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ANNUAL REPOR T 2000 PA TENT ENFORCEMENT AND ROY AL TIES L TD This is the html version of the file http://www.pearlltd.com/content/2000annualreport.pdf. G o o g l e automatically generates html versions of documents as we crawl the web. Google is not affiliated with the authors of this page nor responsible for its content. These search terms have been highlighted: unified data technologies ltd udtl -------------------------------------------------------------------------------- Page 1 ANNUAL REPOR T 2000 PA TENT ENFORCEMENT AND ROY AL TIES L TD -------------------------------------------------------------------------------- Page 2 PATENT ENFORCEMENT AND ROYALTIES LTD. Innovation is the life force of our modern society. Technology related to wireless communication, software, Internet business, biotechnology and genetic engineering has resulted in significant changes to our way of living. The impact of innovation in these areas will be even more dramatic than that which occurred during the industrial revolution of the 1800s. Patent Enforcement and Royalties Ltd. is a public company that has developed a unique method of investing in these innovations, whether in the form of patents or other intellectual property. PEARL helps creators and inventors of intellectual property by assisting those who have had their creations stolen by large corporations. While the vast majority of intellectual property never amounts to commercial success, PEARL's strategy dramati- cally increases the odds of achieving a positive financial return by only investing after the commercial viability of a patent has been proven. PEARL's shareholders therefore have a unique pathway to access one of the most exciting investment sectors of our time. A generous dividend policy provides our investors with the lion's share of the proceeds from any successful settlements or court awards while giving PEARL the financial muscle to build an ever-increasing portfolio of inventions. On the following pages is the story of PEARL's first year of public life. * Embraced by inventor's community * Built a portfolio of five cases * Raised $2 million to enlarge portfolio * Went public through reverse takeover Corporate Profile Highlights -------------------------------------------------------------------------------- Page 3 -------------------------------------------------------------------------------- Page 4 Patent Enforcement and Royalties Ltd. 2 In May, 1999, Patent Enforcement and Royalties Ltd. became the first public company in the world with a mandate to invest in patents and other intellectual property by assisting inventors in asserting their legal rights when their inventions have been misappropriated by unscrupulous corporations. During its first year of life, PEARL management examined and assessed more than 75 potential investments, carefully selecting five of them. As word of PEARL's service becomes more known amongst lawfirms and inventors in North America and around the world, an increasing number of diverse opportunities have come our way. A typical investment scenario is as follows: a patent owner or creator of intellectual property knows or suspects that a large corporation (frequently, many large corporations) is using his or her invention without authorization, and without paying royalties or licensing fees. In many cases, the inventor had first approached the corporation to market the patented creation. Although intellectual property infringement is clearly against the law, it is often difficult for an inventor to gain access to the corporation's records, and very costly to prove infringement in court. A typical patent infringement suit can cost hundreds of thousands or even millions of dollars before justice is served, particularly if the defendant chooses to prolong the action. Few individual inventors or small companies have the time or the finances to negotiate the complex maze of the legal system in order to secure fairness and equity. In most cases, PEARL negotiates for a significant portion of future royalties, licensing fees and other revenue in return for assisting in both case management and the payment of a portion of the costs associated with the effort. PEARL's compensation also includes a portion of any settlement or judgment for past royalties or licensing fees. There is no fixed formula in these investments. PEARL has the ability to craft an agreement with the inventor that fits his or her needs while compensating all parties fairly. PEARL may acquire a direct interest in the patent itself, or it may purchase or acquire shares of the company which owns the rights to the creation. Furthermore, PEARL may simply earn a share in the revenue generated by the intellectual property by assisting with the inevitable and extravagant costs of infringement litigation. Since it is PEARL's intention to have its shareholders benefit directly from any success in receiving funds from a settlement or a court award from the intellectual property it invests in, the company has adopted a generous dividend plan based on net revenue from any of PEARL's investments. Although the board retains discretion with respect to the declaration and payment of dividends, PEARL's dividend plan calls for Directors' Report to Shareholders "Few individual inventors or small companies have the time or the finances to negotiate the complex maze of the legal system in order to secure fairness and equity." "...the company has adopted a generous dividend plan based on net revenue from any of PEARL's investments." -------------------------------------------------------------------------------- Page 5 Patent Enforcement and Royalties Ltd. 3 the distribution to shareholders of 50% of the net revenue from any settlement or judgment of up to US$10 million. If net revenue from any settlement or judgment exceeds $10 million, 75% of such excess would be distributed as dividends. The same ratios would apply to ongoing royalties or licensing fees, on a case-by-case basis. Three of PEARL'S investments involve situations where the inventor, unable to seek redress through negotiation, has been before the courts for many years. Gaus vs Conair was originally filed in 1994, while The International Academy of Science vs Novell was first filed in 1992. A company that PEARL made an equity investment in, Kinbauri Gold Corp., has been litigating with IAMGOLD since 1991. PEARL'S two most recent invest- ments, one involving Internet browser programming technology and the other a popular line of children's toys, have not yet resorted to the courts and it is hopeful that meaningful discussions with the infringers will take place in the near future. Looking to the future, PEARL intends to continue seeking out and investing in patents and other intellectual property on much the same basis as it has done so far. Our goal over the next few years is to increase the active portfolio to between 20 and 30 investments, a number which would provide a continuous stream of revenue and exciting news by way of either settlements or court awards. PEARL got its start by raising approximately $1.2 million in 1999. The company then raised a further $2 million (gross proceeds) from a special warrant offering in March, 2000. Additional financing may be necessary in the future in order to expand our portfolio further. We would like to thank the shareholders who have believed in our unique concept. We are confident that this faith will be rewarded. On behalf of the Board of Directors, Brian Courtney, Chairman and Chief Executive Officer John Cocomile, President and Chief Operating Officer July 15, 2000 "Our goal over the next few years is to increase the active portfolio to between 20 and 30 investments..." -------------------------------------------------------------------------------- Page 6 THE HAIR DRYER SAFETY MECHANISM In 1999, PEARL acquired a royalty/income interest in a U.S. patent relating to a safety mechanism used in hair dryers and other appliances. The patented technology prevents electrical shock in the event that an appliance containing the device is immersed in water. Subsequent to its purchase of an interest in this patent, PEARL signed a funding agreement with the inventor of the technology and the owner of the patent, Dr. Harry Gaus, of Dilsberg, Germany. Dr. Gaus initiated legal proceedings in the United States District Court, Southern District of New York, in 1994, alleging patent infringement. The defendant is Conair Corporation, a leading hair dryer manufacturer based in Stamford, Connecticut. The safety mechanisms in the Conair appliances are manufactured predominantly in Costa Rica and sold in the United States. In October, 1999, the Honorable Kevin T. Duffy of the United States District Court, Southern District of New York dismissed Conair's second summary judgment motion, which had been brought in March, 1999. In May, 2000, Conair's third motion for summary judgment was denied by the court. A hearing will be held on September 5, 2000, to address scheduling and other pre-trial issues. A trial is anticipated later in 2000. THE LOCAL-AREA-NETWORK In 1999, PEARL acquired an option to purchase 80% of the outstanding shares of Intellectual Property Resource Corporation ("IPRC") of Louisville, Kentucky, which holds a 10.5% carried interest in any proceeds from a U.S. patent issued in 1987 covering critical aspects of the local area network technology. The inventor of the technology is Dr. Roger Billings of the International Academy of Science, an educational institution based in Independence, Missouri. In 1991, the Academy initiated a lawsuit against Novell Inc., a world leader in local area networking technology, demanding $220 million in royalties, which have been accruing ever since. There are a large number of alleged infringers, and a 1993 article in Business Week magazine indicated at that time that the aggregate claim from all of the alleged infringers may be worth $62.5 billion in damages. The suit was stayed in October, 1994 pending re-examination by the U.S. Patent and Trademark Office. The results of the re-examination and appeal to the Board of Patent Appeals and Interferences are anticipated in the near future. THE WEB BROWSER Late in 1999, PEARL agreed with UFIL Unified Data Technologies Ltd. to assist in the enforcement of a patent that covers a number of elements critical to the next generation of web browsers and other Internet-related programs. Under the terms of the funding agreement, PEARL will "In May, 2000, Conair's third motion for summary judgment was denied by the court." Our Investment Portfolio Patent Enforcement and Royalties Ltd. 4 -------------------------------------------------------------------------------- Page 7 Patent Enforcement and Royalties Ltd. 5 THE WEB BROWSER (continued) assist in enforcing the claims of UDTL's U.S. Patent covering technology that allows different forms of stored digital documents to be searched and accessed more efficiently on the Internet. PEARL's rights are limited to one application of the UDTL technology, which also has other commercial applications. It is believed that the patent is being infringed by the many companies building products based on an emerging metadata standard known as the Resource Description Framework (RDF). This standard was issued recently by the World Wide Web Organization, a standards body with more than 100 of the leading information technology companies as members. UDTL, a private company registered in Barbados, claims that RDF relies on technology covered by UDTL's patent. This Agreement has been assigned to PEARL (New Jersey). PEARL's agreement with UDTL identifies 45 potential infringers of the software. In return for enforcing the patent, PEARL will receive 50% of any revenues after legal costs. THE CHILDREN'S TOYS In May, 2000, PEARL (New Jersey) entered into an agreement with a New York based private toy developer to assist in the enforcement of its copyright against an international toy manufacturer which is producing a line of toys and other products in alleged violation of the copyright. The award-winning toys have been a major marketing success for the manufacturer. In return for providing financial and case management assistance, PEARL will receive 50% of all revenue derived from the copyright after legal fees. OTHER INVESTMENTS In two separate transactions in 1999 and 2000, PEARL spent a total of $304,000 to purchase two series of Preferred Shares of Kinbauri Gold Corporation. The shares pay dividends based upon revenue, and under the terms of the agreement PEARL could receive up to $2.2 million based upon certain revenue assumptions over a five-year period. Kinbauri is currently involved in a lawsuit against IAMGOLD International African Mining Gold Corporation. Kinbauri brought an action in 1991 for breach of contract against IAMGOLD as a result of a failed amalgamation between the parties. On the liability issue, Kinbauri was successful at trial. IAMGOLD has appealed the judgment and a hearing date for the appeal has been scheduled for November 1, 2000. Issues relating to the damages claimed by Kinbauri will be addressed after the outcome of the appeal. In this lawsuit, Kinbauri has claimed damages in the amount of $10 million. "The award-winning toys have been a major marketing success for the manufacturer." "It is believed that the patent is being infringed by the many companies building products based on an emerging metadata standard known as the Resource Description Framework (RDF)." -------------------------------------------------------------------------------- Page 8 The following discussion and analysis of the consolidated financial condition, changes in financial position and results of operations of PEARL for the year ended June 30, 2000, and the eight months ended June 30, 1999 should be read in conjunction with the financial statements of PEARL and related notes thereto. RESULTS OF OPERATIONS The Company's only revenue since incorporation has been interest earned on cash balances. The interest earned is directly related to the amount of funds on hand. The Company only invests in interest-bearing bank accounts or R1 rated interest-bearing securities. General administrative expenses ("G&A") consist of ongoing expenses in administering the affairs of the Company. The highest expenses in each of the reported time periods consist of wages and benefits, management and consulting fees. In the twelve months ended June 30, 2000 these totaled $349,287 or 63% of total G&A compared to $98,288 or 54% of G&A in the eight month period ended June 30, 1999. DEFERRED COSTS As at June 30, 2000 the Company had deferred costs of $1,176,657 compared to $261,239 as at June 30, 1999. These costs represent amounts paid or payable in respect of its interests in various intellectual property infringement suits. At June 30, 2000 93.3% of total deferred costs are costs related to the Gaus vs Conair case. WORKING CAPITAL At June 30, 2000 the Company had $31,678 in working capital compared to $973,576 on June 30, 1999. In addition to the above there was, at June 30, 2000, $878,845 held by the Company's Transfer Agent pursuant to an escrow agreement (see Note 8 of the financial statements). The only source of working capital since incorporation has been equity financing. OUTLOOK The Company's goal over the next two to three years is to acquire interests in 20 to 30 intellectual property rights which have been infringed. The objective is to have a significant number of cases in various stage of negotiation, to ensure a steady stream of revenue flowing to the Company from settlements and judgments. It is also anticipated that once a sufficient number of cases have been resolved, steady revenue will flow from royalties. Long-term growth will be assured by reinvesting a portion of all settlements into new intellectual property cases. Management Discussion and Analysis of Financial Statements Patent Enforcement and Royalties Ltd. 6 -------------------------------------------------------------------------------- Page 9 Patent Enforcement and Royalties Ltd. 7 Auditors' Report To the Shareholders of Patent Enforcement and Royalties Ltd. (formerly Ciclo Capital Ltd.): We have audited the consolidated balance sheets of Patent Enforcement and Royalties Ltd. (formerly Ciclo Capital Ltd.) as at June 30, 2000 and 1999 and the consolidated statements of operations, deficit and cash flows for the year ended June 30, 2000 and the eight month period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. These 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, evi- dence supporting the amounts and disclosures in the financial state- ments. 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 June 30, 2000 and 1999 and the results of its operations and cash flows for the year ended June 30, 2000 and the eight month period ended June 30, 1999 in accordance with generally accepted accounting principles. Chartered Accountants Toronto, Ontario July 17, 2000 -------------------------------------------------------------------------------- Page 10 2000 1999 ASSETS Current: Cash $ 471,293 $ 1,001,395 Amounts receivable and prepaids 39,688 34,495 510,981 1,035,890 Cash held in trust - special warrants (Note 8) 878,845 - Investment in Kinbauri Gold Corp. [Note 3(c)] 330,301 - Deferred costs (Note 5) 1,176,657 261,239 Capital asset, net 4,564 - $ 2,901,348 $ 1,297,129 LIABILITIES Current: Accounts payable and accrued liabilities $ 479,303 $ 62,314 SHAREHOLDERS' EQUITY Capital stock: (Note 7) Authorized: Unlimited common shares Unlimited preference shares issuable in series Issued common shares 1,739,925 1,709,925 Special warrants (Note 8) 1,676,846 - Deficit (994,726) (475,110) 2,422,045 1,234,815 $ 2,901,348 $ 1,297,129 Approved on behalf of the Board: John Cocomile, Director Brian Courtney, Director The accompanying notes form an integral part of these consolidated financial statements Consolidated Balance Sheets Patent Enforcement and Royalties Ltd. 8 JUNE 30, 2000 AND 1999 -------------------------------------------------------------------------------- Page 11 2000 1999 Revenue: Interest income $ 35,019 $ 11,086 General administrative expenses: Advertising, entertainment, promotion 12,374 - Consulting fees 17,169 66,288 Management fees 42,000 32,000 Office and general 48,011 41,765 Depreciation 806 - Professional fees 47,708 36,280 Investor relations 63,282 - Rent 12,416 - Transfer agents fees 5,317 5,014 Travel 15,434 - Wages and benefits 290,118 - 554,635 181,347 Write down of mining properties (Note 6) - 158,003 Write down of goodwill on acquisition (Note 4) - 21,160 Net loss for the period $ (519,616) $ (349,424) Net loss per share $ (0.05) $ (0.05) Weighted average number of shares 10,550,833 10,415,833 CONSOLIDATED STATEMENTS OF DEFICIT FOR THE YEAR ENDED JUNE 30, 2000 AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999 2000 1999 Deficit, beginning of period $ (475,110) $ (125,686) Net loss for the period (519,616) (349,424) Deficit, end of period $ (994,726) $ (475,110) The accompanying notes form an integral part of these consolidated financial statements FOR THE YEAR ENDED JUNE 30, 2000 AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999 Patent Enforcement and Royalties Ltd. 9 Consolidated Statements of Operations -------------------------------------------------------------------------------- Page 12 2000 1999 Cash was provided by (used in) the following activities: Operations: Net loss for the period $ (519,616) $ (349,424) Items not requiring an outlay of cash: Depreciation 806 - Write down of Goodwill - 21,160 Write down of mining properties - 158,003 Net change in non-cash working capital items 411,796 29,939 (107,014) (140,322) Investments: Investment in Kinbauri Gold Corp. (330,301) - Deferred costs (915,418) (261,239) Acquisition of goodwill - (21,160) Acquisition of capital assets (5,370) - (1,251,089) (282,399) Financing: Issuance of common shares for cash (Note 7) 30,000 20,000 Net proceeds of special warrant financing (Note 8) 1,676,846 - Cash held in trust - special warrant financing (Note 8) (878,845) - Issuance of common shares for acquisitions (Notes 4 & 7) - 909,500 828,001 929,500 Net change in cash (530,102) 506,779 Cash, beginning of period 1,001,395 494,616 Cash, end of period $ 471,293 $ 1,001,395 The accompanying notes form an integral part of these consolidated financial statements FOR THE YEAR ENDED JUNE 30, 2000 AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999 Consolidated Statements of Cash Flows Patent Enforcement and Royalties Ltd. 10 -------------------------------------------------------------------------------- Page 13 FOR THE YEAR ENDED JUNE 30, 2000 AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999 Notes to Consolidated Financial Statements 1 Incorporation and nature of business: The corporation was incorporated under the Canada Business Corporations Act on October 2, 1996 and was continued in Ontario in the fiscal period ended June 30, 1999. The Company is in the business of acquiring interests in patents, copy- rights or other intellectual properties which are being infringed for the purpose of litigating and participating in any successful judgments resulting therefrom. The corporation also hopes to participate in contin- uing royalties or fees from successful settlements. 2 Principles of consolidation: The consolidated financial statements include the accounts of Patent Enforcement and Royalties Ltd. ("PEARL") and its wholly owned sub- sidiary Minesource Exploration Ltd. ("Minesource"). PEARL was formed by the amalgamation of Ciclo Capital Ltd. ("Ciclo") and the former PEARL on July 1, 1999. PEARL was incorporated on November 30, 1998 and acquired by Ciclo in May 1999 (see Note 4). 3 Significant accounting policies: a Deferred costs Intellectual Property: The Company is in the start-up stage in the intellectual property law- suit business and has not earned any revenue to date. Direct costs incurred in the acquisition of stakes in intellectual property lawsuits have been deferred with the intention that the deferred expenditures be amortized by charges against income from future successful law- suits or settlements. If a lawsuit should prove unsuccessful, or the case abandoned all costs associated with this case will be written off. Should the costs incurred exceed the estimated proceeds the costs will be written down to the estimated recoverable amount. b Capital asset: Capital asset, which consists of computer equipment, is carried at cost and is depreciated using the declining balance method of deprecia- tion at an annual rate of 30%. c Investment in Kinbauri Gold Corp.: The Company owns 750,000 Series A Convertible Preferred Shares of Kinbauri Gold Corp. ("Kinbauri"). The Shares are non-voting, redeemable and retractable after the expiration of three years and extendable for a further two years. Dividends are receivable if and when declared by Kinbauri based on a percentage of Kinbauri's cash flow for a limited period of up to five years; 16.3% on the initial $1.6 million of cash flow, 12.6% on the next $2.0 million and 5.6% on the next $8.4 mil- lion. A maximum of $986,760 in dividends could be paid on the Series A Convertible Preferred Shares on cash flow of $12 million. Patent Enforcement and Royalties Ltd. 11 -------------------------------------------------------------------------------- Page 14 Notes to Consolidated Financial Statements FOR THE YEAR ENDED JUNE 30, 2000 AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999 3. Significant accounting policies (continued): In addition, the Company owns 773,003 Series B Convertible Preferred Shares. The Series B shares are non-voting, redeemable and retractable after the expiration of three years and extendable for a fur- ther two years. Dividends are receivable if and when declared by Kinbauri based on a percentage of Kinbauri's cash flow for a limited period of up to five years; 19.9375% on the initial $1.6 million of cash flow, 15.4% on the next $2.0 million and 7.29% on the next $8.4 mil- lion. A maximum of $1,239,360 in dividends could be paid on the Series B Convertible Preferred Shares on cash flow of $12 million. d Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make esti- mates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from those estimates. e Financial instruments: The Company's financial instruments recognized in the balance sheet consists of amounts receivable and current liabilities. The fair value of these financial instruments approximate their carrying value due to the short maturity or current market rate associated with these instruments. 4 Acquisitions: During the fiscal year ended June 30, 1999 Ciclo acquired a 100% interest in Comoro Capital Ltd. ("Comoro") in exchange for 920,000 common shares of Ciclo issued at $0.2228 per share or $205,000 in the aggregate. On June 1, 1999 the two companies amalgamated and continued under the name Ciclo Capital Ltd. The Company has written off the goodwill acquired in this transaction. The following represents the fair market value of the net assets acquired: Cash and marketable securities $ 183,997 Accounts receivable 6,322 Goodwill 21,160 211,479 Less: Accounts payable (6,479) $ 205,000 Patent Enforcement and Royalties Ltd. 12 -------------------------------------------------------------------------------- Page 15 Notes to Consolidated Financial Statements FOR THE YEAR ENDED JUNE 30, 2000 AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999 4 Acquisitions (continued): During the fiscal year ended June 30, 1999 Ciclo acquired a 100% interest in Patent Enforcement and Royalties Ltd. for 2,900,000 common shares of Ciclo issued at $0.25 per share or $725,000 in the aggregate plus cash of $30,000 and costs incurred in the acquisition of $34,370 for a total of $789,370. On July 1, 1999 the two companies amalgamated and contin- ued under the name Patent Enforcement and Royalties Ltd. The following represents the fair market value of the net assets acquired: Cash and marketable securities $ 725,000 Deferred expenditures 240,844 965,844 Less: Accounts payable (7,500) Less: loan payable (168,974) $ 789,370 5 Deferred Costs: Included in deferred costs are all expenditures incurred on behalf of plain- tiffs on active cases in which the Company has acquired an interest and cases which are currently being investigated. The Company has purchased an interest in two intellectual property law- suits from Intellectual Property Reserve Corporation ("IPRC") for US$75,000. The details of the agreement is as follows: I With regards to the first case the Company has purchased IPRC's 40% interest in any proceeds of the litigation. The Company's share of any proceeds are to be split as follows; the first US$150,000 shall be paid to IPRC with the balance to be split one third to the IPRC and two thirds to the Company. Included in deferred costs is $507,586 due from one of the plaintiffs representing his share of the costs incurred to date by the Company. If the individual does not pay this amount the Company will recover two times the amount from the proceeds of any settlement before any percentage allocation. II With regards to the second case the Company has purchased IPRC's 10.5% interest in any proceeds of the litigation. The Company's share of any proceeds are to be split as follows; the first US$500,000 shall be paid to IPRC with the balance to be split one third to IPRC and two thirds to the Company. On July 7, 1999 the Company entered into an option agreement to purchase 80% of the issued and outstanding shares of Intellectual Property Reserve Corporation ("IPRC") for $10. In addition, if the option is exercised the Company has committed to pay to the optionor their pro-rata share of any proceeds of the litigation as disclosed above, if and when any proceeds are received. The option to purchase the shares expires on July 7, 2009. Patent Enforcement and Royalties Ltd. 13 -------------------------------------------------------------------------------- Page 16 Notes to Consolidated Financial Statements FOR THE YEAR ENDED JUNE 30, 2000 AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999 5 Deferred Costs (continued): The Company has agreed, under the terms of a funding agreement with UFIL Unified Data Technologies Ltd. ("UDTL"), to assist in the enforcement of UDTL's U.S. Patent No. 5,684,985 covering technology that allows differ- ent forms of stored digital documents to be searched and accessed more efficiently on the Internet. In return for assisting in enforcing the patent, the Company will receive 50% of any revenues, after legal cost, that are derived from a list which currently has 45 potential infringing parties. The Company has also entered into an agreement, with a New York based private toy developer to assist in the enforcement of its copyright against an international toy manufacturer which is producing a line of toys and other products in alleged violation of the copyright. The award-winning toys have been a major marketing success for the manufacturer. In return for providing financial and case management assistance, the Company will receive 50% of all revenue derived from the copyright after deducting legal fees should the Company be successful in reaching a financial reward or recovery through negotiation or litigation. 6 Interest in mining property: Pursuant to an agreement dated February 11, 1997 the Company was grant- ed an option to acquire a 100% interest in a gold property known as the Nat River Property consisting of 80 claim units in Timmins, Ontario. The Company paid $20,000 cash and issued 150,000 Common shares at $0.15 per share to acquire the option. The Company had met all the require- ments of the option agreement and had therefore earned its interest in the properties. During the fiscal year ended June 30, 1999 the Company wrote off its invest- ment in this mining property as it has no further plans on these claims. During the year ended June 30, 2000 these claims were abandoned. 7 Capital stock: The Company is authorized to issue an unlimited number of common shares and an unlimited number of preference shares in one or more series. The directors are authorized to fix the number of preference shares and their designation, rights, privileges and conditions attached to the shares of each series. As of June 30, 2000 and 1999 no preference shares have been issued. Patent Enforcement and Royalties Ltd. 14 -------------------------------------------------------------------------------- Page 17 Notes to Consolidated Financial Statements FOR THE YEAR ENDED JUNE 30, 2000 AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999 7 Capital stock (continued): The Company has issued common shares as follows: # shares $ value Balance October 31, 1998 6,495,833 $ 780,425 Yorkton securities option 100,000 20,000 Issued on acquisition of PEARL 2,900,000 725,000 Issued on acquisition of Comoro 920,000 205,000 Less: Share issue costs (20,500) Balance June 30,1999 10,415,833 $ 1,709,925 Stock options exercised 135,000 30,000 Balance June 30, 2000 10,550,833 $ 1,739,925 Of the above issued shares, 2,184,086 are being held in escrow. Releases are subject to the consent of the Executive Director of the Alberta Securities Commission and will be released as follows: 1,112,975 on the basis of one share for each $0.20 of cash flow generated by the Company; 333,334 on March 3, 2001 444,444 on April 6, 2001 293,333 as to one half each on June 1, 2001 and 2002. Pursuant to a prospectus filed with the Alberta Securities Commission on September 10, 1997 and an agency agreement dated September 8, 1997 the Company issued 1,000,000 common shares at $0.20 per share to the public for gross proceeds of $200,000. The costs of the issue, including agents' commission were $53,034. Pursuant to the agency agreement a single non-transferable option was granted to Yorkton Securities Inc. to purchase 100,000 shares of the Company at $0.20 per common share. The option was exercised in the fis- cal year ended June 30, 1999. The Company has established a stock option plan for its directors, officers and employees, under which it has granted options to directors, officers and employees as follows: I options to purchase 60,417 [1999 - 100,417] common shares at a price of $0.20 per share expiring June 2, 2002. II options to purchase 229,583 [1999 - 279,583] common shares at a price of $0.20 per share expiring March 3, 2003. III options to purchase 540,000 [1999 - 580,000] common shares at a price of $0.25 until May 28, 2004. Patent Enforcement and Royalties Ltd. 15 -------------------------------------------------------------------------------- Page 18 Notes to Consolidated Financial Statements FOR THE YEAR ENDED JUNE 30, 2000 AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999 7 Capital stock (continued): IV options to purchase 5,000 common shares at a price of $0.40 until June 7, 2004. V options to purchase 100,000 common shares at a price of $0.40 until January 12, 2002. VI options to purchase 108,000 common shares at a price of $0.40 until March 1, 2002. 8 Special warrants: On March 31, 2000, pursuant to an agency agreement with Canaccord Capital Corporation and Northern Securities Inc. (the "Agents"), the Company sold 3,125,000 special warrants at a price of $0.64 per special war- rant for gross proceeds of $2.0 million. Net proceeds of the financing total $1,676,846 after deduction of Agents' commission in the amount of $200,000 and expenses of the offering incurred to date in the amount of $123,154. The special warrants will be automatically converted into common shares (on a one for one basis) on the earlier of (the "Expiry Date"): (a) September 30, 2001; and (b) five business days after receipt of a final prospectus qualifying the distribution of the shares to be issued on the exercise of the special war- rants. Of the net proceeds of the special warrant financing, 50% is held in trust by the Company's transfer agent pursuant to an escrow agreement. As such, the funds are not available for current working capital use. The escrowed funds will be released to the Company on the Expiry Date as defined above. As additional compensation, the Company issued to the Agents non-assignable special rights (the "Agents' Special Rights") of the Company which are exercisable, without payment of additional compen- sation, into non-assignable share purchase warrants of the Company (the "Agents' Warrants"). The Agents' Warrants will entitle the Agents to pur- chase up to 312,500 common shares exercisable in whole or in part at any time up to September 30, 2001 at a price of $0.64 per common share. The Company is in the process of issuing a prospectus qualifying the dis- tribution of 3,125,000 common shares on the issuance of 3,125,000 previ- ously issued special warrants. The prospectus will also qualify the distri- bution of the Agents' Warrants upon exercise of the Agents' Special Rights. 9 Income taxes: The Company has available approximately $995,000 (1999 - $275,500) in non-capital loss carryforwards which can be used to reduce future taxable income. The potential benefit of these losses has not been recognized in these financial statements and will expire, if unused, in the fiscal years end- ing June 30, 2003 to 2007. 10 Subsequent event: On July 1, 2000 the Company and its wholly owned subsidiary Minesource amalgamated and continued under the name Patent Enforcement and Royalties Ltd. Patent Enforcement and Royalties Ltd. 16 -------------------------------------------------------------------------------- Page 19 DIRECTORS Brian Courtney, Chairman and Chief Executive Officer Oakville, Ontario, Canada John Cocomile, President and Chief Operating Officer Toronto, Ontario, Canada Kerry J. Knoll, Vice-President, Corporate Affairs Toronto, Ontario, Canada Ian J. McDonald Toronto, Ontario, Canada Kenneth G. Oakley Toronto, Ontario, Canada MANAGEMENT Brian Courtney, Chairman and Chief Executive Officer John Cocomile, President and Chief Operating Officer Denis C. Arsenault, Chief Financial Officer Kerry J. Knoll, Vice-President, Corporate Affairs REGISTRAR AND TRANSFER AGENT CIBC Mellon Trust Company Toronto, Ontario, Canada LEGAL COUNSEL Johnstone & Company Toronto, Ontario, Canada AUDITORS Wasserman Ramsay Toronto, Ontario, Canada INVESTOR INFORMATION Kerry Knoll Vice-President, Corporate Affairs Tel: 416-860-1438 Fax: 416-367-0182 Email: info@pearlltd.com Renmark Financial Communications Tel: 514-939-3989 Fax: 514-939-3717 Email: info@renmarkfinancial.com ADDRESS Patent Enforcement & Royalties Ltd. 6 Adelaide Street East, Suite 220 Toronto, ON Canada M5C 1H6 Tel: 416-860-1438 Fax: 416-367-0182 Website: www.pearlltd.com SHARE INFORMATION Listing: Canadian Venture Exchange Symbol: PAL Corporate Directory -------------------------------------------------------------------------------- Page 20
Received on Wednesday, 2 January 2002 13:53:51 UTC