"), including its most recent reports on Form 8-K and Form 10-Q, and amendments thereto. The Company was incorporated under the laws of Utah on February 6, 1986 and subsequently reorganized under the laws of Nevada on December 30, 1993. The Company's reorganization plan was formulated for the purpose of changing the state of domicile and provided that the Company form a new corporation in Nevada which acquired all of the contractual obligations, shareholder rights and identity of the Utah corporation, and then the Utah corporation was dissolved. As of December 31, 1997 the Company was in the developmental stage, and its operations to date had been limited to the sale of shares to Capital General Corporation and the gifts of shares to the giftees. The Company was then in the process of investigating potential business ventures which, in the opinion of management, would provide a source of eventual profit to the Company. Pursuant to an Agreement made and entered into on February 25th 1998 the Company issued and delivered on February 26, 1998, 12,848,300 shares of its Common Stock bearing a restrictive legend to 3127575 Canada Inc. (now delSECUR Inc.), a Canadian Corporation, in exchange for which issuance, it acquired all of the outstanding shares of 3127575 Canada Inc. Through 3127575 Canada Inc., the Company has become the exclusive licensee of the del-ID technology for personal identification by means of electronic scanning of finger characteristics. 3127575 Canada Inc., obtained these exclusive rights by the Exclusive License Agreement dated November 12, 1997 between it and Pierre de Lanauze, inventor of the del-ID technology. The transaction was exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof. Also, because the 12,848,300 shares were issued solely to non-U.S. persons, the transaction qualified for exemption under Rules 901 et seq. of Regulation S. Following the above transaction the former shareholders of delSECUR Inc. owned 92.5% of the outstanding shares of the Company. The del-ID(Registered) technology permits precise and positive authentication of the identity of any living individual and is applicable to a wide range of financial transactions where authentication of the individual is necessary to eliminate fraud and other improper use of services. The del-ID(Registered) system collects biological data from the finger image of the individual and transfers the image to a unique electronic signature called the "del-gram". The del-gram is not a digitized bitmap image of the finger, but a synthesized subset of biological data sufficient to identify the individual. Commercial applications of the del-ID(Registered) technology are numerous and include access to the information highway/internet, identification of employees working from a home office and requiring access to certain databases or information, health cards, social insurance cards, drivers' licenses, passport control encryption and access to confidential files, control of payment by debit or credit payment systems such as credit cards, smartcards, authentication of oral telephone ordering, access control to sensitive areas, hotel room access, cellular and digital telephone controls, automobile entry and protection, census and election control, door locks, vault locks, residential alarm system controls, timesheet management, student file management and many others. Page 2 Patent protection was pending for the del-ID system in the United States. Since June 26, 2001, The United States Patent application has been allowed for issuance by the U.S. Department of Commerce Patent and Trademark Office. We improved the technology from a proof of concept to totally functional devices that we called "the first generation". Those del-ID(Registered) devices will be implemented for dedicated applications with leading corporations. The secondary done in parallel covers the implementation of a study in a controlled laboratory environment. During the last two years, an amount of $446,521 was spent for Research & Development, $184,569 for the year ending May 31, 2000 and $261,952 for the year ending May 31, 2001. Moreover, culminating several months of discussions with various agencies and senior levels of the United States Government, the Company is involved with National Security Agency who has signed a Confidential Agreement. The signing of the agreement will permit delSECUR inc. to disclose its core del-ID(Registered) technology to NSA for testing and evaluation as a national and international means of protection against computer hacking. They have to make recommendations to the US Federal Government. The signing of this Confidentiality Agreement confirmed the uniqueness and innovative aspects of the del-ID(Registered) technology, as mentioned on the Press Release issued on April 5th, 2000. The next step will be the implementation of the totally functional del-ID technology within their laboratory as agreed with their representatives. The Company expects to encounter substantial competition in the business in which it proposes to engage. It is likely that the competing entities will have significantly greater experience, resources, facilities, contacts and managerial expertise than the Company and will, consequently, be in a better position than the Company to obtain access to and to engage in the proposed business. The Company may not be in a position to compete with larger and more experienced entities. Business opportunities in which the Company may ultimately participate are likely to be very risky and extremely speculative. The Company will not manufacture del-ID (Registered) cards or card readers directly. This will tend to minimize the capital requirements of the Company, its principal activities being limited to marketing the del-ID system to manufacturers and/or users internationally. Anticipated sources of revenue are license fees payable by government agencies and corporate entities for the right to manufacture, use or sell cards and card readers incorporating the del-ID system, as well as royalty payments by such entities for each card and reader employed in a del-ID system. We anticipate the first commercial revenue following the issuance of first application results from our technology showcases. delSECUR Corporation announced July 1st 1999 the creation of a new wholly owned subsidiary, delSECUR USA Inc., incorporated in Delaware and with its principal offices located at 555, 11th Street NW, 6th Floor, Lincoln Square, Washington D.C. 20004. This subsidiary has been created specifically to manage all delSECUR operations in the United States. The decision to locate the offices in Washington D.C. was made following the recent expressions of interest in the del-ID (Registered) technology by several U.S. Government agencies. This subsi- diary has no employee and does not have any operations. The corporation Canadian subsidiary has currently 5 employees of its officers of the Company. The Agreement dated February 25, 1998 and the Exclusive License Agreement dated November 12, 1997 were attached as Exhibits A and B to the Company's electronic filing of Form 8-K on March 10, 1998. In December 2000, the Company adopted the delSECUR Corporation Stock Option Plan for the granting of stock options to directors, officers, employees and consultants of the Company. The Company has reserved 1,400,000 shares of common stock for issuance under the Plan, in order to enable certain key employees, officers, directors and consultants of the Corporation to participate in the Page 3 growth of the Corporation and thereby provide effective incentives for such individuals. The Plan shall be managed by the Board of Directors. In accordance with the terms of the Plan, the beneficiaries may be granted options to purchase ordinary shares at a price determined by the Board of Directors. The price may not be below the market price in accordance with the regulations established by the regulatory bodies having jurisdiction over the securities of the Corporation. The total amount of common shares of the Corporation that may be subscribed under the Plan is 1,400,000 shares. ITEM 2. Properties. Pursuant to an Agreement dated February 25, 1998 between the company and delSECUR Inc. the Company acquired, through its subsidiary, world license rights to the del-ID (Registered) technology described in Item 1 above. The del-ID (Registered) technology is owned by its inventor, the Company's controlling shareholder, Pierre de Lanauze. The Company, through delSECUR Inc., owns various computer and office equipment, furnishings etc., acquired at a cost not exceeding $500,000 USD. delSECUR Inc. leases office space in downtown Montreal; it has no manufacturing facilities and does not plan to manufacture its products directly. ITEM 3. Legal Proceedings. During the period prior to December 31, 1997 there have been numerous legal proceedings against the Company and its former Directors and Officers. These have been fully reported in previous reports filed with the Securities and Exchange Commission. None of such legal proceedings are currently pending. No legal proceedings have been incurred as a result of the Agreement dated February 25th,1998, as described in Item 1 above. There is two pending legal proceeding described as follows: 1. The claim pending before the Quebec Court of Appeal commenced on or about January 7, 1999, between three shareholders of delSYNCHRO Inc., appellants vs. Pierre de Lanauze, delSYNCHRO Inc., delSECUR Corporation, delSECUR Inc., & Al., respondents. The appellants claim that delSYNCHRO Inc. is the owner of the {{del-ID system}} developed by Mr. Pierre De Lanauze.; The appellants request the Court to declare delSYNCHRO owner of the invention known as "del- ID" and the related rights and consequently that: a) the license agreement related to the DEL-ID invention signed in November 1997 between DELSECUR Inc. and delSECUR Corporation be considered to be signed between delSYNCHRO Inc. and delSECUR Corporation; b) the exchange of shares on February 25, 1998 whereby delSECUR Corp-oration issued 9,854,609 of its shares to shareholders of DELSECUR Inc. in exchange for the acquisition by delSECUR Corporation of all the issued shares of DELSECUR Inc. should be amended so that the 9,854,609 shares of delSECUR Corporation will be issued to the shareholders of delSYNCHRO Inc. in exchange for the acquisition by delSECUR Corporation of all the issued shares of delSYNCHRO Inc. 2. Two former consultants, as Plaintiffs/Cross-Defendants, and delSECUR Inc. and delSECUR Corporation, as Defendants/Cross-Plaintiffs. Plaintiffs were hired to introduce the Defendants to major financial institutions and strategic partners. Plaintiffs cancelled their agreement arguing Defendants prevented them from fulfilling their duties. They claim damages for loss of commissions, value of shares, stock options and damage to reputation, totalling CDN$3,827,350. Defendants vigorously deny the claim, arguing Plaintiffs failed their obligations and are entitled to nothing. Defendants filed a cross-demand claiming from Plaintiffs CDN $ 329,903.99 in reimbursement of value paid and in damages. Page 4 ITEM 4. Submission of Matters to a Vote of Security Holders. No matter submitted to the Company's security holders for a vote during the fourth quarter of the fiscal year ending May 31, 2001. PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholders Matters. As of September 5, 2001, there were 646 record holders of the Company's common stock. The Company has not previously declared or paid any dividends on its common stock and does not anticipate declaring any dividends in the foreseeable future. The Company's common stock commenced trading on the NASD Bulletin Board on March 31, 1998 under the symbol GDER. The symbol was changed to DLSC following the name modification as of July 15th 1999. The aggregate market value of the stock held by been non-affiliates on that date was $25,057,619. The following table lists the high and low bid prices for the common stock of the Company during the last two most recent years. These quotations are inter-dealer prices without retail mark-up, mark-down and may not represent actual transactions: NASDAQ-OTC High Bid Low Bid Price Price 2001 First Quarter $ 12.8125 $ 5.00 Second Quarter 8.4375 2.8125 Third Quarter 3.60 1.5625 Fourth Quarter 3.26 1.19 2000 First Quarter $ 4.00 $ 1.9375 Second Quarter 6.00 1.875 Third Quarter 18.125 6.625 Fourth Quarter 13.6875 4.437550 The following table lists the recent sales of unregistered securities During the last fiscal year made by the registrant. In all cases the shares sold were of its common stock, par value $.01 per share. Number of Date of Sale Purchaser Shares Consideration 19-06-00 Sylvain Falardeau 3,380 Services Rendered 19-06-00 James B. Holderman 20,000 Services Rendered 19-06-00 BLC Valeurs Mobilieres 50,000 Services Rendered 14-07-00 Pierre de Lanauze 34,750 Compensation for advance 22-09-00 Michael Mills Productions 3,000 Services Rendered 17-11-00 Lorenzo D'Alesio 4,000 Services Rendered 17-11-00 Pierre de Lanauze 96,763 Compensation for advance 17-11-00 Anthony M. Cieri 5,000 Services Rendered All of the above transactions were made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. All of the individuals or entities who received shares for services rendered were either employees or consultants or had otherwise rendered services to the Company at the time the shares were received. In each instance the number of shares issued was a negotiated amount, based upon the value of the services as determined by the Company's Board of Directors. These shares have a minimum holding period of one year. Page 5 ITEM 6. Management's Discussion and Analysis of Financial Condition and Results of Operation. As a consequence of the Agreement entered into on February 25, 1998, the management and operations of the Company changed to give effect to the new business of the Company as described in Item 1. The financing of current operations will be provided in part by the Balance to be received of USD $264,553.95 of the Private placement in the initial amount of USD 750,000. We are also undertaking efforts to proceed with another private placement of USD $1,000,000. We are hopeful to close the transaction before mid-October 2001. If needed, the controlling shareholder, Mr. Pierre de Lanauze, will provide the appropriate funding to meet the company's operations. This funding arise from the sales of shares from his personal portfolio. Mr de Lanauze holds 6,975,797 ordinary shares carrying shares certificate number 2010. The total number of shares issued and outstanding of delSECUR CORPORATION is 14,754,026. Management is of the opinion that the Company's del-ID technology, while as yet untested in the marketplace, represents a viable business opportunity in a number of different fields of government and business activity. Given the well publicized worldwide requirement for ID authentication systems and the paucity of suitable alternatives available, it is the intention of management to proceed by way of co-ventures, joint ventures, sublicense agreements and similar arrangements with major entities, including governments at all levels, that can benefit from implementing the technology in their existing operations. The Company has no present intention to manufacture del-ID products; instead, products will be manufactured by licensed outside suppliers/users. The last twelve months have been dedicated to finalizing the technology del-ID(registered) advancing from a concept version all the way to pre-commer- cialization edition devices. We actually have a functional reader to create the abstract image from a living finger with the enrolment software and diagnostics both operational. We have also developed an application a smart card. We are now in the process to implement technologies showcases with banks, government and industries. We have already letter of intent to this effect. We have gained much intelligence and credibility when the patent has been allowed to Mr. De Lanauze on the del-ID(registered) technology by the U.S. Patent Office. delSECUR can confirm to hold the exclusive, world-wide license of a unique technology of which the intellectual property is official recognized. For a potential licensee this is a factor in their decision to commit to commercialisation and legally with delSECUR. There is a momentum to replace personal identification number (PIN) and passwords by a more secure technology. We are in relation with potential users and their interest in the del-ID(registered) technology make the management team confident to generate incomes in the actual fiscal year. The Company had a net loss of $2,896,904 for the year ended May 31, 2001 compared with a loss of $2,809,448 for the year ended May 31, 2000. The increased loss of about $87,456 was mainly due to an increase of $77,383 in research and development costs and operating fees. Page 6 ITEM 7. Financial Statements and Supplementary Data. See Item 13. DELSECUR CORPORATION. SUMMARY OF OPERATIONS MAY 31, 2001
2001 2000 1999 1998 1997 ------------- ------------- ------------- ------------- ----------- Total Assets.................$ 428,585 390,948 $ 777,419 $ 845,921 $ 580,249 Revenues..................... 0 0 0 0 0 Operating Expenses........... 2,896,904 2,809,448 1,274,955 1,021,133 822,219 Net Earnings (Loss) (2,896,904) (2,809,448) (1,274,955) (1,021,133) (822,219) Per share data Earnings (Loss)............ (0.20) (.20) (0.09) (0.24) (0.82) Average Common Share Outstanding................ 14,454,026 14,165,615 13,848,300 4,212,075 1,000,000
As of May 31, 2001 there were 14,509,304 shares outstanding. ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable. ITEM 9. Directors and Executive Officers of the Registrant. The following table shows the positions held by the Company's officers and directors during the year ended May 31, 2001. Directors are appointed annually and serve until the next annual meeting of the Company's stockholders, and until their successors have been elected and have qualified. Officers are appointed to their positions, and continue in such positions, at the discretion of the directors. On December 14,1998, following the resignation of Mr. J. Randall McCormick (May 4th 1998) and Mrs. Julie Gaucher (December 14th 1998) new Directors and Officers were appointed, who will serve until the next annual meeting of the Company's stockholders. These new Directors and Officers are as follows: Name Age Position Since Pierre de Lanauze 62 President, CEO, Director March, 1998 Marc Descheneaux 49 Executive Vice President, Director March, 1998 Suzanne de Lanauze 39 Secretary/Treasurer, Director March, 1998 PIERRE DE LANAUZE is a graduate of the Cinq Mars School in Montreal, Canada. He has been active in the audio-video business for the past 20 years. In this field he has been involved in projects for Expo' 67 in Montreal, Walt Disney Studios, the Canadian Broadcast Corporation and the Canadian Department of National Defense. In 1986 he founded DelSynchro, Inc. to market motion picture dubbing technologies he developed. Mr. de Lanauze has also developed three other technologies which pertain to the dubbing and subtitling of motion pictures, and video security. Mr. de Lanauze has been developing the del-ID technology since January 1995. His responsibilities at the Company are to further develop and implement the del-ID technology. MARC DESCHENEAUX, B.A.A., received his undergraduate Baccalaureat degree in business Administration in 1977. After obtaining a graduate degree in International Commerce from the Universite de Paris-Nord in 1979, Mr. Descheneaux was employed as an investment analyst with what is now the Canadian Development Bank. From 1979 to 1983 he was a Director of Industrial Credit with Mouvement Desjardins, a Canadian financial institution. Subsequently, Mr. Descheneaux has held management positions with two large Canadian wholesaling companies, Metro Richelieu and Groupe Ro-Na. In 1997, after two years as a Page 7 business consultant, Mr. Descheneaux joined the management team of Mr. Pierre de Lanauze at 3127575 Canada Inc. As Executive Vice President Mr. Descheneaux will oversee general management and adiministration, daily operations and marketing of the Company's technologies. SUZANNE DE LANAUZE, graduated from Campus Pont-Viau, Laval in 1979. From 1992 to 1995 she was a secretary and paralegal at Colby Monet Demers Delage and Crevier, a Montreal law firm. In 1995 Ms.de Lanauze became an administrative assistant to Pierre de Lanauze President of del Synchro Inc. In 1997 she became Director of Administration of 3127575 Canada Inc. Ms. De Lanauze's responsibi- lities at the Company consist of overall office management as well as legal secretarial functions. Ms. de Lanauze is the daughter of Pierre de Lanauze. ITEM 10. Executive Compensation.
SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Awards Payouts (a) (b) (c) (d) (e) (f) (g) (h) (i) Restricted Securities Name and Other Annual Stock underlying LTIP All Other Principal Salary Bonus Compensation Award(s) options/ SARs Payouts Compensation Position Year ($) ($) ($) ($) (#) ($) ($) ------------------------------------------------------------------------------------------------------------------------- Pierre de 31/05/01 141,500 Nil Nil Nil 500,000 Nil Nil Lanauze, 31/05/00 130,000 Nil Nil Nil Nil Nil Nil President & CEO 31/05/99 130,000 Nil Nil Nil Nil Nil Nil Marc Descheneaux 31/05/01 85,000 Nil Nil Nil 300,000 Nil Nil Execituve 31/05/00 91,465 Nil Nil Nil Nil Nil Nil Vice-President 31/05/99 81,950 Nil Nil Nil Nil Nil Nil Suzanne de 31/05/01 55,000 Nil Nil Nil 300,000 Nil Nil Lanauze, General 31/05/00 40,000 Nil Nil Nil Nil Nil Nil Manager 31/05/99 40,000 Nil Nil Nil Nil Nil Nil Jean-Francois 31/05/01 60,000 Nil Nil Nil 100,000 Nil Nil Gregoire, 31/05/00 60,000 Nil Nil Nil Nil Nil Nil Integration, 31/05/99 60,000 Nil Nil Nil Nil Nil Nil Vice-President
Page 8
Option/SAR Grants in Last Fiscal Year Individual Grants --------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) Number of Percent of total Securities options/SARs - Underlying Granted to Exercise - options/SARs Employees in or base Expiration - Name Granted (#) Fiscal Year price ($/Sh) Date ---- ----------- ----------- ------------ ---- Pierre de Lanauze 500,000 500,000 Nil March 2011 Marc Descheneaux 300,000 300,000 Nil March 2011 Suzie de Lanauze 300,000 300,000 Nil March 2011 Jean-Fracois Gregoire 100,000 100,000 Nil March 2011
ITEM 11. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth, as of September 5, 2001, information regarding the beneficial ownership of shares by each person known by the Company to own five percent or more of the outstanding shares, by each of the directors and by the officers and directors as a group.
Amount of Title Name and Address beneficial Percent of Class beneficial owner ownership of class ------------------ ---------------------- ---------------------- -------------- DIRECTORS AND OFFICERS Common Stock Mr. Pierre de Lanauze 6,975,797 48.00% 1231, Avenue Theroret Ile Bizard, Quebec,. Canada H9E 1H7 (Director and Officer) Common Stock Mr. Mark Descheneaux 10,000 0.0006% 1801 McGill College, Suite 1330 Montreal, Quebec, Canada H3A 2N4 (Director and Officer) Common Stock Ms. Suzanne de Lanauze 8,735 0.0006% 1801 McGill College, Suite 1330 Montreal, Quebec, Canada H3A 2N4 (Director and Officer) Total of all 5% or Greater Shareholders 7,514,772 51.80% Total of all officers / directors (3 persons) 6,994,532 48.20%
ITEM 12. Certain Relationships and Related Transactions. During the year ended May 31, 2001 no officer, director, nominee for election as a director, or associate of such officer, director or nominee is, or was, in debt to the Company. The Company is in debt with Pierre de Lanauze, President and CEO of the Company, regarding the balance due on the distribution rights for an amount of $1,545,700 and for the advance made to the Company for an amount of $235,000. PART IV ITEM 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. Financial Statements and Financial Statement Schedules. Financial Statements - May 31, 2001, 2000 and 1999. Reports on Form 8-K. There were no reports on Form 8-K filed during the fourth quarter of fiscal year ending May 31, 2001. Page 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DELSECUR CORPORATION. Date: October 10, 2001 By: /s/ Pierre de Lanauze Pierre de Lanauze, President, Chairman of the Board and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: October 10, 2001 By: /s/ Pierre de Lanauze Pierre de Lanauze, President, Chairman of the Board and Director Date: October 10, 2001 By: /s/ Suzanne de Lanauze Suzanne de Lanauze, Secretary/Treasurer and Director Date: October 10, 2001 By: /s/ Marc Descheneaux Marc Descheneaux Executive Vice President, Director Page 10 PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and other members of the worldwide PricewaterhouseCoopers organization. June 27, 2001 Independent Auditors' Report To the Stockholders of delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) We have audited the consolidated balance sheets of delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) as at May 31, 2000 and 2001 and the consolidated statements of loss, deficit and cash flows for each of the years in the three-year period ended May 31, 2001. 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 generally accepted auditing standards in the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at May 31, 2000 and 2001 and the results of its operations and its cash flows for each of the years in the three-year period ended May 31, 2001 in accordance with generally accepted accounting principles in the United States of America. /s/ PriceWaterhouseCoopers LLP Chartered Accountants delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Consolidated Balance Sheets As at May 31, 2000 and 2001 -------------------------------------------------------------------------------- (expressed in Canadian dollars)
2000 2001 $ $ Assets Current assets Cash 8,755 - Sales taxes receivable 27,139 44,806 Prepaid expenses 31,873 37,239 Advances to a common control company, without interest (note 3) 185,960 185,000 ----------------------------------------- 253,727 267,045 Fixed assets (note 4) 137,220 161,539 License (note 5) 1 1 ----------------------------------------- 390,948 428,585 ----------------------------------------- Liabilities Current liabilities Bank overdraft - 1,083 Trade accounts payable 114,234 218,029 Accrued liabilities 90,862 108,073 Advances from a common control company, without interest 185,157 184,907 Balance due on distribution right (note 5) 1,497,800 1,545,700 Advances from a director, without interest (note 6) 342,942 235,000 Demand loans, bearing interest at a monthly rate varying from 0.5% to 1% 195,000 190,000 Deposit on shares not yet issued - 375,000 ----------------------------------------- 2,425,995 2,857,792 ----------------------------------------- Deferred credit 5,366 3,832 ----------------------------------------- Commitments and contingencies (notes 13 and 14) Stockholders' Deficiency Common stock, US$0.001 par value Authorized 100,000,000 Shares Issued and outstanding (note 7) 14,509,304 Shares (2000 - 14,292,411) 20,371 20,698 Additional paid-up capital (note 9) 3,910,463 6,414,414 Deficit accumulated during the development stage (5,971,247) (8,868,151) ----------------------------------------- (2,040,413) (2,433,039) ----------------------------------------- 390,948 428,585 -----------------------------------------
delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Consolidated Statements of Loss -------------------------------------------------------------------------------- (expressed in Canadian dollars)
Years ended May 31, From date of inception to ----------------------------------------------------------- May 31, 1999 2000 2001 2001 $ $ $ $ Revenue Interest - - - 5,000 Management income - - - 3,000 ------------------------------------------------------------------------------- - - - 8,000 ------------------------------------------------------------------------------- Expenses Depreciation 60,671 52,274 46,951 249,843 Interest expense 22,150 27,700 23,300 98,326 Research and development (net of tax credits of nil for 2001; 2000 - $28,588; 1999 - nil) 242,130 184,569 261,952 923,977 Loss on settlement of shares - 95,090 331,396 426,486 General and administrative expenses 950,004 2,449,815 2,233,305 7,134,253 ------------------------------------------------------------------------------- 1,274,955 2,809,448 2,896,904 8,832,885 ------------------------------------------------------------------------------- Net loss (1,274,955) (2,809,448) (2,896,904) (8,824,885) ------------------------------------------------------------------------------- Net loss per weighted average share (basic and diluted) (note 10) (0.09) (0.20) (0.20) -----------------------------------------------------------
delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Consolidated Statements of Deficit -------------------------------------------------------------------------------- (expressed in Canadian dollars)
Years ended May 31, From date of inception to ----------------------------------------------------------- May 31, 1999 2000 2001 2001 $ $ $ $ Deficit accumulated during the development stage - Beginning of year (1,886,844) (3,161,799) (5,971,247) - Net loss (1,274,955) (2,809,448) (2,896,904) (8,824,885) Amount from additional paid-up capital (note 9) - - - (43,266) ------------------------------------------------------------------------------- Deficit accumulated during the development stage - End of year (3,161,799) (5,971,247) (8,868,151) (8,868,151) -------------------------------------------------------------------------------
delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Consolidated Statements of Cash Flows -------------------------------------------------------------------------------- (expressed in Canadian dollars)
Years ended May 31, From date of inception to ----------------------------------------------------------- May 31, 1999 2000 2001 2001 $ $ $ $ Cash flows provided by (used in) Operating activities Net loss (1,274,955) (2,809,448) (2,896,904) (8,824,885) Adjustments to reconcile loss to net cash provided by operating activities Depreciation of property and equipment 60,671 52,274 46,951 249,842 Provision on common control company advances - 15,000 5,000 310,402 Loss on foreign exchange fluctuation 60,700 23,800 47,900 132,400 Amortization of deferred credit (766) (1,534) (1,534) (3,834) Free rent 7,666 - - 7,666 Services rendered paid for with common shares - 1,565,341 2,403,951 3,969,292 Changes in Sales taxes receivable 97,145 8,369 (17,667) (44,806) Prepaid expenses (24,038) (1,015) (5,366) (37,239) Advances to a common control company (33,087) (30,224) (4,040) (495,402) Director loan 29,687 700,362 (107,942) 235,000 Trade accounts payable 217,311 (197,695) 103,795 218,029 Accrued liabilities (63,273) 55,935 17,211 108,073 Advances from a common control company 43,670 (4,720) (250) 184,907 ------------------------------------------------------------------------------- (879,269) (623,555) (408,895) (3,990,555) ------------------------------------------------------------------------------- Financing activities Loan 188,500 - - 601,850 Repayment of loan (205,636) (52,987) (5,000) (411,850) Loan from a director - - - 2,085,250 Increase in bank overdraft - - 1,083 1,083 Contribution from a director 958,281 691,613 100,000 1,749,894 Share issues - 282 327 709 Deposit on shares - - 375,000 375,000 ------------------------------------------------------------------------------- 941,145 638,908 471,410 4,401,936 ------------------------------------------------------------------------------- Investing activities Additions to fixed assets (50,600) (21,071) (71,270) (411,381) ------------------------------------------------------------------------------- Increase (decrease) in cash during the year 11,276 (5,718) (8,755) - Cash - Beginning of year 3,197 14,473 8,755 - ------------------------------------------------------------------------------- Cash - End of year 14,473 8,755 - - ------------------------------------------------------------------------------- Non-cash financing and investing activities Repayment of a loan to a shareholder (note 9) - - - (2,085,250) ------------------------------------------------------------------------------- Acquisition of license (note 5) - - - (1,413,299) ------------------------------------------------------------------------------- Supplemental cash flow information Cash paid for interest 22,150 27,700 23,300 98,326
delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Notes to Consolidated Financial Statements May 31, 2000 and 2001 -------------------------------------------------------------------------------- (expressed in Canadian dollars) 1 Incorporation and nature of operations delSECUR Corporation, a development stage enterprise, was incorporated under the laws of the State of Utah on February 6, 1986 and subsequently incorporated under the laws of the State of Nevada on December 31, 1993 under the name of Grandeur Inc. Effective May 28, 1999, the company legally changed its name to delSECUR Corporation. Through its subsidiary, DELSECUR Inc., the company is at the commercialization stage of the "DEL ID" project. Pursuant to an agreement made and entered into on February 25, 1998, delSECUR Corporation (the "company") issued and delivered on February 26, 1998 12,848,300 shares of its common stock in exchange for which issuance it acquired all of the outstanding shares of DELSECUR Inc. For accounting purposes, the transaction is treated as an issuance of shares by DELSECUR Inc. for the net monetary assets of the company (at February 26, 1998 - nil), accompanied by a recapitalization. The historical financial statements prior to February 28, 1998 are those of DELSECUR Inc. 2 Significant accounting policies These consolidated financial statements are expressed in Canadian dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America. Consolidation These consolidated financial statements include the accounts of the company and its subsidiary. Accounting methods The company recognizes revenue and expenses based on the accrual method of accounting. Dividend policy The company has not yet adopted any policy regarding payment of dividends. Cash and cash equivalents For financial statement purposes, the company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Earnings (loss) per share Earnings or loss per common share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during each year. (1) delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Notes to Consolidated Financial Statements May 31, 2000 and 2001 -------------------------------------------------------------------------------- (expressed in Canadian dollars) Fixed assets and depreciation Fixed assets are recorded at cost. Depreciation is calculated using the declining balance method at a rate of 30% for computer equipment and 20% for office equipment. The carrying value of the property and equipment is evaluated whenever significant events or changes occur that might indicate an impairment through comparison of the carrying value to the net recoverable amount. Research and development costs Research costs, which include all costs incurred to establish technological feasibility, and development costs are charged to operations in the year in which they are incurred. License The license is recorded at its carrying value. Income taxes The company uses the assets and liabilities approach for financial accounting and reporting of income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period in which the change occurs. Tax credits The company is entitled to scientific research and experimental development tax credits granted by the Canadian federal government and the government of the Province of Quebec. Tax credits are accounted for as a reduction of the related expenditures in the year in which they are incurred subject to a valuation allowance for non-refundable tax credits when it is more likely than not that the tax credits will not be realized. Stock-based compensation costs The company accounts for employee stock-based compensation costs using the intrinsic value method as set out in APB 25, "Accounting for Stock Issued to Employees", and related interpretations. Options granted to parties other than employees providing services to the company are accounted for using the fair value method based either on the fair value of services provided or on the fair value of the options granted. In accordance with SFAS 123, "Accounting for Stock-based Compensation", the company provides pro forma disclosures of net earnings (loss) and net earnings (loss) per common share as if the fair value based method of accounting had been used. (2) delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Notes to Consolidated Financial Statements May 31, 2000 and 2001 -------------------------------------------------------------------------------- (expressed in Canadian dollars) Use of estimates These financial statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on informed estimates and judgements of management with consideration given to materiality. Actual results could differ from those estimates. Fair value of financial instruments Due to their short-term maturity, the carrying values of certain financial instruments were assumed to approximate their fair values. The financial instruments include: sales taxes receivable and advances to a common control company included in current assets, trade accounts payable, accrued liabilities, advances from a common control company, balance due on distribution right and demand loans included in current liabilities. The fair value of these financial instruments is not significantly different from their carrying amounts. Credit risk The company's exposure to credit risk is as indicated by the carrying amounts of the financial assets. The company may be exposed to losses in the future if the debtors fail to pay. Significant portions of the amounts receivable are from related parties. Translation of foreign currencies Monetary assets and liabilities are translated at the year-end exchange rate. Any gain or loss due to exchange fluctuation is charged to the statement of loss. Recent accounting pronouncements In 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", and SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" has been issued. delSECUR Corporation must adopt the statements on June 1, 2001. The statements outline accounting and reporting standards for derivative instruments and hedging activities. Under the standard, all derivatives will be recognized at fair value and will be accounted for depending on the intended use of each derivative and its designation as a hedge. The adoption of the statement will have no impact on the balance sheet and the statement of loss. (3) delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Notes to Consolidated Financial Statements May 31, 2000 and 2001 -------------------------------------------------------------------------------- (expressed in Canadian dollars) After the year ended May 31, 2001, the Financial Accounting Standards Board approved for issuance SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. As a result, the pooling-of-interests method will be prohibited. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement, which for delSECUR will be June 1, 2002. However, for any acquisitions completed after June 30, 2001, goodwill and intangible assets with an indefinite life will not be amortized. It is expected that SFAS 141 and SFAS 142 will not have an impact on the company's business, results of operations and financial condition. 3 Advances to a common control company
2000 2001 $ $ Balance - Beginning of year 461,138 491,362 Payments net of charges 30,224 4,040 ----------------------------------------- 491,362 495,402 Provision on common control company advances (305,402) (310,402) ----------------------------------------- Balance - End of year 185,960 185,000 -----------------------------------------
(4) delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Notes to Consolidated Financial Statements May 31, 2000 and 2001 -------------------------------------------------------------------------------- (expressed in Canadian dollars) 4 Fixed assets
2000 ---------------------------------------------------------------- Accumulated Cost depreciation Net $ $ $ Computer equipment 314,164 194,994 119,170 Office equipment 25,949 7,899 18,050 ---------------------------------------------------------------- 340,113 202,893 137,220 ---------------------------------------------------------------- 2001 ---------------------------------------------------------------- Accumulated Cost depreciation Net $ $ $ Computer equipment 385,433 238,334 147,099 Office equipment 25,949 11,509 14,440 ---------------------------------------------------------------- 411,382 249,843 161,539 ----------------------------------------------------------------
5 License On November 12, 1997, the principal stockholder of the company and owner of an invention consisting of an apparatus and method, including related software, for scanning and storing an optical representation of a finger's capillary lines entered into an agreement with the company whereby he granted the company the exclusive right to commercialize the invention which shall include, among other things, manufacturing and marketing the invention under the terms and conditions contained therein for the consideration of US$1,000,000 (CA$1,545,700 as at May 31, 2001). In addition to these considerations, the company agrees to pay the owner a royalty equal to 2% of all revenues derived by the company, directly or indirectly, from the invention, provided the royalty shall be renegotiated to a lesser amount if the U.S. patent is not issued. This transaction was measured at its carrying value of $1. The excess of the consideration payable over the carrying value at the date of the transaction was recorded against additional paid-up capital and deficit. On June 26, 2001, the company received a notice of allowance for the application of the U.S. patent. (5) delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Notes to Consolidated Financial Statements May 31, 2000 and 2001 -------------------------------------------------------------------------------- (expressed in Canadian dollars) 6 Advances from a director As indicated in note 1 to these financial statements, the company is a development stage enterprise and has yet to earn revenue. The current funding of the operation is provided by the principal stockholder of the company. The balance due at May 31, 2000 has been settled through the issuance of 34,750 shares as at July 14, 2000 and 96,763 shares as at November 8, 2000. These shares have a minimum holding period of one year. 7 Common stock
1999 2000 2001 From date of inception to May 31, 2001 ----------------------- ---------------------------------------------- ----------------------- Number Amount Number Amount Number Amount Number Amount $ $ $ $ Balance - Beginning of 3,848,300 19,715 3,848,300 19,715 14,292,411 20,371 - - ---------------------------------------------------------------------------------------------- Issuances of common stock February 6, 1986 - - - - - - 1,000,000 1,424 February 26, 1998 (note 1) - - - - - - 12,484,300 18,291 Stocks issued in exchange for cash (*) October 5, 1999 ($3.67 per share - $293,960) - - 80,000 119 - - 80,000 119 October 25, 1999 ($3.32 per share - $368,935) - - 111,111 163 - - 111,111 163 ---------------------------------------------------------------------------------------------- - - 191,111 282 - - 14,039,411 19,997 ---------------------------------------------------------------------------------------------- Promotional services June 8, 1999 ($4.79 per share - $479,150) - - 100,000 147 - - 100,000 147 October 5, 1999 ($5.40 per share - $129,766) - - 24,000 35 - - 24,000 35 October 25, 1999 ($4.15 per share - $136,990) - - 33,000 49 - - 33,000 49 December 1, 1999 ($9.94 per share - $348,064) - - 35,000 52 - - 35,000 52 April 5, 2000 ($16.70 per share - $233,843) - - 14,000 21 - - 14,000 21 June 19, 2000 ($16.64 per share - $332,741) - - - - 20,000 30 20,000 30 June 19, 2000 ($16.64 per share - $831,852) - - - - 50,000 74 50,000 74 November 13, 2000 ($5.11 per share - $20,434) - - - - 4,000 6 4,000 6 ---------------------------------------------------------------------------------------------- - - 206,000 304 74,000 110 280,000 414 ----------------------------------------------------------------------------------------------
(6) delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Notes to Consolidated Financial Statements May 31, 2000 and 2001 -------------------------------------------------------------------------------- (expressed in Canadian dollars)
1999 2000 2001 From date of inception to May 31, 2001 ----------------------- ---------------------------------------------- ----------------------- Number Amount Number Amount Number Amount Number Amount $ $ $ $ Salaries June 8, 1999 ($5.51 per share - $55,100) - - 10,000 15 - - 10,000 15 ---------------------------------------------------------------------------------------------- Loss on settlement of shares June 8, 1999 ($3.52 per share - $95,090) - - 27,000 40 - - 27,000 40 June 19, 2000 ($16.64 per share - $56,233) - - - - 3,380 5 3,380 5 July 14, 2000 ($17.72 per share - $615,709) - - - - 34,750 51 34,750 51 November 8, 2000 ($5.11 per share - $494,317) - - - - 96,763 149 96,763 149 ---------------------------------------------------------------------------------------------- - - 27,000 40 134,893 205 161,893 245 ---------------------------------------------------------------------------------------------- Other services June 8, 1999 ($4.79 per share - $49,715) - - 10,000 15 - - 10,000 15 September 13, 2000 ($9.15 per share - $27,448) - - - - 3,000 5 3,000 5 November 13, 2000 ($5.11 per share - $25,543) - - - - 5,000 7 5,000 7 ---------------------------------------------------------------------------------------------- - - 10,000 15 8,000 12 18,000 27 ---------------------------------------------------------------------------------------------- 13,848,300 19,715 14,292,411 20,371 14,509,304 20,698 14,509,304 20,698 ----------------------------------------------------------------------------------------------
(*) All shares issued, either for cash or other consideration, have been accounted for at the par value of US$0.001. Any other amounts have been accounted for as additional paid-up capital. The amounts assigned to non-cash consideration have been determined at the quoted market value at date of issuance. 8 Stock option plan In December 2000, the company adopted the delSECUR Corporation 2000 Stock Plan (the "Plan"). The Plan provides for the granting of stock options to directors, officers, employees and consultants of the company. The company has reserved 1,400,000 shares of common stock for issuance under the Plan. The exercise price under the Plan shall be determined by the Board on the date an option is granted provided, however, that such price may not be less than the market price of the shares on the grant date. Options granted under the Plan do not have a defined vesting period; however, the Board may subject the exercise of the options to certain conditions. (7) delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Notes to Consolidated Financial Statements May 31, 2000 and 2001 -------------------------------------------------------------------------------- (expressed in Canadian dollars) During the year, 1,200,000 options were granted at a price equal to the market value on the day immediately preceding the date the options were granted. The fair value of options granted during the year was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5.35%, no dividends, expected lives of three years and volatility of 125%. A summary of the status of the Plan as of May 31, 2001 and the changes during the year ended May 31, 2001 is presented below: Outstanding - Beginning of year - Granted 1,200,000 Exercised - Cancelled - ------------------ Outstanding - End of year 1,200,000 ------------------ Options exercisable - End of year 1,200,000 ------------------ The options have an average remaining life of 9 years, 7 months and the exercise price of each option is US$2.00. The weighted average fair value of an option granted during the year is US$1.49. 9 Additional paid-up capital
From date of inception to May 31, 1999 2000 2001 2001 $ $ $ $ Balance - Beginning of year 695,602 1,653,883 3,910,463 - Issuance of capital at inception - - - (1,324) Add: Increase of contributed surplus from issuance of shares - 1,564,967 2,403,951 3,968,918 Add: Loans forgiven - - - 2,085,250 Add: Contribution from a director 958,281 691,613 100,000 1,749,894 Deduct: License (note 5) - - - (1,413,299) ------------------------------------------------------------------------------- 1,653,883 3,910,463 6,414,414 6,389,439 Amount transferred to deficit - - - 43,266 Recapitalization on February 26, 1998 (note 1) - - - (18,291) ------------------------------------------------------------------------------- Balance - End of year 1,653,883 3,910,463 6,414,414 6,414,414 -------------------------------------------------------------------------------
(8) delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Notes to Consolidated Financial Statements May 31, 2000 and 2001 -------------------------------------------------------------------------------- (expressed in Canadian dollars) 10 Loss per common share Basic loss per common share was calculated by dividing the net loss by the weighted average number of common shares outstanding during the year. As a result of the net losses for the year ended May 31, 2001, the effect of converting options was antidilutive. The following table details the weighted average number of common shares outstanding:
1999 2000 2001 Weighted average number of common shares outstanding - basic 13,848,300 14,165,615 14,454,026 Weighted average effect of dilutive securities Employee stock options - - 76,271 ---------------------------------------------------------------- Weighted average number of common shares outstanding - diluted 13,848,300 14,165,615 14,530,297 ----------------------------------------------------------------
11 Income taxes The company's net deferred tax asset is comprised of the following:
2000 2001 $ $ Net operating loss carryforwards 1,621,400 1,997,100 Research and development tax credits 76,200 250,100 Difference between carrying value versus tax basis for: Fixed assets (26,200) (67,100) Advances to a common control company 77,900 78,200 License 350,900 326,300 Research and development expenses 135,100 283,100 Foreign currency translation - 50,600 ----------------------------------------- 2,235,300 2,918,300 Less: Valuation allowance 2,235,300 2,918,300 ----------------------------------------- - - -----------------------------------------
(9) delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Notes to Consolidated Financial Statements May 31, 2000 and 2001 -------------------------------------------------------------------------------- (expressed in Canadian dollars) The provision for income taxes varies from the expected provision at the statutory rate for the following reasons:
1999 2000 2001 % % % Combined basic federal and provincial statutory tax rate (45) (45) (45) Deduction for active business income earned in Quebec 7 7 7 Valuation allowance 36 37 37 Permanent differences including amortization of goodwill and non-deductible items 2 1 1 ---------------------------------------------------------------- Provision for income taxes per the financial statements - - - ----------------------------------------------------------------
Due to the uncertainty regarding the realization of the favourable tax attributes in future tax returns, the company has recognized a valuation allowance against its deferred tax assets. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced. As of May 31, 2001, the company has net operating loss carryforwards available to reduce its future taxable income of approximately $5,257,800 and $5,471,800 for federal and provincial income tax purposes respectively. These losses will expire between 2003 and 2007 if not utilized beforehand. 12 Related party transactions During the three-year period, the company made the following transactions with two companies owned by the principal stockholder:
1999 2000 2001 $ $ $ Expenses 77,850 - - Acquisition of fixed assets 40,855 - -
The expenses occurred in the normal course of the company's activities and were measured at the exchange value. The fixed assets were acquired from companies under common control at a cost equal to the net book value of the vendor. (10) delSECUR Corporation and Subsidiary (note 1) (development stage enterprises) Notes to Consolidated Financial Statements May 31, 2000 and 2001 -------------------------------------------------------------------------------- (expressed in Canadian dollars) 13 Contingencies a) An application was filed by three minority shareholders of Delsynchro Inc., a common control company, which requested the Court to declare Delsynchro owner of the invention known as "DEL ID" and the related rights and consequently that: i) the license agreement related to the DEL ID invention signed in November 1997 between DELSECUR Inc. and delSECUR Corporation be considered to be signed between Delsynchro Inc. and delSECUR Corporation; ii) the exchange of shares on February 25, 1998 whereby delSECUR Corporation issued 9,854,609 of its shares to shareholders of DELSECUR Inc. in exchange for the acquisition by delSECUR Corporation of all the issued shares of DELSECUR Inc. should be amended so that the 9,854,609 shares of delSECUR Corporation will be issued to the shareholders of Delsynchro Inc., a common control company, in exchange for the acquisition by delSECUR Corporation of all the issued shares of Delsynchro Inc. During the year, the company received a judgement in its favour. The case is still pending as the plaintiffs intend to appeal. Management believes that the resolution of the litigation in which Delsynchro Inc. is involved would not have a material adverse effect on the financial condition or results of operations of the company. b) An application was filed by two former consultants to the company requesting an important sum of money for damages resulting from an alleged breach of contract. The company has responded with an application against the same two former consultants for breach of contract and libel. Management believes that the resolution of the litigation will not have an adverse effect on the financial condition or results of operations of the company. 14 Contractual obligations The company has signed a rental contract whereby it must pay a base rent as well as additional fees. The contract expires in November 2003. The rent expense is $19,917 (2000 - $19,907; 1999 - $44,360). The base rent for the next three years is as follows: $ 2002 21,444 2003 21,444 2004 10,722 (11)