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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
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[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934; OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period________ to _________
Commission File No. 000-32277
RTICA CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
ONTARIO, CANADA
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(Jurisdiction of Incorporation or Organization)
999 BARTON STREET
STONEY CREEK, ONTARIO L8E 5H4 CANADA
(905) 643-8669
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(Address, Including Zip Code and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
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None
Securities registered or to be registered pursuant to
Section 12(g) of the Act:
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None
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
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Common Stock, no par value
As of November 15, 2001, the registrant had 34,052,636 shares of Common
Stock outstanding.
Indicate by check mark whether RTICA (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 RTICA was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days:
Yes [X] No [ ]
Indicate by check mark which financial statement item RTICA has
elected to follow:
Item 17 [ ] Item 18 [X]
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2
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The consolidated statements of operations data for each of the years ended
May 31, 2001, 2000 and 1999 and cumulative period from June 13, 1991 (inception)
to May 31, 2001 and the consolidated balance sheets data as of May 31, 2001 and
2000 are derived from our consolidated financial statements that have been
audited by KPMG LLP, independent auditors, that are included elsewhere in this
Annual Report.
Our consolidated financial statements are prepared in accordance with
Canadian GAAP, which differ in certain respects from U.S. GAAP. For a
description of the material differences between Canadian GAAP and U.S. GAAP in
regard to our consolidated financial statements, see note 13 to our consolidated
financial statements. The historical results below are not necessarily
indicative of the results to be expected for any future period.
THE COMPANY'S ACCOUNTS ARE MAINTAINED IN CANADIAN DOLLARS. IN THIS ANNUAL
REPORT, ALL DOLLAR AMOUNTS ARE EXPRESSED IN CANADIAN DOLLARS EXCEPT WHERE
OTHERWISE INDICATED. Where conversions to U.S. dollars has been provided, the
exchange rate is based on the date of the event if applicable or the exchange
rate at the end of the relevant fiscal year if no date is specified. See
"Exchange Rate Information" in this Item 3.A. below for historical exchange rate
information.
The selected financial data should be read in conjunction with our
consolidated financial statements and the notes to our consolidated financial
statements included elsewhere in this Annual Report, and "Item 5. Operating and
Financial Review and Prospects" of this Annual Report.
3
SELECTED CONSOLIDATED FINANCIAL DATA OF
RTICA CORPORATION
(Expressed in Canadian Dollars)
Fiscal Years Ended May 31,
(audited)
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2001 2000 1999
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Income Statement Data:
Interest income ................... $ 97,101 $ 7,095 $ 60,233
Fees and licenses ................. -- 6,077 --
Operating expenses ................ 3,061,814 1,318,579 1,347,693
Loss for the period ............... (2,964,713) (1,305,407) (1,287,460)
Deficit accumulated during
development stage, period end ..... (7,305,436) (4,340,723) (3,035,316)
Loss per share .................... (0.13) (.09) (.11)
Balance Sheet Data:
Current assets .................... $ 1,476,794 $ 1,814,120 $ 765,854
Fixed assets ...................... 435,236 534,481 18,790
Goodwill .......................... 26,364 52,728 79,092
Deferred development costs ........ 1 1 1
Total assets ...................... 1,938,395 2,401,330 863,737
Current liabilities ............... 299,369 768,248 1,501,350
Due to government ................. 200,694 -- --
Convertible debentures ............ -- 349,278 --
Shareholders' equity .............. 1,438,332 1,283,804 2,292,703
RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPALS
The consolidated financial statements of the Company have been prepared in
accordance with Canadian Generally Accepted Accounting Principles, which differ
materially in certain respects from United States Generally Accepted Accounting
Principles. For a description of these differences see note 13 to the
consolidated financial statements of the Company for its fiscal year ended May
31, 2001 included in Item 18 of this Annual Report.
4
EXCHANGE RATE INFORMATION
The following table sets forth, for each period indicated the high and low
exchange rates based on the noon buying rate in the city of New York for cable
transfers in Canadian dollars as provided by the Bank of Canada, which is often
referred to as the "noon buying rate." The exchange rates are presented as
Canadian dollars per US$1.00. On November 15, 2001, the noon buying rate was
US$1.00 equals C$1.587 and the inverse noon buying rate was C$1.00 equals
US$0.630.
June 2001 July 2001 August 2001 September 2001 October 2001
--------- --------- ----------- -------------- ------------
High ..................... C$0.66 C$0.66 C$0.65 C$0.64 C$0.64
Low ...................... 0.65 0.65 0.65 0.63 0.63
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YEARS ENDED MAY 31,
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1997 1998 1999 2000 2001
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High ..................... C$0.75 C$0.73 C$0.70 C$0.70 C$0.68
Low ...................... 0.71 0.68 0.63 0.66 0.63
Average (1) .............. 0.73 0.71 0.66 0.68 0.66
End of Period ............ 0.72 0.69 0.68 0.67 0.65
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(1) The average is based on the average of the noon buying rates on the last
business day of each month in the period indicated.
B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable.
D. RISK FACTORS
WE ONLY HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN ANALYZE OUR
POTENTIAL PROFITABILITY. Because of our limited operating history, our
strategies may not prove to be effective in dealing with problems associated
with the formation of a new business and as a result our RTICA(TM) product may
never be successfully commercialized. Since inception, we have been engaged
primarily in manufacturing start-up commercialization activities related to our
RTICA(TM) insulating products. We may encounter problems, expenses,
complications and delays in connection with the development, application or the
utilization of our technology, particularly because that technology is new and
commercially unproven and because of the competitive environment in which we
plan to operate. In addition, we have shipped test product to the United States
for installation over the past six months and anticipate commercial shipments to
begin in the winter of 2002. However, we may experience delays or unanticipated
problems which will prevent us from meeting this goal or continuing to ship
commercial amounts of product.
5
WE HAVE OPERATED AT A LOSS SINCE INCEPTION. Since inception we have
operated at a loss and we may never be able to operate profitably. On May 31,
2001, we had an accumulated deficit from inception of C$7,305,436 (approx.
US$4,726,618), and we have incurred a loss for the three months ended August 31,
2001 of C$859,119 (approx. US$555,077). We anticipate that we will continue to
experience significant operating and net losses through the end of our fiscal
year ending May 31, 2002 as a result of costs associated with expanding the
commercial manufacture and distribution of our product. Such losses will
continue until such time, if ever, that our products can successfully be brought
to market and generate sufficient operating revenues. We may never become
profitable or may not be able to sustain profitability if achieved. Based upon
these factors and others discussed in Note 1 to the Financial Statements for the
fiscal year ended May 31, 2001, our independent auditors have issued an
unqualified opinion in Canada with comments by auditors for U.S. readers on
Canada-U.S. reporting differences, indicating that the continuation of RTICA as
a going concern is dependent upon achieving additional financing and,
ultimately, upon the achievement of profitable operations. See "Item 5.
Operating and Financial Review and Prospects" and the Financial Statements.
WE ONLY HAVE SUFFICIENT FUNDS TO OPERATE FOR THE NEXT THREE MONTHS AS OF
THE DATE OF THIS REPORT AND WE CANNOT BE SURE THAT WE WILL GENERATE THE
NECESSARY ADDITIONAL CAPITAL TO FINANCE THE GROWTH OF OUR BUSINESS. We estimate
that we have sufficient cash resources to fund our operations for approximately
three (3) months from the date of this report based on our current cash
requirements, which result principally from the implementation of our business
plan and working capital needs and high start-up costs. As at August 31, 2001,
we had cash reserves of C$697,494 (approx. US$450,651), which are being used
principally for equipment, engineering and installation, start-up expenses and
working capital. Unless we generate significant revenues during calendar 2002,
our failure to obtain additional financing prior to December 31, 2002, may
prevent us from entering commercial production, force us to scale back our
operations and limit our ability to effectively compete in the insulation and
building materials industry.
OUR PROJECTED MANUFACTURING COST ESTIMATES AND GROSS MARGIN PERCENTAGES FOR
COMMERCIAL OPERATIONS MAY NOT BE ACCURATE SINCE THEY ARE BASED PRINCIPALLY UPON
ASSUMPTIONS DRAWN FROM SMALL SCALE, TEST OPERATIONS. Given that we have no
history of commercial scale operations, and because we are producing a new and
innovative product, our current projections with respect to manufacturing costs
and gross margins per unit of production may not be realized. In the event that
the gross margin percentage is less than currently projected by management, cash
flow contributions from operations may be less than we have projected which
would limit our growth potential and may prevent us from achieving profitability
or becoming a large scale commercial producer.
WE MAY BE UNABLE TO PROTECT OUR PATENT AND PROPRIETARY TECHNOLOGY RELATED
TO THE MANUFACTURE OF RTICA(TM) DUE TO OUR LIMITED FINANCIAL RESOURCES. Our
success and competitive position are dependent in large part on our ability to
defend our technology against infringement from others. Although we have patents
in the United States and Canada, as well as proprietary technology and trade
secrets protected by non-disclosure agreements, the cost of defending our
technology and intellectual property could be beyond our present or future
financial resources. In addition, our competitors may independently develop
technology which is substantially equivalent or superior to our technology, or
our competitors may develop functionally similar products outside the protection
of any licenses, patents or other intellectual property rights that we have or
may obtain.
WE LACK OPERATING EXPERIENCE WHICH MAY IMPEDE OUR ABILITY TO EFFECTIVELY
PRODUCE AND MARKET OUR PRODUCT. Because we are a development stage enterprise
and have only limited operating experience, we may not be able to effectively
produce and market our product. The transition from a start-up operation to an
enterprise capable of effectively marketing RTICA(TM) products may require
additional management, technical personnel, capital and other resources. While
we have expanded our
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employee base over the past year, competition for qualified personnel in these
areas is intense. Failure to obtain qualified personnel or to meet marketing
standards could prevent or delay the effective commercialization of our
products, even if successfully developed by us.
OUR CURRENT MARKETING AND SALES STRATEGY IS DIRECTED AT A SINGLE, TARGETED
CUSTOMER BASE. If we cannot successfully implement our marketing strategy, we
may not be able to successfully commercialize and sell our product. We do not
currently have well-established sales and distribution channels for our product.
We are currently focusing our marketing and sales effort on certain major
insulation subcontractors in the United States and Canada. We believe that these
users represent a significant potential customer base for the RTICA(TM)
products. Marketing to this directed group can be accomplished with a limited
number of our personnel and at a relatively low cost. If our strategy is not
successful and we do not succeed in selling our product to this targeted
customer base, we may be forced to develop a broad, national based sales and
distribution network to generate customer demand and to sell our products on a
national basis. The development of such a network would likely involve
significant costs and additional risks and uncertainties. Therefore, the failure
of our current marketing and sales strategy would likely have a material adverse
effect on our business, results of operations and financial condition.
OUR CURRENT MANUFACTURING CAPACITY IS EXTREMELY LIMITED AND WE CANNOT BE
SURE THAT OUR EFFORTS TO EXPAND OUR CAPACITY TO A COMMERCIAL SCALE WILL BE
SUCCESSFUL. We currently have limited manufacturing capacity and we may
encounter problems scaling up our system to commercial scale. The failure to
expand our current manufacturing facility to a commercial level or relocate to a
larger facility would limit our ability to manufacture significant quantities of
our product and thereby limit our sales potential. Although we currently have a
manufacturing facility in Stoney Creek, Ontario, Canada, our plant as currently
configured is not large enough to produce commercial quantities profitably. To
manufacture RTICATM in sufficient quantities and at acceptable costs under our
plan we must expand or relocate our current facility. In connection with our
expansion effort, we may encounter equipment and process problems when we
attempt to duplicate our results at commercial production levels. In addition,
we will need financing to accomplish such expansion and can make no assurances
that such financing will be available or available on terms acceptable to us.
OUR BUSINESS IS BASED SOLELY ON THE SUCCESS OF RTICA(TM), WHICH IS NOT
COMMERCIALLY PROVEN. Our reliance upon one product to generate revenues exposes
us to commercial risks reflecting lack of product diversification. We have not
generated any revenues to date and our revenues over at least the next year will
be entirely dependent upon the sale of our RTICA(TM) insulation and related
technology and licensing opportunities. If our RTICA(TM) insulation does not
achieve market acceptance, our lack of diversification could have material
adverse effects on our business.
THE TECHNOLOGY THAT WE USE IN PRODUCING RTICA(TM) MAY NOT PASS LONG-TERM
TESTING. Because RTICA(TM) represents a new product that has not undergone
long-term testing, our products may experience unanticipated problems. While we
believe that RTICA(TM) represents a novel technology in insulating materials,
commercialization has only just begun. Our product and technology may not
provide equal or superior performance compared with competitive products and
commercialization may not be successful. Moreover, although we have completed
both internal testing and testing by an independent laboratory, and although the
initial results from presenting our products to established users have
demonstrated advantages over other products, there has been no long-term testing
done on the product to ensure our integrity over significant time periods. Thus,
RTICA(TM) products may experience unanticipated problems.
7
WE HAVE ONLY BEGUN TO COMMERCIALIZE THE MANUFACTURE AND SALE OF OUR
RTICA(TM) PRODUCT, AND WE CANNOT BE SURE THAT IT WILL RECEIVE BROAD MARKET
ACCEPTANCE. Even if our technology is successful after long-term testing, as
discussed above, RTICA(TM) products may not be accepted by the market. Factors
that may limit the market acceptance of RTICA(TM) may include:
o obstacles in market entry relative to competitive products,
o the availability of alternative products,
o the price of our products relative to alternative products, and
o the possible lack of motivation of potential customers to change
suppliers.
WE HAVE A LIMITED NUMBER OF EMPLOYEES AND LIMITED FINANCIAL RESOURCES,
WHICH COULD LIMIT OUR ABILITY TO MANAGE THE GROWTH OF OUR BUSINESS. We may not
have adequately provided for the costs and risks associated with rapid future
growth. Any such growth could place a significant strain on our managerial,
operational and financial resources, and we would be required to implement and
improve our managerial controls and procedures and operational and financial
systems. In addition, we will be required to hire, train, integrate, manage and
retain our workforce including our technology, manufacturing, engineering, sales
and business development staff. Locating and retaining qualified personnel in
the insulation industry is extremely competitive. We may not have adequately
allowed for the costs and risks associated with our proposed expansion and our
systems, procedures or controls may not be adequate to support our operations.
Furthermore, we may not be able to successfully locate, train and integrate
personnel into our workforce.
THE INSULATION INDUSTRY IS HIGHLY COMPETITIVE; WE MAY NOT BE ABLE TO
COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN OUR INDUSTRY BECAUSE SOME OF OUR
COMPETITORS ARE BETTER KNOWN AND HAVE SUBSTANTIALLY GREATER RESOURCES THAN WE
DO. We may not be able to effectively compete against such well entrenched
industry competitors with much greater technical resources and broad
distribution networks. The insulation industry is dominated by a small number of
very large and well-capitalized multinational participants. In response to
environmental and health concerns, these companies are utilizing increasing
percentages of recycled materials in their production processes, and are
developing new products which are perceived to have fewer health related
concerns.
WE MAY NOT BE ABLE TO OBTAIN THE RECYCLED PLASTIC NEEDED TO MANUFACTURE OUR
PRODUCT. Because the largest percentage of the production cost of RTICA(TM) is
the cost of the recycled plastic used in its production, the lack of
availability of that raw material or a significant increase in its cost could
impair our ability to profitably produce our product. We rely on a plentiful and
continuing supply of a specific type of low cost recycled plastic. While we
currently believe that there are adequate supplies of the recycled plastic that
we use from several sources, if supply of the type of recycled plastic we use
becomes more difficult to obtain or the price for that raw material increases
significantly we may not be able to secure adequate raw material supplies to
profitably produce and market RTICA(TM).
WE MAY NOT BE ABLE TO SECURE TIMELY BUILDING CODE CERTIFICATION. Although
we are in the process of obtaining building code certification and listing of
RTICA(TM) in all required jurisdictions in Canada and the United States, we
cannot be sure that we will obtain such approvals. Customer acceptance and sales
of our product may be adversely impacted if we do not obtain certification under
United States and Canadian building codes. Although building code approval is
not legally required to sell our product to our target market in either the
United States or Canada, certification would enable us to bypass the review of
our product specifications on a case by case basis in connection with each sale,
and to market our product with a listing reference number. We are currently in
the process of applying for certification in Canada and the United States;
however, certification will not be obtained until we are able to demonstrate our
ability to generate consistent, approved product quality on an ongoing basis
8
using a commercial scale plant. There is no guarantee that our standard will be
accepted or that we will be certified and establish a listing. Our failure to
achieve certification could impair our ability to market and sell our product on
a large scale. See "Item 4.B. Business Overview -- Government Regulation."
OUR DIRECTORS AND OFFICERS MAY BE ABLE TO CONTROL OR SIGNIFICANTLY
INFLUENCE US DUE TO THEIR CONCENTRATED STOCK OWNERSHIP. Directors and officers
beneficially own approximately 34.72% of our issued and outstanding stock
(without giving effect to the exercise of options held by said persons) and,
therefore, may be able to influence or control the outcome of substantially all
actions requiring stockholder approval, including the election of the entire
Board of Directors, and the outcome of any stockholder votes concerning a
merger, asset sale, or other major corporate transaction affecting RTICA. Such
control could also delay, deter, or prevent an unsolicited takeover of RTICA.
CURRENCY FLUCTUATIONS THAT DEVALUE THE CANADIAN DOLLAR AGAINST THE UNITED
STATES DOLLAR COULD ADVERSELY EFFECT OUR RESULTS OF OPERATIONS. In the event
that the Canadian dollar was materially devalued against the United States
dollar, our operating results could be materially adversely affected. The
volatility of the Canadian dollar against United States currency may affect our
profits, as certain supplies and equipment purchased by us are manufactured and
exported to Canada by foreign companies. Accordingly, the relationship of the
Canadian dollar to the value of the United States dollar may materially affect
our operating results.
WE MAY QUALIFY AS A PASSIVE FOREIGN INVESTMENT COMPANY ("PFIC")FOR UNITED
STATES FEDERAL INCOME TAX PURPOSES FOR OUR TAXABLE YEAR ENDED MAY 31, 2001 AND
PRIOR YEARS. If it is determined that we were a PFIC for our taxable year ended
May 31, 2001 or for any prior period, there could be adverse tax consequences
for U.S. shareholders who acquired or owned their shares while we qualified as a
PFIC. See "Item 10.E. Taxation - United States Tax Consequences - The Company's
Status as a Passive Foreign Investment Company."
AN INVESTMENT IN RTICA MAY HAVE LIMITED LIQUIDITY IF AN ACTIVE TRADING
MARKET IN THE UNITED STATES DOES NOT DEVELOP. Although our common stock
currently trades on the Canadian Venture Exchange (CDNX), the trading history
suggests there is limited liquidity in the public market for our securities and
liquidity may not increase and/or be sustained. While, we intend to have our
common stock listed on the OTC-BB, we can make no assurances that our common
stock will ever be listed or if listed that an active U.S. market will develop.
In addition, factors such as announcements of quarterly variations in our
financial results and changes in general market conditions, among other things,
could cause the market price of the shares to fluctuate significantly. In recent
years, the stock market has experienced significant price and volume
fluctuations.
IF OUR STOCK IS LISTED ON A U.S. EXCHANGE, IT MAY BE SUBJECT TO PENNY STOCK
REGULATION. Disclosure requirements adopted by the Commission may have the
effect of reducing the trading activity in the secondary market for our stock if
it becomes subject to the penny stock rules. In addition, if our common stock
becomes subject to the penny stock rules, purchasers of shares may find it more
difficult to sell their shares. These rules regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from those rules, to deliver a standardized risk
disclosure document prepared by the Commission, which specifies information
about penny stocks and the nature and significance of
9
risks of the penny stock market. The broker-dealer also must provide the
customer with bid and offer quotations for the penny stock, the compensation of
the broker-dealer and our salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise exempt from those rules the broker-dealer must
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction. Based on the recent trading prices of common stock in Canada
(C$0.60 (approximately US$0.38) on November 15, 2001), it is likely that our
stock will be subject to the penny stock regulations for the foreseeable future.
WE MAY BE SUBJECT TO CLAIMS BY USERS OF OUR RTICA(TM) PRODUCT AND WE MAY
NOT HAVE SUFFICIENT INSURANCE TO COVER SUCH CLAIMS. Although our product has
been tested, it is newly developed and only has a short performance history.
Accordingly, we are at greater risk of potential liability for breach of
contract, personal injury, property damage, and negligence, including claims for
lack of timely performance and/or for failure to deliver the service promised
(including improper or negligent performance or design, failure to meet
specifications, and breaches of express or implied warranties). Further, while
we have general liability insurance, including product liability coverage, in
effect, we may not have sufficient coverage to protect us against such claims.
THE SALE OF INSULATION PRODUCTS IS SEASONAL AND THE SEASONALITY OF OUR
PRODUCT SALES COULD ADVERSELY EFFECT THE VALUE OF OUR STOCK. Once we begin
manufacturing and sales, our business will probably experience seasonal
fluctuations in sales and operating results from quarter to quarter. In general,
operating results in the industry are weakest in the first calendar quarter
because of the effects of winter weather on construction and the consequent
reduction in sales of insulation. Fluctuations in our quarterly sales and
operating results caused by the seasonality of our industry could result in
significant volatility in, and otherwise adversely affect, the market price of
the common stock.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements that involve risks
and uncertainties. These statements relate to our future plans, objectives,
expectations and intentions. We have identified these statements by the use of
words such as "may," "will," "expect," "anticipate," "intend," "plan,"
"estimate," "believe," "continue" or other similar expressions. These
forward-looking statements reflect our current expectations and assumptions as
to future events that may not prove to be accurate. Our actual results are
subject to a number of risks and uncertainties and could differ immediately from
those discussed in these statements. Factors that could contribute to these
differences include, but are not limited to, our ability to adapt to current and
future changes in technology; our ability to successfully commercialize
development and sale of our product; our ability to introduce new and enhanced
products on a timely basis; our ability to overcome significant and increasing
competition in our industry; the impact of depending on a single supplier or a
limited number of suppliers for key components and materials in our products;
our ability to attract and retain sufficient numbers of highly skilled
technical, sales and marketing and other personnel; and our ability to sustain
research and development activities. In addition, such forward-looking
statements could be affected by general industry and market conditions as well
as growth rates, general international economic conditions including exchange
rate fluctuations, and other future factors. In light of the many risks and
uncertainties surrounding our business and operations, you should keep in mind
that we cannot guarantee that the forward-looking statements described in this
Annual Report will transpire. We undertake no obligation and do not intend to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required under applicable
law.
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ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
We were incorporated by Certificate of Incorporation issued pursuant to the
provisions of the Business Corporations Act (Alberta) on May 30, 1997 under the
name Inzeco Holdings, Inc. In April 2001, we changed our name to RTICA
Corporation and continued the corporation's existence under the laws of the
province of Ontario.
Our principal office is located at 999 Barton Street, Stoney Creek,
Ontario, Canada L8E 5H4. Our registered office is located at Suite 700, 220 Bay
Street, Toronto, Ontario M5J 2W4. We maintain a website at www.rtica.com.
We are a public corporation whose shares are listed for trading, since
October 1997, on the Canadian Venture Exchange (CDNX). In connection with our
name change, we changed our trading symbol on the CDNX from IZE to RTN,
effective the opening of the market on April 9, 2001. Our authorized capital
consists of an unlimited number of shares of Common Stock, or which 34,052,636
were issued and outstanding as of November 15, 2001, and an unlimited number of
shares of Preferred Stock, none of which are issued or outstanding.
B. BUSINESS OVERVIEW
We are in the business (through our wholly owned subsidiary, RTICA Inc.) of
developing and producing insulating materials for use in the residential and
commercial building market. Our insulating products are marketed under the name
"RTICA(TM)." RTICA(TM) is a non-irritating insulating material for thermal and
acoustical applications. We manufacture RTICA(TM) utilizing polyethylene
terephthalate ("PET"), a plastic commonly used in soft drink bottles, packaging,
film and fibers. PET is a commodity raw material available from many sources in
Canada and the United States. For more than the past five years, we have
endeavored to improve the insulating properties of our product while increasing
production levels of consistent, high quality product.
RTICA(TM) looks and is applied like fiberglass in both blowing wool and
batt applications. Results from internal and independent laboratory testing
demonstrate that RTICA(TM) provides an equivalent thermal performance to glass
and rock wool fibers, cellulose and expanded polystyrene foam insulating
materials. In addition, based on our manufacturing costs, we believe that
RTICA(TM) can be sold at competitive prices.
RTICA(TM) can be produced in a variety of forms and shapes to satisfy most
insulation applications. This includes, flexible batts, boards, shapes, and
blowing wool (loose fill). In addition, no special protection is needed to
handle the material. These qualities, combined with lower production costs
associated with RTICA(TM) than required for the production of traditional
insulation materials make RTICA(TM) competitive with all but the lowest
performance insulation.
We are currently in the process of expanding our manufacturing capabilities
and over the past six months have shipped quantities of product of RTICA(TM) for
demonstration and testing to potential customers in the United States and
Canada. No revenues were booked from these shipments. We are targeting our sales
efforts to professional contractors in the United States. We have been working
with groups of U.S. contractors on product development and market testing over
the past year. While we anticipate that this will facilitate our introduction of
RTICA(TM) to the retail side in the U.S. market, there
11
can be no assurances that we will be able to successfully implement our
expansion strategy of offering increasing quantities of our products.
To facilitate our transition to operations, we have shifted virtually all
Research and Development to our long-standing research collaborator, the
National Research Council Industrial Materials Institute, (NRC-IMI) in
Boucherville, Quebec. NRC-IMI has a world-wide reputation as a leader in plastic
processing and technology. We have engineered, built and installed at NRC-IMI's
facility a Research and Development scale manufacturing line that incorporates
all of our technical processing advances to date. This new arrangement allows us
to direct the activities of the Stoney Creek plant solely towards product and
market development.
Our success will depend in large part upon the ability of our products to
meet targeted performance and cost objectives. We are committing considerable
time, effort and resources to finalize development of our products and product
enhancements. Although we have shipped product in fiscal 2001, significant
commercial production will not occur until January 2002 at the earliest. Our
ability to produce large scale commercial quantities of RTICA(TM) of consistent
high quality is unproven. Large scale commercial production is subject to
unanticipated delays, expenses, difficulties, the possible insufficiency of
funding as well as other risks inherent in the development of new products and
technologies. There can be no assurance as to when, or whether, such large scale
commercialization of RTICATM will be successfully completed. See Risk Factors --
We only have a limited operating history upon which you can analyze our
potential profitability.
Our future operating results will also depend upon our ability to gain
market acceptance of RTICA(TM). Although we are working with U.S. contractors on
marketing and development, the market for our product is still new and evolving,
and it is difficult to assess or predict with any assurance the growth rate, if
any, or the size of the market for RTICA(TM). There can be no assurance that the
market for our product will develop, or that our product will achieve market
acceptance. If the market fails to develop, develops more slowly than expected
or becomes saturated with competitors, or if RTICA(TM) does not achieve
significant market acceptance, our business, operating results or financial
condition will be materially adversely affected. See "Risk Factors -- Our
RTICA(TM) product has not yet been sold on a commercial basis, we cannot be sure
it will receive broad market acceptance."
Once we begin manufacturing and distributing commercial quantities of
product, we anticipate seasonal fluctuations in our sales and operating results
from quarter to quarter. In general, operating results in the industry are
weakest in the first calendar quarter because of the effects of winter weather
on construction and the consequent reduction in sales of insulation. The effects
of seasonality on our operating results could adversely affect the market price
of the common stock. See "Risk Factors -- The sale of insulation products is
seasonal and the seasonality of our product sales could adversely effect the
value of our stock."
COMPETITION
We believe that certain attributes of RTICA(TM) provide us with a
competitive advantage. These attributes include the following:
o User Friendly Product: RTICA(TM) neither causes skin irritation on
contact nor poses a threat to respiratory health due to dust
inhalation. Such ease and comfort in handling are factors that we
believe provide the most significant advantage of our product for all
users, especially professional installation contractors.
12
o Thermal Performance: RTICA(TM) provides excellent thermal performance
properties with optimum cost-efficiency.
o Energy Conservation: RTICA(TM) requires less energy to make than most
competitive products, yet conserves more energy when in place; it
utilizes significant quantities of recycled PET, an inducement to
recycling of plastic waste.
While we believe that there is no insulation product on the market that
competes directly with RTICA(TM) in terms of achieving significant savings
through the use of recycled plastic to produce insulation material, RTICA(TM)
will compete in the extremely competitive building insulation market,
principally composed of large domestic and multinational companies which have
significantly greater assets, working capital and marketing personnel than us.
See "Risk Factors -- The insulation industry is highly competitive; we may not
be able to compete successfully with other companies in our industry because
some of our competitors are better known and have substantially greater
resources than we do." In addition, we expect that if our products become
successful, competitors will be more likely to develop and introduce into the
marketplace comparable products and technologies. In such event, we will likely
be competing with larger, better capitalized and nationally recognized
competitors.
MARKETING, SALES AND SEASONALITY
The residential segment of the insulation market in North America is
currently dominated by products produced from fiberglass and other mineral fiber
products. We believe our RTICA(TM) product is well positioned to supply product
for high performance thermal and acoustical applications in construction and
manufacturing sectors currently occupied by fiberglass and plastic foams.
However, RTICA(TM) is a new product with no broad based recognition and we do
not currently have any established sales and distribution channels for
RTICA(TM). To overcome the lack of an existing market, we have adopted a
strategy of a focused marketing effort directed at large insulation contractors
in Canada and the East Coast of the United States. We believe that this market
represents a significant customer base that can be targeted at relatively low
cost, rather than expending significant funds for the creation of a broad- based
national sales network. Relationships developed with large insulation
contractors will assist and enhance our marketing efforts by providing product
validation as well as important anticipated customer endorsements for RTICA(TM)
which will generate additional consumer demand. Based on the success of our
marketing and sales effort, we can then consider expanding our marketing program
to include architects, builders, sub-contractors and retail outlets throughout
Canada and the United States.
Consistent with our marketing strategy, we are presently negotiating with
United States installation contractors, who we believe will purchase all of the
initial output of our production facility subject to competitive pricing. Such
sales will likely be subject to the purchaser obtaining building code approval
for the intended product application. To date, no sales contracts have been
entered into and there can be no assurance that any sales will actually be made
to these contractors.
We believe that in the future, we will have the potential to sell licenses
to manufacture, use and sell RTICA(TM) products using our patented technology
and trademarks outside of Canada and the United States. Potential licensees
include contractors, distributors of construction materials and end users who
require large quantities of insulation materials. We may also seek strategic
partners among product users and manufacturers that use and/or produce PET, as
well as other investors who are interested in participating to bring RTICA(TM)
to market.
On September 1, 1997, we sold for a fee of C$20,000 (approx. US$14,417), an
option for an exclusive ten-year license to make, use and sell our insulation
products in four provinces located in
13
western Canada using our technology. The option may be exercised at any time
within six months after the date we produce RTICA(TM) at a rate of 500 kilograms
per hour at our Ontario facility. The exercise price for the option is C$500,000
(approx. US$323,885). Although the license would be exclusive even as to RTICA,
management believes that the territory covered by the license represents
approximately 2% of the potential customer base (by population) in Canada and
the United States. There can be no assurance that the optionee will exercise its
option for the license.
GOVERNMENT REGULATION
Based on our product testing, we believe that RTICA(TM) will meet
applicable building code standards in most jurisdictions in Canada and the
United States. Although building code certification is generally necessary as a
practical matter, it is not required to legally sell our product; users of our
product may obtain approval for their intended product use on a case-by-case
basis in the local jurisdiction where the product is being used. Once a product
is certified, it is given a "listing reference number," which enables users to
bypass the building code review process on a case by case basis in connection
with each proposed use of the product. As certification thereby saves users time
and effort, we believe that it is imperative that we obtain certification for
RTICA(TM) as soon as practicable. We are currently in the process of applying
for certification in Canada and the United States. Building code certification
of a product generally requires an audit of manufacturing and testing processes
and a manufacturer's demonstration of its ability to make a product with given
specifications on a consistent, ongoing basis. Therefore, we believe
certification of RTICATM will not be obtained until the expansion of our
manufacturing capability is completed and reasonable production levels are
sustained. There is no guarantee that our standard will be accepted or that we
will be certified and establish a listing. The failure to obtain certification
could have a significant adverse affect on our ability to successfully
commercialize our product. See "Risk Factors -- We may not be able to secure
timely building code certification."
PRICING
There are a number of parameters that impact upon the pricing of
insulation products. These include costs of raw materials, costs of energy, the
density of the fiber, fiber thickness, direct labor and packaging. In addition,
numerous factors are likely to influence cost competitiveness considerations,
including ease of installation and resistance to heat flow. Our pricing
assumptions are based upon underlying assumptions with respect to direct labor,
materials, and yield, which in turn is predicated upon certain mean assumptions
with respect to production output, fiber physical properties, thickness, loft,
resultant density and thermal performance. While we have made test installations
of RTICA(TM), we have not yet sold any product. Therefore, our ability to fully
test the reasonableness of our pricing assumptions is not yet evident. This will
be necessary if we are to instill confidence in builders and distributors, and
in various trade associations, which might then be willing to promote the
dissemination of RTICA(TM) in the marketplace.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which we are a party, and we are
not aware of any threatened legal proceedings involving us.
C. ORGANIZATIONAL STRUCTURE
We have two wholly-owned subsidiaries, RTICA Inc. and Inzeco Overseas, Ltd.
We develop, produce and market our RTICA(TM) product through RTICA Inc., a
corporation formed under the laws of
14
the province of Ontario, Canada. Inzeco Overseas, Ltd., a Barbados corporation,
licenses the technology from RTICA Inc., and may in the future license such
technology to business outside of North America.
Our corporate governance issues became more complicated during the year. On
January 9, 2001, our initial registration statement on Form SB-2 was declared
effective by the Securities Exchange Commission. The registration statement
covered the resale of shares acquired by certain purchasers in our recent
private placement. As a result, we now have ongoing disclosure responsibility
both in Canada and the United States. In addition, our audited financial
statements now require a U.S. GAAP reconciliation. We monitored the Fair
Disclosure guidelines by the SEC and similar guidelines in Canada and used them
accordingly as templates to structure our own corporate disclosure policy.
Also during the year, our investor relations/communications program was
expanded significantly. New hits on the Company web site were up and a steady
flow of information packages was directed to the investment community, as were
regular, in-person presentations.
Keeping pace with a dramatic increase in administrative and manufacturing
activity led to a significant strengthening of the Company's human resources.
New staff appointments include a controller, office coordinator, project
manager, plant supervisor, plant mechanic and technician. Based on our capital
and the size of our facility, our staff can now operate the plant 24 hours per
day, four days per week. We expect to be able to operate the plant 24 hours a
day, seven days per week during fiscal 2003, however we can make no assurances
that we will obtain the proper financing and be able to expand the capacity of
the plant in order to achieve that objective within that time frame if at all.
Considerable resources have been allocated to the building code approval
process, particularly as they apply in U.S. jurisdictions. After many months of
delay and frustration, we are pleased to report progress, having overcome the
inertia of the U.S. system to secure approvals for a significant portion of the
U.S. market.
D. PROPERTY, PLANTS AND EQUIPMENT
We lease 10,000 square feet of plant and office facilities in Stoney Creek,
Ontario, Canada, which is about halfway between Buffalo, New York and Toronto,
Ontario. The site is equipped with production, office and test laboratory
facilities and is under a lease expiring May 31, 2004 and has a monthly rent of
C$6,738 (approx. US$4,350) plus taxes. Although commercial production does not
occur at this facility, machinery and equipment at this facility has annual
capacity of 560,000 kilograms assuming a twenty-four hour day, year round
production schedule. There are no encumbrances on company owned capital assets.
Our facility is zoned for industrial applications, and we are subject to
certain workplace health and safety guidelines, including forklift licensing and
workplace safety policies and procedures, with which we believe we are in
compliance. In addition, we believe that we are in compliance with all of the
applicable regulations and statutes that govern the disposal of waste inventory,
machine parts, and other similar items.
The plant at Stoney Creek was designed and constructed as a research and
development facility and is therefore limited in terms of space and machinery.
While we anticipate commencing commercial production at a limited scale at this
facility beginning in calendar 2002, we may experience delays or unanticipated
problems which prevent us from meting this goal.
It is our intention to expand the plant's capacity either through the
renovation of the existing facility or by locating an appropriate facility
elsewhere. The increase in our production capacity
15
resulting from the expansion of a production capabilities will depend on the
amount of capital which the company can raise. Although we presently intend to
finance any such expansion or relocation through a combination of equity and
debt financing, with an emphasis on equity financing, we can make no assurances
that such financing will be available, or available on terms acceptable to us.
See "Risk Factors - Our current manufacturing capacity is extremely limited and
we cannot be sure that our efforts to expand our capacity to a commercial scale
will be successful."
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
The following discussion and analysis should be read in conjunction with
our consolidated financial statements and the related notes included elsewhere
in this Annual Report. Our consolidated financial statements are reported in
Canadian collars and have been prepared in accordance with accounting principles
generally accepted in Canada, or Canadian GAAP. To the extent applicable to our
consolidated financial statements included elsewhere in this Annual Report,
these principles conform in all material respects with accounting principles
generally accepted in the United States, or U.S. GAAP, except as described in
note 13 of our consolidated financial statements.
We have not yet commenced commercial production, and we earned no income
from operations in the fiscal year ended 2001. We expended larger amounts of
resources to develop manufacturing parameters and processes during fiscal 2001.
Our consolidated assets during the fiscal year ended May 31, 2001 decreased
from C$2,401,330 (US$1,604,088) to C$1,938,395 (US$1,254,141). Cash, short-term
investments and cash in trust comprised C$1,394,051 (US$901,951) and C$1,712,725
(US$1,144,100) of total assets at May 31, 2001 and 2000 respectively.
During the fiscal year ended 2001, we raised a total of C$2,759,241
(US$1,843,173) from the issuance of special warrants, share purchase warrants
and the exercise of stock options. On May 29, 2001, convertible debentures were
converted into 900,000 common shares of the Company with an assigned value of
C$370,722 (US$239,857). In the fiscal year ended 2000, we raised C$1,680,570
(US$1,122,621) pursuant to a private placement.
As a development stage company, we have generated no revenues from the sale
of product during the fiscal year ended 2001. Interest income of C$97,101
(US$62,824) was earned during the year versus C$7,095 (US$4,739) in the prior
year, as a result of higher cash balances following the share issuance
previously discussed.
Operating expenses of C$3,061,814 (US$1,980,993) were significantly higher
than the prior year of C$1,318,579 (US$880,811), as a result of product and
market development activities undertaken.
During the year, we received C$200,694 (US$129,849) in repayable
contributions received from the National Research Council ("NRC") to assist in
pre-commercialization. In addition, we have been reimbursed for C$156,000
(US$100,932) in the current year for research and development projects carried
out by the NRC.
On the investment front, we expanded our shareholder base to include
potential customers and institutions. Fiscal 2001 began in early June with the
settlement of a May 31, 2000 private placement, in
16
which certain members of a U.S.-based buying group, the National Insulation
Contractors' Exchange (NICE), participated as lead investors, joined by
prominent institutional participants.
We are exposed to cash balances of United States bank balances and the
purchase cost for inputs sold in U.S. dollars. The size and nature of our
operations do not allow the managing of risk through the use of hedging
instruments.
B. LIQUIDITY AND CAPITAL RESERVE
We generate cash from private placement equity financings, interest income
on cash balances, receipt of recoverable goods and services tax, and government
assistance for research and development initiatives. We currently have
sufficient funds to operate for the next three months. See "Risk Factors -- We
only have sufficient funds to operate for the next three months as of the date
of this report and we cannot be sure that we will generate the necessary
additional capital to finance the growth of our business."
In the fiscal year ended 2000, we raised money through the issuance of a
convertible debenture for C$360,000 (US$243,789). In the fiscal year ended 2001,
this debenture was converted into capital stock. We have no other debt
outstanding besides trade payables in the normal course of business and
recoverable government contributions from future revenues.
Our cash balances are invested in bank balances and short term money market
instruments. As cash is required, money market instruments are redeemed and
transferred to bank balances to satisfy accounts payable. All of our cash and
cash equivalents are held in either United States and Canadian dollars. We do
not currently use any financial instruments for hedging purposes.
As at May 31, 2001 and through the date of this report, we have no
commitments for any material additions to our capital equipment.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
From inception to May 31, 2001, we have incurred C$2,657,300 (approx.
US$1,783,423 ) on research and development. To facilitate our transition to
operations, we shifted virtually all Research and Development to our
long-standing research collaborator, the National Research Council Industrial
Materials Institute, (NRC-IMI), an outside agency in Quebec, Canada with a
specialized infrastructure and personnel relating to our products. These R&D
activities are focused on making production of our products more cost effective
and improving product features to add value. Already at NRC-IMI's facility is an
R&D scale manufacturing line engineered, built and installed by the Company that
incorporates all our technical processing advances to date. This new arrangement
allows us to direct the activities of the Stoney Creek plant solely towards
product and market development.
Under a grant program with the Canadian federal government through the
National Research Council Canada ("NRC-Canada"), we are eligible to be
reimbursed for a portion of R&D expenses paid by us to NRC-IMI. In addition, we
are parties to a Repayable Contribution Agreement with NRC-Canada under which
NRC Canada agrees to make repayable contributions up to C$445,000 (approx.
US$288,257) for the performance of certain work we undertake. Amounts
contributed by NRC-Canada are repayable commencing January 1, 2004.
During the year we achieved breakthroughs in fiber properties, processing
methods, equipment design and product features. Aside from broadening our
know-how, these advances have led to an
17
application for another patent. Most significantly, we developed R-Buds(TM), an
innovation in blowing wool configuration with far reaching benefits. R-Buds(TM)
allows us to ship product cost-effectively on a national basis, and radically
simplifies the handling and installation of blowing wool by professional
contractors.
PATENTS
We have US patent number 5,582,905 (published on December 10, 1996) and
Canadian patent number 2,190,957 (published on April 6, 1999). These patents
cover fiber based plastic insulating products made without using adhesives or
mechanical methods to create thickness, or loft, which is a fundamental
requirement for efficient insulating performance. Although RTICA(TM) is made of
recycled PET, we believe that the patents cover a wide range of polymers. The US
patent will expire on December 9, 2016, and the Canadian patent will expire on
April 5, 2019. Applications for such patents are also pending in the European
Patent Office. Even though our patents do not prevent others from making
thermoplastic fiber insulation, we believe that they will result in their
incurring higher manufacturing costs due to the need to use more difficult
methods to create the loft. We have filed additional patent applications for our
method and related equipment designs in the United States. See "Risk Factors --
We may be unable to protect our patent and proprietary technology related to the
manufacture of RTICA(TM) due to our limited financial resources."
D. TREND INFORMATION
As a development stage company, we cannot yet determine what trends will
develop for our production, sales and inventory. While our marketing research
provides support that market demand for RTICA(TM) will continue once commercial
production begins, we can make no assurances that demand will actually continue
once we are capable of the production and sale of commercial quantities of
product.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth the information about our directors and
executive officers as of November 15, 2001.
Name Age Position with RTICA
- ---- --- -------------------
Warren D. Arseneau .... 53 Director & President
Roger J. Short ........ 62 Director
Robert H. Stikeman .... 56 Director, Chief Financial Officer & Secretary
Martin H. Beck ........ 49 Director & Vice President, Technology
Michael Boyd .......... 50 Director
Steve Letwin .......... 46 Director
Richard Galloway ...... 52 Vice-President, Sales and Marketing
18
WARREN ARSENEAU -- Warren Arseneau - President and Director since
inception of the Company in April of 1987. Mr. Arseneau has occupied a key role
in guiding the development of RTICA Inc. since its establishment in 1991. RTICA
Inc. is our wholly owned subsidiary and was named E2 Development Corporation
prior to its name change in 1999. From June 1991 to June 1998, Mr. Arseneau
served as a consultant to RTICA pursuant to a management contract between E2
Development Corporation and Mr. Arseneau. From June 1998 through December 1999,
Mr. Arseneau provided services to E2 Development Corporation, RTICA Inc. and
RTICA pursuant to a management contract with Flat Rock Management, a sole
proprietorship in Ontario engaged in management consulting which is wholly owned
by Mr. Arseneau. From December 1999 through May 15, 2000, Mr. Arseneau worked
without a written agreement. On May 15, 2000, a second consulting agreement was
effected between Flat Rock Management and RTICA Inc. Mr. Arseneau currently
serves as a consultant to RTICA under this contract which will remain in effect
until December 31, 2004. See "Executive Compensation -- Contracts with
Executives."
ROGER J. SHORT -- Director since inception. Since September 1996, Mr. Short
has owned Lecourt Enterprises Investment Management and Consulting. From
September 1994 to September 1996, Mr. Short was chairman and chief executive
officer of ES&S Limited, a privately held Canadian corporation in the industrial
distribution business. From January 1991 to September 1994, Mr. Short was
president, chief executive officer, and a director of Wajax Ltd., a Canadian
public corporation listed on both the Toronto Stock Exchange and the Montreal
Stock Exchange. He was also a director of Wajax Ltd.
ROBERT H. STIKEMAN -- Counsel, Director and Chief Financial Officer since
inception. Mr. Robert Stikeman has practised law in the Province of Ontario for
approximately twenty years. Since 1986 he has served as senior partner in
Stikeman, Graham, Keeley & Spiegel, a law firm which he was instrumental in
establishing. Prior to that he was employed in private practice since
approximately 1975.
MARTIN H. BECK -- Vice President, Technology and Director since inception.
Since 1988, Mr. Beck has been the principal shareholder and director of Dev Tech
Labs, Inc., a private corporation providing a research and development facility.
In 1986, Mr. Beck founded Dev Tech, Inc., a consulting and engineering
corporation. In 1991, Dev Tech, Inc. and Dev Tech Labs, Inc. merged. During the
period from 1977 to 1985, Mr. Beck was employed by Continental Can Corporation,
a public corporation in the United States, initially as a research and
development supervisor and then a general manager of research and engineering
and site manager in research and development, engineering and manufacturing
support and division quality control.
MICHAEL M. BOYD -- Director since inception. Since September 1997, Mr. Boyd
has been Vice-President of Merchant Banking with HSBC Capital (Canada) Inc.
HSBC Capital (Canada) Inc. is a subsidiary of the HSBC Bank Canada, a member of
the HSBC Group which is one of the largest financial institutions in the world.
From May 1995 to present, Mr. Boyd has also served as President of Junior
Industrial Finance Corp, a personal investment company. Mr. Boyd has over
twenty-four years of business experience in the areas of venture capital
investment, corporate finance and merchant banking. Mr. Boyd also serves as a
Director for Acton Food Group Inc. which is listed on the Toronto Stock Exchange
under the symbol AFF, Wescam Inc, listed on the Toronto Stock Exchange as WSC,
and Stake Technology Limited, listed on NASDAQ under the symbol STKL.
STEVEN LETWIN -- Director since November 2000. Mr. Letwin is currently the
Vice-President, Distribution & Services of Enbridge Inc. and prior to holding
this position he was the President and Chief Operating Officer of Energy
Services for Enbridge Inc. during the period of March 1999 through August 2000.
Prior to his employment with Enbridge Inc., he was employed as the Chief
Financial Officer (from
19
March 1998 to March 1999) and Vice-President, Marketing (from October 1995 to
March 1998) of TransCanada Pipelines. Mr. Letwin has held senior executive
positions with a number of companies in the energy transmission, exploration and
production sectors. He has been responsible for acquisitions and divestitures,
corporate economics and planning, corporate services and information systems,
and financial services in companies that were involved in gas transmission, oil,
refined products and electrical power.
RICHARD GALLOWAY -- Vice-President, Sales and Marketing since June 2000.
Prior to that period, from September 1999 to May 2000, Mr. Galloway performed
similar marketing services for RTICA on a part time basis. From September 1989
through December 1999, Mr. Galloway performed marketing services for Team
Contracting Inc. in the construction industry. Specifically Mr. Galloway worked
in the areas of construction management for additions and renovations and
construction of low income housing. His major clients included the United States
Military, the Department of Housing, in various locations through out the United
States, the New York City Board of Education and the City of New York Design &
Construction Department. Prior to his employment at Team Contracting, Inc., Mr.
Galloway was a sales and marketing executive in the insulation industry.
All Directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Directors currently receive
no compensation for serving on the Board of Directors other than reimbursement
of reasonable expenses incurred in attending meetings. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
There is no family relationship between any Director or Officer and any other
Director or Officer.
B. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid in respect of the
Chief Executive Officer and those individuals who received compensation in
excess of US$100,000 per year ("Named Executive Officer"). We have one Named
Executive Officer. There were no other individuals who received compensation in
excess of US$100,000 in the most recently completed fiscal year. During our most
recently completed financial year the Named Executive Officer received an
aggregate cash compensation by us and our wholly owned subsidiary, RTICA Inc. in
the amount of C$153,500 (approx. US$99,032).
SUMMARY COMPENSATION TABLE(1)
IN CANADIAN DOLLARS
Annual Compensation Long-Term Compensation
-------------------------------- ----------------------
Name and Principal Securities Underlying
Position Year Salary (C$) Bonus(C$) Options/SARs (#)
- ----------------- ---- ----------- --------- ----------------------
Warren Arseneau, President ..... 2001 153,500(1) 0(2) 200,000(3)
- ----------
(1) This represents management fees paid under a consulting contract pursuant
to which office and administrative expenses of approximately C$40,000
(approx. US$25,806) incurred by Mr. Arseneau were to be paid by Mr.
Arseneau.
(2) Under the terms of Mr. Arseneau's contract with RTICA, over the four year
term of the agreement, Mr. Arseneau is entitled to bonuses totaling up to
C$325,000 if RTICA meets certain economic and strategic goals. See
"Contracts with Executives."
(3) On December 1, 2000, Mr. Arseneau was granted 100,000 options which were
immediately exerciseable as to 100,000 shares of Common Stock of RTICA at
an exercise price of C$0.70 (US$0.45) per share and an expiration date of
December 1, 2003. On January 15, 2001, Mr. Arseneau was granted another
100,000 options which were immediately exerciseable as to 100,000 shares of
Common Stock of RTICA at C$0.57 (US$0.37) per share and an expiration date
of January 15, 2004. The options were granted pursuant to the terms of the
Arseneau Consulting Agreement described below under "Contracts with
Executives."
20
EMPLOYMENT AGREEMENTS
RTICA Inc., the wholly owned subsidiary of RTICA, signed a consulting
agreement with Warren Arseneau dated May 15, 2000 to manage RTICA (the "Arseneau
Consulting Agreement"). The Arseneau Consulting Agreement terminates on December
31, 2004. In consideration for the services to be provided by Mr. Arseneau, we
have agreed to pay the following consulting fees to Mr. Arseneau: C$13,000
(approx. US$8,513) per month during calendar 2001; C$13,500 (approx. US$8,840)
per month during calendar 2002; C$14,000 (approx. US$9,168) per month during
calendar 2003; C$1,500 (approx. US$982) per day, for a maximum of 100 days
during calendar 2004. Mr. Arseneau is also entitled to bonuses totaling
C$325,000, in the event the company meets certain economic and strategic goals.
In the event of a sale of RTICA, Mr. Arseneau will be entitled to one percent
(1%) of the sale proceeds. In addition, in the event of a change in control, we
will owe Mr. Arseneau a penalty fee of C$750,000 (approx. US$485,286) if the
Arseneau Consulting Agreement is terminated within 24 months of the change in
control.
In addition, the Arseneau Consulting Agreement provides for Mr. Arseneau to
be granted options to purchase a total of 425,000 shares of RTICA's common
stock. The options are to be issued as to 100,000 shares on each of December 1,
2000, January 15, 2001, January 15, 2002, and January 15, 2003, and as to the
remaining 25,000 shares underlying the options on January 15, 2004. The options
shall be immediately exercisable at the fair market value on the date of
issuance. Mr. Arseneau has been granted 200,000 options pursuant this grant. Mr.
Arseneau is also reimbursed for certain travel expenses and other direct
expenses made on behalf of RTICA.
RTICA Inc. has also signed a confidentiality, non-competition and
intellectual property agreement with Warren Arseneau dated May 15, 2000. The
term of the agreement is for 3 years after termination of the consulting
agreement with Mr. Arseneau.
Mr. Michael Boyd, through Junior Industrial Finance Corp., ("JIFC")
provides financing, strategic planning and other consulting services to RTICA
pursuant to a consulting agreement between RTICA Inc., a wholly owned subsidiary
of RTICA, and JIFC. The agreement is effective as of April 1, 2000 and
terminates on December 30, 2001. Under the agreement, Mr. Boyd receives US$500
per month plus US$50 per month expense allowance and reimbursement for out of
pocket expenses incurred in connection with services performed.
Mr. Martin Beck provides financing, strategic planning and other consulting
services to RTICA pursuant to a consulting agreement with RTICA Inc., a wholly
owned subsidiary of RTICA. The agreement is effective as of April 1, 2000 and
terminates on December 30, 2002. Under the agreement, Mr. Beck receives US$1,000
for up to ten hours consulting services per month plus US$100 expense allowance
for up to twenty hours consulting services per month. For consulting services
over ten hours per month, Mr. Beck is paid fees of US$1,000 per day and US$50
per day for expenses incurred over twenty hours of consulting services per
month. In addition, Mr. Beck is entitled to a bonus of US$5,000
21
in the event RTICA secures financing of at least C$2,000,000 (approx.
US$1,294,096) during the term of the agreement.
Mr. Roger Short serves RTICA pursuant to a consulting agreement executed by
RTICA Inc. and Mr. Short. The agreement is effective as of January 1, 2000 and
terminates on December 31, 2001. Under the agreement, Mr. Short receives C$2,500
(approx. US$1,609) per month plus C$300 (approx. US$203) per month expense
allowance for up to two days of consulting services per month and reimbursement
for out of pocket expenses incurred by Mr. Short in connection with services
performed. For consulting services over two days per month, Mr. Short is paid
fees of C$1,600 (approx. US$1,035) per day.
Since June 2000, Mr. Richard Galloway provided consulting services to RTICA
related to sales and marketing on a full time basis and is currently paid
US$10,000 per month for services performed. Mr. Galloway has no written contract
with us, however, we intend to enter a written consulting agreement with Mr.
Galloway during the fiscal year ending May 31, 2002. Mr. Galloway has not been
granted any bonuses or options to date.
None of our other executive officers or directors presently receives or has
received a salary or other compensation from RTICA or RTICA Inc. However, it is
intended that certain of our officers may be employed in the future pursuant to
written employment agreements. We presently believe that none of the salaries
with officers will exceed C$30,000 (approx. US$20,634) during the fiscal year
ending 2002.
STOCK OPTION PLAN
The shareholders of RTICA have adopted the RTICA Corporation Stock Option
Plan in order to provide an incentive for key directors, officers and employees.
RTICA's stock option plan provides that the Board of Directors of RTICA may,
from time to time in its discretion, grant to key directors, officers and
employees and consultants providing significant time and attention to RTICA
under contract to RTICA, or the registered retirement savings plan, or holding
companies of them, the option to purchase shares of RTICA's common stock. The
Board of Directors may determine the market price per share of common stock and
the number of shares of common stock which may be allotted to each such person
or plan and all other terms and conditions of the option, in accordance with the
applicable policies of any relevant regulatory authority or the Canadian Venture
Exchange. These options will be exercisable for a period not exceeding 5 years
from the date of grant. The shareholders have authorized the granting of up to
3,500,000 options by the directors. Currently there are 3,240,250 outstanding,
which have been granted at the following exercise prices: 1,810,250 at $0.20 per
share; 5,000 at $0.22 per share; 55,000 at $0.25 per share; 30,000 at $0.35 per
share; 115,000 at $0.39 per share; 60,000 at $0.53 per share; 100,000 at $0.55
per share; 125,000 at $0.70 per share, and 940,000 at $0.75 per share.
RTICA's stock option plan provides that if a participant ceases to be
eligible due to the loss of corporate office (being that of an officer or
director) or employment or consultant status, the option shall expire after 90
days. The stock option plan also provides that the estate of a deceased
participant can exercise the deceased's options for a period not exceeding six
months following the date of the death.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND
LIMITATION OF LIABILITY
Part VII of the Company's By-Laws limits the personal liability of
directors and officers to the Company or its shareholders for monetary damages
arising from a breach of their fiduciary duty in certain circumstances. Part VII
of the Company's By-Laws also provides that the Company may
22
indemnify its officers and directors to the fullest extent permitted by the
Alberta Business Corporations Act from any liability and all costs, charges and
expenses that such officer or director sustains in respect to any action, suit
or proceeding that is proposed or commenced against him or her for or in respect
the execution of the duties of his or her office. Part 9 of the Alberta Business
Corporations Act authorizes a corporation to indemnify directors and officers
unless such party has been adjudicated in any proceeding not to have acted in
good faith in the reasonable belief that his action was in the best interests of
the corporation. The effect of these provisions is to permit such
indemnification by us for liabilities arising under the Securities Act.
C. COMMITTEES OF THE BOARD OF DIRECTORS
There are two Board Committees, the Audit Committee, comprised of three
members, two of whom are unrelated directors and the Compensation Committee,
comprised of three members, two of whom are unrelated directors.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors (the "Committee") is composed
of three directors, two of whom are non-management directors. The current
members of the Committee are Robert Stikeman, Martin Beck and Michael Boyd. The
Audit Committee has direct communications channels with internal personnel
responsible for financial statement preparation and with the Corporation's
external auditors. The Committee monitors audit functions and the preparation of
financial statements and meets with outside auditors independent of management.
Additional responsibilities include the review of any auditors' reports to
management and review of internal controls and transactions between officers and
the Corporation. The Audit Committee met more than once between May 31, 2000 and
May 31, 2001.
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the "Committee") is
composed of three directors, two of whom are non-management directors. The
current members of the Committee are Robert Stikeman, Martin Beck and Michael
Boyd. The Compensation Committee reviews the executive officers' compensation
and management's recommendations on stock option grants to employees. The
Committee meets as required to make recommendations to the Board of Directors
with respect to senior executive compensation.
The compensation of the Corporation's executive officers including those
named in the Summary Compensation Table below (the "Named Executive Officers")
is determined by the Board of Directors based on recommendations made by the
Committee.
Compensation for executive officers, including each of the Named Executive
Officers, consists of a base salary and long-term share-based incentives, all of
which are administered by the Committee.
The Committee establishes salary ranges for the positions held by executive
officers following an annual review of the responsibilities of the officer, the
officer's performance, experience and years of service and the salary levels for
comparable positions in other comparable companies. The Compensation Committee
met more than once between May 31, 2000 and May 31, 2001.
23
D. EMPLOYEES
We currently employ ten full-time employees and three full-time
consultants, including Warren Arseneau, President of RTICA, who provides
services pursuant to a written consulting agreement. See "Management --
Contracts with Executives." All of our full-time employees perform services for
us at our Stoney Creek facility. As we grow, we will be required to hire, train,
integrate, manage and retain our workforce including our technology,
manufacturing, engineering, sales and business development staff.
E. SHARE OWNERSHIP
The following table sets forth the beneficial ownership of shares of Common
Stock of the Company as of November 15, 2001 of (i) the Chief Executive Officer
and each of the Company's other executive officers, (ii) each director and
nominee to serve as a director and (iii) all directors and executive officers of
the Company as a group:
==============================================================================================================
NAME OF | | AMOUNT AND NATURE OF | PERCENT OF
BENEFICIAL OWNER | POSITION WITH RTICA | BENEFICIAL OWNERSHIP | CLASS(8)
- ----------------------------------------|-----------------------------|------------------------|--------------
Warren Arseneau | Director & President | 4,286,307(1) | 12.44%
- ----------------------------------------|-----------------------------|------------------------|--------------
Martin H. Beck | Director & Vice | |
| President, Technology | 5,042,962(2) | 14.57%
- ----------------------------------------|-----------------------------|------------------------|--------------
Michael Boyd | Director | 1,173,722(3) | 3.41%
- ----------------------------------------|-----------------------------|------------------------|--------------
Richard Galloway | Vice President, Sales & | |
| Marketing | 33,503 | *
- ----------------------------------------|-----------------------------|------------------------|--------------
Stevin Letwin | Director | 100,000(4) | 0.29%
- ----------------------------------------|-----------------------------|------------------------|--------------
Roger J. Short | Director | 1,577,518(5) | 4.63%
- ----------------------------------------|-----------------------------|------------------------|--------------
Robert H. Stikeman | | |
Stikeman, Graham, Keeley & Spiegel | Director, Chief Financial | |
220 Bay Street | Officer & Secretary | 368,022(6) | 1.08%
7th Floor, Box 24 | | |
Toronto, Ontario M5J 2W4 Canada | | |
- ----------------------------------------|-----------------------------|------------------------|--------------
All directors and executive officers | | |
as a group (7 persons) | | 12,548,531(7) | 34.72%
==============================================================================================================
* Less than one percent.
(1) Includes 410,000 shares of common stock subject to options granted to Mr.
Arseneau that are currently exercisable.
(2) Includes 4,083,212 shares of common stock owned by Greensulate L.L.C., a
private U.S. company controlled by Martin Beck. Also includes 567,750
shares subject to options granted to Mr. Beck that are currently
exercisable.
(3) Includes 352,631 shares of common stock owned directly by Mr. Boyd; 141,937
shares owned indirectly through Investor Services in Trust for Mr. Boyd's
RRSP; and 362,154 shares owned indirectly through Junior Industrial Finance
Corp., a private company wholly owned by Mr. Boyd. Includes 235,000 shares
subject to options granted to Mr. Boyd that are currently exercisable. Also
includes an aggregate of 95,000
24
shares that Mr. Boyd has the right to acquire from various persons
including 25,000 shares from each of Messrs. Arseneau, Short and Beck. The
options with respect to the 95,000 shares are exercisable at C$0.60 and
expire on June 14, 2003.
(4) Includes 100,000 shares of common stock subject to options granted to Mr.
Letwin that are currently exercisable. Does not include 3,627,723 shares of
common stock owned by Enbridge, Inc., where Mr. Letwin is an officer.
(5) Includes 577,500 shares of common stock subject to options granted to Mr.
Short that are currently exercisable.
(6) Includes 100,000 shares of common stock subject to options granted to Mr.
Stikeman that are currently exercisable.
(7) Includes an aggregate of 2,085,250 shares of common stock issuable upon
exercise of currently outstanding options granted to officers and directors
of RTICA that are currently exercisable.
(8) Shares of common stock which a person has the right to acquire within 60
days of the date of this annual report pursuant to the exercise of options,
warrants or other convertible securities are deemed to be outstanding for
the purpose of computing the percentage ownership of such individual or
group, but are not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person shown in the table. See
"Directors and Executive Officers -- Compensation."
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
To our knowledge, we are not directly or indirectly owned or controlled by
another corporation or by any foreign government.
The following table sets forth information as of November 15, 2001 with
respect to the beneficial ownership of shares of common stock currently issued
and outstanding by (i) each person known to us to be the owner of more than 5%
of the outstanding shares of common stock, (ii) each officer and director, and
(iii) all officers and directors as a group. Unless otherwise indicated, the
address for each individual listed is 999 Barton Street, Stoney Creek, Ontario
L8E 5H4 Canada.
=============================================================================
| | | PERCENT OF
TITLE OF CLASS | NAME | AMOUNT | CLASS(1)
- -----------------|---------------------------------|-------------|-----------
Common Stock | Warren Arseneau | 4,286,307(2)| 12.44%
- -----------------|---------------------------------|-------------|-----------
Common Stock | Martin H. Beck | 5,042,962(3)| 14.57%
- -----------------|---------------------------------|-------------|-----------
Common Stock | Enbridge Inc.(4) | 3,627,723 | 10.65%
| Canada Trust Tower | |
| 421 7th Avenue SW, Suite 2900 | |
| Calgary, Alberta T2P 4K9 Canada | |
- -----------------|---------------------------------|-------------|-----------
Common Stock | Nice Investments LLC(5) | 3,087,500 | 9.07%
| 40 West Gude Drive, Suite 210 | |
| Rockville, Maryland 20850 | |
=============================================================================
25
- -----------
(1) Shares of common stock which a person has the right to acquire within 60
days of the date of this annual report pursuant to the exercise of options,
warrants or other convertible securities are deemed to be outstanding for
the purpose of computing the percentage ownership of such individual or
group, but are not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person shown in the table. See
"Directors and Executive Officers -- Compensation."
(2) Includes 410,000 shares subject to options granted to Mr. Arseneau that are
currently exercisable.
(3) Includes 4,083,212 shares owned by Greensulate L.L.C., a private U.S.
company controlled by Martin Beck. Also includes 567,750 shares subject to
options granted to Mr. Beck that are currently exercisable.
(4) Enbridge Inc. is a public company that trades on the Toronto Stock Exchange
under the symbol ENB and on NASDAQ under the symbol ENBR.
(5) Nice Investments LLC is a Delaware limited liability company owned by
members of a trade association in the construction industry.
B. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as set forth below, from the beginning of our last fiscal year
through the date of this report we have not entered into any transactions with
any director, executive officer, director nominee, 5% or more shareholder, or
any member of the immediate families of the foregoing persons (including
spouses, parents, children, siblings and in-laws).
1. In fiscal 2001, DevTech Labs Inc. ("DevTech") provided us with product
and process development services in consideration for US$10,668. Mr.
Martin Beck, a Director of RTICA is the President, Director and a
principal shareholder of DevTech. In addition, since January 1, 2000,
we have paid Mr. Beck US$1,100 per month as consulting fees. The terms
of this contract are set forth in the section entitled "Executive
Compensation -- Contracts with Executives."
2. On November 23, 1999, DevTech loaned RTICA, Inc, a wholly owned
subsidiary of RTICA, US$25,000 pursuant to a promissory note bearing
interest at a rate of 5.42% per annum with a maturity date of November
22, 2000. There was no prepayment penalty under the terms of the note.
RTICA Inc. repaid the total indebtedness due under the note prior to
the maturity date.
3. Messrs. Arseneau, Boyd and Short, all of whom are Directors of RTICA,
perform services for the company pursuant to consulting contracts. The
terms of these contracts are set forth in the section entitled
"Executive Compensation -- Contracts with Executives."
4. Mr. Robert Stikeman through Stikeman, Graham, Keeley & Spiegel
receives fees from RTICA in consideration for legal services provided
to RTICA.
26
We believe that the terms of the transactions described above were
comparable to those which could have been obtained from non-affiliated parties.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS Pages F-1 to F-26
Independent Auditors' Report.............................................. F-1
Comments by Auditors for U.S. Readers on Canada-U.S. Reporting
Differences............................................................. F-2
Consolidated Balance Sheets as of May 31, 2001 and 2000................... F-3
Consolidated Statements of Operations and Deficit for the Years ended
May 31, 2001 and 2000 and cumulative period from June 13, 1991
(inception) to May 31, 2001............................................. F-4
Consolidated Statements of Cash Flows for the Years ended
May 31, 2001 and 2000 and cumulative period from June 13, 1991
(inception) to May 31, 2000............................................. F-5
Notes to Consolidated Financial Statements................................ F-6
ITEM 9. THE OFFER AND LISTING
Not Applicable, except for Item 9.A.4 and Item 9.C.
A. PRICE RANGE OF COMMON STOCK
Our authorized capital stock consists of an unlimited number of shares of
common stock, of which 34,052,636 were issued and outstanding as of November 15,
2001, and an unlimited number of Preferred Stock, none of which is outstanding.
Our common stock currently trades on the Canadian Venture Exchange (CDNX) under
the symbol RTN. We have no established trading market in the United States.
The following table sets forth, for the period indicated, the high and low
bid prices, in Canadian Dollars for our shares of common stock from May 31, 1997
through May 31, 2001, as reported by the CDNX:
High Low
----- -----
(In Canadian Dollars)
Year Ended May 31, 1998* ............. $1.00 $0.43
Year Ended May 31, 1999 .............. 0.52 0.08
Year Ended May 31, 2000 .............. 1.20 0.18
First Quarter ............... 0.50 0.18
Second Quarter .............. 0.50 0.35
Third Quarter ............... 0.45 0.30
Fourth Quarter .............. 1.20 0.22
Year Ending May 31, 2001 ............. $0.90 0.46
First Quarter ............... 0.90 0.57
Second Quarter .............. 0.84 0.58
Third Quarter ............... 0.76 0.50
Fourth Quarter .............. 0.71 0.46
- ----------
* From initial listing in October 1997.
27
The following table sets forth, for the past six months, the high and low
bid prices, in Canadian Dollars for our shares of common stock, as reported by
the CDNX:
Month Ended High Low
----------- ----- ----
(In Canadian Dollars)
May 31, 2001 ........................ $0.65 0.55
June 30, 2001 ....................... 0.90 0.54
July 31, 2001 ....................... 0.75 0.61
August 31, 2001 ..................... 0.86 0.68
September 30, 2001 .................. 0.74 0.55
October 31, 2001 .................... 0.71 0.58
On November 15, 2001, both the high and low bid prices, in Canadian dollars
for shares of our common stock were $0.61 (US$0.384) and $0.60 (US$0.378)
respectively.
C. MARKETS
Our common stock currently trades on the Canadian Venture Exchange (CDNX)
under the symbol RTN. We have no established trading market in the United
States. Although we are seeking a market maker to apply to the National
Association of Securities Dealers to quote our stock on the Over the Counter
Bulletin Board (OTCBB), no assurances can be made that any market maker will
agree to quote our stock on the OTCBB or that a public market for our shares
will ever develop in the United States.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not Applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Incorporated by reference to exhibits 3.1.1 to 3.1.3 to our registration
statement on Form SB-2 (Reg. No. 333-50212) filed November 17, 2000.
C. MATERIAL CONTRACTS
Other than the NRC-IMI contract for research and development services (see
"Item 5. Operating and Financial Review and Prospects -- Research and
Development") and the consulting contracts with Messrs. Arseneau, Beck, Boyd and
Short (see "Item 6.B. Executive Compensation -- Employment Agreements"), in the
past two years, we have not entered into any material contracts other than
contracts entered into in the ordinary course of our business.
28
D. EXCHANGE CONTROLS
There is no law or governmental decree or regulation in Canada that
restricts the export or import of capital, or affects the remittance of
dividends, interest or other payments to non-resident holders of our Common
Stock, other than withholding tax requirements.
There is no limitation imposed by Canadian law or by our articles of
incorporation or our other charter documents on the right of a non-resident to
hold or vote Common Stock, other than as provided by the INVESTMENT CANADA ACT,
the NORTH AMERICAN FREE TRADE AGREEMENT IMPLEMENTATION ACT (Canada) and the
WORLD TRADE ORGANIZATION AGREEMENT IMPLEMENTATION ACT. The INVESTMENT CANADA ACT
requires notification and, in certain cases, advance review and approval by the
Government of Canada of the acquisition by a "non-Canadian" of "control" of a
"Canadian business", all as defined in the INVESTMENT CANADA ACT. Generally, the
threshold for review will be higher in monetary terms for a member of the World
Trade Organization or North American Free Trade Agreement.
E. MATERIAL UNITED STATES AND CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The Canada-United States Income Tax Convention, 1980, as amended (the
"Treaty") essentially calls for taxation of shareholders by the shareholder's
country of residence. In those instances in which a tax may be assessed by the
other country, a corresponding credit against the tax owed in the country of
residence is generally available, subject to limitations.
UNITED STATES
The following describes material United States federal income tax
consequences of the purchase, ownership and disposition of RTICA shares of
common stock by a shareholder who is a citizen or resident of the United States
or a United States domestic corporation or who otherwise will be subject to
United States federal income tax. This summary is based on the United States
Internal Revenue Code of 1986 (the "Code"), as amended, administrative
pronouncements, judicial decisions and existing and proposed Treasury
Regulations, changes to any of which subsequent to the date of this prospectus
may affect the tax consequences described herein. This summary discusses only
the material United States federal income tax consequences to those beneficial
owners holding the securities as capital assets within the meaning of Section
1221 of the Code and does not address the tax treatment of a beneficial owner
that owns 10% or more of shares of the Company's common stock. It is for general
guidance only and does not address the consequences applicable to certain
specialized classes of taxpayers such as certain financial institutions,
insurance companies, dealers in securities or foreign currencies, certain
religious, scientific, charitable and similar tax-exempt organizations, or
United States persons whose functional currency (as defined in Section 985 of
the Code) is not the United States dollar. Persons considering the purchase of
these securities should consult their own tax advisors with regard to the
application of the United States and other income tax laws to their particular
situations. In particular, a United States shareholder should consult his own
tax advisor with regard to the application of the United States federal income
tax laws to his situation.
1. COMPANY'S STATUS AS A PASSIVE FOREIGN INVESTMENT COMPANY
The Company may have qualified as a passive foreign investment company
("PFIC") for United States federal income tax purposes for one or more of its
taxable years and may in
29
future years qualify as a PFIC. Consequently, a U.S. shareholder who owns
(directly or indirectly) shares of the Company's common stock may be subject to
the PFIC tax rules discussed below.
A corporation is considered a PFIC for any taxable year if either (i) at
least 75% of its gross income is "passive income", or (ii) at least 50% of the
value of its assets (based on an average of the quarterly values of the assets
during the taxable year) is attributable to assets that are held for the
production of passive income. For purposes of this test, the Company would be
treated as owning the Company's proportionate share of the assets and earning
its proportionate share of the income of any other corporation in which the
Company owns, directly or indirectly, more than 25% (by value) of the stock. You
should consult your tax advisor to determine whether the Company qualified as a
PFIC in any taxable year.
If you are a U.S. person who directly or indirectly holds shares of the
Company's common stock during any taxable year in which the Company qualified as
a PFIC, you will be subject to special tax rules with respect to any "excess
distributions" that you receive and any gain you may realize from a (direct or
indirect) sale or other disposition (including a pledge) of the shares, unless
you make a Section 1295 election to have the Company treated as a "qualified
electing fund" (a "QEF"). If you do not make such an election to have the
Company treated as a QEF, the following rules will apply:
1. Distributions to a U.S. shareholder made by the Company during a
taxable year that are "excess distributions" (defined generally as
distributions in any taxable year which exceed 125% of the average
distributions in the three preceding taxable years (or such fewer
number of preceding taxable years in the shareholder's holding
period)) must be allocated ratably to each day of such shareholder's
holding period. The portion of any excess distribution allocated to
the U.S. shareholder's current taxable year and to taxable years when
the Company was not a PFIC must be included in the shareholder's gross
income for the year of the distribution as ordinary income. The
remainder of the excess distribution is subject to a "deferred tax,"
which, in general, is the tax (computed at the highest rate of tax)
that would have been owed if that remainder had been included in the
shareholder's income in a previous year, plus an interest charge. The
portion of any distribution that is not an "excess distribution" will
be subject to the tax rules regarding dividends (which generally treat
such distributions as ordinary income to the extent of the
distributing corporation's allocable earnings and profits, and treat
any excess either as a return of capital or as capital gain).
2. The entire amount of any gain realized upon the (direct or indirect)
sale or other disposition (including certain dispositions, such as a
pledge, which might not otherwise result in the recognition of gain
for U.S. income tax purposes) of shares of the Company stock will be
treated as an excess distribution in the year of such (direct or
indirect) sale or other disposition and as a consequence will be taxed
as ordinary income and, to the extent allocable to taxable years prior
to the year of such sale or disposition, will be subject to an
interest charge. Limitations may apply to the recognition of losses on
any such sale or other disposition.
30
If you are a U.S. person who directly or indirectly holds shares of the
Company's common stock during any taxable year in which the Company qualified as
a PFIC and you make a Section 1295 election to have the Company treated as a
QEF, you will be currently taxable on your pro rata share of the Company's
ordinary earnings and capital gain (at ordinary income and capital gains rates,
respectively) for each taxable year of the Company, regardless of whether or not
distributions are made to the shareholders. Your tax basis in your shares will
be increased to reflect taxed but undistributed income. Distributions of income
that had previously been taxed will result in a corresponding reduction of tax
basis in the shares and will not be taxed again as a distribution to you.
A shareholder may make a Section 1295 election with respect to a PFIC for
any taxable year of the shareholder. Once a Section 1295 election is made, it
remains in effect, although not applicable, during those years that the
corporation is not a PFIC. If in a subsequent year the corporation again
qualifies as a PFIC, the Section 1295 election previously made is still valid
and binding on the shareholder. Once a shareholder makes a Section 1295
election, the shareholder may revoke the election only with the consent of the
IRS.
If a shareholder timely makes a Section 1295 election for the first taxable
year of the Company in which it qualified as a PFIC that is included in the
shareholder's holding period, then the "excess distribution" rules described
above will not apply to such shareholder; if the shareholder makes a Section
1295 election but it is not for such first taxable year, then the "excess
distribution" rules and the rules governing shareholders who make a Section 1295
election may both apply to such shareholder. A shareholder who timely files a
Section 1295 election for the first taxable year of the Company in which it
qualified as a PFIC that is included in the shareholder's holding period will be
taxable at capital gains rates when he sells or otherwise disposes of his
Company stock (assuming the stock is otherwise a capital asset in his hands).
A shareholder making the Section 1295 election must make the election on or
before the due date, as extended, for filing the shareholder's income tax return
for the first taxable year to which the election will apply. In making the
election, the shareholder must provide various information (required by the IRS
regulations) to the IRS. The rules relating to the Section 1295 election are
complex and require considerable information to be supplied to the IRS. Any
shareholder contemplating making a Section 1295 election should consult with his
own tax advisor with respect to the timing, mechanics and consequences of making
such an election.
Alternatively, a U.S. person who directly or indirectly holds shares of the
Company's common stock during any taxable year in which the Company qualified as
a PFIC may elect to mark the Company's stock to market each year. In general,
such a shareholder would include in income each year an amount equal to the
excess, if any, of the fair market value of the Company's stock as of the close
of the Company's taxable year over the shareholder's adjusted tax basis in such
stock. Such increase would be taxable to the electing shareholder as ordinary
income. An electing shareholder would generally be allowed a deduction if the
electing shareholder's adjusted tax basis in the Company's stock exceeds its
fair market value as of the close of the Company's taxable year. However, such
deductions would be allowed only to the extent of any net mark-to-market gains
with respect to the stock that were included in income by the shareholder for
prior taxable years. A shareholder who makes this election for the first taxable
year in his holding period for which the Company qualified as a PFIC would not
be subject to the excess distribution rules referred to above; however, if the
mark-to-market election is not made for such first taxable year, a special
coordination rule will apply for the first taxable year for which the election
is in effect. A mark-to-market election may not be revoked without the consent
of the IRS and once made, would apply to all taxable years during which the
Company's common stock is traded on an established securities exchange.
31
Any shareholder wishing to make the mark-to-market election should consult
his own tax advisor as to the timing, mechanics and consequences of making such
an election.
Special rules apply with respect to the calculation of the foreign tax
credit with respect to income attributable to a PFIC.
Each U.S. shareholder should consult his own tax advisor with respect to
how the PFIC rules may affect such shareholder's tax situation, in particular
the annual reporting requirements and any available shareholder elections.
2. IF THE COMPANY IS NOT A PFIC
If the Company does not qualify as a PFIC for any taxable year in which a
U.S. shareholder holds (directly or indirectly) stock in the Company, the
following discussion describes the United States federal income tax consequences
arising from the holding and disposition of the Company's common stock.
A United States shareholder generally will realize (to the extent of the
Company's current and accumulated earnings and profits) foreign source ordinary
income on the receipt of cash dividends, if any, with respect to shares of the
Company's common stock equal to the United States dollar value of such
dividends, determined by reference to the exchange rate in effect on the day the
dividends are received by (or credited to) the United States shareholder (with
the value of such dividends computed before any reduction for any Canadian
withholding tax). To the extent that distributions exceed the current and
accumulated earnings and profits of the Company, such excess will be treated
first as a return of capital (up to the U.S. shareholder's adjusted tax basis in
the shares) and thereafter as gain from the sale or exchange of such shares.
United States shareholders should consult their own tax advisors regarding the
treatment of foreign currency gain or loss, if any, on any dividends received
which are converted into United States dollars on a date subsequent to receipt.
Subject to the requirements and limitations imposed by the Code, a U.S.
shareholder may elect to claim (as a foreign tax credit against the U.S. federal
income tax liability of such holder) the amount of any Canadian tax withheld or
paid with respect to dividends on the shares of the Company's common stock.
Dividends on the shares of the Company's common stock generally will constitute
"passive income" or, in the case of certain U.S. shareholders, "financial
services income," for U.S. foreign tax credit purposes. Subject to the
requirements and limitations imposed by the Code, U.S. shareholders who do not
elect to claim any foreign tax credits may claim a deduction (in computing their
United States taxable income) for any Canadian income tax withheld or paid with
respect to such dividends. Dividends paid on the shares of the Company's common
stock will generally not be eligible for the dividends received deduction
available in certain cases to U.S. corporations.
Upon a sale or exchange of a share of the Company's common stock, a U.S.
shareholder will generally recognize gain or loss equal to the difference
between the amount realized on such sale or exchange and the adjusted tax basis
of such share of common stock. Generally, any gain or loss recognized as a
result of the foregoing will be taxed as capital gain or loss (assuming the
stock was a capital asset in the shareholder's hands) and will be either
long-term or short-term depending upon the period of time the shares that were
sold or exchanged, as the case may be, were held. Preferential tax rates for
long term capital gains apply generally to a U.S. shareholder which is an
individual, estate or trust. Deductions for capital losses, however, may be
subject to significant limitations.
EACH INVESTOR SHOULD CONSULT HIS OWN TAX ADVISOR TO DISCUSS THE TAX
CONSEQUENCES OF OWNING SHARES IN VIEW OF HIS PARTICULAR SITUATION.
32
CANADA
The following is a summary of material Canadian federal income tax
considerations generally applicable to the acquisition, holding and disposition
of shares of our common stock purchased pursuant to this prospectus by a United
States shareholder who, for the purposes of the Income Tax Act (Canada) and the
Canada-United States Income Tax Convention, as applicable and at all relevant
times:
o is resident in the United States and not resident in Canada;
o holds shares of our common stock as capital property;
o does not have a "permanent establishment" or "fixed base" in Canada;
and
o deals with us at arm's length.
Special rules, which are not discussed in this summary, may apply to "financial
institutions" and to non- resident insurers carrying on an insurance business in
Canada and elsewhere.
This summary is based on the current provisions of the Income Tax Act
(Canada) and the regulations thereunder and the Canada-United States Income Tax
Convention, all specific proposals to amend the Income Tax Act (Canada) or the
regulations thereunder announced by the Canadian Minister of Finance prior to
the date of this prospectus and the current published administrative practices
of Revenue Canada. This summary does not otherwise take into account or
anticipate any changes in law or administrative practice nor does it take into
account income tax laws or considerations of any province or territory of Canada
or any jurisdiction other than Canada, which may differ from the federal income
tax consequences described herein.
EACH INVESTOR SHOULD CONSULT HIS TAX ADVISOR TO DISCUSS THE TAX
CONSEQUENCES OF OWNING SHARES IN VIEW OF HIS PARTICULAR SITUATION.
DIVIDENDS
Under the Income Tax Act (Canada) and the Canada-United States Income Tax
Convention, dividends paid or credited, or deemed to be paid or credited, on the
shares of our common stock to a United States shareholder who owns less than 10%
of our voting shares will be subject to Canadian withholding tax at the rate of
15% of the gross amount of such dividends or deemed dividends.
Under the Canada-United States Income Tax Convention, dividends paid or
credited to certain religious, scientific, charitable and similar tax exempt
organizations and certain pension organizations that are resident, and exempt
from tax, in the United States and that have complied with certain
administrative procedures are exempt from this Canadian withholding tax.
EACH INVESTOR SHOULD CONSULT HIS TAX ADVISOR TO DISCUSS THE TAX
CONSEQUENCES OF OWNING SHARES IN VIEW OF HIS PARTICULAR SITUATION.
DISPOSITION OF SHARES OF COMMON STOCK
A capital gain realized by a United States shareholder on a disposition or
deemed disposition of shares of our common stock will not be subject to tax
under the Income Tax Act (Canada) unless such shares constitute taxable Canadian
property within the meaning of the Income Tax Act (Canada) at the time of the
disposition or deemed disposition. In general, the shares of our common stock
will not be "taxable Canadian property" if they are listed on a prescribed
exchange, which includes the Canadian Venture Exchange on which our shares are
listed, or at any time within the five-year period immediately
33
preceding the disposition the United States shareholder, persons with whom the
United States shareholder did not deal at arm's length, or the United States
shareholder together with such persons owned or had an interest in or a right to
acquire more than 25% of any class or series of our shares. A deemed disposition
of shares of our common stock will arise on the death of a United States
shareholder.
EACH INVESTOR SHOULD CONSULT HIS TAX ADVISOR TO DISCUSS THE TAX
CONSEQUENCES OF OWNING SHARES IN VIEW OF HIS PARTICULAR SITUATION.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable.
G. STATEMENT BY EXPERTS
Not Applicable.
H. DOCUMENTS ON DISPLAY
Any statement in this Annual Report about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this Annual Report. You must review the
exhibits themselves for a complete description of the contract or document.
You may review a copy of our filings with the SEC, including exhibits and
schedules filed with it, at the SEC's public reference facilities in Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the Regional
Offices of the SEC located at 233 Broadway, New York, New York 10279 and at the
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
You may also obtain copies of such materials from the Public Reference Section
of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. You may call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. The SEC maintains a Web site
(HTTP://WWW.SEC.GOV) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
Although we make many of our filings with the SEC electronically as a foreign
private issuer, we are not obligated to do so.
You may read and copy any reports, statements or other information that we
file with the SEC at the addresses indicated above and you may also access them
electronically at the Web site set forth above. These SEC filings are also
available to the public from commercial document retrieval services.
WE ARE REQUIRED TO FILE REPORTS AND OTHER INFORMATION WITH THE SEC UNDER
THE SECURITIES EXCHANGE ACT OF 1934. REPORTS AND OTHER INFORMATION FILED BY US
WITH THE SEC MAY BE INSPECTED AND COPIED AT THE SEC'S PUBLIC REFERENCE
FACILITIES DESCRIBED ABOVE. AS A FOREIGN PRIVATE ISSUER, WE ARE EXEMPT FROM THE
RULES UNDER THE EXCHANGE ACT PRESCRIBING AND FURNISHING AND CONTENT OF PROXY
STATEMENTS AND OUR OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS ARE EXEMPT
FROM THE REPORTING AND SHORT-SWING PROFIT RECOVERY PROVISIONS CONTAINED IN
SECTION 16 OF THE EXCHANGE ACT. UNDER THE EXCHANGE ACT, AS A FOREIGN PRIVATE
ISSUER, WE ARE NOT REQUIRED TO PUBLISH FINANCIAL STATEMENTS AS FREQUENCY OR AS
PROMPTLY AS UNITED STATES COMPANIES.
34
I. SUBSIDIARY INFORMATION
See Item 4.C. of this Annual Report.
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT RISK
Not applicable. The Company is a small business issuer.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
35
PART II
ITEM 13. DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES
Not Applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS
Not Applicable.
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
36
PART III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 to F-24.
ITEM 19. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 Articles of Incorporation (incorporated herein by reference to Exhibit
3.1.1 to the Company's registration statement on Form SB-2 filed on
November 17, 2000).
1.2 Amendment to Articles of Incorporation (incorporated herein by
reference to Exhibit 3.1.2 to the Company's registration statement on
Form SB-2 filed on November 17, 2000).
1.3 Restated and Amended Articles of Incorporation (incorporated herein by
reference to Exhibit 3.1.3 to the Company's registration statement on
Form SB-2 filed on November 17, 2000).
1.4 Bylaws of the Corporation (incorporated herein by reference to Exhibit
3.2.1 to the Company's registration statement on Form SB-2 filed on
November 17, 2000).
1.5 Amendment to Bylaws (incorporated herein by reference to Exhibit 3.2.2
to the Company's registration statement on Form SB-2 filed on November
17, 2000).
2.1 Form of Common Stock (incorporated herein by reference to Exhibit 4.1
to the Company's registration statement on Form SB-2 filed on November
17, 2000).
4.1 Consulting Contract with Warren Arseneau dated May 15, 2000
(incorporated herein by reference to Exhibit 10.1 to the Company's
registration statement on Form SB-2 filed on November 17, 2000).
4.2 Consulting Contract with Martin H. Beck dated April 1, 2000
(incorporated herein by reference to Exhibit 10.2 to the Company's
registration statement on Form SB-2 filed on November 17, 2000).
4.3 Consulting Contract with Michael Boyd dated April 1, 2000
(incorporated herein by reference to Exhibit 10.3 to the Company's
registration statement on Form SB-2 filed on November 17, 2000).
4.4 Consulting Contract with Roger Short dated January 1, 2000
(incorporated herein by reference to Exhibit 10.4 to the Company's
registration statement on Form SB-2 filed on November 17, 2000).
4.5 Confidentiality, Non-competition and intellectual property agreement
with Warren Arseneau dated May 15, 2000 (incorporated herein by
reference to Exhibit 10.5 to the Company's registration statement on
Form SB-2 filed on November 17, 2000).
37
4.6 Escrow Agreement dated as of September 18, 1997 among the Corporation,
Montreal Trust Company of Canada and those shareholders that executed
such Escrow Agreement (incorporated herein by reference to Exhibit
10.6 to the Company's registration statement on Form SB-2 filed on
November 17, 2000).
4.7 Timed Release Escrow Agreement dated April 28, 1998 between the
Corporation and those shareholders that executed such Escrow Agreement
(incorporated herein by reference to Exhibit 10.7 to the Company's
registration statement on Form SB-2 filed on November 17, 2000).
4.8 Performance Release Escrow Agreement dated April 28, 1998 between the
Corporation and those shareholders that executed such Escrow Agreement
(incorporated herein by reference to Exhibit 10.8 to the Company's
registration statement on Form SB-2 filed on November 17, 2000).
4.9 Transfer Agency and Registrarship Agreement dated as of September 18,
1997, between the Corporation and Montreal Trust Company of Canada
(incorporated herein by reference to Exhibit 10.9 to the Company's
registration statement on Form SB-2 filed on November 17, 2000).
4.10 Standard Terms for R&D Project of Service (incorporated herein by
reference to Exhibit 10.11 to the Company's registration statement on
Form SB-2 filed on November 17, 2000).
4.11 Industrial Research Assistance Program Repayable Contribution
Agreement (incorporated herein by reference to Exhibit 10.12 to the
Company's registration statement on Form SB-2 filed on November 17,
2000).
4.12 RTICA Corporation Stock Option Plan (incorporated herein by reference
to Exhibit 10.10 to the Company's registration statement on Form SB-2
filed on November 17, 2000).
4.13 Form of Stock Option Agreement (incorporated herein by reference to
Exhibit 10.13 to the Company's registration statement on Form SB-2
filed on November 17, 2000).
6. Computation of per share earnings (included in Financial Statements).
7. Ratio of earning to fixed charges (included in Financial Statements).
8. Subsidiaries of Company (incorporated herein by reference to Exhibit
21 to the Company's registration statement on Form SB-2 filed on
November 17, 2000).
38
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this registration statement on its behalf.
RTICA CORPORATION
BY: /s/ Warren Arseneau
----------------------------------
Warren Arseneau, President
Date: November 28, 2001
39
Consolidated Financial Statements
(Expressed in Canadian dollars)
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC.
(A DEVELOPMENT STAGE COMPANY))
Years ended May 31, 2001, 2000 and 1999 and
cumulative period from June 13, 1991
(inception) to May 31, 2001
kpmg [LOGO]
KPMG LLP
CHARTERED ACCOUNTANTS Telephone (905) 949-7800
Mississauga Executive Centre Telefax (905) 949-7799
Four Robert Speck Parkway www.kpmg.ca
Suite 1500
Mississauga ON L4Z 1S1
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of RTICA Corporation (formerly
Inzeco Holdings Inc.) as at May 31, 2001 and 2000 and the consolidated
statements of operations and deficit and cash flows for the years ended May 31,
2001, 2000 and 1999 and cumulative period from June 13, 1991 (inception) to 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 Canadian generally accepted auditing
standards and United States generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at May 31, 2001 and
2000 and the results of its operations and its cash flows for the years ended
May 31, 2001, 2000 and 1999 and for the period from June 13, 1991 (inception) to
May 31, 2001 in accordance with Canadian generally accepted accounting
principles.
Accounting principles generally accepted in Canada vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected the financial statements to the extent summarized in note 13
to the consolidated financial statements.
[GRAPHIC OMITTED]
[SIGNATURE OF KPMG LLP]
Chartered Accountants
Mississauga, Canada
June 29, 2001
F-1
kpmg [LOGO]
KPMG LLP
CHARTERED ACCOUNTANTS Telephone (905) 949-7800
Mississauga Executive Centre Telefax Telefax (905) 949-7799
Four Robert Speck Parkway www.kpmg.ca
Suite 1500
Mississauga ON L4Z 1S1
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
note 1 to the consolidated financial statements. Our report to the directors
dated June 29, 2001, is expressed in accordance with Canadian reporting
standards which do not permit a reference to such events and conditions in the
auditors' report when these are adequately disclosed in the financial
statements.
[GRAPHIC OMITTED]
[SIGNATURE OF KPMG LLP]
Chartered Accountants
Mississauga, Canada
June 29, 2001
F-2
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Consolidated Balance Sheets
(Expressed in Canadian dollars)
May 31, 2001 and 2000
- ------------------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------------------
Assets
Current assets:
Cash, short-term investments
and cash in trust (note 6(e)) $ 1,394,051 $ 1,712,725
GST and other receivables 74,301 92,953
Prepaid expenses 8,442 8,442
- ------------------------------------------------------------------------------------------
1,476,794 1,814,120
Fixed assets (note 3) 435,236 534,481
Goodwill, net of accumulated amortization
of $82,574 (2000 - $56,210) 26,364 52,728
Deferred development costs 1 1
- ------------------------------------------------------------------------------------------
$ 1,938,395 $ 2,401,330
==========================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 299,369 $ 768,248
Due to government (note 4) 200,694 --
Convertible debentures (note 5) -- 349,278
Shareholders' equity:
Share capital (note 6) 8,743,768 5,613,805
Equity component of convertible debentures (note 5) -- 10,722
Deficit accumulated during development stage (7,305,436) (4,340,723)
- ------------------------------------------------------------------------------------------
1,438,332 1,283,804
Going concern (note 1)
Commitments and contingencies (note 11)
- ------------------------------------------------------------------------------------------
$ 1,938,395 $ 2,401,330
==========================================================================================
See accompanying notes to consolidated financial statements.
On behalf of the Board:
"Warren Arseneau", signed Director
"Roger Short", signed Director
F-3
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Consolidated Statements of Operations and Deficit
(Expressed in Canadian dollars)
======================================================================================================
Cumulative
period from
June 13, 1991
Years ended May 31, (inception) to
2001 2000 1999 May 31, 2001
- ------------------------------------------------------------------------------------------------------
Income:
Interest $ 97,101 $ 7,095 $ 60,233 $ 167,524
Fees and licenses -- 6,077 -- 622,482
- ------------------------------------------------------------------------------------------------------
97,101 13,172 60,233 790,006
Operating expenses:
Development 947,651 246,870 568,562 2,657,300
Consulting 610,354 354,110 102,434 1,427,188
Professional fees 445,138 117,109 176,652 909,371
Sales and marketing 262,895 93,600 27,060 383,555
General and administrative 238,276 160,660 58,161 633,666
Amortization of fixed assets 149,139 8,025 4,094 173,253
Management fees 127,000 129,174 209,864 873,386
Rent and property taxes 123,822 68,187 12,683 223,542
Travel 58,863 44,795 82,965 356,325
Interest on convertible debentures 36,586 40,248 65,000 141,834
Factory overhead 34,393 18,673 -- 53,066
Amortization of goodwill 26,364 26,364 26,364 82,574
Interest and bank charges 1,333 10,764 892 136,096
Patents -- -- 12,962 44,286
- ------------------------------------------------------------------------------------------------------
3,061,814 1,318,579 1,347,693 8,095,442
- ------------------------------------------------------------------------------------------------------
Loss for the period (2,964,713) (1,305,407) (1,287,460) (7,305,436)
Deficit accumulated during development
stage, beginning of period (4,340,723) (3,035,316) (1,747,856) --
- ------------------------------------------------------------------------------------------------------
Deficit accumulated during development
stage, end of period $ (7,305,436) $ (4,340,723) $ (3,035,316) $ (7,305,436)
======================================================================================================
Loss per share (notes 2(i) and 9) $ (0.13) $ (0.09) $ (0.11)
======================================================================================================
Weighted average number of shares
outstanding 22,050,619 14,194,298 11,960,818
======================================================================================================
See accompanying notes to consolidated financial statements.
F-4
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
===================================================================================================================
Cumulative
period from
June 13, 1991
Years ended May 31, (inception) to
2001 2000 1999 May 31, 2001
- -------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Loss for the period $ (2,964,713) $ (1,305,407) $ (1,287,460) $ (7,305,436)
Items not involving cash:
Interest on convertible debentures 10,722 40,248 65,000 115,970
Amortization 175,503 34,389 30,458 255,827
Interest expense on converted loan -- -- -- 96,000
Expenses settled by issuance
of common shares -- -- -- 431,388
Foreign exchange gain (23,590) (3,281) -- (26,871)
Change in non-cash operating working
capital balances:
GST and other receivables 18,652 (15,494) (57,539) (74,301)
Prepaid expenses -- 13,524 7,010 (8,442)
Accounts payable and accrued
liabilities (468,879) 726,898 (9,492) 218,024
- -------------------------------------------------------------------------------------------------------------------
(3,252,305) (509,123) (1,252,023) (6,297,841)
Financing activities:
Due to government 200,694 -- -- 200,694
Issuance of convertible debentures -- 360,000 -- 1,860,000
Issuance of common shares 3,000 1,715,854 25,250 2,272,767
Issuance of special warrants 2,202,700 -- -- 2,870,659
Exercise of share purchase warrants 553,541 -- -- 553,541
Decrease in due to related parties -- -- (259,792) --
Proceeds from loan payable -- -- -- 254,000
- -------------------------------------------------------------------------------------------------------------------
2,959,935 2,075,854 (234,542) 8,011,661
Investing activities:
Purchase of fixed assets (49,894) (523,716) (19,180) (608,489)
Deferred development costs -- -- -- (1)
Cash acquired on reverse takeover -- -- -- 261,850
- -------------------------------------------------------------------------------------------------------------------
(49,894) (523,716) (19,180) (346,640)
Foreign exchange gain held on foreign currency 23,590 3,281 -- 26,871
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (318,674) 1,046,296 (1,505,745) 1,394,051
Cash and cash equivalents, beginning of period 1,712,725 666,429 2,172,174 --
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,394,051 $ 1,712,725 $ 666,429 $ 1,394,051
===================================================================================================================
For further cash flow information see note 10.
Cash and cash equivalents are comprised of cash, short-term investments and cash
in trust.
See accompanying notes to consolidated financial statements.
F-5
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
RTICA Corporation (formerly Inzeco Holdings Inc. (a development stage company))
(the "Company") is a public company that was incorporated on May 30, 1997 under
the Business Corporations Act (Alberta), was continued under the Business
Corporations Act (Ontario) on April 25, 2001 and is listed on the Canadian
Venture Exchange. The Company is engaged in the commercialization of technology
and productivity processes that converts 100% recycled PET plastics into
insulation products.
1. GOING CONCERN:
These financial statements have been prepared on a going concern basis and,
as such, it has been assumed that the Company will be able to realize its
assets and discharge its liabilities in the normal course of operations. To
May 31, 2001, the Company has incurred continuing losses from operations
and an accumulated a deficit of $7,305,436. The ability of the Company to
continue is dependent upon the ongoing support of its shareholders, the
attainment of financing necessary to complete the technology and begin
commercial production and the achievement of profitable operations from the
commercial production and licensing of the insulating products and sale of
licensing rights. These financial statements do not include any adjustments
relating to the recoverability of assets and classification of liabilities
or any other adjustments that might be necessary should the Company be
unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES:
These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada. A reconciliation to accounting
principles generally accepted in the United States is provided in note 13.
Significant accounting policies adopted by the Company are as follows:
F-6
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(a) Basis of presentation:
These financial statements include the accounts of the Company and its
wholly owned subsidiaries, Inzeco Overseas Limited and RTICA Inc.
("RTICA") (formerly E2 Development Corporation ("E2D")). RTICA was
acquired in a reverse takeover and is treated as the continuing entity
and the acquiror for financial accounting purposes, notwithstanding
that the Company is the continuing entity for legal purposes given
that the former shareholders of RTICA controlled the combined entity
after the transaction. Accordingly, the consolidated statements of
operations are a continuation of RTICA's financial statements, and
therefore reflect the following:
(i) the operations of RTICA from inception (June 13, 1991); and
(ii) the operations of the Company after April 28, 1998, the date of
acquisition.
As part of the reverse takeover, the Company entered into
share-for-share agreements with each shareholder of E2D whereby the
Company agreed to acquire all of the outstanding common shares and
310,908 common share purchase warrants of E2D, in exchange for
17,499,995 common shares and 1,243,633 common share purchase warrants
of the Company which represented 86% of the issued and outstanding
common shares of the Company on a fully diluted basis as at April 28,
1998.
The accounting for the business combination was as follows:
==========================================================================
Ascribed value attributed to shares and
warrants issued to acquire the Company $ 480,000
Less transaction costs (190,557)
- --------------------------------------------------------------------------
Net proceeds $ 289,443
==========================================================================
Fair value of net assets of the Company:
Current assets (including cash of $261,850) $ 350,811
Goodwill 108,938
Current liabilities (170,306)
- --------------------------------------------------------------------------
$ 289,443
==========================================================================
F-7
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
All significant intercompany transactions and balances are eliminated
on consolidation.
(b) Short-term investments:
Short-term investments include investments with maturities of less
than 90 days at date of acquisition and investments with maturities of
365 days at date of acquisition which are readily convertible into
cash.
(c) Fixed assets:
Fixed assets are recorded at original cost less accumulated
amortization. Amortization is provided when the assets are available
for use, on a declining-balance basis over the estimated useful lives
of the assets at the following annual rates:
=================================================================
Machinery and equipment 25%
Furniture 25%
Vehicles 30%
Computer hardware 30%
=================================================================
(d) Goodwill:
Goodwill is recorded at cost less accumulated amortization and is
being amortized on a straight-line basis over five years. On an annual
basis, management reviews the recoverability of goodwill by assessing
future cash flows on an undiscounted basis.
(e) Development and patents:
Development costs are expensed in the period incurred until technical
feasibility has been obtained, adequate resources exist and
recoverability is assured at which time development costs are
capitalized. Patent costs are expensed in the period incurred.
F-8
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(f) Change in accounting policy:
In December 1997, the Accounting Standards Board of The Canadian
Institute of Chartered Accountants ("CICA") issued Section 3465 of the
CICA Handbook, Income Taxes ("Section 3645"). Effective June 1, 1999,
the Company retroactively adopted Section 3465. Section 3465 requires
a change from the deferred method of accounting for income taxes to
the asset and liability method of accounting for income taxes.
Under the asset and liability method of Section 3465, future tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Future income tax assets and liabilities are measured using
enacted or substantively enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Section 3465, the effect on
future income tax assets and liabilities of a change in tax laws and
rates is recognized in income in the period that includes the
enactment date.
Pursuant to the deferral method, which was applied for the year ended
May 31, 1999 and prior years, deferred income taxes are recognized for
income and expense items that are reported in different years for
financial reporting purposes and income tax purposes using the tax
rate applicable for the year of the calculation. Under the deferral
method, deferred income taxes are not adjusted for subsequent changes
in tax rates.
There was no cumulative effect of this change in accounting for income
taxes as of June 1, 1999 and, thus, no restatement of the opening
balance of deficit for the years ended May 31, 2000 and 2001 was
required.
(g) Foreign currency translation:
Transactions denominated in foreign currencies are translated into
Canadian dollars using exchange rates in effect on the date of the
transaction. Monetary assets and liabilities are translated into
Canadian dollars using current exchange rates and non-monetary assets
and liabilities using historical exchange rates. Translation gains and
losses are included in the consolidated statements of operations and
deficit.
F-9
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(h) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the period. Actual results could differ from those
estimates.
(i) Earnings per share:
Effective with the year end May 31, 2001, the Company adopted the new
recommendations of the CICA relating to earnings per share. This new
standard has been given retroactive application. Under the new
standard, basic per share amounts have been calculated by dividing net
income attributable to common shareholders by the weighted average
number of shares outstanding in a manner inconsistent with that
followed in prior reporting periods.
Under the treasury stock method, the weighted average number of shares
outstanding used in determining basic earnings per share in each of
the years presented excludes 9,298,939 of the escrowed shares as
described in note 6(a). These shares require the Company to meet
specified performance measures and are considered contingently issued.
The effect of the retroactive application of the new standard resulted
in an increase in loss per share for 2000 by $0.03 and for 1999 by
$0.05.
(j) Fair values of financial instruments:
Cash, short-term investments and cash held in trust, other receivables
and accounts payable and accrued liabilities are reflected in the
financial statements at carrying values which approximate fair values
because of the short-term maturities of these instruments. The
carrying value of the debt component of the convertible debentures
approximates its fair value since the interest rate approximates
current interest rates. There is no market for the due to government
and consequently, it is not considered practical to determine its fair
value.
F-10
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(k) Stock-based compensation plan:
The Company has a stock-based compensation plan, which is described in
note 6(c). No compensation expense is recognized for this plan when
shares or stock options are issued to employees or non-employees. Any
consideration paid by employees or non-employees on exercise of stock
options or purchase of shares is credited to share capital. If shares
or stock options are repurchased from employees or non-employees, the
excess of the consideration paid over the carrying amount of the
shares or stock options cancelled is charged to deficit.
3. FIXED ASSETS:
=======================================================================
Accumulated Net book
2001 Cost amortization value
-----------------------------------------------------------------------
Machinery and equipment $ 525,292 $ 137,263 $ 388,029
Furniture 11,108 3,724 7,384
Vehicles 15,848 5,542 10,306
Computer hardware 56,241 26,724 29,517
-----------------------------------------------------------------------
$ 608,489 $ 173,253 $ 435,236
=======================================================================
=======================================================================
Accumulated Net book
2000 Cost amortization value
-----------------------------------------------------------------------
Machinery and equipment $ 525,292 $ 7,842 $ 517,450
Furniture 10,105 1,263 8,842
Vehicles 7,500 1,125 6,375
Computer hardware 15,698 13,884 1,814
-----------------------------------------------------------------------
$ 558,595 $ 24,114 $ 534,481
=======================================================================
F-11
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
4. DUE TO GOVERNMENT:
On November 1, 2000, the Company signed a contract with the National
Research Council Canada whereby the Company is eligible to receive up to
$445,000 as a repayable contribution for various research and development
projects carried out by the Company. Repayment of these contributions
begins on January 1, 2004 based on 1% of the Company's gross revenue up to
a maximum of $667,500.
The Company is required to contribute two-thirds of the total cost of the
work; otherwise, its reimbursements will be proportionately reduced. If the
Company is found to be in breach of the contract, the National Research
Council Canada is able to demand repayment of up to three times the total
amount of advances already made. For the year ended May 31, 2001, the
Company has incurred costs of $899,000 and has received $200,694 of the
repayable contribution.
5. CONVERTIBLE DEBENTURES:
On May 26, 1998, the Company issued a $1,500,000 Series I Convertible
Senior Debenture. The principal was convertible at any time, in whole or in
part, at the option of the holder into common shares at $0.55 per common
share. Once the Company built a plant which produced a specified output,
the debenture was convertible at the Company's option. On December 21,
1999, the debenture was converted at the Company's option into 2,727,723
common shares at $0.55 per common share.
On April 15, 2000, the Company issued three $120,000 convertible debentures
for total proceeds of $360,000. The principal and any accrued and unpaid
interest was convertible at any time, in whole or in part, at the option of
the holder into common shares at $0.40 per common share. The principal
outstanding was interest bearing at 6.5% per annum payable semi-annually
and in arrears on June 15 and December 15 of each year, commencing on June
15, 2000 and was due on June 30, 2001. The debentures were secured by the
tangible assets of the Company and could have been subordinated to other
debt incurred by the Company up to $1,250,000. On May 29, 2001, the
debentures were converted into 900,000 common shares at $0.40 per common
share.
F-12
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
5. CONVERTIBLE DEBENTURES (CONTINUED):
The amount of interest recorded in the current year prior to conversion was
$36,586 (2000 - $40,248; 1999 - $65,000).
The equity component represents the excess of the face value over the debt
component at the date of issuance. The continuity of the equity component
of convertible debentures from inception is as follows:
========================================================================
Equity component of $1,500,000
convertible debenture, May 26, 1998 $ 105,000
------------------------------------------------------------------------
Balance, May 31, 1998 and 1999 105,000
Conversion of $1,500,000 convertible
debenture, December 21, 1999 (105,000)
Equity component of three $120,000
convertible debentures, April 15, 2000 10,722
------------------------------------------------------------------------
Balance, May 31, 2000 10,722
Conversion of three $120,000 convertible
debentures, May 29, 2001 (10,722)
------------------------------------------------------------------------
Balance, May 31, 2001 $ --
========================================================================
F-13
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
6. SHARE CAPITAL:
The authorized share capital of the Company consists of unlimited
preference shares issuable in series and unlimited common shares.
Common share transactions from inception are as follows:
==================================================================================================
Shares Amount
--------------------------------------------------------------------------------------------------
Shares issued for cash, June 13, 1991 1,000 $ 10
Shares issued on stock split, May 30, 1996 2,199,000 --
Shares issued for consulting services, May 30, 1996 456,166 431,388
--------------------------------------------------------------------------------------------------
Balance, May 31, 1997 2,656,166 431,398
Shares issued for cash, August 29, 1997 825,000 275,000
Shares issued on conversion of warrants, December 23, 1997 145,833 121,528
Shares issued on conversion of warrants, March 7, 1998 153,750 128,125
Shares issued on conversion of E2D warrants, March 7, 1998 20,250 --
Shares issued for debt and accrued interest, April 28, 1998 236,830 350,000
Shares exchanged on reverse takeover, April 28, 1998 (4,037,829) --
Shares exchanged on reverse takeover, April 28, 1998 17,499,995 --
Shares issued to the Company's shareholders
at reverse takeover, April 28, 1998 2,925,000 289,443
Shares issued on exercise of options, May 20, 1998 20,000 4,000
--------------------------------------------------------------------------------------------------
Balance, May 31, 1998 20,444,995 1,599,494
Shares issued on conversion of special warrants,
October 25, 1998 1,666,667 667,959
Shares issued on exercise of options, May 20, 1999 126,250 25,250
--------------------------------------------------------------------------------------------------
Balance, May 31, 1999 22,237,912 2,292,703
Shares issued on conversion of debenture,
December 21, 1999 2,727,723 1,605,248
Shares issued on exercise of options, October 26, 1999 75,000 33,750
Shares issued on exercise of options, November 26, 1999 125,000 25,000
Shares issued for cash, May 31, 2000 2,807,500 1,657,104
--------------------------------------------------------------------------------------------------
Balance, May 31, 2000 27,973,135 5,613,805
Shares issued on exercise of share purchase warrants,
June 30, 2000 850,418 553,541
Shares issued on conversion of special warrants,
October 15, 2000 4,033,333 2,202,700
Shares issued on exercise of options, October 31, 2000 15,000 3,000
Shares issued on Registration Statement not being filed
and declared effective by December 31, 2000,
April 19, 2001 280,750 --
Shares issued on conversion of debentures, May 29, 2001 900,000 370,722
--------------------------------------------------------------------------------------------------
Balance, May 31, 2001 34,052,636 $ 8,743,768
==================================================================================================
F-14
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
6. SHARE CAPITAL (CONTINUED):
(a) On April 28, 1998, all of RTICA's outstanding common shares and
warrants were exchanged for 17,499,995 common shares and 1,243,633
warrants of the Company. The warrants had an exercise price of $0.65
per common share, with an expiry date of June 30, 2000. On June 30,
2000, 850,418 of the 1,243,633 common share purchase warrants issued
in connection with transactions were exercised for $553,541. The
remaining 393,215 warrants expired on the same day.
In connection with this transaction, the Canadian Venture Exchange
required that a total of 10,939,937 common shares be held in escrow.
Of these shares, 1,640,998 shall be released at a rate of 1/3 each
year commencing June 3, 1999. On June 3, 2001, 546,999 (June 3, 2000 -
547,000; June 3, 1999 - 546,999) shares were released from escrow. The
remaining 9,298,939 are to be released at a rate of 1 share for every
$0.20 of cash flow generated to a maximum of 1/3 per year. Cash flow
generated is defined by the escrow agreement to be audited net income
adjusted by certain non-cash items. None of these shares were released
from escrow in 2001.
1,350,000 common shares are also held in escrow in connection with the
initial public offering of the Company pursuant to the prospectus of
the Company dated September 19, 1997. These initial escrowed shares
will also be released at a rate of 1/3 for each of the three years
ending April 28, 1999, 2000 and 2001, respectively. All shares have
been released from escrow as of April 28, 2001.
(b) On April 28, 1998, the Company completed a private placement of
1,666,667 special warrants at a subscription price of $0.45 each for
net proceeds of $667,959. The special warrants were converted to
common shares on October 25, 1998. In addition to the commission of
10% of the gross proceeds of the issue, the Agent was granted a
non-transferable option to acquire 166,667 common shares at $0.45 per
share. On October 26, 1999, the Agent exercised 75,000 share options
for total consideration of $33,750. The remaining 91,667 options
expired on October 27, 1999.
F-15
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
6. SHARE CAPITAL (CONTINUED):
(c) Shares which may be issued under options, warrants and convertible
debenture are as follows:
======================================================================================================
Weighted
average Weighted
Range of remaining average
Number exercise contractual exercise
of shares price Expiry life price
------------------------------------------------------------------------------------------------------
Directors' and
management's December 20, 2001 to
stock option plan 1,855,250 $0.20 - 0.25 April 29, 2003 1.75 years $ 0.20
Directors' and
management's December 20, 2001 to
stock option plan 145,000 0.35 - 0.39 February 8, 2003 1.46 years 0.38
Directors' and
management's June 6, 2003 to
stock option plan 1,115,000 0.53 - 0.75 March 30, 2004 2.36 years 0.68
------------------------------------------------------------------------------------------------------
3,115,250
======================================================================================================
The Company has established a stock option plan for its directors and
officers and certain consultants and has reserved for issuance
3,288,750 common shares. Pursuant to the plan, stock options vest
immediately and are exercisable for a period of between three to five
years from the date of grant. Options are granted at the closing
market price of the Company's common stock on the date of grant. At
year end, 3,115,250 (2000 - 2,015,250; 1999 - 2,020,250) options are
outstanding at exercise prices ranging from $0.20 to $0.75 per share
with 1,990,250 (2000 - 1,705,250; 1999 - 1,830,250) options issued to
six directors and officers.
F-16
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
6. SHARE CAPITAL (CONTINUED):
A summary of the Company's stock option activity is as follows:
=====================================================================================================
2001 2000 1999
-----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number of average Number of average Number of average
stock exercise stock exercise stock exercise
options price options price options price
-----------------------------------------------------------------------------------------------------
Outstanding, beginning
of year 2,015,250 $ 0.21 2,020,250 $ 0.20 2,035,000 $ 0.20
Granted 1,115,000 0.68 120,000 0.38 85,000 0.28
Exercised (15,000) 0.20 (125,000) 0.20 (71,250) 0.20
Forfeited -- -- -- -- (28,500) 0.20
-----------------------------------------------------------------------------------------------------
Outstanding, end of year 3,115,250 0.38 2,015,250 0.21 2,020,250 0.20
=====================================================================================================
Exercisable, end of year 3,115,250 $ 0.38 2,015,250 $ 0.21 2,020,250 $ 0.20
=====================================================================================================
Available for grant 173,500 488,500 108,500
=====================================================================================================
During the year, the maximum number of shares issuable under the stock
option plan was increased by 800,000 to 3,500,000.
(d) In connection with an initial public offering in fiscal 1998, 150,000
non-transferable common share purchase options at $0.20 each were
granted to the Agent. 95,000 options were exercised in fiscal 1998 for
total consideration of $19,000. On May 20, 1999, 55,000 options were
exercised for total consideration of $11,000.
(e) On May 31, 2000, the Company completed a private placement of
2,807,500 common shares with a subscription price of U.S. $0.40 per
share for gross proceeds of U.S. $1,123,000 or Cdn. $1,680,570. The
shares were fully paid, with the proceeds held in trust by the
Company's escrow agent until June 6, 2000 when the funds were wired to
the Company. Costs of arranging the private placement were $23,466. If
the Company did not have a Registration Statement filed and declared
effective by the Securities and Exchange Commission in the United
States by December 31, 2000, the Company was required to issue one
additional common share for each ten shares issued under this private
placement.
F-17
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
6. SHARE CAPITAL (CONTINUED):
The Registration Statement was not declared effective by December 31,
2000. The Company has issued, for nil consideration, the 280,750
additional common shares required due to not having the Registration
Statement filed and declared effective by December 31, 2000.
(f) On June 14, 2000, the Company completed a private placement of
4,033,333 special warrants at a subscription price of $0.60 each for
gross cash proceeds of $2,420,000. Each special warrant was
convertible into one common share or 1.1 common shares if a receipt
for the related prospectus was not received by October 15, 2000. Costs
of arranging the private placement, including Agent's commissions is
$217,300 plus 201,667 compensation options expiring June 14, 2002,
which entitles the Agent to purchase one common share for $0.60 per
share.
The prospectus was filed on October 12, 2000 and, on October 15, 2000,
the special warrants were converted into 4,033,333 common shares.
7. RELATED PARTY TRANSACTIONS:
In the normal course of operations, the Company had the following
transactions, which were measured at the exchange amount, with certain
related parties:
=============================================================================================
Nature of relationship 2001 2000 1999
---------------------------------------------------------------------------------------------
Sales and marketing Shareholder and officer $ 174,000 $ 86,000 $ --
Management fees Shareholders, officers
and directors 127,000 129,000 210,000
Development charges Shareholders, officer
and director 117,000 57,000 452,000
Consulting Shareholders, officers
and directors 90,000 163,000 18,000
Professional fees Shareholder, officer
and director 69,000 26,000 36,000
Purchase of fixed assets Shareholder -- 330,000 --
=============================================================================================
F-18
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
8. INCOME TAXES:
(a) The tax effects of temporary differences that give rise to significant
portions of the future tax assets and future tax liabilities are
presented below:
================================================================================
2001 2000
--------------------------------------------------------------------------------
Long-term future tax assets:
Non-capital loss carryforwards $ 1,553,000 $ 1,085,000
Research and development expenses 101,000 51,000
Fixed assets 67,000 29,000
Reserve for repayment of government assistance 60,000 --
Investment tax credits 44,000 12,000
Deferred financing costs 35,000 74,000
Cumulative eligible capital 1,000 1,000
------------------------------------------------------------------------------
1,861,000 1,252,000
Valuation allowance (1,861,000) (1,252,000)
--------------------------------------------------------------------------------
$ -- $ --
================================================================================
The valuation allowance on the future tax asset must reflect that
portion of the future tax assets including the income tax loss
carryforwards which more likely than not will not be realized from
future operations. Considering the Company's cumulative losses in
recent years, the Company believes it is appropriate to provide an
allowance of 100% against all available future tax assets including
income tax loss carryforwards, regardless of their terms of expiry.
F-19
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
8. INCOME TAXES (CONTINUED):
(b) During the year, none of the non-capital losses expired (2000 -
$301,000; 1999 - nil).
At May 31, 2001, the Company has approximately $5,344,000 (2000 -
$2,949,000; 1999 - $1,853,000) of non-capital losses and $336,000
(2000 - $125,000; 1999 - nil) of research and development expenses
available to reduce future years' income for income tax purposes. The
non-capital losses and year of expiry and research and development
expenses are as follows:
=====================================================================
Non-capital losses:
2002 $ 257,000
2003 200,000
2004 210,000
2005 813,000
2006 349,000
2007 1,025,000
2008 2,348,000
2009 71,000
2010 71,000
Research and development expenses - no expiry 336,000
=====================================================================
9. LOSS PER SHARE:
Loss per share figures are calculated using the weighted average number of
common shares outstanding calculated on a daily basis. The effect of the
exercise of the special warrants, share purchase options and share purchase
warrants and the conversion of the convertible debenture would not have had
a dilutive effect on the years presented. The following are items which
could potentially dilute basic earnings per share in the future:
(a) the release of the 9,298,939 performance release escrow shares
disclosed in note 6(a); and
(b) the exercise of the 3,115,250 directors and officers stock options
disclosed in note 6(c).
F-20
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
10. STATEMENTS OF CASH FLOWS:
===================================================================================================
Cumulative
period from
June 13, 1991
Years ended May 31, (inception) to
2001 2000 1999 May 31, 2001
---------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 18,464 $ 10,214 $ 1,241 $ 65,216
===================================================================================================
Supplementary disclosures relating
to non-cash financing activities:
Conversion of debentures $ 370,722 $ 1,605,248 $ -- $ 1,975,970
Other non-cash share issuances -- -- -- 1,070,831
===================================================================================================
11. COMMITMENTS AND CONTINGENCIES:
(a) On September 1, 1997, the Company sold for proceeds of $20,000 an
option for an exclusive license to make, use and sell insulation
products in western Canada using the Company's technology. If the
option is exercised, the price for the license is $500,000 for a
10-year term. The option expires after the Company meets certain
production milestones.
(b) The Company is committed to minimum annual payments under an operating
lease for its administrative office and manufacturing facility as
follows:
====================================================================
2002 $ 60,000
2003 63,000
2004 65,000
--------------------------------------------------------------------
$ 188,000
====================================================================
F-21
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
(c) On June 21, 1999, the Company signed a contract with the National
Research Council Canada who is to perform certain research and
development projects on the Company's behalf. The Company is committed
to pay $745,000 to June 1, 2002. The Company is eligible to be
reimbursed up to 40% of total expenditures incurred, to a maximum of
$200,000. For the year ended May 31, 2001, the Company has paid the
National Research Council Canada, $385,000 (2000 - $115,000) and has
been reimbursed for $156,000 (2000 - $30,000) (of which $10,000 (2000
- nil) is included in other receivables) under the contract.
12. COMPARATIVE FIGURES:
Certain 2000 comparative figures have been reclassified to conform to the
financial statement presentation adopted in 2001.
13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES:
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada ("Canadian GAAP")
which differ in certain respects with those principles and practices that
the Company would have followed had its financial statements been prepared
in accordance with accounting principles and practices generally accepted
in the United States ("U.S. GAAP").
The Company's accounting principles generally accepted in Canada for
measurement of the consolidated balance sheet and the consolidated
statements of operations and cash flows differ from accounting principles
generally accepted in the United States as follows:
(a) Stock options:
Beginning in 1996, United States accounting principles allow, but do
not require companies to record compensation for employee stock option
plans at fair value. The Company has chosen to continue to account for
employee stock options using the intrinsic value method as permitted
under Canadian and United States accounting principles. Using this
approach, however, the Company is still required under United States
accounting principles to account for stock options issued to
consultants under the fair value method.
F-22
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED):
Since none of the Company's stock options have been issued by virtue
of employment or directorship, all of the stock options have been
accounted for under U.S. GAAP using the fair value method. The fair
value of these options has been estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for
2001, 2000 and 1999, respectively: risk free interest rate of 5.7%,
6.4% and 4.7%; dividend yields of 0%, volatility factors of the
expected market price of the Company's common stock of 182%, 310% and
160%; and a weighted average expected life of the options of three
years. The estimated fair value of these options is expensed in the
period granted since there is no vesting period. The weighted average
grant date fair values of options issued in 2001, 2000 and 1999 were
$0.61, $0.38 and $0.35, respectively.
The United States accounting pronouncement also requires the
disclosure of pro forma loss and loss per share information as if the
Company had accounted for its employee stock options issued in 1995
and subsequent years under the fair value method. As all options have
already been accounted for under the fair value method, the pro forma
information is the same as reported for the year.
(b) Convertible debentures:
Under Canadian GAAP, convertible debentures are split for accounting
purposes between debt and shareholders' equity as described in note 5.
Under U.S. GAAP, the convertible debenture is recorded as debt, except
if the conversion price at date of issuance is less than the fair
market value, in which case the intrinsic value of the beneficial
conversion feature is allocated to paid-in capital and the resulting
discount is recognized as interest expense over the period through to
the earliest conversion date. The convertible debenture issued on
April 15, 2000 is considered to have a beneficial conversion feature
under U.S. GAAP given that the conversion price of $0.40 per share was
less than the private placements of $0.60 per share as described in
note 6.
(c) Share capital:
Under Canadian GAAP, the additional common shares issued, as described
in note 6(e), are accounted for like a stock split. Under U.S. GAAP,
the additional shares would be recorded at $193,718 ($0.69 per share)
which is the market value on December 31, 2000, the date they became
issuable, by a charge to deficit. The shares are included in the basic
earnings per share calculation for U.S. GAAP purposes from December
31, 2000.
F-23
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED):
(d) Business combinations:
Under Canadian GAAP, a reverse takeover transaction is accounted for
as a business combination, with the amount of the purchase price in
excess of the fair market value of the net assets acquired allocated
to goodwill. Under U.S. GAAP, the merger of a private operating
company into a non-operating public shell corporation with nominal net
assets is considered to be a capital transaction, rather than a
business combination, with no goodwill being recorded.
(e) Comprehensive income:
Under U.S. GAAP, comprehensive income or loss must be reported which
is defined as all changes in equity other than those resulting from
investments by owners and distributions to owners. Under U.S. GAAP,
the Company's comprehensive loss is the same as its reported loss for
the year.
(f) New accounting pronouncements:
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 established methods
of accounting for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging
activities. Application of this SFAS has been postponed. As such, the
Company will be required to implement SFAS No. 133 for its fiscal year
ended May 31, 2002.
The Company expects that the adoption of this pronouncement will have
no material impact on its financial position, results of operations or
cash flows.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 replaced the requirements to amortize
intangible assets with indefinite lives and goodwill with a
requirement for an impairment test. It also requires an evaluation of
intangible assets and their useful lives and a transitional impairment
test for goodwill and certain intangible assets. The Company will be
required to implement this SFAS for its fiscal year ended May 31,
2003.
F-24
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED):
As the Company's goodwill will be fully amortized for the year ended
May 31, 2002, the adoption of this pronouncement will have no material
impact on its financial position, results of operations or cash flows.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction,
development and (or) normal use of the asset. The Company will be
required to implement this SFAS for its fiscal year ended May 31,
2004.
The Company expects that the adoption of this pronouncement will have
no material impact on its financial position, results of operations or
cash flows.
The impact of the items noted above on the financial statements is as
follows:
================================================================================================
2001 2000 1999
------------------------------------------------------------------------------------------------
Loss for the year per Canadian GAAP $ (2,964,713) $ (1,305,407) $ (1,287,460)
Goodwill amortization (note 13(d)) 26,364 26,364 26,364
Compensation expense from stock options
issued to non-employees (note 13(a)) (675,565) (45,950) (29,450)
Additional interest resulting from beneficial
conversion feature on convertible debt
(note 13(b)) -- (180,000) --
------------------------------------------------------------------------------------------------
Loss for the year per U.S. GAAP $ (3,613,914) $ (1,504,993) $ (1,290,546)
================================================================================================
Basic loss per share per U.S. GAAP $ (0.16) $ (0.11) $ (0.11)
================================================================================================
Weighted average number of shares
outstanding per U.S. GAAP 22,050,619 14,194,298 11,960,818
================================================================================================
F-25
RTICA CORPORATION
(FORMERLY INZECO HOLDINGS INC. (A DEVELOPMENT STAGE COMPANY))
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)
Years ended May 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------
13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED):
===============================================================================================
2001 2000
-----------------------------------------------------------------------------------------------
Total convertible debentures per Canadian GAAP $ -- $ 349,278
Reclass equity component of convertible debentures -- 10,722
-----------------------------------------------------------------------------------------------
Total convertible debentures per U.S. GAAP $ -- $ 360,000
===============================================================================================
Fair value of stock options issued to non-employees $ 1,100,947 $ 438,195
Beneficial conversion feature of convertible debentures 180,000 180,000
-----------------------------------------------------------------------------------------------
Other paid-in capital, end of the year per U.S. GAAP $ 1,280,947 $ 618,195
===============================================================================================
Share capital, end of the year per Canadian GAAP $ 8,743,768 $ 5,613,805
Additional shares issued (note 13(c)) 193,718 --
Elimination of goodwill (108,938) (108,938)
Fair value of stock options exercised 12,813 --
-----------------------------------------------------------------------------------------------
Share capital, end of the year per U.S. GAAP $ 8,841,361 $ 5,504,867
===============================================================================================
The consolidated statement of deficit under U.S. GAAP is as follows:
=============================================================================================
2001 2000 1999
---------------------------------------------------------------------------------------------
Deficit, beginning of year,
per Canadian GAAP $ (4,340,723) $ (3,035,316) $ (1,747,856)
Cumulative adjustments:
Goodwill amortization 56,210 29,846 3,482
Compensation expense from
employee stock options issued
to non-employees (438,195) (392,245) (362,795)
Additional interest resulting from
beneficial conversion feature
on convertible debt (180,000) -- --
Additional shares issued (note 13(c)) (193,718) -- --
Loss for the year per U.S. GAAP (3,613,914) (1,504,993) (1,290,546)
---------------------------------------------------------------------------------------------
Deficit, end of year, per U.S. GAAP $ (8,710,340) $ (4,902,708) $ (3,397,715)
=============================================================================================
F-26