SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR QUARTER ENDED JUNE 30, 1999 COMMISSION FILE NO. 33-28562
TOUCAN GOLD CORPORATION
(Exact name of registrant as specified in charter)
DELAWARE 75-2661571
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
8201 PRESTON ROAD, SUITE 600
DALLAS, TEXAS 75225
- --------------------------------------------------------------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (214) 890-8065
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
As of August 18, 1999, there were 13,765,808 shares of the common stock, $.01
par value, of the registrant issued and outstanding.
Transitional Small Business Disclosure Format (check one)
YES NO X
--- ---
1
TOUCAN GOLD CORPORATION
June 30, 1999
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
------
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998...........F-1
Consolidated Statements of Operations for the three months ended June 30, 1999 and
1998 (unaudited)..............................................................................F-2
Consolidated Statements of Operations for the six months ended June 30, 1999 and
1998..........................................................................................F-3
Consolidated Statement of Stockholders' Equity for the six months ended June 30, 1999
and the year ended December 31, 1998 (unaudited)..............................................F-4
Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998
(unaudited)...................................................................................F-5
Notes to Consolidated Financial Statements (unaudited)........................................F-6
Item 2. Management's Discussion and Analysis of Financial Condition and
------ Results of Operations.........................................................................1
PART II. OTHER INFORMATION...............................................................................3
Item 1. Legal Proceedings...............................................................................3
------
Item 2. Changes in Securities and Use of Proceeds.......................................................3
------
Item 3. Defaults Upon Senior Securities.................................................................4
------
Item 4. Submission of Matters to a Vote of Security Holders.............................................4
------
Item 5. Other Information...............................................................................4
------
Item 6. Exhibits and Reports on Form 8-K...............................................................15
------
SIGNATURES
2
TOUCAN GOLD CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
Cash $ 711 $ 83,973
Receivables and other assets 1,024,200 47,844
------------ -----------
Total current assets 1,024,911 131,817
Noncurrent receivable 718,900 -
Investment in subsidiary 1,707,398 -
Mineral rights - 2,559,869
------------ -----------
$ 3,451,209 $ 2,691,686
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Amounts payable to related parties $ 70,000 $ -
Accrued expenses and other liabilities 149,207 100,436
------------ -----------
Total current liabilities 219,207 100,436
Stockholders' equity
Preferred stock, par value $.01 per share; authorized,
2,000,000 shares; issued and outstanding, none - -
Common stock, $.01 par value per share; authorized
30,000,000 shares; issued and outstanding,
9,085,433 shares in 1999 and 8,237,933
shares in 1998 90,854 82,379
Additional paid-in capital 4,687,251 4,526,226
Accumulated deficit (1,546,103) (2,017,355)
------------ -----------
Total stockholders' equity 3,232,002 2,591,250
------------ -----------
$ 3,451,209 $ 2,691,686
=========== ===========
The accompanying notes are an integral part of these statements.
F-1
TOUCAN GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30,
(unaudited)
1999 1998
------------ ----------
Cost and expenses
Consulting fees $ 136,487 $ 41,690
Legal and professional fees 89,562 43,768
Claims abandoned - 30,500
Travel costs 7,500 821
Public relations 2,028 16,918
Other 13,399 16,735
---------- ----------
Total cost and expenses 248,976 150,432
Other income (expense)
Interest income - 39
Gain on sale of subsidiary 799,944 -
Interest expense - (5,833)
---------- ----------
Total other income (expense) 799,944 (5,794)
---------- ----------
Net earnings (loss) $ 550,968 $ (156,226)
========== ==========
Earnings (loss) per share - basic and diluted $.06 $(.02)
=== ====
Weighted average shares outstanding 8,828,702 8,039,933
========== ==========
The accompanying notes are an integral part of these statements.
F-2
TOUCAN GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended June 30,
(unaudited)
1999 1998
----------- ----------
Cost and expenses
Consulting fees $ 170,581 $ 97,545
Legal and professional fees 128,568 76,129
Claims abandoned - 30,500
Travel costs 15,031 8,025
Public relations 2,388 38,833
Other 12,124 38,852
----------- ----------
Total cost and expenses 328,692 289,319
Other income (expense)
Interest income - 1,893
Gain on sale of subsidiary 799,944 -
Interest expense - (5,833)
----------- ----------
Total other income (expense) 799,944 (3,940)
----------- ----------
Net earnings (loss) $ 471,252 $ (293,259)
=========== ==========
Earnings (loss) per share - basic and diluted $.06 $(.04)
=== ====
Weighted average shares outstanding 8,533,318 8,039,933
=========== ==========
The accompanying notes are an integral part of these statements.
F-3
TOUCAN GOLD CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 1999
(unaudited) and the year ended
December 31, 1998
Common Stock Additional
--------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ---------- ----------- -------
Balance at January 1, 1998 8,039,933 $ 80,399 $4,488,606 $(1,159,053) $3,409,952
Issuance of common stock 198,000 1,980 37,620 - 39,600
Net loss - - (858,302) (858,302)
--------- --------- ---------- ------------ ----------
Balance at December 31, 1998 8,237,933 82,379 4,526,226 (2,017,355) 2,591,250
Issuance of common stock 847,500 8,475 161,025 - 169,500
Net earnings - - - 471,252 471,252
--------- -------- ---------- ------------ ----------
Balance at June 30, 1999 (unaudited) 9,085,433 $ 90,854 $4,687,251 $(1,546,103) $3,232,002
========= ======== ========== =========== ==========
The accompanying notes are an integral part of these statements.
F-4
TOUCAN GOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
(unaudited)
1999 1998
---------- -----------
Operating activities
Net earnings (loss) $ 471,252 $ (293,259)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities
Gain on sale of subsidiary (799,944) -
Issuance of common stock in payment of expenses 169,500 -
Net changes in operating assets and liabilities
Receivables and other assets 12,725 4,484
Accrued expenses and other liabilities 71,315 295,047
--------- ----------
Net cash provided by (used in) operating activities (75,152) 6,272
Investing activities
Acquisition of mineral rights (78,110) (485,730)
Financing activities
Net borrowings from related parties 70,000 -
--------- ----------
Net decrease in cash (83,262) (479,458)
Cash at beginning of period 83,973 504,795
--------- ----------
Cash at end of period $ 711 $ 25,337
========= ==========
The accompanying notes are an integral part of this statement.
F-5
TOUCAN GOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements of Toucan Gold Corporation and
subsidiaries (the Company) contained herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, all adjustments necessary for a
fair presentation of the consolidated financial position as of June 30,
1999, and the consolidated results of operations for the three months and
six month periods ended June 30, 1999 and 1998, and the consolidated cash
flows for the six months ended June 30, 1999 have been made. In addition,
all such adjustments made, in the opinion of management, are of a normal
recurring nature. The results of operations for the periods presented are
not necessarily indicative of the results to be expected for the full fiscal
year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the interim reporting
rules of the Securities and Exchange Commission. The interim consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and related notes for the year ended
December 31, 1998, included in the Company's 1998 Annual Report on Form
10-KSB.
NOTE B - SALE OF MINERAL RIGHTS
On June 30, 1999, Minmet PLC (Minmet), an Irish publicly-traded company,
exercised its options to purchase (1) all of the outstanding capital stock
of Mineradora de Bauxita Ltda. (MBL), a Brazilian company and a wholly-owned
subsidiary, and (2) debt in the amount of $1,000,000 plus interest owed by
MBL to the Company. The aggregate exercise price of the options was
$3,400,000 consisting of 25 million Minmet ordinary shares, $250,000 in
cash, and warrants to purchase 7.7 million shares of Minmet at (pound).08
per share. The closing market price of Minmet shares at June 30, 1999 was
(pound).0825 per share ($.13 at the then exchange rate). For accounting
purposes, the Company has valued the Minmet shares at (pound).07 ($.1106)
per share, which is a discount from market because of restrictions agreed to
by the Company on their sale. The warrants were valued at $385,000. A gain
on the sale of $799,944 was recognized.
At June 30, 1999, the amounts due to Toucan Gold Corporation from Minmet
are reflected on the balance sheet as a receivable. A portion of the
consideration due from Minmet is owed to Toucan Mining Ltd. (TML),a
wholly-owned subsidiary which is no longer consolidated. See Note C. In
July 1999, Minmet paid to Toucan Gold Corporation and TML the entire amount
of consideration due.
F-6
TOUCAN GOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999
(unaudited)
NOTE C - SPIN-OFF OF SUBSIDIARY
On July 16, 1999, the Board of Directors approved the spin-off of all of the
outstanding common shares of TML to the shareholders of Toucan Gold
Corporation. Record date for the spin-off is August 3, 1999; provided,
however, that the record date will be effective only if the spin-off is
effected within 60 days of the record date. Accordingly, in the balance
sheet at June 30, 1999, TML has been deconsolidated and is carried on the
equity method of accounting. At June 30, 1999, the assets of TML consisted
of cash of $498, a receivable from Minmet of $1,656,900 and mineral rights
in the amount of $50,000. The receivable represents the portion of the sale
proceeds due to TML (Note B) and consists of the warrants to purchase 7.7
million Minmet shares, valued at $385,000, and 11.5 million Minmet shares
valued at $1,271,900.
NOTE D - PURCHASE OF ITIS TECHNOLOGIES LIMITED (ITIS)
On July 22, 1999, Toucan Gold Corporation acquired all of the outstanding
capital stock of ITIS, a U.K. company. Consideration given was 4,680,375
common shares, which resulted in the ITIS shareholders owning 34% of the
common stock of Toucan Gold Corporation. ITIS is a software development
company offering business to business software to facilitate secure internet
transactions.
As a result of the sale of MBL and the spin-off of TML, Toucan Gold will
have no operations, and its assets consist of only cash and receivables. The
acquisition or ITIS, therefore, will be accounted for as a recapitalization
of ITIS. Accordingly, financial statements of the Registrant covering
periods subsequent to the ITIS acquisition will be those of ITIS, the
operating company.
F-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Generally
Toucan Gold Corporation (the "Company" or "Toucan") was organized in
the State of Delaware on July 22, 1996. The Certificate of Incorporation of
Toucan authorizes a class of 30,000,000 shares of common stock, par value $.01
per share (the "Company Common Stock"), and 2,000,000 shares of preferred stock,
par value $.01 per share. The Company was formed for the purposes of
reincorporating Starlight Acquisitions, Inc., a Colorado corporation
("Starlight"), in the State of Delaware (the "Reincorporation"). Starlight was
incorporated on January 20, 1989. The Reincorporation was effected by merging
(the "Merger") Starlight into the Company, which, prior to the Reincorporation,
was a wholly owned subsidiary of Starlight, pursuant to an Agreement and Plan of
Merger (the "Merger Agreement"). Upon completion of the Merger, Starlight ceased
to exist, and Toucan continued to operate the business of Starlight under the
name Toucan Gold Corporation. The Reincorporation became effective on July 29,
1996. As a result of the Reincorporation, each then outstanding share of
Starlight common stock, no par value (the "Starlight Common Stock"), was
converted into one share of Company Common Stock.
Effective May 10, 1996, Toucan Mining Limited, an exploration stage
company incorporated on November 3, 1995 under the laws of the Isle of Man
(British Isles) ("Toucan Mining"), became a wholly owned subsidiary of Starlight
when Starlight acquired all of the outstanding capital stock of Toucan Mining in
exchange for 4,534,999 shares of Starlight Common Stock (the "Share Exchange),
pursuant to a Share Exchange Agreement (the "Share Exchange Agreement"). As a
result of the Share Exchange, a change in control of Starlight occurred, whereby
Toucan Mining is deemed to have acquired Starlight.
Toucan Mining has been a development stage company, conducting its
operations primarily through its wholly-owned subsidiary, Mineradora de Bauxita
Ltda. ("MBL"), which is an authorized mining company organized under the laws of
Brazil. From its inception until November of 1998, MBL was financed entirely by
the Company. The Company sought to capitalize MBL for the purpose of conducting
mineral exploration, specifically gold exploration. However, pursuant to the
Minmet Transactions (as defined below), the Company has disposed of its mining
operations.
The Minmet Transactions
On July 15, 1999, Company completed the sale of all of the share
capital of Mineradora de Bauxita Ltda. ("MBL"), the Brazilian subsidiary of TML
through which the Company's Brazilian exploration activities had been conducted.
As reported in a Current Report on Form 8-K, filed with the Securities and
Exchange Commission on January 5, 1999 (the "January 8-K"), the Company and TML
on December 4, 1998 consummated certain transactions, involving, among other
things, the grant of an option (the "MBL Option") to Minmet PLC ("Minmet"), an
Irish company, whose shares are quoted on the Exploration Securities Market of
the Irish Stock Exchange, to purchase all of the issued share capital of MBL.
TML, the Company's wholly-owned subsidiary that was the beneficial
owner of the issued share capital of MBL at such time, granted the MBL Option to
Minmet to acquire all of the issued share capital of MBL. TML received 7.5
million ordinary shares (the "Option Shares") in Minmet solely for TML granting
the MBL Option. Most of the Option Shares were transferred to creditors of the
Company and TML in payment of certain obligations.
On June 30, 1999, Minmet exercised the MBL Option. The exercise of the
MBL Option was consummated on July 15, 1999 and in connection therewith Minmet
has acquired all of the issued share capital of MBL by issuing an additional 25
million ordinary shares (the "Completion Shares") in Minmet to TML.
Additionally, as reported in the January 8-K, the sale and distribution
of the Completion Shares are restricted without Minmet's consent as follows: TML
or the Company may sell up to 3 million of the Completion Shares in each of the
three six (6) month periods after the issuance thereof. Any Completion Shares
not disposed of in a six (6) month period may be added to the number of
Completion Shares that may be sold in later periods.
1
Minmet has agreed that the Completion Shares may be placed through
Minmet's brokers with Minmet's consent and that it will act reasonably in
respect of all such requests by the Company or TML in connection with the sale
of the Completion Shares.
Finally, on December 4, 1998, the Company granted an option (the "Loan
Option") to Minmet to acquire from the Company the benefit of the loans that it
has made to MBL in the principal amount of $1 million. The Company received the
sum of U.S. $275,000 solely for the Company granting the Loan Option. On June
30, 1999, Minmet exercised the Loan Option. The exercise of the Loan Option was
consummated on July 15, 1999 and in connection therewith Minmet paid the Company
$250,000 and issued to the Company warrants (the "Warrants") to subscribe for a
further 7.7 million Ordinary Shares (the "Warrant Shares") of Minmet at an
exercise price of (sterling) 0.08 pence per share.
Following the consummation of the MBL Option and the Loan Option, TML
retained the claim in the Cuiaba Basin of Brazil that has been delivered to TML
pursuant to the Agreement of Settlement and Release with Joseph J. Haraoui (as
described in Item 5(a) hereof) and its rights pursuant to such agreement to
acquire the other six (6) claims in the Cuiaba Basin of Brazil.
While the agreements related to the Minmet transactions may permit the
Company to distribute the Option Shares, the Completion Shares, the Warrants,
and the Warrant Shares (collectively, the "Minmet Securities") to stockholders
of the Company, subject to certain limitations, the Board of Directors of the
Company, in approving the various agreements with Minmet, has determined for
securities law reasons that no Minmet Securities will be distributed to
stockholders of the Company as a dividend or in any similar distribution.
Accordingly, the Board of Directors of the Company has no present intention of
distributing any of the Minmet Securities to stockholders of the Company as a
dividend or in any similar distribution, and no such distribution can be made to
stockholders of the Company unless with the unanimous consent of the Board based
on an opinion of counsel that such distribution will not require registration
under the Securities Act of 1933, as amended (the "Securities Act"), of the
issuance of the Minmet Securities to Toucan Mining or the Company or such
distribution. Consequently, depending on the amount and nature of other assets
owned by the Company at relevant times, the Company may need to acquire
non-securities assets or sell or otherwise dispose of the Minmet Securities in
order to avoid being deemed to be an investment company under the Investment
Company Act of 1940, as amended.
The consolidated financial statements for the three and six month
periods ended June 30, 1999, reflect the results of Toucan's operations, which
consisted primarily of the Minmet Transactions and the maintenance of Toucan
Mining and MBL's various claims and purchase of new claims which were
capitalized in the financial statements. Legal, accounting, investor relations,
consulting, travel, subsistence expenses and other general administrative costs
were expensed.
Proposed Spin-Off of Toucan Mining Limited
- ------------------------------------------
As discussed in Item 5(c) hereof, the Company's Board of Directors has
approved the Spin-Off of all of the outstanding shares of Toucan Mining to
stockholders of record on August 3, 1999, subject to the satisfaction of certain
conditions. As discussed in Note C to the financial statements, the assets of
Toucan Mining consist principally of certain of the proceeds of the Minmet
transaction that were allocated to Toucan Mining.
Acquisition of ITIS Technologies Limited
- ----------------------------------------
As discussed in Item 5(d) hereof, on July 22, 1999, the Company
acquired all of the issued and outstanding capital stock of ITIS Technologies
Limited, a company organized under the laws of the United Kingdom ("ITIS"), in
exchange for 4,680,375 shares of the Company's common stock. The share exchange
resulted in the ITIS shareholders owning 34% of the issued and outstanding
shares of Common Stock of the Company. ITIS is a software development company
offering business to business software to facilitate secure transactions.
As a result of the sell of MBL and the Spin-Off of Toucan Mining, the
Company will have no operations, and its assets consist of only cash and
receivables. The acquisition of ITIS, therefore, will be accounted for as a
recapitalization of ITIS. Accordingly, financial statements of the Company
included in future filings will be those of ITIS, the operating company.
2
Certain of the information contained in this Quarterly Report on Form
10-QSB constitutes forward looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended, that involves certain risks, uncertainties and additional costs
described in this Quarterly Report on Form 10-QSB. The actual results that are
achieved may differ materially from any forward looking projections, due to such
risks, uncertainties and additional costs. Although the Company believes that
the expectations reflected in such forward looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
achieved. Subsequent written and oral forward looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by reference to such risks, uncertainties and additional costs.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) None
(b) None
(c) During the period covered by this Report and subsequent thereto,
the Company issued, or approved the issuance, of the following securities that
were not registered under the Securities Act of 1933, as amended (the
"Securities Act").
(i) On April 27, 1999, the Board of Directors, in recognition
of such person's contributions to the Company, agreed to amend each of such
person's stock option agreements or warrant agreements, respectively, to extend
the exercise dates of such agreements to January 1, 2001.
Number of Shares Subject
Name to Options or Warrants
- ---- ------------------------
Robert P. Jeffcock 200,000
Robert A. Pearce 50,000
Roy G. Williams (including affiliated entities) 400,000
L. Clark Arnold 50,000
Igor Mousasticoshvily 133,333
David Carmichael 50,000
Such options and warrants were granted pursuant to the exemption set forth under
Section 4(2) of the Securities Act.
(ii) On April 27, 1999 the Board of Directors approved the
issuance of shares of common stock, par value $.10 per share (the "Common
Stock"), to the following persons in lieu of paying such persons salary or fees
owed to such persons. Such shares of Common Stock were valued for such purpose
at $.20 per share, the price of shares of Common Stock on the Nasdaq OTC
Bulletin Board as of April 27, 1999:
Name Number of Shares
- ---- ----------------
Robert P. Jeffcock 250,000
Robert A. Pearce 187,500
Don Box 20,000
Igor Mousasticoshvily 50,000
Roy G. Williams 300,000
3
Such shares were issued pursuant to Section 4(2) of the Securities Act. The
issuance to Roy G. Williams is also discussed under Item 5 hereof.
(iii) On June 9, 1999 the Company entered into an Agreement of
Settlement and Release (the "Settlement Agreement") with Joseph J. Haraoui and
related parties ("Haraoui") to resolve certain disputes relating to the
agreement (the "Claim Agreement") reached in 1996 with Haraoui with respect to
the acquisition of up to twenty-five (25) specified claims (the "Claims") in the
Cuiaba Basin of Brazil. Pursuant to the terms of the Settlement Agreement, the
Company issued to Haraoui an aggregate of 250,000 shares (the "Settlement
Shares") of Common Stock. The Settlement Shares were issued pursuant to Section
4(2) of the Securities Act. The Settlement Agreement acknowledged that Haraoui
was entitled to receive 210,000 shares (the "Initial Shares") of the Settlement
Shares pursuant to the Claims Agreement with respect to claims that had been
delivered to Toucan Mining Limited, the Company's subsidiary, from time to time
since 1996 and, that the holding period for purposes of Rule 144 the promulgated
pursuant to the Securities Act with respect to the Initial Shares had been
satisfied. See also Item 5 hereof.
(iv) On July 22, 1999, the Company acquired ITIS Technologies
Limited ("ITIS") in exchange for the Company's agreement to issue an aggregate
of 4,680,375 shares (the "Consideration Shares") of Common Stock to the
shareholders (the "ITIS Shareholders") of ITIS. See also Item 5 hereof. The
Consideration Shares were issued pursuant to Section 4(2) of the Securities Act.
(d) None
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
(a) HARAOUI CLAIMS SETTLEMENT. In September 1996, the Company entered
into an agreement (the "Claims Agreement") to acquire from Joseph J. Haraoui
twenty-five (25) priority claims (the "Claims") in the Cuiaba Basin of Brazil.
Subsequently, there was a dispute between the Company and Mr. Haraoui relating
to the Claims and the amount and nature of the consideration that was to be paid
by the Company to Mr. Haraoui in connection with the delivery of the Claims. On
June 9, 1999, the Company (and related parties) seeking to resolve this dispute
entered into an Agreement of Settlement and Release (the "Agreement") with Mr.
Haraoui and related parties (collectively "Haraoui") to settle all disputes
between the Company and Haraoui relating to the Claims.
Pursuant to the terms of the Agreement, Haraoui released the Company
and certain related parties, including the officers and directors of the Company
and MBL, from all claims or liabilities relating to the Claims. The Company
delivered to Haraoui an aggregate of 250,000 shares of the Company's common
stock, par value $0.01 per share (the "Common Stock"). In addition, Toucan
Mining Limited, a subsidiary of the Company ("TML") paid to Haraoui a cash
payment of U.S. $50,000.
Pursuant to the terms of the Agreement, Haraoui delivered to TML the
seventh (7th) claim on Exhibit A to the Agreement and agreed to use his best
efforts to deliver to TML (or its assignee) all of the first six (6) claims
described on Exhibit A to the Agreement, certified by the Departamento Nacional
De Produca Mineral ("DNPM"), with priority, having good, clean and transferrable
title and published by the Brazilian authorities in the Government Gazette (each
a "Certified Claim" and collectively the "Certified Claims"). Further, it was
agreed that prior to June 30, 2002 (the "Termination Date"), Haraoui would not
pledge, sell, give an option to purchase, contract to sell or otherwise assign
any of the above-referenced claims to any person or entity other than TML (or
its assignees).
TML agreed to pay to Haraoui or Haraoui's nominee an additional cash
payment of U.S.$20,000 for each
4
Certified Claim that is delivered to TML. If a claim referenced on Exhibit A to
the Agreement was not delivered to TML as a Certified Claim on or before the
Termination Date, TML would have no obligation whatsoever to make any payment to
Haraoui with respect to such claim.
(b) SALE OF MINMET SHARES. In July 1999, the Company sold 2 million
Minmet shares at prices between 8 pence and 8.5 pence (Sterling) per share
resulting in net cash proceeds to the Company of approximately $270,000.
On August 13, 1999, the Company sold an additional 8.5 million Minmet
shares and TML sold 1.5 million Minmet shares at the placing price of 8 pence
(Sterling) per share. These transactions resulted in net cash proceeds of
approximately $1.1 million to the Company and approximately $190,000 to TML, not
including placement commissions.
(c) THE SPIN-OFF. On July 16, 1999, the Board of Directors of the
Company approved the Spin-Off of all of the outstanding shares (the "TML
Shares") of TML to the stockholders of the Company. The TML Shares will be
distributed on a share for share basis to holders of the Company's common stock
(the "Common Stock") as of the record date. The record date for determining the
holders of Common Stock entitled to the distribution of the TML Shares has been
set for August 3, 1999. Pursuant to Delaware corporate law, if the distribution
of the TML Shares is not consummated within 60 days of such date a new record
date will be selected. The date of the distribution of the TML Shares has not
been determined because the consummation of the distribution of the TML Shares
is dependent upon the satisfaction of the following conditions: (i) the
conversion of TML into a public limited company under Isle of Man law and the
change of its name from Toucan Mining Limited to Toucan Mining Plc; (ii) the
registration of the TML Shares under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); and (ii) the furnishing of an Information
Statement to the stockholders as of the record date describing TML and the
distribution of the TML Shares that substantially complies with Regulation 14C
under the Exchange Act. The ITIS Shareholders have agreed in the Share Sale
Agreement that they are not entitled to participate in the Spin-Off.
In connection with the proposed Spin-Off, the proceeds of the Minmet
Transactions were allocated between the Company and TML as of June 30, 1999 as
follows:
Allocated to
Form of Proceeds Total Company TML
---------------- ----- ------------ ---
Cash $ 250,000 $ 250,000
Minmet Plc Shares 2,765,000 1,493,100 $1,271,900
Minmet Plc Warrants 385,000 - 325,000
----------- ----------- ----------
$ 3,400,000 $ 1,743,100 $1,656,900
For purposes hereof, shares of Minmet are valued at 7 pence (Sterling)
per share based on the trading price of shares of Minmet on the Irish Stock
Exchange at 8.25 pence (Sterling) per share as of June 30, 1999 and taking into
account the restrictions on transfer of the Minmet shares applicable to the
Company and TML.
(d) ACQUISITION OF ITIS TECHNOLOGIES LIMITED. On July 22, 1999, the
Company consummated the acquisition of all of the issued and outstanding capital
stock of ITIS Technologies Limited, a company organized under the laws of the
United Kingdom ("ITIS"), in exchange (the "Share Exchange") for 4,680,375 shares
(the "Consideration Shares") of the Company's Common Stock, pursuant to a Share
Sale Agreement re ITIS Technologies Limited (the "Share Sale Agreement"), dated
July 22, 1999, by and among David J. Blanchfield, James L. Jackson, David R.
Wray, Barry Jones, Ian McNeill (the "ITIS Shareholders") and the Company. The
Company was obligated to issue the Completion Shares within 20 days of July 22,
1999, the closing date of the Share Exchange (the "Closing Date"). The
Completion Shares were issued on August 6, 1999, and the ITIS Shareholders own
34% of the issued and outstanding shares of Common Stock, not including
outstanding warrants and options to purchase Common Stock.
Pursuant to the Share Sale Agreement, the Company represented that on
the Closing Date the Company's balance sheet would reflect net current assets
valued at a minimum of approximately US$1,620,000, including certain ordinary
shares (the "Minmet Shares") of Minmet, but excluding the value of TML. The
value of the Minmet Shares owned by the Company was determined by averaging the
closing price of the ordinary shares of Minmet on the London Stock Exchange for
the ten day trading period immediately preceding the second trading day prior to
the
5
closing date of the Share Exchange as disclosed in the Financial Times, not
taking into account any restrictions on the sale of the Minmet Shares applicable
to the Company. The Company believes it is in compliance with this
representation. Each ITIS Shareholder warranted pursuant to the Share Sale
Agreement that he will not dispose of any of the Completion Shares for one year
from the Closing Date and will dispose of no more than one-third of his
Completion Shares per year in the first through fourth years after the Closing
Date.
Each ITIS Shareholder further agreed (i) that for 36 months after the
Closing Date, he will not directly or indirectly solicit, interfere with or
attempt to entice away any person who is, or has been during the past 12 months,
a licensor, client, customer or employee of ITIS; and (ii) for a period of 36
months after the Closing Date, not to directly or indirectly act as a manager,
agent or employee or otherwise associate himself with any entity in the business
of computer software development, marketing and sale of software products
substantially similar to the software products of ITIS.
Pursuant to the Share Sale Agreement, Robert P. Jeffcock and Ian
McNeill have been elected to the Board of Directors of ITIS. Although such
action is not required by the Share Sale Agreement, the Company has appointed
James L. Jackson and David R. Wray to its Board of Directors.
Robert Jeffcock entered into a consulting and employment agreement with
the Company, dated July 22, 1999, and agreed to serve as Chairman and Chief
Executive Officer of the Company and consultant to the Company for an initial
term of six months, terminable thereafter upon prior written notice of one
month. After the initial term, it is contemplated that Mr. Jeffcock would remain
Chairman of the Board of Directors, but be replaced as Chief Executive Officer.
Mr. Jeffcock will receive approximately US$4,860 per month during the term of
the agreement.
David Blanchfield, James L. Jackson and David R. Wray each entered into
employment agreements with ITIS, dated July 22, 1999, and were appointed
Managing Director, Technical Director and Research Development Director of ITIS,
respectively. Each agreement has an initial term of three years, terminable by
the Company prior to three years for cause only. Compensation for each officer
will consist of approximately US$56,700 per year during the term of their
agreements, payable monthly in arrears, until such time as certain funds are
raised by the Company (the "Financing"), at which time each officer's
compensation will increase to approximately US$121,500 per year, payable monthly
in arrears, plus a bonus package which may enable each officer to earn
approximately an additional US$40,500 in the first year of the employment
agreement. These agreements contain confidentiality and non-competition
provisions.
Commercial Technology Limited entered into a consulting agreement with
ITIS, dated July 22, 1999, agreeing to provide Ian McNeill's services as interim
financial director to ITIS. The initial term of the agreement is six months,
terminable thereafter upon prior written notice of one month. Commercial
Technology Limited's compensation consists of a retainer of approximately $4,680
per month during the term of the agreement. CMM Ventures Limited also entered
into a consulting agreement with ITIS, dated July 22, 1999, agreeing to provide
Barry Jones's services as Marketing Director Designate to ITIS. The initial term
of the agreement is six months, terminable thereafter upon prior written notice
of one month. CMM Ventures Limited's compensation consists of a retainer of
approximately $4,680 per month during the term of the agreement. Once the
Financing is achieved, it is contemplated that Barry Jones will join ITIS as an
employee in the position of Marketing Director for an initial term of one year,
terminable thereafter upon prior written notice of six months. As Marketing
Director, Mr. Jones would be entitled to compensation of approximately
US$121,500 per year, payable monthly in arrears. ITIS consented under the
agreement to Barry Jones's continued work for CCAT Limited and participation on
the Board of Directors of PAS Limited.
PROPOSED NAME CHANGE. The Board of Directors has approved a change in
the name of the Company to "Authoriszor Inc." subject to the approval of such
action by the stockholders of the Company.
ITIS
GENERAL. ITIS is a software development company incorporated under the
laws of the United Kingdom. The principal executive office of ITIS is located at
2 Parklands, Studley Roger, Ripon, North Yorkshire HG4 3AY, United Kingdom. ITIS
develops software solutions that are compliant with existing protocols and
standards on the Internet
6
and intranets and enable secure, reliable and manageable business-to-business
communications.
DESCRIPTION OF BUSINESS
ITIS develops, markets and supports an Internet, extranet and intranet
security solution known as Authoriszor that has been designed to manage
identity, access, security, usage and appropriate functionality characteristics
of Wide Area Networks ("WANs") accessed through World Wide Web ("WWW" or "web")
technology. Authoriszor also has been designed to enable the integration of back
office applications into secure networks through an Application Programmer
Interface ("API"). Management believes Authoriszor has the capability to
integrate with firewalls and other security techniques, or to operate alone to
deliver security solutions for clients intending to make data and applications
available over the Internet, corporate intranets or across extranets.
Authoriszor has been designed to integrate tightly with Microsoft Windows 98 and
Microsoft Windows 2000 operating systems as well as Microsoft applications.
Microsoft recently granted the product portfolio its "Designed for Back Office"
logo and ITIS is a member of Hewlett Packard's NetConnect program.
ITIS is a development stage company based in the United Kingdom which
has yet to sell any products and currently has no revenues. ITIS has one
customer and one trial installation at Calderdale & Kirklees Health Authority
within the UK National Health Service.
INDUSTRY BACKGROUND
The Increase in Connectivity
The ability to access and distribute information is a major strategic
issue for companies in the battle to win new customers, drive revenues per
customer, improve customer service, control costs and reduce time to market for
new products. This new business imperative has resulted in a dramatic increase
in connectivity.
Initially, the need for increased connectivity resulted in the growth
of Local Area Networks ("LANs") and WANS within both large and small
organizations. These networks delivered the ability to access and share
information through client/server technology among work-groups and across entire
enterprises. The possibilities of connectivity have grown through the widespread
adoption of the Internet and the WWW for business-to- business communication.
Early use in the form of e-mail has grown into other areas driven by the desire
to improve efficiencies in business-to-business transactions.
The emergence of Internet technology and the World Wide Web have
resulted in a dramatic simplification of operation and improved accessibility of
computer networks. Company-wide networks began to move towards these
technologies and WANs became "Intranets" using the public network
infrastructure. Organizations were now able to share internal information across
work-groups and across continents. The same technology could be used to share
information in a similar way across company boundaries with suppliers, supply
chain partners and customers. Corporate intranets could be connected to create
extranets. Technology developed rapidly to enable database access, application
sharing, cross-company transaction processing and a host of associated
applications. As a consequence, the rate of change in connectivity has continued
to accelerate.
The Need for Application and Data Security
The advance in connectivity is, however, constrained by some serious
concerns and limitations. Management believes that the most serious of these
concerns for its potential customers is security and that historical approaches
to security, while adequate for protection of mainframe computers and internal
WANs, are no longer sufficient to adequately secure information on global
networks using public infrastructure.
The techniques currently most commonly used to provide security are
firewalls, user name/password, digital certificates and smart cards. Each of
these has a useful role to play. However, management believes that on their own
these techniques are, in practice, not sufficient to answer the security
concerns expressed by users. ITIS believes that user names and passwords are
fairly easily discoverable and hackers have, and publicize, techniques for
copying and
7
stealing digital certificates. Firewalls have an important role to play in
protecting systems from common forms of attack such as denial of service, but
are only partial solutions to the security problem in that they cannot
accurately identify the parties in a request for computer resources.
Administration in the New Network Environment
The application explosion
Medium and large companies usually have multiple applications, often
developed in "islands of computing," using different languages, development
environments, design standards and databases. This problem is growing
exponentially as the problems of multiple applications in companies' intranets
are replaced by the problems of delivery of even more applications across
several companies in extranets.
Scalability
The extended network of users, including employees, supply chain
partners and technology partners can grow to high numbers. Management believes
that currently available tools for management of extranets and public network
infrastructure simply cannot cope with these problems of scale.
Network access
The condition of development in "islands of computing" means that it is
often necessary to have several different log-on techniques and identities for
different applications and sites visited. Management believes that in service
centers handling sites with access to multiple applications, lost passwords
account for a significant percentage of all help desk calls in extranet
environments. This may cause poor performance whether the network users are
employees or customers.
Security
Management believes that the most significant of these problems is the
user perception of poor security. While business line managers are increasingly
recognizing the benefits of using web technology to conduct more of their
business activities over internal networks and the Internet, the implementation
of secure web applications that allow classes of users to link to different
applications has been relatively slow. ITIS believes that the absence of strong,
flexible security software that can easily manage access rights has been a
significant obstacle to further development in this area and that organizations
will become increasingly concerned about protecting the integrity and security
of these networks, reducing the incidence of network disruptions, and reducing
the expense of network administration.
Management believes that these are the problems that ITIS's core
product offering, Authoriszor, addresses.
AUTHORISZOR - THE ITIS SOLUTION
ITIS has developed what management believes to be a new and
fundamentally different approach to WWW network management and security.
Authoriszor is designed to enable secure access and transmission of applications
and data between authorized groups and individuals across the Internet, within
the corporate intranet and across extranets using standard browsers and WWW
communication protocols. Management believes that the combination of the six
core technologies in the Authoriszor portfolio enables enforcement of
integrated, centrally managed policies that will achieve secure, reliable and
efficient communications. Additionally, the Authoriszor API (defined below) has
been designed to enable clients easily to integrate other applications into the
secure network environment. In particular, management believes that the tight
integration with Microsoft technology allows for simple integration with any
Windows 95/98 or Microsoft Windows NT applications. The following are the six
key technologies that management believes differentiate Authoriszor from other
network access, management and security technologies.
8
Extensible Positive Client Identification ("ePCI")
ePCI has been developed by ITIS specifically to overcome the issues
associated with identifying parties in a remote exchange of information. It is
provided as an integral part of Authoriszor, and management believes it provides
features and functionality normally associated only with highly specified LAN
management systems. All clients on the network are silently identified. This
means that it is not necessary to have any sign-on procedure after the initial
installation of the Authoriszor client software.
Continuous Client Authentication Technique ("CCAT")
All users of the system are managed and monitored throughout the
duration of their session on the Authoriszor server to ensure that the identity
of the client that started the transaction continues to be that client and that
the information accessed by them is appropriate to their pre-defined status.
Pseudo URLs ("PURLs")
PURLs is the core differentiating technology of Authoriszor. Access to
web pages is gained through Uniform Resource Locators ("URLs"). URLs are
addresses for real web content including actual pages in static HTML and scripts
for dynamic web pages. Through the URL a mildly determined hacker can gain
access to page sources and scripts.
A PURL is constructed according to the information content and the
profile of the authorized client. No actual page or script exists in a public
location for the hacker to hack.
Virtual Page Publication System ("VPPS")
Authoriszor controls access to web page files and content through VPPS.
On any request for information by a client, Authoriszor uses VPPS to store
information where it is inaccessible from the web and may even be on one or more
separate computers not connected to the Internet.
Positive Information Profiling System ("PIPS")
PIPS enables the selection of appropriate information for each client
transaction. It holds profiles for all content and clients so that published
page content can be matched to requests for information. It is the combination
of PURLs, VPPS and PIPS that enables ITIS to mass customize information for
individual clients.
Active Security Responder ("ASR")
The web server will not fulfill any request without ASR permission. ASR
has been designed to ensure that Authoriszor is able to safely deliver all the
page services of a web server environment while delivering the highest level of
access control, security and integrated WWW network management in the industry.
INTEGRATION FEATURES
Application Programmers Interface ("API")
The Authoriszor API allows the integration of legacy applications and
data into an Authoriszor network environment. All page, client and evaluation
data is available to ASP, Java, J2 or COM applications, allowing for safe
delivery of content to and from back office systems.
Consequently, it is possible to link in-house systems directly to the
Internet using the full security and management attributes of Authoriszor. The
Authoriszor API and PIPS have been designed to ensure that customer information
can be safely on-line at all times.
9
Microsoft Integration
Microsoft has approved Authoriszor as an official Microsoft Back Office
Logo product. Authoriszor has been designed to integrate with current and future
Microsoft software, allowing Microsoft users to custom build applications and
deploy them effectively throughout the enterprise. Integration with the
Microsoft Windows NT operating system would mean that users can maintain the
"look and feel" of that system, but also use Authoriszor's strong authentication
technology to build on Microsoft Windows NT security. This would require no
additional logon or password verification. Management projects that users with
Microsoft Windows experience will be able to confidently navigate the
Authoriszor Management Console immediately.
Integration with other Security Technologies
Firewalls, Public Key Infrastructure ("PKI") and Certification
Authorities each have a role to play in securing networks. Authoriszor has been
designed to integrate with these technologies to deliver end-to-end security. In
particular, ITIS will seek alliances with firewall vendors to deliver complete
packaged security solutions.
CUSTOMER SERVICE & SUPPORT
ITIS is a start-up company. At this time its technical staff consists
of two employees. One of the main priorities following the recent acquisition by
the Company is to invest in a customer support capability in both the United
States and Europe. This process will be implemented in line with the setting up
of pilot schemes and early adopter sales.
PRODUCT DEVELOPMENT PLAN
ITIS believes that its future success will depend, in part, upon its
ability to enhance its existing product portfolio and introduce new products
that address the sophisticated needs of end-users.
CUSTOMER TARGET SEGMENTS
ITIS initially will strive to win the business of high profile "early
adopters" of Authoriszor with specific and above average requirements for
security, privacy and confidentiality. These entities will be organizations with
wide access at multiple levels, multiple groups cutting across levels, and
network access across company boundaries (intranets and extranets). This market
will predominantly consist of Fortune 500 companies.
Secondarily, ITIS's strategy will address vertical segments requiring
higher than usual security, privacy and confidentiality. This target group is
likely to include banks, security companies, law firms, healthcare
organizations, research organizations and educational institutions as well as
military and investigative organizations, including police authorities.
COMPETITION
Products competitive with Authoriszor already exist in the network
management and security market and management anticipates that the level of
competitive activity will increase quickly. The principal competitors of ITIS's
Authoriszor product portfolio at this time are getAccess from enCommerce Inc,
Site Minder From Netegrity Inc and ClearTrust from Securant Technologies Inc.
ITIS expects additional competition from other emerging and established
companies. There can be no assurance that ITIS's current and potential
competitors, including Microsoft and Hewlett Packard, will not develop security
products that may be more effective than ITIS's current or future products or
that ITIS's technologies and products will not be rendered obsolete by such
developments. Further, the network management and security market have
historically been characterized by low financial barriers to entry.
Virtually all of ITIS's current and potential competitors have longer
operating histories, greater name recognition, access to larger customer bases
and significantly greater financial, technical and marketing resources than
ITIS. As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer
10
requirements or to devote greater resources to the promotion and sale of their
products than ITIS. In addition, certain of ITIS's competitors may determine,
for strategic reasons, to consolidate in order to substantially lower the price
of their products. ITIS expects there will be increasing consolidation in the
network management and security market and that there can be no assurance that
such consolidation will not materially adversely impact ITIS's competitive
position. In addition, current and potential competitors have established or may
establish financial or strategic relationships among themselves, with existing
or potential competitors, resellers or other third parties. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. There can be no assurance that ITIS
will be able to compete successfully against current and future competitors or
even that ITIS will be able to establish itself as a viable competitor within
the market at all. Increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which would materially adversely
affect ITIS's business, operating results and financial condition.
ITIS believes that the principal competitive factors affecting the
market for network management and security products include security
effectiveness, integration capabilities, manageability, technical features,
performance, ease of use, price, scope of product offerings, distribution
relationships and customer service and support. Although ITIS believes it will
eventually establish itself as competitive within this market with respect to
such factors, there can be no assurance that ITIS will be able to maintain any
such competitive position, should it ever be established, against current and
potential competitors, especially those with significantly greater financial,
marketing, service, support, technical and other competitive resources.
In the future, vendors of operating systems software or networking
hardware may enhance their products to include functionality currently provided
by the Authoriszor product portfolio. The widespread implementation of such
bundled offerings would have a material adverse effect on the competitiveness of
Authoriszor, particularly if the quality and functionality of such products were
comparable to that delivered by Authoriszor. Even if the functionality offered
by such bundled products is more limited than that offered by Authoriszor there
is no guarantee that a significant number of customers would not choose the more
limited functionality in lieu of purchasing additional software. In the event of
any of the foregoing conditions, ITIS's business, operating results and
financial condition would be materially adversely affected.
INTELLECTUAL PROPERTY RIGHTS; PATENT APPLICATIONS
ITIS intends to rely primarily on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. ITIS has established copyrights on
all aspects of Authoriszor and has registered UK trademarks on all Authoriszor
logos used for branding. ITIS has adopted confidentiality procedures and
contractual provisions to further protect its proprietary rights. Additional
protection for the software, documentation and other written materials is
afforded by trade secret and unfair competition laws.
Between three and five potentially patentable Authoriszor technologies/
methodologies have been identified and a strategy for obtaining patents in both
the UK and US put in place. Currently, patent applications are in process in the
US and an Opinion of ITIS's attorney has already been received confirming that
there appear to be several patentable inventions within Authoriszor. However,
there is no assurance that the patents to be applied for will be granted. As
management intends to position ITIS to penetrate the US market, ITIS will
complete the US application and simultaneously apply with an amended UK
application. Additional patent applications for target markets such as Europe
and Southeast Asia are under consideration.
There can be no assurance that others will not develop technologies
that are similar or superior to ITIS's technology or design around any patents
which may issue to ITIS. Despite ITIS's efforts to protect its proprietary
rights, unauthorized parties may copy aspects of ITIS's products or obtain and
use information that ITIS regards as proprietary. Policing any of such
unathorized uses of ITIS's products will be difficult, and although ITIS is
unable to project the extent to which piracy of its software products may occur,
software piracy can be expected to be a persistent problem. In addition, the
laws of some foreign countries may not protect ITIS's proprietary rights as
fully as do the laws of the US and the UK. There can be no assurance that ITIS's
competitors will not independently develop similar technology.
11
There can be no assurance that third parties will not claim
infringement by ITIS with respect to current or future products. ITIS expects
that software companies will increasingly be subject to infringement claims as
the number of products and competitors in ITIS's industry segment grows and the
functionality of products in different industry segments overlaps. Responding to
such claims, regardless of merit, could be time consuming, result in costly
litigation, cause product shipment delays or require ITIS to enter into royalty
or licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to ITIS or at all, which could have a
material adverse effect upon ITIS's business, operating results and financial
condition.
EMPLOYEES
At the time of acquisition, ITIS had only its three founders in full
time employment, together with a financial consultant and a marketing
consultant. Management intends for the marketing consultant to become a full
time Director after achievement of the next round of funding. Management is
currently interviewing for two extra software developers with considerable Unix
experience, a Webmaster and a Quality Control Manager. Interviews for an
Administration/Finance Manager will be taking place over the next few weeks. The
future growth of the payroll is likely to be concentrated on the
development/sales/professional divisions of ITIS as many of its back office
procedures, such as shipping, invoicing and delivery schedules, will be built
into our web site. The next stage of recruitment is to build up additional
technical support in line with Authoriszor coming on stream in the user base.
The Company is currently seeking applicants for a US Chief Executive
Officer position.
RISK FACTORS
Fluctuation in Operating Results
ITIS anticipates that its quarterly operating results of ITIS will vary
according to several factors, any of which could have an adverse effect on
sales. ITIS is a start-up operation in an early adopter market. Its revenues
will tend to take the form of pilot projects with large organizations leading to
full implementation only on proof of the Authoriszor technology. This may tend
to lead to an uneven revenue stream. This trend may also be exacerbated by long
sales lead times with the major revenues coming after a pilot period.
ITIS projects that European sales will be a significant proportion of
ITIS's revenue, particularly in 1999 and 2000. These revenues are subject to
seasonal variation relating to the slowdown in spending in the third quarter.
ITIS believes that in the absence of exceptional factors such as new product
introductions or major pilot projects, it will encounter proportionally lower
revenues in the third quarters.
ITIS operates with low backlog levels for product license sales.
Consequently, the volume of orders in a given quarter has a significant impact
on the revenues for that quarter. As ITIS's expense levels are based in part on
projected revenue expectations if order levels fall below expected levels they
will have an immediate impact on earnings. ITIS believes that because of these
factors period to period earnings are not, necessarily, a meaningful indicator
of future revenue and earnings trends. Due to these factors, it is likely that
in some future quarter ITIS's operating results may fall below the expectations
of public market analysts and investors. In such an event the price of the
Company's stock may be materially adversely affected.
Anticipated Decline in Margins
As the network management and security market advances towards maturity
it is anticipated that, following the trend of technology industries, there will
be a move towards packaging of multiple, functional elements at "less than the
sum of the parts" pricing. ITIS will not experience a decline in earnings if it
can achieve its market share objectives in the early market phase and can move
towards a higher level of service based revenue streams as margins decline.
Failure to achieve these two objectives would have serious, long term
consequences for ITIS's profitability and its market capitalization.
12
Changes in the Competitive Environment
See "Competition."
The Pace of Technology Change
As already indicated, the network management and security market is
subject to rapid technological change and innovation. Customer requirements are
also subject to significant short term changes. As a result, ITIS must
continuously change and improve its products in response to changes in operating
systems, application software, computer and communications hardware, network
software, programming tools and computer language technology. The introduction
of products embodying new technologies and the emergence of new industry
standards may render existing products obsolete or unmarketable. In particular,
the market for Internet, intranet and extranet applications is very new and is
evolving rapidly. ITIS's operating results will depend upon its ability to
remain abreast of these advances. There can be no assurance that ITIS will be
successful in developing new products or product enhancements that respond to
technology changes and evolving industry standards, or that ITIS will not
experience difficulties that could delay or prevent successful development,
introduction or marketing of these products, or that the new products will
adequately meet the developing needs of the market and achieve market
acceptance. If ITIS does not respond adequately to the need for developing and
introducing new products or enhancements to existing products in a timely manner
in response to changing market conditions or customer requirements, ITIS's
business, operating results and financial condition would be materially
adversely affected.
Proprietary Standards
The adoption of Authoriszor's ePCI and PURL components by our customers
as proprietary standards may be jeopardized by a public perception that the use
of client side software results in a loss of flexibility and ease of access to
software systems. Management's view is that ePCI is a valuable tool for assuring
and enhancing tight and continuing security, and that other commonly used
Internet capabilities require the use of client software, the most obvious being
e-mail. In order to utilize PURL to attain information security at a high level
of category/group/individual confidentiality and integrity, the user must
implement a modified paradigm through a conversion process. To ease this
process, conversion tools exist. However, if ITIS should be unable to persuade
customers to adopt ePCI and PURL as proprietary standards or that PURL
conversion tools will significantly facilitate migration to a more secure
environment, its business, operating results and financial condition would be
materially adversely affected.
Risks Associated With Emerging Network Management and Security Markets
The markets for ITIS's products are rapidly evolving. There can be no
assurance that the Internet or common public protocols will continue to be used
to facilitate communications or that the market for network management and
security systems will continue to expand. Continued growth of this market will
depend, in large part, upon the continued expansion of Internet usage and the
number of organizations adopting or expanding intranets, upon the ability of
their respective infrastructures to support an increasing number of users and
services, and upon the continued development of new and improved services for
implementation across the Internet, and between the Internet and intranets. If
the necessary infrastructure or complementary products and services are not
developed in a timely manner and, consequently, the network management,
security, Internet and intranet markets fail to grow or grow more slowly than
ITIS currently anticipates, ITIS's future business, operating results and
financial condition would be materially adversely affected.
The Impact of Year 2000 Compliance Issues
ITIS is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two-digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
13
State of Readiness
ITIS has completed the evaluation of Authoriszor and believes that the
current version of Authoriszor is Year 2000 compliant.
As ITIS begins to enter into contracts with business application
software suppliers for use in its financial, sales, word processing, marketing,
customer support and administrative operations, management intends to inquire of
any such supplier as to the Year 2000 compliance of its software product. Also,
as ITIS begins to employ the technology of third-party vendors related to voice
mail, security systems, building equipment and other systems, ITIS will seek
similar assurances from such vendors. Further, ITIS will likely rely in the near
future, both domestically and internationally, upon various vendors,
governmental agencies, utility companies, telecommunications service companies,
delivery service companies and other service providers who are outside of ITIS's
control. There is no assurance that such parties will not suffer a Year 2000
business disruption, which could have a material adverse effect on ITIS's
financial condition and results of operations.
Costs Associated with Year 2000 Issues
To date, ITIS has not incurred any material costs in connection with
identifying or evaluating Year 2000 compliance issues. There can be no
assurance, however, that there will not be increased costs associated with
ITIS's Year 2000 compliance efforts since these efforts have just recently begun
and, therefore, the potential impact of Year 2000 issues on ITIS's financial
condition and results of operations cannot be determined at this time.
Risks of Year 2000 Issues
Although ITIS does not believe that it will incur any material costs or
experience material disruptions in its business associated with preparing its
internal systems for the Year 2000, there can be no assurances that ITIS will
not experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems. Worst case scenarios would include: corruption of data contained in
ITIS's internal information systems, hardware failure, and the failure of
services provided by government agencies and other third parties (e.g.,
electricity, phone service, water transport, internet services, etc.).
Contingency Plans
ITIS has not developed a comprehensive contingency plan to address
situations that may result from the Year 2000. If Year 2000 compliance issues
are discovered, ITIS will evaluate the need for contingency plans relating to
such issues.
Dependence on Key Personnel
ITIS clearly has a dependency on the three founders and is immediately
addressing this problem with an aggressive recruitment program, as described in
the "Employees" section.
Base of Operations in the United Kingdom
Management anticipates that the main market for ITIS's products is the
US. This market cannot successfully be attacked, either geographically or
culturally, by a small UK-based operation. Additionally, management believes
that the presence of a US citizen resident in ITIS's headquarters operation is a
basic requirement for successful US market penetration. If ITIS cannot quickly
establish a headquarters presence managed by a US citizen as Chief Executive
Officer in the US, its business, operating results and financial condition would
be materially adversely affected.
Time to Market
A significant threat to the achievement of ITIS's marketing plan goals
is slow time to market. The main threat to this program is any delay, for
whatever reason, in the recruitment of the high quality personnel required in
software development. It is vital that ITIS achieves a round of financing that
will enable a domestically based
14
attack on the US market. Management projects that failure to achieve this
financing will result in an early lead being gained by one of the referenced
competitors. In that case, differentiated positioning will become more important
and will need to be more explicit and the chance of market share gain will be
adversely affected. Pricing policy will also suffer as a result of an attempt to
win market share and grow brand from a weaker position. If ITIS should fail to
achieve fast time to market in the US, its business, operating results and
financial condition would be materially adversely affected.
Product Liability and the Risk of Product Defects
ITIS's products will be used for network management and security
functions which may be critical to organizations and, as a result, the eventual
sale and support of products by ITIS may entail the risk of product liability
and related claims. A product liability claim brought against ITIS could have a
material adverse effect on ITIS's business, operating results and financial
condition. Software products as complex as those offered by ITIS may contain
undetected errors or failures when first introduced or when new versions are
released. In particular, the personal computer hardware environment is
characterized by a wide variety of non-standard configurations that make
prerelease testing for programming or compatibility errors very difficult and
time consuming. Despite testing by ITIS, there can be no assurance that errors
will not be found in new products or releases after commencement of commercial
shipments. The occurrence of these errors could result in adverse publicity,
loss of or delay in market acceptance or claims by customers against ITIS, any
of which could have a material adverse effect upon ITIS's business, operating
results and financial condition.
Dependence on Proprietary Technology; Risk of Infringement; Trademarks
See "Intellectual Property; Patent Applications."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
(a) The following exhibits are furnished in accordance with Item 601 of
Regulation S-B.
10.1(1) Agreement of Settlement and Release, dated June 9, 1999,
by and among Joseph J. Haraoui, Toucan Gold Corporation
and Toucan Mining Limited. (Exhibit 10.1)
10.2(2) Agreement for the sale and purchase of the whole of the
issued share capital of Anagram Limited, dated December
3, 1998, among Toucan Mining Limited, Toucan Gold Corp-
oration, Inc. and Minmet Plc. (Exhibit 10.1)
10.3(2) Supplemental Agreement, dated December 3, 1998 among
Toucan Mining Limited, Toucan Gold Corporation, Inc.,
and Minmet Plc. (Exhibit 10.2)
10.4(2) Option Agreement Regarding Mineradora De Bauxita Ltda,
dated December 3, 1998, among Toucan Mining Limited,
Toucan Gold Corporation, Inc. and Anagram Limited.
(Exhibit 10.3)
10.5(2) Agreement for the purchase of the whole of the issued
share capital of Mineradora de Bauxita Ltda, dated
December 3, 1998 among Toucan Mining Limited, Toucan
Gold Corporation, Inc. and Anagram Limited. (Exhibit
10.4)
10.6(2) Form of Minmet Plc Warrant Instrument. (Exhibit 10.5)
10.7(3) Share Sale Agreement re ITIS Technologies Limited, dated
July 22, 1999, by and among David J. Blanchfield, James
L Jackson, David R. Wray, Barry Jones, Ian McNeill and
Toucan Gold Corporation. (Exhibit 10.1)
15
10.8(3) Deed of Indemnity, dated July 22, 1999, by and among
David J. Blanchfield, James L Jackson, David R. Wray,
Barry Jones, Ian McNeill and Toucan Gold Corporation.
(Exhibit 10.2)
10.9(3) Letter of Appointment, dated July 22, 1999, by and
between David J. Blanchfield and ITIS Technologies
Limited. (Exhibit 10.3)
10.10(3)Letter of Appointment, dated July 22, 1999, by and
between James L. Jackson and ITIS Technologies Limited.
(Exhibit 10.4)
10.11(3)Letter of Appointment, dated July 22, 1999, by and
between David R. Wray and ITIS Technologies Limited.
(Exhibit 10.5)
10.12(3)Engagement Letter, dated July 22, 1999, by and between
Commercial Technology Ltd. and ITIS Technologies Limited.
(Exhibit 10.6)
10.13(3)Engagement Letter, dated July 22, 1999, by and between
CMM Ventures Ltd. and ITIS Technologies Limited. (Exhibit
10.7)
10.14(3)Engagement Letter, dated July 22, 1999, by and between
Robert Jeffcock and Toucan Gold Corporation. (Exhibit
10.8)
27* Financial Data Schedule
- ----------------
(1) Incorporated by reference to the exhibit shown in
parenthesis included in the Company's Current
Report on Form 8-K, filed by the Company with the
Securities and Exchange Commission on July 15,
1999.
(2) Incorporated by reference to the exhibit shown in
parenthesis included in the Company's Current
Report on Form 8-K, filed by the Company with the
Securities and Exchange Commission on January 5,
1999.
(3) Incorporated by reference to the exhibit shown in
parenthesis included in the Company's Current
Report on Form 8-K, filed by the Company with the
Securities and Exchange Commission on August 6,
1999.
* Filed herewith.
(b) Form 8-K:
1. The Company filed with the Securities and Exchange
Commission on July 30, 1999 a Current Report on Form 8-K,
describing the closing of the Minmet Transactions, the
approval of the spin-off of Toucan Mining Ltd. by the Board of
Directors of the Company to the stockholders of the Company,
and the entering into the Release and Settlement Agreement
with Joseph Haraoui.
2. The Company filed with the Securities and Exchange
Commission on August 6, 1999 a Current Report on Form 8-K
describing the acquisition of ITIS Technologies, Ltd.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Quarterly Report to be signed on its behalf
by the undersigned thereunto duly authorized.
TOUCAN GOLD CORPORATION
(Registrant)
Date: August 19, 1999 By: /s/ Robert P. Jeffcock
----------------------------------------
Robert P. Jeffcock, President and Chief
Executive Officer (Principal Executive
Officer)
Date: August 18, 1999 By: /s/ Robert A. Pearce
-----------------------------------------
Robert A. Pearce, Chief Financial Officer
(Principal Financial Officer and Chief
Accounting Officer)
17